G.R. No. 129015. August 13, 2004.
* Same; Same; Same; If a bank pays a forged check, it must be considered as
SAMSUNG CONSTRUCTION COMPANY PHILIPPINES, INC., petitioner, vs. FAR
EAST BANK AND TRUST COMPANY AND COURT OF APPEALS, respondents.
Negotiable Instruments Law; Checks; A forged signature is “wholly
inoperative” and payment made “through or under such signature” is ineffectual or
does not discharge the instrument.—The general rule is to the effect that a forged
signature is “wholly inoperative,” and payment made “through or under such
signature” is ineffectual or does not discharge the instrument. If payment is made,
the drawee cannot charge it to the drawer’s account. The traditional justification for
the result is that the drawee is in a superior position to detect a forgery because he
has the maker’s signature and is expected to know and compare it. The rule has a
healthy cautionary effect on banks by encouraging care in the comparison of the
signatures against those on the signature cards they have on file. Moreover, the very
opportunity of the drawee to insure and to distribute the cost among its customers
who use checks makes the drawee an ideal party to spread the risk to insurance.
Same; Same; Forgery; Forgery is a real or absolute defense by the party
whose signature is forged.—Under Section 23 of the Negotiable Instruments Law,
forgery is a real or absolute defense by the party whose signature is forged. On the
premise that Jong’s signature was indeed forged, FEBTC is liable for the loss since it
authorized the discharge of the forged check. Such liability attaches even if the bank
exerts due diligence and care in preventing such faulty discharge. Forgeries often
deceive the eye of the most cautious experts; and when a bank has been so deceived,
it is a harsh rule which compels it to suffer although no one has suffered by its being
deceived. The forgery may be so near like the genuine as to defy detection by the
depositor himself, and yet the bank is liable to the depositor if it pays the check.
Same; Same; Same; A document formally presented is presumed to be genuine
until it is proved to be fraudulent.—Thus, the first matter of inquiry is into whether
the check was indeed forged. A document formally presented is presumed to be
genuine until it is proved to be fraudulent. In a forgery trial, this presumption must
be overcome but this can only be done by convincing testimony and effective
illustrations.
Same; Same; Same; Bare fact that the forgery was committed by an employee
of the party whose signature was forged cannot necessarily imply that such party’s
negligence was the cause for the forgery.—The bare fact that the forgery was
committed by an employee of the party whose signature was forged cannot
necessarily imply that such party’s negligence was the cause for the forgery.
Employers do not possess the preternatural gift of cognition as to the evil that may
lurk within the hearts and minds of their employees.
paying out of its funds and cannot charge the amount so paid to the account of the
depositor.—Still, even if the bank performed with utmost diligence, the drawer whose
signature was forged may still recover from the bank as long as he or she is not
precluded from setting up the defense of forgery. After all, Section 23 of the
Negotiable Instruments Law plainly states that no right to enforce the payment of a
check can arise out of a forged signature. Since the drawer, Samsung Construction, is
not precluded by negligence from setting up the forgery, the general rule should
apply. Consequently, if a bank pays a forged check, it must be considered as paying
out of its funds and cannot charge the amount so paid to the account of the depositor.
A bank is liable, irrespective of its good faith, in paying a forged check.
Same; Same; Same; Negligence; The presumption remains that every person
takes ordinary care of his concerns, and that the ordinary course of business has
been followed; Negligence is not presumed but must be proven by him who alleges
it.—Still, in the absence of evidence to the contrary, we can conclude that there was
no negligence on Samsung Construction’s part. The presumption remains that every
person takes ordinary care of his concerns, and that the ordinary course of business
has been followed. Negligence is not presumed, but must be proven by him who
alleges it. While the complaint was lodged at the instance of Samsung Construction,
the matter it had to prove was the claim it had alleged—whether the check was
forged. It cannot be required as well to prove that it was not negligent, because the
legal presumption remains that ordinary care was employed.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
TINGA, J.:
Called to fore in the present petition is a classic textbook question—if a bank pays
out on a forged check, is it liable to reimburse the drawer from whose account the
funds were paid out? The Court of Appeals, in reversing a trial court decision adverse
to the bank, invoked tenuous reasoning to acquit the bank of liability. We reverse,
applying time-honored principles of law.
The salient facts follow.
Plaintiff Samsung Construction Company Philippines, Inc. (“Samsung
Construction”), while based in Biñan, Laguna, maintained a current account with
defendant Far East Bank and Trust Company (“FEBTC”) at the latter’s Bel-Air,
Makati branch. The sole signatory to Samsung Construction’s account was Jong Kyu
Lee (“Jong”), its Project Manager, while the checks remained in the custody of the
company’s accountant, Kyu Yong Lee (“Kyu”).
On 19 March 1992, a certain Roberto Gonzaga presented for payment FEBTC
Check No. 432100 to the bank’s branch in BelAir, Makati. The check, payable to cash
and drawn against Samsung Construction’s current account, was in the amount of
Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00). The bank
teller, Cleofe Justiani, first checked the balance of Samsung Construction’s account.
After ascertaining there were enough funds to cover the check, she compared the
signature appearing on the check with the specimen signature of Jong as contained
in the specimen signature card with the bank. After comparing the two signatures,
Justiani was satisfied as to the authenticity of the signature appearing on the check.
She then asked Gonzaga to submit proof of his identity, and the latter presented
three (3) identification cards.
At the same time, Justiani forwarded the check to the branch Senior Assistant
Cashier Gemma Velez, as it was bank policy that two bank branch officers approve
checks exceeding One Hundred Thousand Pesos, for payment or encashment. Velez
likewise counterchecked the signature on the check as against that on the signature
card. He too concluded that the check was indeed signed by Jong. Velez then
forwarded the check and signature card to Shirley Syfu, another bank officer, for
approval. Syfu then noticed that Jose Sempio III (“Sempio”), the assistant
accountant of Samsung Construction, was also in the bank. Sempio was well-known
to Syfu and the other bank officers, he being the assistant accountant of Samsung
Construction. Syfu showed the check to Sempio, who vouched for the genuineness of
Jong’s signature. Confirming the identity of Gonzaga, Sempio said that the check was
for the purchase of equipment for Samsung Construction. Satisfied with the
genuineness of the signature of Jong, Syfu authorized the bank’s encashment of the
check to Gonzaga.
The following day, the accountant of Samsung Construction, Kyu, examined the
balance of the bank account and discovered that a check in the amount of Nine
Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00) had been
encashed. Aware that he had not prepared such a check for Jong’s signature, Kyu
perused the checkbook and found that the last blank check was missing. He reported
the matter to Jong, who then proceeded to the bank. Jong learned of the encashment
of the check, and realized that his signature had been forged. The Bank Manager
reputedly told Jong that he would be reimbursed for the amount of the check. Jong
proceeded to the police station and consulted with his lawyers. Subsequently, a
criminal case for qualified theft was filed against Sempio before the Laguna court.
In a letter dated 6 May 1992, Samsung Construction, through counsel, demanded
that FEBTC credit to it the amount of Nine Hundred Ninety Nine Thousand Five
Hundred Pesos (P999,500.00), with interest. In response, FEBTC said that it was
still conducting an investigation on the matter. Unsatisfied, Samsung Construction
filed a Complaint on 10 June 1992 for violation of Section 23 of the Negotiable
Instruments Law, and prayed for the payment of the amount debited as a result of
the questioned check plus interest, and attorney’s fees. The case was docketed as
Civil Case No. 92-61506 before the Regional Trial Court (“RTC”) of Manila, Branch 9.
During the trial, both sides presented their respective expert witnesses to testify
on the claim that Jong’s signature was forged. Samsung Corporation, which had
referred the check for investigation to the NBI, presented Senior NBI Document
Examiner Roda B. Flores. She testified that based on her examination, she concluded
that Jong’s signature had been forged on the check. On the other hand, FEBTC,
which had sought the assistance of the Philippine National Police (PNP), presented
Rosario C. Perez, a document examiner from the PNP Crime Laboratory. She
testified that her findings showed that Jong’s signature on the check was genuine.
Confronted with conflicting expert testimony, the RTC chose to believe the
findings of the NBI expert. In a Decision dated 25 April 1994, the RTC held that
Jong’s signature on the check was forged and accordingly directed the bank to pay or
credit back to Samsung Construction’s account the amount of Nine Hundred Ninety
Nine Thousand Five Hundred Pesos (P999,500.00), together with interest tolled
from the time the complaint was filed, and attorney’s fees in the amount of Fifteen
Thousand Pesos (P15,000.00). FEBTC timely appealed to the Court of Appeals. On
28 November 1996, the Special Fourteenth Division of the Court of Appeals rendered
a Decision, reversing the RTC Decision and absolving FEBTC from any liability. The
Court of Appeals held that the contradictory findings of the NBI and the PNP created
doubt as to whether there was forgery. Moreover, the appellate court also held that
assuming there was forgery, it occurred due to the negligence of Samsung
Construction, imputing blame on the accountant Kyu for lack of care and prudence in
keeping the checks, which if observed would have prevented Sempio from gaining
access thereto. The Court of Appeals invoked the ruling in PNB v. National City
Bank of New York that, if a loss, which must be borne by one or two innocent
persons, can be traced to the neglect or fault of either, such loss would be borne by
the negligent party, even if innocent of intentional fraud.
Samsung Construction now argues that the Court of Appeals had seriously
misapprehended the facts when it overturned the RTC’s finding of forgery. It also
contends that the appellate court erred in finding that it had been negligent in
safekeeping the check, and in applying the equity principle enunciated in PNB v.
National City Bank of New York.
 Since the trial court and the Court of Appeals arrived at contrary findings on
questions of fact, the Court is obliged to examine the record to draw out the correct
conclusions. Upon examination of the record, and based on the applicable laws and
jurisprudence, we reverse the Court of Appeals.
Section 23 of the Negotiable Instruments Law states:
When a signature is forged or made without the authority of the person whose
signature it purports to be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to enforce payment thereof against
any party thereto, can be acquired through or under such signature, unless
the party against whom it is sought to enforce such right is precluded from setting
up the forgery or want of authority. (Emphasis supplied)
The general rule is to the effect that a forged signature is “wholly inoperative,” and
payment made “through or under such signature” is ineffectual or does not discharge
the instrument. If payment is made, the drawee cannot charge it to the drawer’s
account. The traditional justification for the result is that the drawee is in a superior
position to detect a forgery because he has the maker’s signature and is expected to
know and compare it. The rule has a healthy cautionary effect on banks by
encouraging care in the comparison of the signatures against those on the signature
cards they have on file. Moreover, the very opportunity of the drawee to insure and to
distribute the cost among its customers who use checks makes the drawee an ideal
party to spread the risk to insurance.
Brady, in his treatise The Law of Forged and Altered Checks, elucidates:
When a person deposits money in a general account in a bank, against which he
has the privilege of drawing checks in the ordinary course of business, the
relationship between the bank and the depositor is that of debtor and creditor. So far
as the legal relationship between the two is concerned, the situation is the same as
though the bank had borrowed money from the depositor, agreeing to repay it on
demand, or had bought goods from the depositor, agreeing to pay for them on
demand. The bank owes the depositor money in the same sense that any debtor owes
money to his creditor. Added to this, in the case of bank and depositor, there is, of
course, the bank’s obligation to pay checks drawn by the depositor in proper form
and presented in due course. When the bank receives the deposit, it impliedly agrees
to pay only upon the depositor’s order. When the bank pays a check, on which the
depositor’s signature is a forgery, it has failed to comply with its contract in this
respect. Therefore, the bank is held liable.
The fact that the forgery is a clever one is immaterial. The forged signature may so
closely resemble the genuine as to defy detection by the depositor himself. And yet, if
a bank pays the check, it is paying out its own money and not the depositor’s.
The forgery may be committed by a trusted employee or confidential agent. The
bank still must bear the loss. Even in a case where the forged check was drawn by the
depositor’s partner, the loss was placed upon the bank. The case referred to
is Robinson v. Security Bank, Ark., 216 S. W. Rep. 717. In this case, the plaintiff
brought suit against the defendant bank for money which had been deposited to the
plaintiff’s credit and which the bank had paid out on checks bearing forgeries of the
plaintiff’s signature.
xxx
It was held that the bank was liable. It was further held that the fact that the
plaintiff waited eight or nine months after discovering the forgery, before notifying
the bank, did not, as a matter of law, constitute a ratification of the payment, so as to
preclude the plaintiff from holding the bank liable. x x x
This rule of liability can be stated briefly in these words: “A bank is bound to know
its depositors’ signature.” The rule is variously expressed in the many decisions in
which the question has been considered. But they all sum up to the proposition that a
bank must know the signatures of those whose general deposits it carries.
By no means is the principle rendered obsolete with the advent of modern
commercial transactions. Contemporary texts still affirm this well-entrenched
standard. Nickles, in his book Negotiable Instruments and Other Related
Commercial Paper wrote, thus:
The deposit contract between a payor bank and its customer determines who can
draw against the customer’s account by specifying whose signature is necessary on
checks that are chargeable against the customer’s account. Therefore, a check drawn
against the account of an individual customer that is signed by someone other than
the customer, and without authority from her, is not properly payable and is not
chargeable to the customer’s account, inasmuch as any “unauthorized signature on an
instrument is ineffective” as the signature of the person whose name is signed.
Under Section 23 of the Negotiable Instruments Law, forgery is a real or absolute
defense by the party whose signature is forged. On the premise that Jong’s signature
was indeed forged, FEBTC is liable for the loss since it authorized the discharge of
the forged check. Such liability attaches even if the bank exerts due diligence and care
in preventing such faulty discharge. Forgeries often deceive the eye of the most
cautious experts; and when a bank has been so deceived, it is a harsh rule which
compels it to suffer although no one has suffered by its being deceived. The forgery
may be so near like the genuine as to defy detection by the depositor himself, and yet
the bank is liable to the depositor if it pays the check.
Thus, the first matter of inquiry is into whether the check was indeed forged. A
document formally presented is presumed to be genuine until it is proved to be
fraudulent. In a forgery trial, this presumption must be overcome but this can only be
done by convincing testimony and effective illustrations.
In ruling that forgery was not duly proven, the Court of Appeals held:
[There] is ground to doubt the findings of the trial court sustaining the alleged
forgery in view of the conflicting conclusions made by handwriting experts from the
NBI and the PNP, both agencies of the government.
xxx
These contradictory findings create doubt on whether there was indeed a forgery.
In the case of Tenio-Obsequio v. Court of Appeals, 230 SCRA 550, the Supreme
Court held that forgery cannot be presumed; it must be proved by clear, positive and
convincing evidence.
This reasoning is pure sophistry. Any litigator worth his or her salt would never
allow an opponent’s expert witness to stand uncontradicted, thus the spectacle of
competing expert witnesses is not unusual. The trier of fact will have to decide which
version to believe, and explain why or why not such version is more credible than the
other. Reliance therefore cannot be placed merely on the fact that there are colliding
opinions of two experts, both clothed with the presumption of official duty, in order
to draw a conclusion, especially one which is extremely crucial. Doing so is
tantamount to a jurisprudential cop-out.
Much is expected from the Court of Appeals as it occupies the penultimate tier in
the judicial hierarchy. This Court has long deferred to the appellate court as to its
findings of fact in the understanding that it has the appropriate skill and competence
to plough through the minutiae that scatters the factual field. In failing to thoroughly
evaluate the evidence before it, and relying instead on presumptions haphazardly
drawn, the Court of Appeals was sadly remiss. Of course, courts, like humans, are
fallible, and not every error deserves a stern rebuke. Yet, the appellate court’s error in
this case warrants special attention, as it is absurd and even dangerous as a
precedent. If this rationale were adopted as a governing standard by every court in
the land, barely any actionable claim would prosper, defeated as it would be by the
mere invocation of the existence of a contrary “expert” opinion.
On the other hand, the RTC did adjudge the testimony of the NBI expert as more
credible than that of the PNP, and explained its reason behind the conclusion:
After subjecting the evidence of both parties to a crucible of analysis, the court
arrived at the conclusion that the testimony of the NBI document examiner is more
credible because the testimony of the PNP Crime Laboratory Services document
examiner reveals that there are a lot of differences in the questioned signature as
compared to the standard specimen signature. Furthermore, as testified to by Ms.
Rhoda Flores, NBI expert, the manner of execution of the standard signatures used
reveals that it is a free rapid continuous execution or stroke as shown by the
tampering terminal stroke of the signatures whereas the questioned signature is a
hesitating slow drawn execution stroke. Clearly, the person who executed the
questioned signature was hesitant when the signature was made.
During the testimony of PNP expert Rosario Perez, the RTC bluntly noted that
“apparently, there [are] differences on that questioned signature and the standard
signatures.” This Court, in examining the signatures, makes a similar finding. The
PNP expert excused the noted “differences” by asserting that they were mere
“variations,” which are normal deviations found in writing. Yet the RTC, which had
the opportunity to examine the relevant documents and to personally observe the
expert witness, clearly disbelieved the PNP expert. The Court similarly finds the
testimony of the PNP expert as unconvincing. During the trial, she was confronted
several times with apparent differences between strokes in the questioned signature
and the genuine samples. Each time, she would just blandly assert that these
differences were just “variations,” as if the mere conjuration of the word would
sufficiently disquiet whatever doubts about the deviations. Such conclusion, standing
alone, would be of little or no value unless supported by sufficiently cogent reasons
which might amount almost to a demonstration.
The most telling difference between the questioned and genuine signatures
examined by the PNP is in the final upward stroke in the signature, or “the point to
the short stroke of the terminal in the capital letter ‘L,’ ” as referred to by the PNP
examiner who had marked it in her comparison chart as “point no. 6.” To the plain
eye, such upward final stroke consists of a vertical line which forms a ninety degree
(90°) angle with the previous stroke. Of the twenty one (21) other genuine samples
examined by the PNP, at least nine (9) ended with an upward stroke. However,
unlike the questioned signature, the upward strokes of eight (8) of these signatures
are looped, while the upward stroke of the seventh forms a severe forty-five degree
(45°) with the previous stroke. The difference is glaring, and indeed, the PNP
examiner was confronted with the inconsistency in point no. 6.
Q: Now, in this questioned document point no. 6, the “s”
stroke is directly upwards.
 A: Yes, sir.
Q: Now, can you look at all these standard signature (sic)
were (sic) point 6 is repeated or the last stroke “s” is
pointing directly upwards?
A: There is none in the standard signature, sir.
Again, the PNP examiner downplayed the uniqueness of the final stroke in the
questioned signature as a mere variation, the same excuse she proffered for the other
marked differences noted by the Court and the counsel for petitioner.
There is no reason to doubt why the RTC gave credence to the testimony of the
NBI examiner, and not the PNP expert’s. The NBI expert, Rhoda Flores, clearly
qualifies as an expert witness. A document examiner for fifteen years, she had been
promoted to the rank of Senior Document Examiner with the NBI, and had held that
rank for twelve years prior to her testimony. She had placed among the top five
examinees in the Competitive Seminar in Question Document Examination,
conducted by the NBI Academy, which qualified her as a document examiner. She
had trained with the Royal Hongkong Police Laboratory and is a member of the
International Association for Identification. As of the time she testified, she had
examined more than fifty to fifty-five thousand questioned documents, on an average
of fifteen to twenty documents a day. In comparison, PNP document examiner Perez
admitted to having examined only around five hundred documents as of her
testimony.
In analyzing the signatures, NBI Examiner Flores utilized the scientific
comparative examination method consisting of analysis, recognition, comparison
and evaluation of the writing habits with the use of instruments such as a magnifying
lense, a stereoscopic microscope, and varied lighting substances. She also prepared
enlarged photographs of the signatures in order to facilitate the necessary
comparisons. She compared the questioned signature as against ten (10) other
sample signatures of Jong. Five of these signatures were executed on checks
previously issued by Jong, while the other five contained in business letters Jong had
signed. The NBI found that there were significant differences in the handwriting
characteristics existing between the questioned and the sample signatures, as to
manner of execution, link/connecting strokes, proportion characteristics, and other
identifying details.
The RTC was sufficiently convinced by the NBI examiner’s testimony, and
explained her reasons in its Decisions. While the Court of Appeals disagreed and
upheld the findings of the PNP, it failed to convincingly demonstrate why such
findings were more credible than those of the NBI expert. As a throwaway, the
assailed Decision noted that the PNP, not the NBI, had the opportunity to examine
the specimen signature card signed by Jong, which was relied upon by the employees
of FEBTC in authenticating Jong’s signature. The distinction is irrelevant in
establishing forgery. Forgery can be established comparing the contested signatures
as against those of any sample signature duly established as that of the persons
whose signature was forged.
FEBTC lays undue emphasis on the fact that the PNP examiner did compare the
questioned signature against the bank signature cards. The crucial fact in question is
whether or not the check was forged, not whether the bank could have detected the
forgery. The latter issue becomes relevant only if there is need to weigh the
comparative negligence between the bank and the party whose signature was
forged.
At the same time, the Court of Appeals failed to assess the effect of Jong’s
testimony that the signature on the check was not his. The assertion may seem self-
serving at first blush, yet it cannot be ignored that Jong was in the best position to
know whether or not the signature on the check was his. While his claim should not
be taken at face value, any averments he would have on the matter, if adjudged as
truthful, deserve primacy in consideration. Jong’s testimony is supported by the
findings of the NBI examiner. They are also backed by factual circumstances that
support the conclusion that the assailed check was indeed forged. Judicial notice can
be taken that is highly unusual in practice for a business establishment to draw a
check for close to a million pesos and make it payable to cash or bearer, and not to
order. Jong immediately reported the forgery upon its discovery. He filed the
appropriate criminal charges against Sempio, the putative forger.
Now for determination is whether Samsung Construction was precluded from
setting up the defense of forgery under Section 23 of the Negotiable Instruments
Law. The Court of Appeals concluded that Samsung Construction was negligent, and
invoked the doctrines that “where a loss must be borne by one of two innocent
person, can be traced to the neglect or fault of either, it is reasonable that it would be
borne by him, even if innocent of any intentional fraud, through whose means it has
succeeded or who put into the power of the third person to perpetuate the wrong.”
Applying these rules, the Court of Appeals determined that it was the negligence of
Samsung Construction that allowed the encashment of the forged check.
In the case at bar, the forgery appears to have been made possible through the
acts of one Jose Sempio III, an assistant accountant employed by the plaintiff
Samsung [Construction] Co. Philippines, Inc. who supposedly stole the blank check
and who presumably is responsible for its encashment through a forged signature of
Jong Kyu Lee. Sempio was assistant to the Korean accountant who was in possession
of the blank checks and who through negligence, enabled Sempio to have access to
the same. Had the Korean accountant been more careful and prudent in keeping the
blank checks Sempio would not have had the chance to steal a page thereof and to
effect the forgery. Besides, Sempio was an employee who appears to have had
dealings with the defendant Bank in behalf of the plaintiff corporation and on the
date the check was encashed, he was there to certify that it was a genuine check
issued to purchase equipment for the company.
We recognize that Section 23 of the Negotiable Instruments Law bars a party from
setting up the defense of forgery if it is guilty of negligence. Yet, we are unable to
conclude that Samsung Construction was guilty of negligence in this case. The
appellate court failed to explain precisely how the Korean accountant was negligent
or how more care and prudence on his part would have prevented the forgery. We
cannot sustain this “tar and feathering” resorted to without any basis.
The bare fact that the forgery was committed by an employee of the party whose
signature was forged cannot necessarily imply that such party’s negligence was the
cause for the forgery. Employers do not possess the preternatural gift of cognition as
to the evil that may lurk within the hearts and minds of their employees. The Court’s
pronouncement in PCI Bank v. Court of Appeals applies in this case, to wit:
[T]he mere fact that the forgery was committed by a drawer-payor’s confidential
employee or agent, who by virtue of his position had unusual facilities for
perpetrating the fraud and imposing the forged paper upon the bank, does not entitle
the bank to shift the loss to the drawer-payor, in the absence of some circumstance
raising estoppel against the drawer.
Admittedly, the record does not clearly establish what measures Samsung
Construction employed to safeguard its blank checks.
Jong did testify that his accountant, Kyu, kept the checks inside a “safety box,”
and no contrary version was presented by FEBTC. However, such testimony cannot
prove that the checks were indeed kept in a safety box, as Jong’s testimony on that
point is hearsay, since Kyu, and not Jong, would have the personal knowledge as to
how the checks were kept.
Still, in the absence of evidence to the contrary, we can conclude that there was no
negligence on Samsung Construction’s part. The presumption remains that every
person takes ordinary care of his concerns, and that the ordinary course of business
has been followed. Negligence is not presumed, but must be proven by him who
alleges it. While the complaint was lodged at the instance of Samsung Construction,
the matter it had to prove was the claim it had alleged—whether the check was
forged. It cannot be required as well to prove that it was not negligent, because the
legal presumption remains that ordinary care was employed.
Thus, it was incumbent upon FEBTC, in defense, to prove the negative fact that
Samsung Construction was negligent. While the payee, as in this case, may not have
the personal knowledge as to the standard procedures observed by the drawer, it well
has the means of disputing the presumption of regularity. Proving a negative fact
may be “a difficult office,” but necessarily so, as it seeks to overcome a presumption
in law. FEBTC was unable to dispute the presumption of ordinary care exercised by
Samsung Construction, hence we cannot agree with the Court of Appeals’ finding of
negligence.
The assailed Decision replicated the extensive efforts which FEBTC devoted to
establish that there was no negligence on the part of the bank in its acceptance and
payment of the forged check. However, the degree of diligence exercised by the bank
would be irrelevant if the drawer is not precluded from setting up the defense of
forgery under Section 23 by his own negligence. The rule of equity enunciated in PNB
v. National City Bank of New York, as relied upon by the Court of Appeals, deserves
careful examination.
The point in issue has sometimes been said to be that of negligence. The drawee
who has paid upon the forged signature is held to bear the loss, because he
has been negligent in failing to recognize that the handwriting is not that
of his customer. But it follows obviously that if the payee, holder, or presenter of the
forged paper has himself been in default, if he has himself been guilty of a negligence
prior to that of the banker, or if by any act of his own he has at all contributed to
induce the banker’s negligence, then he may lose his right to cast the loss upon the
banker. (Emphasis supplied)
Quite palpably, the general rule remains that the drawee who has paid upon the
forged signature bears the loss. The exception to this rule arises only when
negligence can be traced on the part of the drawer whose signature was forged, and
the need arises to weigh the comparative negligence between the drawer and the
drawee to determine who should bear the burden of loss. The Court finds no basis to
conclude that Samsung Construction was negligent in the safekeeping of its checks.
For one, the settled rule is that the mere fact that the depositor leaves his check book
lying around does not constitute such negligence as will free the bank from liability to
him, where a clerk of the depositor or other persons, taking advantage of the
opportunity, abstract some of the check blanks, forges the depositor’s signature and
collect on the checks from the bank. And for another, in point of fact Samsung
Construction was not negligent at all since it reported the forgery almost immediately
upon discovery.
 It is also worth noting that the forged signatures in PNB v. National City Bank of
New York were not of the drawer, but of indorsers. The same circumstance
attends PNB v. Court of Appeals, which was also cited by the Court of Appeals. It is
accepted that a forged signature of the drawer differs in treatment than a forged
signature of the indorser.
The justification for the distinction between forgery of the signature of the drawer
and forgery of an indorsement is that the drawee is in a position to verify the
drawer’s signature by comparison with one in his hands, but has ordinarily no
opportunity to verify an indorsement.
Thus, a drawee bank is generally liable to its depositor in paying a check which
bears either a forgery of the drawer’s signature or a forged indorsement. But the bank
may, as a general rule, recover back the money which it has paid on a check bearing a
forged indorsement, whereas it has not this right to the same extent with reference to
a check bearing a forgery of the drawer’s signature.
The general rule imputing liability on the drawee who paid out on the forgery
holds in this case.
Since FEBTC puts into issue the degree of care it exercised before paying out on
the forged check, we might as well comment on the bank’s performance of its duty. It
might be so that the bank complied with its own internal rules prior to paying out on
the questionable check. Yet, there are several troubling circumstances that lead us to
believe that the bank itself was remiss in its duty.
The fact that the check was made out in the amount of nearly one million pesos is
unusual enough to require a higher degree of caution on the part of the bank. Indeed,
FEBTC confirms this through its own internal procedures. Checks below twenty-five
thousand pesos require only the approval of the teller; those between twenty-five
thousand to one hundred thousand pesos necessitate the approval of one bank
officer; and should the amount exceed one hundred thousand pesos, the concurrence
of two bank officers is required.
In this case, not only did the amount in the check nearly total one million
pesos, it was also payable to cash. That latter circumstance should have aroused the
suspicion of the bank, as it is not ordinary business practice for a check for such large
amount to be made payable to cash or to bearer, instead of to the order of a specified
person. Moreover, the check was presented for payment by one Roberto Gonzaga,
who was not designated as the payee of the check, and who did not carry with him
any written proof that he was authorized by Samsung Construction to encash the
check. Gonzaga, a stranger to FEBTC, was not even an employee of Samsung
Construction. These circumstances are already suspicious if taken independently,
much more so if they are evaluated in concurrence. Given the shadiness attending
Gonzaga’s presentment of the check, it was not sufficient for FEBTC to have merely
complied with its internal procedures, but mandatory that all earnest efforts be
undertaken to ensure the validity of the check, and of the authority of Gonzaga to
collect payment therefor.
According to FEBTC Senior Assistant Cashier Gemma Velez, the bank tried, but
failed, to contact Jong over the phone to verify the check. She added that calling the
issuer or drawer of the check to verify the same was not part of the standard
procedure of the bank, but an “extra effort.” Even assuming that such personal
verification is tantamount to extraordinary diligence, it cannot be denied that FEBTC
still paid out the check despite the absence of any proof of verification from the
drawer. Instead, the bank seems to have relied heavily on the say-so of Sempio, who
was present at the bank at the time the check was presented.
FEBTC alleges that Sempio was well-known to the bank officers, as he had
regularly transacted with the bank in behalf of Samsung Construction. It was even
claimed that everytime FEBTC would contact Jong about problems with his account,
Jong would hand the phone over to Sempio. However, the only proof of such
allegations is the testimony of Gemma Velez, who also testified that she did not know
Sempio personally, and had met Sempio for the first time only on the day the check
was encashed. In fact, Velez had to inquire with the other officers of the bank as to
whether Sempio was actually known to the employees of the bank. Obviously, Velez
had no personal knowledge as to the past relationship between FEBTC and Sempio,
and any averments of her to that effect should be deemed hearsay evidence.
Interestingly, FEBTC did not present as a witness any other employee of their Bel-Air
branch, including those who supposedly had transacted with Sempio before.
Even assuming that FEBTC had a standing habit of dealing with Sempio, acting in
behalf of Samsung Construction, the irregular circumstances attending the
presentment of the forged check should have put the bank on the highest degree of
alert. The Court recently emphasized that the highest degree of care and diligence is
required of banks.
Banks are engaged in a business impressed with public interest, and it is their
duty to protect in return their many clients and depositors who transact business
with them. They have the obligation to treat their client’s account meticulously and
with the highest degree of care, considering the fiduciary nature of their relationship.
The diligence required of banks, therefore, is more than that of a good father of a
family.
 Given the circumstances, extraordinary diligence dictates that FEBTC should have
ascertained from Jong personally that the signature in the questionable check was
his.

Still, even if the bank performed with utmost diligence, the drawer whose
signature was forged may still recover from the bank as long as he or she is not
precluded from setting up the defense of forgery. After all, Section 23 of the
Negotiable Instruments Law plainly states that no right to enforce the payment of a
check can arise out of a forged signature. Since the drawer, Samsung Construction, is
not precluded by negligence from setting up the forgery, the general rule should
apply. Consequently, if a bank pays a forged check, it must be considered as paying
out of its funds and cannot charge the amount so paid to the account of the depositor.
A bank is liable, irrespective of its good faith, in paying a forged check.

WHEREFORE, the Petition is GRANTED. The Decisionof the Court of Appeals

dated 28 November 1996 is REVERSED, and the Decision of the Regional Trial Court
of Manila, Branch 9, dated 25 April 1994 is REINSTATED. Costs against respondent.

SO ORDERED.

Petition granted, judgment reversed. That of the court a quo reinstated.

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

Incorporated vs. Naval, 344 SCRA 76 [2000])
 G.R. No. 107382. January 31, 1996.*
ASSOCIATED BANK, petitioner, vs. HON. COURT OF APPEALS, PROVINCE OF
TARLAC and PHILIPPINE NATIONAL BANK, respondents.
G.R. No. 107612. January 31, 1996.*
PHILIPPINE NATIONAL BANK, petitioner, vs.HONORABLE COURT OF
APPEALS, PROVINCE OF TARLAC, and ASSOCIATED BANK, respondents.
Commercial Law; Negotiable Instruments Law; Forgery; A person whose
signature to an instrument was forged was never a party and never consented to
the contract which allegedly gave rise to such instrument.—A forged signature,
whether it be that of the drawer or the payee, is wholly inoperative and no one can
gain title to the instrument through it. A person whose signature to an instrument
was forged was never a party and never consented to the contract which allegedly
gave rise to such instrument. Section 23 does not avoid the instrument but only the
forged signature. Thus, a forged indorsement does not operate as the payee’s
indorsement.
Same; Same; Same; Parties who warrant or admit the genuineness of the
signature in question and those who, by their acts, silence or negligence are
estopped from setting up the defense of forgery, are precluded from using this
defense.—The exception to the general rule in Section 23 is where “a party against
whom it is sought to enforce a right is precluded from setting up the forgery or want
of authority.” Parties who warrant or admit the genuineness of the signature in
question and those who, by their acts, silence or negligence are estopped from setting
up the defense of forgery, are precluded from using this defense. Indorsers, persons
negotiating by delivery and acceptors are warrantors of the genuineness of the
signatures on the instrument.
Same; Same; Same; When the indorsement is a forgery, only the person whose
signature is forged can raise the defense of forgery against a holder in due course.—
In bearer instruments, the signature of the payee or holder is unnecessary to pass
title to the instrument. Hence, when the indorsement is a forgery, only the person
whose signature is forged can raise the defense of forgery against a holder in due
course.
Same; Same; Same; When the holder’s indorsement is forged, all parties prior
to the forgery may raise the real defense of forgery against all parties subsequent
thereto.—Where the instrument is payable to order at the time of the forgery, such as
the checks in this case, the signature of its rightful holder (here, the payee hospital) is
essential to transfer title to the same instrument. When the holder’s indorsement is
forged, all parties prior to the forgery may raise the real defense of forgery against all
parties subsequent thereto.
Same; Same; Same; Indorser cannot interpose the defense that signatures
prior to him are forged.—An indorser of an order instrument warrants “that the
instrument is genuine and in all respects what it purports to be; that he has a good
title to it; that all prior parties had capacity to contract; and that the instrument is at
the time of his indorsement valid and subsisting.” He cannot interpose the defense
that signatures prior to him are forged.
Same; Same; Same; A collecting bank where a check is deposited and which
indorses the check upon presentment with the drawee bank is such an indorser.—A
collecting bank where a check is deposited and which indorses the check upon
presentment with the drawee bank, is such an indorser. So even if the indorsement
on the check deposited by the bank’s client is forged, the collecting bank is bound by
his warranties as an indorser and cannot set up the defense of forgery as against the
drawee bank.
Same; Same; Same; Payment under a forged indorsement is not to the
drawer’s order.—The bank on which a check is drawn, known as the drawee bank, is
under strict liability to pay the check to the order of the payee. The drawer’s
instructions are reflected on the face and by the terms of the check. Payment under a
forged indorsement is not to the drawer’s order. When the drawee bank pays a
person other than the payee, it does not comply with the terms of the check and
violates its duty to charge its customer’s (the drawer) account only for properly
payable items. Since the drawee bank did not pay a holder or other person entitled to
receive payment, it has no right to reimbursement from the drawer. The general rule
then is that the drawee bank may not debit the drawer’s account and is not entitled to
indemnification from the drawer. The risk of loss must perforce fall on the drawee
bank.
Same; Same; Same; Drawer is precluded from asserting forgery where the
drawee bank can prove a failure by the customer/drawer to exercise ordinary care
that substantially contributed to the making of the forged signature.—However, if
the drawee bank can prove a failure by the customer/drawer to exercise ordinary care
that substantially contributed to the making of the forged signature, the drawer is
precluded from asserting the forgery.
Same; Same; Same; Drawee bank can seek reimbursement or a return of the
amount it paid from the presentor bank or person.—In cases involving checks with
forged indorsements, such as the present petition, the chain of liability does not end
with the drawee bank. The drawee bank may not debit the account of the drawer but
may generally pass liability back through the collection chain to the party who took
from the forger and, of course, to the forger himself, if available. In other words, the
drawee bank can seek reimbursement or a return of the amount it paid from the
presentor bank or person. Theoretically, the latter can demand reimbursement from
the person who indorsed the check to it and so on. The loss falls on the party who
took the check from the forger, or on the forger himself.
Same; Same; Same; A collecting bank which indorses a check bearing a forged
indorsement and presents it to the drawee bank guarantees all prior indorsements
including the forged indorsement.—More importantly, by reason of the statutory
warranty of a general indorser in Section 66 of the Negotiable Instruments Law, a
collecting bank which indorses a check bearing a forged indorsement and presents it
to the drawee bank guarantees all prior indorsements, including the forged
indorsement. It warrants that the instrument is genuine, and that it is valid and
subsisting at the time of his indorsement. Because the indorsement is a forgery, the
collecting bank commits a breach of this warranty and will be accountable to the
drawee bank.
Same; Same; Same; Drawee banks not similarly situated as the collecting
bank.—The drawee bank is not similarly situated as the collecting bank because the
former makes no warranty as to the genuineness of any indorsement. The drawee
bank’s duty is but to verify the genuineness of the drawer’s signature and not of the
indorsement because the drawer is its client.
Same; Same; Same; Drawee bank has the duty to promptly inform the
presentor of the forgery upon discovery.—Hence, the drawee bank can recover the
amount paid on the check bearing a forged indorsement from the collecting bank.
However, a drawee bank has the duty to promptly inform the presentor of the forgery
upon discovery. If the drawee bank delays in informing the presentor of the forgery,
thereby depriving said presentor of the right to recover from the forger, the former is
deemed negligent and can no longer recover from the presentor.
Same; Same; Same; Rule mandates that the checks be returned within twenty-
four hours after discovery of the forgery but in no event beyond the period fixed by
law for filing a legal action.—The rule mandates that the checks be returned within
twenty-four hours after discovery of the forgery but in no event beyond the period
fixed by law for filing a legal action. The rationale of the rule is to give the collecting
bank (which indorsed the check) adequate opportunity to proceed against the forger.
If prompt notice is not given, the collecting bank may be prejudiced and lose the
opportunity to go after its depositor.
PETITIONS for review of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
ROMERO, J.:
Where thirty checks bearing forged endorsements are paid, who bears the loss,
the drawer, the drawee bank or the collecting bank?
This is the main issue in these consolidated petitions for review assailing the
decision of the Court of Appeals in “Province of Tarlac v. Philippine National Bank
v. Associated Bank v. Fausto Pangilinan, et al.” (CA-G.R. No. CV No. 17962).
The facts of the case are as follows:
The Province of Tarlac maintains a current account with the Philippine National
Bank (PNB) Tarlac Branch where the provincial funds are deposited. Checks issued
by the Province are signed by the Provincial Treasurer and countersigned by the
Provincial Auditor or the Secretary of the Sangguniang Bayan.
A portion of the funds of the province is allocated to the Concepcion Emergency
Hospital. The allotment checks for said government hospital are drawn to the order
of “Concepcion Emergency Hospital, Concepcion, Tarlac” or “The Chief, Concepcion
Emergency Hospital, Concepcion, Tarlac.” The checks are released by the Office of
the Provincial Treasurer and received for the hospital by its administrative officer
and cashier.
In January 1981, the books of account of the Provincial Treasurer were post-
audited by the Provincial Auditor. It was then discovered that the hospital did not
receive several allotment checks drawn by the Province.
On February 19, 1981, the Provincial Treasurer requested the manager of the PNB
to return all of its cleared checks which were issued from 1977 to 1980 in order to
verify the regularity of their encashment. After the checks were examined, the
Provincial Treasurer learned that 30 checks amounting to P203,300.00 were
encashed by one Fausto Pangilinan, with the Associated Bank acting as collecting
bank.
It turned out that Fausto Pangilinan, who was the administrative officer and
cashier of payee hospital until his retirement on February 28, 1978, collected the
questioned checks from the office of the Provincial Treasurer. He claimed to be
assisting or helping the hospital follow up the release of the checks and had official
receipts. Pangilinan sought to encash the first check with Associated Bank. However,
the manager of Associated Bank refused and suggested that Pangilinan deposit the
check in his personal savings account with the same bank. Pangilinan was able to
withdraw the money when the check was cleared and paid by the drawee bank, PNB.
After forging the signature of Dr. Adena Canlas who was chief of the payee
hospital, Pangilinan followed the same procedure for the second check, in the
amount of P5,000.00 and dated April 20, 1978, as well as for twenty-eight other
checks of various amounts and on various dates. The last check negotiated by
Pangilinan was for P8,000.00 and dated February 10, 1981. All the checks bore the
stamp of Associated Bank which reads “All prior endorsements guaranteed
ASSOCIATED BANK.”
Jesus David, the manager of Associated Bank testified that Pangilinan made it
appear that the checks were paid to him for certain projects with the hospital. He did
not find as irregular the fact that the checks were not payable to Pangilinan but to the
Concepcion Emergency Hospital. While he admitted that his wife and Pangilinan’s
wife are first cousins, the manager denied having given Pangilinan preferential
treatment on this account.
On February 26, 1981, the Provincial Treasurer wrote the manager of the PNB
seeking the restoration of the various amounts debited from the current account of
the Province. In turn, the PNB manager demanded reimbursement from the
Associated Bank on May 15, 1981.
As both banks resisted payment, the Province of Tarlac brought suit against PNB
which, in turn, impleaded Associated Bank as third-party defendant. The latter then
filed a fourth-party complaint against Adena Canlas and Fausto Pangilinan.
After trial on the merits, the lower court rendered its decision on March 21, 1988,
disposing as follows:
“WHEREFORE, in view of the foregoing, judgment is hereby rendered:
1. On the basic complaint, in favor of plaintiff Province of Tarlac and against defendant
Philippine National Bank (PNB), ordering the latter to pay to the former, the sum of
Two Hundred
2. Three Thousand Three Hundred (P203,300.00) Pesos with legal interest thereon
from March 20, 1981 until fully paid;
3. On the third-party complaint, in favor of defendant/third-party plaintiff Philippine
National Bank (PNB) and against third-party defendant/fourth-party plaintiff
Associated Bank ordering the latter to reimburse to the former the amount of Two
Hundred Three Thousand Three Hundred (P203,300.00) Pesos with legal interests
thereon from March 20, 1981 until fully paid;
4. On the fourth-party complaint, the same is hereby ordered dismissed for lack of cause
of action as against fourth-party defendant Adena Canlas and lack of jurisdiction over
the person of fourth-party defendant Fausto Pangilinan as against the latter.
5. On the counterclaims on the complaint, third-party complaint and fourth-party
complaint, the same are hereby ordered dismissed for lack of merit.
SO ORDERED.”
PNB and Associated Bank appealed to the Court of Appeals. Respondent court
affirmed the trial court’s decision in toto on September 30, 1992.
Hence these consolidated petitions which seek a reversal of respondent appellate
court’s decision.
PNB assigned two errors. First, the bank contends that respondent court erred in
exempting the Province of Tarlac from liability when, in fact, the latter was negligent
because it delivered and released the questioned checks to Fausto Pangilinan who
was then already retired as the hospital’s cashier and administrative officer. PNB also
maintains its innocence and alleges that as between two innocent persons, the one
whose act was the cause of the loss, in this case the Province of Tarlac, bears the loss.
Next, PNB asserts that it was error for the court to order it to pay the province and
then seek reimbursement from Associated Bank. According to petitioner bank,
respondent appellate court should have directed Associated Bank to pay the
adjudged liability directly to the Province of Tarlac to avoid circuity.
Associated Bank, on the other hand, argues that the order of liability should be
totally reversed, with the drawee bank (PNB) solely and ultimately bearing the loss.
Respondent court allegedly erred in applying Section 23 of the Philippine Clearing
House Rules instead of Central Bank Circular No. 580, which, being an
administrative regulation issued pursuant to law, has the force and effect of law. The
PCHC Rules are merely contractual stipulations among and between member-banks.
As such, they cannot prevail over the aforesaid CB Circular.
It likewise contends that PNB, the drawee bank, is estopped from asserting the
defense of guarantee of prior indorsements against Associated Bank, the collecting
bank. In stamping the guarantee (for all prior indorsements), it merely followed a
mandatory requirement for clearing and had no choice but to place the stamp of
guarantee; otherwise, there would be no clearing. The bank will be in a “no-win”
situation and will always bear the loss as against the drawee bank.
Associated Bank also claims that since PNB already cleared and paid the value of
the forged checks in question, it is now estopped from asserting the defense that
Associated Bank guaranteed prior indorsements. The drawee bank allegedly has the
primary duty to verify the genuineness of payee’s indorsement before paying the
check.
While both banks are innocent of the forgery, Associated Bank claims that PNB
was at fault and should solely bear the loss because it cleared and paid the forged
checks.
 ***
The case at bench concerns checks payable to the order of Concepcion Emergency
Hospital or its Chief. They were properly issued and bear the genuine signatures of
the drawer, the Province of Tarlac. The infirmity in the questioned checks lies in the
payee’s (Concepcion Emergency Hospital) indorsements which are forgeries. At the
time of their indorsement, the checks were order instruments.
Checks having forged indorsements should be differentiated from forged checks
or checks bearing the forged signature of the drawer.
Section 23 of the Negotiable Instruments Law (NIL) provides:
Sec. 23. FORGED SIGNATURE, EFFECT OF.—When a signature is forged or made
without authority of the person whose signature it purports to be, it is wholly
inoperative, and no right to retain the instrument, or to give a discharge therefor, or
to enforce payment thereof against any party thereto, can be acquired through or
under such signature unless the party against whom it is sought to enforce such right
is precluded from setting up the forgery or want of authority.
A forged signature, whether it be that of the drawer or the payee, is wholly
inoperative and no one can gain title to the instrument through it. A person whose
signature to an instrument was forged was never a party and never consented to the
contract which allegedly gave rise to such instrument. Section 23 does not avoid the
instrument but only the forged signature. Thus, a forged indorsement does not
operate as the payee’s indorsement.
The exception to the general rule in Section 23 is where “a party against whom it
is sought to enforce a right is precluded from setting up the forgery or want of
authority.” Parties who warrant or admit the genuineness of the signature in question
and those who, by their acts, silence or negligence are estopped from setting up the
defense of forgery, are precluded from using this defense. Indorsers, persons
negotiating by delivery and acceptors are warrantors of the genuineness of the
signatures on the instrument.
In bearer instruments, the signature of the payee or holder is unnecessary to pass
title to the instrument. Hence, when the indorsement is a forgery, only the person
whose signature is forged can raise the defense of forgery against a holder in due
course.
The checks involved in this case are order instruments, hence, the following
discussion is made with reference to the effects of a forged indorsement on an
instrument payable to order.
Where the instrument is payable to order at the time of the forgery, such as the
checks in this case, the signature of its rightful holder (here, the payee hospital) is
essential to transfer title to the same instrument. When the holder’s indorsement is
forged, all parties prior to the forgery may raise the real defense of forgery against all
parties subsequent thereto.
An indorser of an order instrument warrants “that the instrument is genuine and
in all respects what it purports to be; that he has a good title to it; that all prior
parties had capacity to contract; and that the instrument is at the time of his
indorsement valid and subsisting.” He cannot interpose the defense that signatures
prior to him are forged.
A collecting bank where a check is deposited and which indorses the check upon
presentment with the drawee bank, is such an indorser. So even if the indorsement
on the check deposited by the bank’s client is forged, the collecting bank is bound by
his warranties as an indorser and cannot set up the defense of forgery as against the
drawee bank.
The bank on which a check is drawn, known as the drawee bank, is under strict
liability to pay the check to the order of the payee. The drawer’s instructions are
reflected on the face and by the terms of the check. Payment under a forged
indorsement is not to the drawer’s order. When the drawee bank pays a person other
than the payee, it does not comply with the terms of the check and violates its duty to
charge its customer’s (the drawer) account only for properly payable items. Since the
drawee bank did not pay a holder or other person entitled to receive payment, it has
no right to reimbursement from the drawer. The general rule then is that the drawee
bank may not debit the drawer’s account and is not entitled to indemnification from
the drawer. The risk of loss must perforce fall on the drawee bank.
However, if the drawee bank can prove a failure by the customer/drawer to
exercise ordinary care that substantially contributed to the making of the forged
signature, the drawer is precluded from asserting the forgery.
If at the same time the drawee bank was also negligent to the point of
substantially contributing to the loss, then such loss from the forgery can be
apportioned between the negligent drawer and the negligent bank.
In cases involving a forged check, where the drawer’s signature is forged, the
drawer can recover from the drawee bank. No drawee bank has a right to pay a
forged check. If it does, it shall have to recredit the amount of the check to the
account of the drawer. The liability chain ends with the drawee bank whose
responsibility it is to know the drawer’s signature since the latter is its customer.
 In cases involving checks with forged indorsements, such as the present petition,
the chain of liability does not end with the drawee bank. The drawee bank may not
debit the account of the drawer but may generally pass liability back through the
collection chain to the party who took from the forger and, of course, to the forger
himself, if available. In other words, the drawee bank can seek reimbursement or a
return of the amount it paid from the presentor bank or person. Theoretically, the
latter can demand reimbursement from the person who indorsed the check to it and
so on. The loss falls on the party who took the check from the forger, or on the forger
himself.
In this case, the checks were indorsed by the collecting bank (Associated Bank) to
the drawee bank (PNB). The former will necessarily be liable to the latter for the
checks bearing forged indorsements. If the forgery is that of the payee’s or holder’s
indorsement, the collecting bank is held liable, without prejudice to the latter
proceeding against the forger.
Since a forged indorsement is inoperative, the collecting bank had no right to be
paid by the drawee bank. The former must necessarily return the money paid by the
latter because it was paid wrongfully.
More importantly, by reason of the statutory warranty of a general indorser in
Section 66 of the Negotiable Instruments Law, a collecting bank which indorses a
check bearing a forged indorsement and presents it to the drawee bank guarantees all
prior indorsements, including the forged indorsement. It warrants that the
instrument is genuine, and that it is valid and subsisting at the time of his
indorsement. Because the indorsement is a forgery, the collecting bank commits a
breach of this warranty and will be accountable to the drawee bank. This liability
scheme operates without regard to fault on the part of the collecting/presenting
bank. Even if the latter bank was not negligent, it would still be liable to the drawee
bank because of its indorsement.
The Court has consistently ruled that “the collecting bank or last endorser
generally suffers the loss because it has the duty to ascertain the genuineness of all
prior endorsements considering that the act of presenting the check for payment to
the drawee is an assertion that the party making the presentment had done its duty
to ascertain the genuineness of the endorsements.”
The drawee bank is not similarly situated as the collecting bank because the
former makes no warranty as to the genuineness of any indorsement. The drawee
bank’s duty is but to verify the genuineness of the drawer’s signature and not of the
indorsement because the drawer is its client.
Moreover, the collecting bank is made liable because it is privy to the depositor
who negotiated the check. The bank knows him, his address and history because he is
a client. It has taken a risk on his deposit. The bank is also in a better position to
detect forgery, fraud or irregularity in the indorsement.
Hence, the drawee bank can recover the amount paid on the check bearing a
forged indorsement from the collecting bank. However, a drawee bank has the duty
to promptly inform the presentor of the forgery upon discovery. If the drawee bank
delays in informing the presentor of the forgery, thereby depriving said presentor of
the right to recover from the forger, the former is deemed negligent and can no
longer recover from the presentor.
Applying these rules to the case at bench, PNB, the drawee bank, cannot debit the
current account of the Province of Tarlac because it paid checks which bore forged
indorsements. However, if the Province of Tarlac as drawer was negligent to the
point of substantially contributing to the loss, then the drawee bank PNB can charge
its account. If both drawee bank-PNB and drawer-Province of Tarlac were negligent,
the loss should be properly apportioned between them.
The loss incurred by drawee bank-PNB can be passed on to the collecting bank-
Associated Bank which presented and indorsed the checks to it. Associated Bank can,
in turn, hold the forger, Fausto Pangilinan, liable.
If PNB negligently delayed in informing Associated Bank of the forgery, thus
depriving the latter of the opportunity to recover from the forger, it forfeits its right
to reimbursement and will be made to bear the loss.
After careful examination of the records, the Court finds that the Province of
Tarlac was equally negligent and should, therefore, share the burden of loss from the
checks bearing a forged indorsement.
The Province of Tarlac permitted Fausto Pangilinan to collect the checks when the
latter, having already retired from government service, was no longer connected with
the hospital. With the exception of the first check (dated January 17, 1978), all the
checks were issued and released after Pangilinan’s retirement on February 28, 1978.
After nearly three years, the Treasurer’s office was still releasing the checks to the
retired cashier. In addition, some of the aid allotment checks were released to
Pangilinan and the others to Elizabeth Juco, the new cashier. The fact that there were
now two persons collecting the checks for the hospital is an unmistakable sign of an
irregularity which should have alerted employees in the Treasurer’s office of the
fraud being committed. There is also evidence indicating that the provincial
employees were aware of Pangilinan’s retirement and consequent dissociation from
the hospital. Jose Meru, the Provincial Treasurer, testified:
 “ATTY. MORGA:
Q: Now, is it true that for a given month there were two releases of
checks, one went to Mr. Pangilinan and one went to Miss Juco?
JOSE MERU:
A: Yes, sir.
Q: Will you please tell us how at the time (sic) when the authorized
representative of Concepcion Emergency Hospital is and was
supposed to be Miss Juco?
A: Well, as far as my investigation show (sic) the assistant cashier told
me that Pangilinan represented himself as also authorized to help in
the release of these checks and we were apparently misled because
they accepted the representation of Pangilinan that he was helping
them in the release of the checks and besides according to them they
were, Pangilinan, like the rest, was able to present an official receipt
to acknowledge these receipts and according to them since this is a
government check and believed that it will eventually go to the
hospital following the standard procedure of negotiating government
checks, they released the checks to Pangilinan aside from Miss Juco.”
The failure of the Province of Tarlac to exercise due care contributed to a
significant degree to the loss tantamount to negligence. Hence, the Province of Tarlac
should be liable for part of the total amount paid on the questioned checks.
The drawee bank PNB also breached its duty to pay only according to the terms of
the check. Hence, it cannot escape liability and should also bear part of the loss.
As earlier stated, PNB can recover from the collecting bank.
In the case of Associated Bank v. CA, six crossed checks with forged indorsements
were deposited in the forger’s account with the collecting bank and were later paid by
four different drawee banks. The Court found the collecting bank (Associated) to be
negligent and held:
“The Bank should have first verified his right to endorse the crossed checks, of which
he was not the payee, and to deposit the proceeds of the checks to his own account.
The Bank was by reason of the nature of the checks put upon notice that they were
issued for deposit only to the private respondent’s account. x x x”
The situation in the case at bench is analogous to the above case, for it was not the
payee who deposited the checks with the collecting bank. Here, the checks were all
payable to Concepcion Emergency Hospital but it was Fausto Pangilinan who
deposited the checks in his personal savings account.
Although Associated Bank claims that the guarantee stamped on the checks (All
prior and/or lack of endorsements guaranteed) is merely a requirement forced upon
it by clearing house rules, it cannot but remain liable. The stamp guaranteeing prior
indorsements is not an empty rubric which a bank must fulfill for the sake of
convenience. A bank is not required to accept all the checks negotiated to it. It is
within the bank’s discretion to receive a check for no banking institution would
consciously or deliberately accept a check bearing a forged indorsement. When a
check is deposited with the collecting bank, it takes a risk on its depositor. It is only
logical that this bank be held accountable for checks deposited by its customers.
A delay in informing the collecting bank (Associated Bank) of the forgery, which
deprives it of the opportunity to go after the forger, signifies negligence on the part of
the drawee bank (PNB) and will preclude it from claiming reimbursement.
It is here that Associated Bank’s assignment of error concerning C.B. Circular No.
580 and Section 23 of the Philippine Clearing House Corporation Rules comes to
fore. Under Section 4 (c) of CB Circular No. 580, items bearing a forged endorsement
shall be returned within twenty-four (24) hours after discovery of the forgery but in
no event beyond the period fixed or provided by law for filing of a legal action by the
returning bank. Section 23 of the PCHC Rules deleted the requirement that items
bearing a forged endorsement should be returned within twenty-four hours.
Associated Bank now argues that the aforementioned Central Bank Circular is
applicable. Since PNB did not return the questioned checks within twenty-four
hours, but several days later, Associated Bank alleges that PNB should be considered
negligent and not entitled to reimbursement of the amount it paid on the checks.
The Court deems it unnecessary to discuss Associated Bank’s assertions that CB
Circular No. 580 is an administrative regulation issued pursuant to law and as such,
must prevail over the PCHC rule. The Central Bank circular was in force for all banks
until June 1980 when the Philippine Clearing House Corporation (PCHC) was set up
and commenced operations. Banks in Metro Manila were covered by the PCHC while
banks located elsewhere still had to go through Central Bank Clearing. In any event,
the twenty-four-hour return rule was adopted by the PCHC until it was changed in
1982. The contending banks herein, which are both branches in Tarlac province, are
therefore not covered by PCHC Rules but by CB Circular No. 580. Clearly then, the
CB circular was applicable when the forgery of the checks was discovered in 1981.
The rule mandates that the checks be returned within twenty-four hours after
discovery of the forgery but in no event beyond the period fixed by law for filing a
legal action. The rationale of the rule is to give the collecting bank (which indorsed
the check) adequate opportunity to proceed against the forger. If prompt notice is not
given, the collecting bank may be prejudiced and lose the opportunity to go after its
depositor.
The Court finds that even if PNB did not return the questioned checks to
Associated Bank within twenty-four hours, as mandated by the rule, PNB did not
commit negligent delay. Under the circumstances, PNB gave prompt notice to
Associated Bank and the latter bank was not prejudiced in going after Fausto
Pangilinan. After the Province of Tarlac informed PNB of the forgeries, PNB
necessarily had to inspect the checks and conduct its own investigation. Thereafter, it
requested the Provincial Treasurer’s office on March 31, 1981 to return the checks for
verification. The Province of Tarlac returned the checks only on April 22, 1981. Two
days later, Associated Bank received the checks from PNB.
Associated Bank was also furnished a copy of the Province’s letter of demand to
PNB dated March 20, 1981, thus giving it notice of the forgeries. At this time,
however, Pangilinan’s account with Associated had only P24.63 in it. Had Associated
Bank decided to debit Pangilinan’s account, it could not have recovered the amounts
paid on the questioned checks. In addition, while Associated Bank filed a fourth-
party complaint against Fausto Pangilinan, it did not present evidence against
Pangilinan and even presented him as its rebuttal witness. Hence, Associated Bank
was not prejudiced by PNB’s failure to comply with the twenty-four-hour return rule.
Next, Associated Bank contends that PNB is estopped from requiring
reimbursement because the latter paid and cleared the checks. The Court finds this
contention unmeritorious. Even if PNB cleared and paid the checks, it can still
recover from Associated Bank. This is true even if the payee’s Chief Officer who was
supposed to have indorsed the checks is also a customer of the drawee bank. PNB’s
duty was to verify the genuineness of the drawer’s signature and not the genuineness
of payee’s indorsement. Associated Bank, as the collecting bank, is the entity with the
duty to verify the genuineness of the payee’s indorsement.
PNB also avers that respondent court erred in adjudging circuitous liability by
directing PNB to return to the Province of Tarlac the amount of the checks and then
directing Associated Bank to reimburse PNB. The Court finds nothing wrong with the
mode of the award. The drawer, Province of Tarlac, is a client or customer of the
PNB, not of Associated Bank. There is no privity of contract between the drawer and
the collecting bank.
The trial court made PNB and Associated Bank liable with legal interest from
March 20, 1981, the date of extrajudicial demand made by the Province of Tarlac on
PNB. The payments to be made in this case stem from the deposits of the Province of
Tarlac in its current account with the PNB. Bank deposits are considered under the
law as loans. Central Bank Circular No. 416 prescribes a twelve percent (12%) interest
per annum for loans, forebearance of money, goods or credits in the absence of
express stipulation. Normally, current accounts are likewise interest-bearing, by
express contract, thus excluding them from the coverage of CB Circular No. 416. In
this case, however, the actual interest rate, if any, for the current account opened by
the Province of Tarlac with PNB was not given in evidence. Hence, the Court deems it
wise to affirm the trial court’s use of the legal interest rate, or six percent (6%) per
annum. The interest rate shall be computed from the date of default, or the date of
judicial or extrajudicial demand. The trial court did not err in granting legal interest
from March 20, 1981, the date of extrajudicial demand.
The Court finds as reasonable, the proportionate sharing of fifty percent—fifty
percent (50%-50%). Due to the negligence of the Province of Tarlac in releasing the
checks to an unauthorized person (Fausto Pangilinan), in allowing the retired
hospital cashier to receive the checks for the payee hospital for a period close to three
years and in not properly ascertaining why the retired hospital cashier was collecting
checks for the payee hospital in addition to the hospital’s real cashier, respondent
Province contributed to the loss amounting to P203,300.00 and shall be liable to the
PNB for fifty (50%) percent thereof. In effect, the Province of Tarlac can only recover
fifty percent (50%) of P203,300.00 from PNB.
The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%)
percent of P203,300.00. It is liable on its warranties as indorser of the checks which
were deposited by Fausto Pangilinan, having guaranteed the genuineness of all prior
indorsements, including that of the chief of the payee hospital, Dr. Adena Canlas.
Associated Bank was also remiss in its duty to ascertain the genuineness of the
payee’s indorsement.
IN VIEW OF THE FOREGOING, the petition for review filed by the Philippine
National Bank (G.R. No. 107612) is hereby PARTIALLY GRANTED. The petition for
review filed by the Associated Bank (G.R. No. 107382) is hereby DENIED. The
decision of the trial court is MODIFIED. The Philippine National Bank shall pay fifty
percent (50%) of P203,300.00 to the Province of Tarlac, with legal interest from
March 20, 1981 until the payment thereof. Associated Bank shall pay fifty percent
(50%) of P203,300.00 to the Philippine National Bank, likewise, with legal interest
from March 20, 1981 until payment is made. SO ORDERED.
Petition of PNB partially granted while that of Associated Bank denied.
Judgment of trial court modified.
Note.—Forgery cannot be presumed it must be proved by clear, positive and
convincing evidence. (Tenio-Obsequio vs. Court of Appeals, 230 SCRA 550 [1994])
 G.R. No. 138510. October 10, 2002.*
TRADERS ROYAL BANK, petitioner, vs. RADIO PHILIPPINES NETWORK, INC.,
INTERCONTINENTAL BROADCASTING CORPORATION and BANAHAW
BROADCASTING CORPORATION, through the BOARD OF ADMINISTRATORS,
and SECURITY BANK AND TRUST COMPANY, respondents.
Banks and Banking; Negotiable Instruments; Checks; When a bank pays a
forged check, it must be considered as paying out of its funds and cannot charge the
amount so paid to the account of the depositor.—“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.” Consequently, if a bank pays a forged check, it
must be considered as paying out of its funds and cannot charge the amount so paid
to the account of the depositor.
Same; Same; Same; Where a check is drawn payable to the order of one
person and is presented for payment by another and purports upon its face to have
been duly indorsed by the payee of the check, it is the primary duty of the bank to
know that the check was duly indorsed by the original payee and, where it pays the
amount of the check to a third person who has forged the signature of the payee, the
loss falls on such bank who cashed the check.—In the instant case, the 3 checks were
payable to the BIR. It was established, however, that said checks were never
delivered or paid to the payee BIR but were in fact presented for payment by some
unknown persons who, in order to receive payment therefor, forged the name of the
payee. Despite this fraud, petitioner TRB paid the 3 checks in the total amount of
P9,790,716.87. Petitioner ought to have known that, where a check is drawn payable
to the order of one person and is presented for payment by another and purports
upon its face to have been duly indorsed by the payee of the check, it is the primary
duty of petitioner to know that the check was duly indorsed by the original payee
and, where it pays the amount of the check to a third person who has forged the
signature of the payee, the loss falls upon petitioner who cashed the check. Its only
remedy is against the person to whom it paid the money.
Same; Same; Same; Crossed Checks; The crossing of a check should put a bank
on guard; The effects of a crossed check are that (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, and, (c) the act of crossing the check serves as a
warning to the holder that the check has been issued for a definite purpose so that
he must inquire if he has received the check pursuant to that purpose, otherwise, he
is not a holder in due course.—It should be noted further that one of the subject
checks was crossed. The crossing of one of the subject checks should have put
petitioner on guard; it was duty-bound to ascertain the indorser’s title to the check or
the nature of his possession. Petitioner should have known the effects of a crossed
check: (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 and (c) the
act of crossing the check serves as a warning to the holder that the check has been
issued for a definite purpose so that he must inquire if he has received the check
pursuant to that purpose, otherwise, he is not a holder in due course. By encashing in
favor of unknown persons checks which were on their face payable to the BIR, a
government agency which can only act only through its agents, petitioner did so at its
peril and must suffer the consequences of the unauthorized or wrongful
endorsement. In this light, petitioner TRB cannot exculpate itself from liability by
claiming that respondent networks were themselves negligent.
Same; Same; Same; A bank is engaged in a business impressed with public
interest and it is its duty to protect its many clients and depositors who transact
business with it.—A bank is engaged in a business impressed with public interest and
it is its duty to protect its many clients and depositors who transact business with it.
It is under the obligation to treat the accounts of the depositors and clients with
meticulous care, whether such accounts consist only of a few hundreds or millions of
pesos.
Same; Same; Same; A collecting bank which indorses a check bearing a forged
indorsement and presents it to the drawee bank guarantees all prior indorsements,
including the forged indorsement itself, and ultimately should be held liable
therefor.—A collecting bank which indorses a check bearing a forged indorsement
and presents it to the drawee bank guarantees all prior indorsements, including the
forged indorsement itself, and ultimately should be held liable therefor. However, it
is doubtful if the subject checks were ever presented to and accepted by SBTC so as to
hold it liable as a collecting bank, as held by the Court of Appeals.
Same; Same; Same; A bank who did not pay the rightful holder or other
person or entity entitled to receive payment has no right to reimbursement.—Since
TRB did not pay the rightful holder or other person or entity entitled to receive
payment, it has no right to reimbursement. Petitioner TRB was remiss in its duty and
obligation, and must therefore suffer the consequences of its own negligence and
disregard of established banking rules and procedures.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
CORONA, J.:
 Petitioner seeks the review and prays for the reversal of the Decision 1 of April
30, 1999 of Court of Appeals in CA-G.R. CV No. 54656, the dispositive portion of
which reads:
“WHEREFORE, the appealed decision is AFFIRMED with modification in the sense
that appellant SBTC is hereby absolved from any liability. Appellant TRB is solely
liable to the appellees for the damages and costs of suit specified in the dispositive
portion of the appealed decision. Costs against appellant TRB.
SO ORDERED.”
As found by the Court of Appeals, the antecedent facts of the case are as follows:
On April 15, 1985, the Bureau of Internal Revenue (BIR) assessed plaintiffs Radio
Philippines Network (RPN), Intercontinental Broadcasting Corporation (IBC), and
Banahaw Broadcasting Corporation (BBC) of their tax obligations for the taxable
years 1978 to 1983.
On March 25, 1987, Mrs. Lourdes C. Vera, plaintiffs’ comptroller, sent a letter to
the BIR requesting settlement of plaintiffs’ tax obligations.
The BIR granted the request and accordingly, on June 26, 1986, plaintiffs
purchased from defendant Traders Royal Bank (TRB) three (3) manager’s checks to
be used as payment for their tax liabilities, to wit:
Check Number Amount
30652 P4,155,835.00
30650 3,949,406.12
30796 1,685,475.75
Defendant TRB, through Aida Nuñez, TRB Branch Manager at Broadcast City
Branch, turned over the checks to Mrs. Vera who was supposed to deliver the same to
the BIR in payment of plaintiffs’ taxes.
Sometime in September, 1988, the BIR again assessed plaintiffs for their tax
liabilities for the years 1979-82. It was then they discovered that the three (3)
managers checks (Nos. 30652, 30650 and 30796) intended as payment for their
taxes were never delivered nor paid to the BIR by Mrs. Vera. Instead, the checks were
presented for payment by unknown persons to defendant Security Bank and Trust
Company (SBTC), Taytay Branch as shown by the bank’s routing symbol transit
number (BRSTN 01140027) or clearing code stamped on the reverse sides of the
checks.
Meanwhile, for failure of the plaintiffs to settle their obligations, the BIR issued
warrants of levy, distraint and garnishment against them. Thus, they were
constrained to enter into a compromise and paid BIR P18,962,225.25 in settlement
of their unpaid deficiency taxes.
Thereafter, plaintiffs sent letters to both defendants, demanding that the amounts
covered by the checks be reimbursed or credited to their account. The defendants
refused, hence, the instant suit.
On February 17, 1985, the trial court rendered its decision, thus:
“WHEREFORE, in view of the foregoing considerations, judgment is hereby rendered
in favor of the plaintiffs and against the defendants by:
a. Condemning the defendant Traders Royal Bank to pay actual damages in the sum
of Nine Million Seven Hundred Ninety Thousand and Seven Hundred Sixteen
Pesos and Eighty-Seven Centavos (P9,790,716.87) broken down as follows:
b. To plaintiff RPN-9—P4,155,835.00
c. To Plaintiff IBC-13—P3,949,406.12
d. To Plaintiff BBC-2—P1,685,475.72 plus interest at the legal rate from the filing of
this case in court.
e. Condemning the defendant Security Bank and Trust Company, being collecting
bank, to reimburse the defendant Traders Royal Bank, all the amounts which the
latter would pay to the aforenamed plaintiffs;
f. Condemning both defendants to pay to each of the plaintiffs the sum of Three
Hundred Thousand (P300,000.00) Pesos as exemplary damages and attorney’s
fees equivalent to twenty-five percent of the total amount recovered; and
g. Costs of suit.
SO ORDERED.”
Defendants Traders Royal Bank and Security Bank and Trust Company, Inc. both
appealed the trial court’s decision to the Court of Appeals. However, as quoted in the
beginning hereof, the appellate court absolved defendant SBTC from any liability and
held TRB solely liable to respondent networks for damages and costs of suit.
In the instant petition for review on certiorari of the Court of Appeals’ decision,
petitioner TRB assigns the following errors: (a) the Honorable Court of Appeals
manifestly overlooked facts which would justify the conclusion that negligence on the
part of RPN, IBC and BBC bars them from recovering anything from TRB, (b) the
Honorable Court of Appeals plainly erred and misapprehended the facts in relieving
SBTC of its liability to TRB as collecting bank and indorser by overturning the trial
court’s factual finding that SBTC did endorse the three (3) managers checks subject
of the instant case, and (c) the Honorable Court of Appeals plainly misapplied the
law in affirming the award of exemplary damages in favor of RPN, IBC and BBC.
In reply, respondents RPN, IBC, and BBC assert that TRB’s petition raises
questions of fact in violation of Rule 45 of the 1997 Revised Rules on Civil Procedure
which restricts petitions for review on certiorari of the decisions of the Court of
Appeals on pure questions of law. RPN, IBC and BBC maintain that the issue of
whether or not respondent networks had been negligent were already passed upon
both by the trial and appellate courts, and that the factual findings of both courts are
binding and conclusive upon this Court.
Likewise, respondent SBTC denies liability on the ground that it had no
participation in the negotiation of the checks, emphasizing that the BRSTN imprints
at the back of the checks cannot be considered as proof that respondent SBTC
accepted the disputed checks and presented them to Philippine Clearing House
Corporation for clearing.
Setting aside the factual ramifications of the instant case, the threshold issue now
is whether or not TRB should be held solely liable when it paid the amount of the
checks in question to a person other than the payee indicated on the face of the
check, the Bureau of Internal Revenue.
“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.” Consequently, if a
bank pays a forged check, it must be considered as paying out of its funds and cannot
charge the amount so paid to the account of the depositor.
In the instant case, the 3 checks were payable to the BIR. It was established,
however, that said checks were never delivered or paid to the payee BIR but were in
fact presented for payment by some unknown persons who, in order to receive
payment therefor, forged the name of the payee. Despite this fraud, petitioner TRB
paid the 3 checks in the total amount of P9,790,716.87.
Petitioner ought to have known that, where a check is drawn payable to the order
of one person and is presented for payment by another and purports upon its face to
have been duly indorsed by the payee of the check, it is the primary duty of petitioner
to know that the check was duly indorsed by the original payee and, where it pays the
amount of the check to a third person who has forged the signature of the payee, the
loss falls upon petitioner who cashed the check. Its only remedy is against the person
to whom it paid the money.
It should be noted further that one of the subject checks was crossed. The crossing
of one of the subject checks should have put petitioner on guard; it was duty-bound
to ascertain the indorser’s title to the check or the nature of his possession. Petitioner
should have known the effects of a crossed check: (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 and (c) the act of crossing the check serves as a warning
to the holder that the check has been issued for a definite purpose so that he must
inquire if he has received the check pursuant to that purpose, otherwise, he is not a
holder in due course.
By encashing in favor of unknown persons checks which were on their face
payable to the BIR, a government agency which can only act only through its agents,
petitioner did so at its peril and must suffer the consequences of the unauthorized or
wrongful endorsement. In this light, petitioner TRB cannot exculpate itself from
liability by claiming that respondent networks were themselves negligent.
A bank is engaged in a business impressed with public interest and it is its duty to
protect its many clients and depositors who transact business with it. It is under the
obligation to treat the accounts of the depositors and clients with meticulous care,
whether such accounts consist only of a few hundreds or millions of pesos.
Petitioner argues that respondent SBTC, as the collecting bank and indorser,
should be held responsible instead for the amount of the checks.
The Court of Appeals addressed exactly the same issue and made the following
findings and conclusions:
As to the alleged liability of appellant SBTC, a close examination of the records
constrains us to deviate from the lower court’s finding that SBTC, as a collecting
bank, should similarly bear the loss.
“A collecting bank where a check is deposited and which indorses the check upon
presentment with the drawee bank, is such an indorser. So even if the indorsement
on the check deposited by the bank’s client is forged, the collecting bank is bound by
his warranties as an indorser and cannot set up the defense of forgery as against the
drawee bank.”
To hold appellant SBTC liable, it is necessary to determine whether it is a party to
the disputed transactions.
Section 3 of the Negotiable Instruments Law reads:
“SECTION 63. When person deemed indorser.—A person placing his signature upon
an instrument otherwise than as maker, drawer, or acceptor, is deemed to be an
indorser unless he clearly indicates by appropriate words his intention to be bound in
some other capacity.”
Upon the other hand, the Philippine Clearing House Corporation (PCHC) rules
provide:
 “Sec. 17.—BANK GUARANTEE. All checks cleared through the PCHC shall bear the We subscribe to the foregoing findings and conclusions of the Court of Appeals.
guarantee affixed thereto by the Presenting Bank/Branch which shall read as follows:
“Cleared thru the Philippine Clearing House Corporation. All prior endorsements A collecting bank which indorses a check bearing a forged indorsement and
and/or lack of endorsement guaranteed. NAME OF BANK/BRANCH BRSTN (Date of presents it to the drawee bank guarantees all prior indorsements, including the
clearing).”
forged indorsement itself, and ultimately should be held liable therefor. However, it
is doubtful if the subject checks were ever presented to and accepted by SBTC so as to
Here, not one of the disputed checks bears the requisite endorsement of appellant
hold it liable as a collecting bank, as held by the Court of Appeals.
SBTC. What appears to be a guarantee stamped at the back of the checks is that of
the Philippine National Bank, Buendia Branch, thereby indicating that it was the
Since TRB did not pay the rightful holder or other person or entity entitled to
latter Bank which received the same.
receive payment, it has no right to reimbursement. Petitioner TRB was remiss in its
duty and obligation, and must therefore suffer the consequences of its own
It was likewise established during the trial that whenever appellant SBTC receives
negligence and disregard of established banking rules and procedures.
a check for deposit, its practice is to stamp on its face the words, “non-negotiable.”
Lana Echevarria’s testimony is relevant:
We agree with petitioner, however, that it should not be made to pay exemplary
“ATTY. Could you tell us briefly the procedure you follow in damages to RPN, IBC and BBC because its wrongful act was not done in bad faith,
ROMANO: receiving checks? and it did not act in a wanton, fraudulent, reckless or malevolent manner.
“A: First of all, I verify the check itself, the place, the date, the
amount in words and everything. And then, if all these We find the award of attorney’s fees, 25% of P10 million, to be manifestly
things are in order and verified in the data sheet I stamp exorbitant. Considering the nature and extent of the services rendered by respondent
networks’ counsel, however, the Court deems it appropriate to award the amount of
my non- negotiable stamp at the face of the check.”
P100,000 as attorney’s fees.
Unfortunately, the words “non-negotiable” do not appear on the face of either of
WHEREFORE, the appealed decision is MODIFIED by deleting the award of
the three (3) disputed checks.
exemplary damages. Further, respondent networks are granted the amount of
P100,000 as attorney’s fees. In all other respects, the Court of Appeals’ decision is
Moreover, the aggregate amount of the checks is not reflected in the clearing
hereby AFFIRMED. SO ORDERED.
documents of appellant SBTC. Section 19 of the Rules of the PCHC states:

“Section 19—Regular Item Procedure: Judgment modified.

Each clearing participant, through its authorized representatives, shall deliver to
the PCHC fully qualified MICR checks grouped in 200 or less items to a batch and
supported by an add-list, a batch control slip, and a delivery statement.
It bears stressing that through the add-list, the PCHC can counter-check and
determine which checks have been presented on a particular day by a particular bank
for processing and clearing. In this case, however, the add-list submitted by appellant
SBTC together with the checks it presented for clearing on August 3, 1987 does not
show that Check No. 306502 in the sum of P3,949,406.12 was among those that
passed for clearing with the PCHC on that date. The same is true with Check No.
30652 with a face amount of P4,155,835.00 presented for clearing on August 11, 1987
and Check No. 30796 with a face amount of P1,685,475.75.
Notes.—Where what was stamped on the check is “DAUD” meaning drawn
against uncollected deposits, the bank may still honor the check at its discretion in
favor of favored clients, in which case there would be no violation of B.P. 22. (Tan vs.
People, 349 SCRA 777 [2001])
A bank authorized to collect the payment of taxpayers in behalf of the Bureau of
Internal Revenue is duty-bound to consult with its principal regarding unwarranted
instructions given by the payor of its agent. (Philippine Commercial International
Bank vs. Court of Appeals, 350 SCRA 446 [2001])
——o0o——

The foregoing circumstances taken altogether create a serious doubt on whether

the disputed checks passed through the hands of appellant SBTC.”
 G.R. No. 139130. November 27, 2002
RAMON K. ILUSORIO, petitioner, vs. HON. COURT OF APPEALS, and
THE MANILA BANKING CORPORATION, respondents.
Civil Law; Damages; Negligence; To be entitled to damages, petitioner has the
burden of proving negligence on the part of the bank for failure to detect the
discrepancy in the signatures on the checks.—On the first issue, we find that
petitioner has no cause of action against Manila Bank. To be entitled to damages,
petitioner has the burden of proving negligence on the part of the bank for failure to
detect the discrepancy in the signatures on the checks. It is incumbent upon
petitioner to establish the fact of forgery, i.e., by submitting his specimen signatures
and comparing them with those on the questioned checks. Curiously though,
petitioner failed to submit additional specimen signatures as requested by the
National Bureau of Investigation from which to draw a conclusive finding regarding
forgery. The Court of Appeals found that petitioner, by his own inaction, was
precluded from setting up forgery.
Same; Same; Same; Negligence is the omission to do something which a
reasonable man, guided by those considerations which ordinarily regulate the
conduct of human affairs would do, or the doing of something which a prudent and
reasonable man would do.—As borne by the records, it was petitioner, not the bank,
who was negligent. Negligence is the omission to do something which a reasonable
man, guided by those considerations which ordinarily regulate the conduct of human
affairs, would do, or the doing of something which a prudent and reasonable man
would do.In the present case, it appears that petitioner accorded his secretary
unusual degree of trust and unrestricted access to his credit cards, passbooks, check
books, bank statements, including custody and possession of cancelled checks and
reconciliation of accounts.
Same; Same; Same; Petitioner’s failure to examine his bank statements
appears as the proximate cause of his own damage; Proximate Cause Defined.—
Petitioner’s failure to examine his bank statements appears as the proximate cause of
his own damage. Proximate cause is that cause, which, in natural and continuous
sequence, unbroken by any efficient intervening cause, produces the injury, and
without which the result would not have occurred. In the instant case, the bank was
not shown to be remiss in its duty of sending monthly bank statements to petitioner
so that any error or discrepancy in the entries therein could be brought to the bank’s
attention at the earliest opportunity. But, petitioner failed to examine these bank
statements not because he was prevented by some cause in not doing so, but because
he did not pay sufficient attention to the matter. Had he done so, he could have been
alerted to any anomaly committed against him.
Same; Criminal Law; Forgery; When a signature is forged or made without
the authority of the person whose signature it purports to be, the check is wholly
inoperative unless the party against whom it is sought to enforce such right is
precluded from setting up the forgery or want of authority.—True, it is a rule that
when a signature is forged or made without the authority of the person whose
signature it purports to be, the check is wholly inoperative. No right to retain the
instrument, or to give a discharge therefor, or to enforce payment thereof against any
party, can be acquired through or under such signature. However, the rule does
provide for an exception, namely: “unless the party against whom it is sought to
enforce such right is precluded from setting up the forgery or want of authority.” In
the instant case, it is the exception that applies. In our view, petitioner is precluded
from setting up the forgery, assuming there is forgery, due to his own negligence in
entrusting to his secretary his credit cards and checkbook including the verification
of his statements of account.
Same; Estoppel; Petitioner cannot hold private respondent in estoppel for the
latter is not the actual party to the criminal action.—On the second issue, the fact
that Manila Bank had filed a case for estafa against Eugenio would not estop it from
asserting the fact that forgery has not been clearly established. Petitioner cannot hold
private respondent in estoppel for the latter is not the actual party to the criminal
action. In a criminal action, the State is the plaintiff, for the commission of a felony is
an offense against the State. Thus, under Section 2, Rule 110 of the Rules of Court the
complaint or information filed in court is required to be brought in the name of the
“People of the Philippines.”
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
QUISUMBING, J.:
This petition for review seeks to reverse the decision1promulgated on January 28,
1999 by the Court of Appeals in CA-G.R. CV No. 47942, affirming the decision of the
then Court of First Instance of Rizal, Branch XV (now the Regional Trial Court of
Ma-kati, Branch 138) dismissing Civil Case No. 43907, for damages.
The facts as summarized by the Court of Appeals are as follows:
Petitioner is a prominent businessman who, at the time material to this case, was
the Managing Director of Multinational Investment Bancorporation and the
Chairman and/or President of several other corporations. He was a depositor in good
standing of respondent bank, the Manila Banking Corporation, under current
Checking Account No. 0609037-0. As he was then running about 20 corporations,
and was going out of the country a number of times, petitioner entrusted to his
secretary, Katherine 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.
Between the dates September 5, 1980 and January 23, 1981, Eugenio was able to
encash and deposit to her personal account about seventeen (17) checks drawn
against the account of the petitioner at the respondent bank, with an aggregate
amount of P119,634.34. Petitioner did not bother to check his statement of account
until a business partner apprised him that he saw Eugenio use his credit cards.
Petitioner fired Eugenio immediately, and instituted a criminal action against her for
estafa thru falsification before the Office of the Provincial Fiscal of Rizal. Private
respondent, through an affidavit executed by its employee, Mr. Dante Razon, also
lodged a complaint for estafa thru falsification of commercial documents against
Eugenio on the basis of petitioner’s statement that his signatures in the checks were
forged. Mr. Razon’s affidavit states:
That I have examined and scrutinized the following checks in accordance with
prescribed verification procedures with utmost care and diligence by comparing the
signatures affixed thereat against the specimen signatures of Mr. Ramon K. Ilusorio
which we have on file at our said office on such dates,
xxx
That the aforementioned checks were among those issued by Manilabank in favor
of its client MR. RAMON K. ILUSORIO, . . .
That the same were personally encashed by KATHERINE E. ESTEBAN, an
executive secretary of MR. RAMON K. ILUSORIO in said Investment Corporation;
That I have met and known her as KATHERINE E. ESTEBAN the attending
verifier when she personally encashed the above-mentioned checks at our said office;
That MR. RAMON K. ILUSORIO executed an affidavit expressly disowning his
signature appearing on the checks further alleged to have not authorized the issuance
and encashment of the same . . . .
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.
At the trial, petitioner testified on his own behalf, attesting to the truth of the
circumstances as narrated above, and how he discovered the alleged forgeries.
Several employees of Manila Bank were also called to the witness stand as hostile
witnesses. They testified that it is the bank’s standard operating procedure that
whenever a check is presented for encashment or clearing, the signature on the check
is first verified against the specimen signature cards on file with the bank.
Manila Bank also sought the expertise of the National Bureau of Investigation
(NBI) in determining the genuineness of the 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.
Defendant’s counterclaim is likewise DISMISSED for lack of sufficient basis.
SO ORDERED.”
Aggrieved, petitioner elevated the case to the Court of Appeals by way of a
petition for review but without success. The appellate court held that petitioner’s own
negligence was the proximate cause of his loss. The appellate court disposed as
follows:
“WHEREFORE, the judgment appealed from is AFFIRMED. Costs against the
appellant. SO ORDERED.”
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
B. FILED A CRIMINAL COMPLAINT FOR ESTAFATHRU FALSIFICATION OF
COMMERCIAL DOCUMENTS AGAINST KATHERINE EUGENIO USING
THE AFFIDAVIT OF PETITIONER STATING THAT HIS SIGNATURES
WERE FORGED AS PART OF THE AFFIDAVITCOMPLAINT.
C. THE COURT OF APPEALS ERRED IN NOT APPLYING SEC. 23,
NEGOTIABLE INSTRUMENTS LAW.
D. 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.
E. 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.
Essentially the issues in this case are: (1) whether or not petitioner has a cause of
action against private respondent; and (2) whether or not -private respondent, in
filing an estafa case against petitioner’s secretary, is barred from raising the defense
that the fact of forgery was not established.
Petitioner contends that Manila Bank is liable for damages for its negligence in
failing to detect the discrepant checks. He adds that as a general rule a bank which
has obtained possession of a check upon an unauthorized or forged endorsement of
the payee’s signature and which collects the amount of the check from the drawee is
liable for the proceeds thereof to the payee. Petitioner invokes the doctrine of
estoppel, saying that having itself instituted a forgery case against Eugenio, Manila
Bank is now estopped from asserting that the fact of forgery was never proven.
For its part, Manila Bank contends that respondent appellate court did not depart
from the accepted and usual course of judicial proceedings, hence there is no reason
for the reversal of its ruling. Manila Bank additionally points out that Section 23 of
the Negotiable Instruments Law is inapplicable, considering that the fact of forgery
was never proven. Lastly, the bank negates petitioner’s claim of estoppel.
On the first issue, we find that petitioner has no cause of action against Manila
Bank. To be entitled to damages, petitioner has the burden of proving negligence on
the part of the bank for failure to detect the discrepancy in the signatures on the
checks. It is incumbent upon petitioner to establish the fact of forgery, i.e., by
submitting his specimen signatures and comparing them with those on the
questioned checks. Curiously though, petitioner failed to submit additional specimen
signatures as requested by the National Bureau of Investigation from which to draw a
conclusive finding regarding forgery. The Court of Appeals found that petitioner, by
his own inaction, was precluded from setting up forgery. Said the appellate court:
We cannot fault the court a quo for such declaration, considering that the plaintiff’s
evidence on the alleged forgery is not convincing enough. The burden to prove
forgery was upon the plaintiff, which burden he failed to discharge. Aside from his
own testimony, the appellant presented no other evidence to prove the fact of forgery.
He did not even submit his own specimen signatures, taken on or about the date of
the questioned checks, for examination and comparison with those of the subject
checks. On the other hand, the appellee presented specimen signature cards of the
appellant, taken at various years, namely, in 1976, 1979 and 1981 (Exhibits “1”, “2”,
“3” and “7”), showing variances in the appellant’s unquestioned signatures. The
evidence further shows that the appellee, as soon as it was informed by the appellant
about his questioned signatures, sought to borrow the questioned checks from the
appellant for purposes of 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.
Moreover, petitioner’s contention that Manila Bank was remiss in the exercise of its
duty as drawee lacks factual basis. Consistently, the CA and the RTC found that
Manila Bank employees exercised due diligence in cashing the checks. The bank’s
employees in the present case did not have a hint as to Eugenio’s modus
operandi because she was a regular customer of the bank, having been designated by
petitioner himself to transact in his behalf. According to the appellate court, the
employees of the bank exercised due diligence in the performance of their duties.
Thus, it found that:
The evidence on both sides indicates that TMBC’s employees exercised due diligence
before encashing the checks. Its verifiers first verified the drawer’s signatures thereon
as against his specimen signature cards, and when in doubt, the verifier went further,
such as by referring to a more experienced verifier for further verification. In some
instances the verifier made a confirmation by calling the depositor by phone. It is
only after taking such precautionary measures that the subject checks were given to
the teller for payment.
Of course it is possible that the verifiers of TMBC might have made a mistake in
failing to detect any forgery—if indeed there was. However, a mistake is not
equivalent to negligence if they were honest mistakes. In the instant case, we believe
and so hold that if there were mistakes, the same were not deliberate, since the bank
took all the precautions.
As borne by the records, it was petitioner, not the bank, who was negligent.
Negligence is the omission to do something which a reasonable man, guided by those
considerations which ordinarily regulate the conduct of human affairs, would do, or
the doing of something which a prudent and reasonable man would do. In the
present case, it appears that petitioner accorded his secretary unusual degree of trust
and unrestricted access to his credit cards, passbooks, check books, bank statements,
including custody and possession of cancelled checks and reconciliation of accounts.
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.
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 us and entitled to utmost respectand even finality. We find
no palpable error that would warrant a reversal of the appellate court’s assessment of
facts anchored upon the evidence on record.
Petitioner’s failure to examine his bank statements appears as the proximate
cause of his own damage. Proximate cause is that cause, which, in natural and
continuous sequence, unbroken by any efficient intervening cause, produces the
injury, and without which the result would not have occurred. 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 bank’s attention at the earliest opportunity. But, petitioner failed to examine
these bank statements not because he was prevented by some cause in not doing so,
but because he did not pay sufficient attention to the matter. Had he done so, he
could have been alerted to any anomaly committed against him. In other words,
petitioner has sufficient opportunity to prevent or detect any misappropriation by his
secretary had he only reviewed the status of his accounts based on the bank
statements sent to him regularly. In view of Article 2179 of the New Civil Code, when
the plaintiff’s own negligence was the immediate and proximate cause of his injury,
no recovery could be had for damages.
Petitioner further contends that under Section 23 of the Negotiable Instruments
Law a forged check is inoperative, and that Manila Bank had no authority to pay the
forged checks. True, it is a rule that when a signature is forged or made without the
authority of the person whose signature it purports to be, the check is wholly
inoperative. No right to retain the instrument, or to give a discharge therefor, or to
enforce payment thereof against any party, can be acquired through or under such
signature. However, the rule does provide for an exception, namely: “unless the party
against whom it is sought to enforce such right is precluded from setting up the
forgery or want of authority.”In the instant case, it is the exception that applies. In
our view, petitioner is precluded from setting up the forgery, assuming there is
forgery, due to his own negligence in entrusting to his secretary his credit cards and
checkbook including the verification of his statements of account.
Petitioner’s reliance on Associated Bank vs. Court of Appeals and Philippine
Bank of Commerce vs. CA 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 Bank’s personnel
diligently performed their duties, having compared the signature in the checks from
the specimen signatures on record and satisfied themselves that it was petitioner’s.
On the second issue, the fact that Manila Bank had filed a case for estafa against
Eugenio would not estop it from asserting the fact that forgery has not been clearly
established. Petitioner cannot hold private respondent in estoppel for the latter is not
the actual party to the criminal action. In a criminal action, the State is the plaintiff,
for the commission of a felony is an offense against the State. 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.”
Further, as petitioner himself stated in his petition, respondent bank filed
the estafa case against Eugenio on the basis of petitioner’s own affidavit, 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.
Petition denied, judgment affirmed.
Note.—Negligence is the omission to do something which a reasonable man,
guided by those considerations which ordinarily regulate the conduct of human
affairs would do or the doing of something which a prudent and reasonable man
would not do. (Jarco Marketing Corporation vs. Court of Appeals, 321 SCRA
375 [1999])
 G.R. No. 117913. February 1, 2002.*
CHARLES LEE, CHUA SIOK SUY, MARIANO SIO, ALFONSO YAP,
RICHARD VELASCO and ALFONSO CO, petitioners, vs. COURT OF
APPEALS and PHILIPPINE BANK OF COMMUNICATIONS, respondents.
G.R. No. 117914. February 1, 2002.*
MICO METALS CORPORATION, petitioner, vs. COURT OF APPEALS and
PHILIPPINE BANK OF COMMUNICATIONS, respondents.
Civil Procedure; During the trial of an action, the party who has the burden of
proof upon an issue may be aided in establishing his claim or defense by the
operation of a presumption, or, expressed differently, by the probative value which
the law attaches to a specific state of facts; A presumption may operate against his
adversary who has not introduced proof to rebut the presumption.—During the trial
of an action, the party who has the burden of proof upon an issue may be aided in
establishing his claim or defense by the operation of a presumption, or, expressed
differently, by the probative value which the law attaches to a specific state of facts. A
presumption may operate against his adversary who has not introduced proof to
rebut the presumption. The effect of a legal presumption upon a burden of proof is to
create the necessity of presenting evidence to meet the legal presumption or
the prima facie case created thereby, and which if no proof to the contrary is
presented and offered, will prevail. The burden of proof remains where it is, but by
the presumption the one who has that burden is relieved for the time being from
introducing evidence in support of his averment, because the presumption stands in
the place of evidence unless rebutted.
Commercial Law; Negotiable Instruments Law; Essential Requisites of a
Negotiable Instrument; Letters of credit and trust receipts are not negotiable
instruments.—Negotiable instruments which are meant to be substitutes for money,
must conform to the following requisites to be considered as such a) it must be in
writing; b) it must be signed by the maker or drawer; c) it must contain an
unconditional promise or order to pay a sum certain in money; d) it must be payable
on demand or at a fixed or determinable future time; e) it must be payable to order or
bearer; and f) where it is a bill of exchange, the drawee must be named or otherwise
indicated with reasonable certainty. Negotiable instruments include promissory
notes, bills of exchange and checks. Letters of credit and trust receipts are, however,
not negotiable instruments. But drafts issued in connection with letters of credit are
negotiable instruments.
Same; Same; Same; A trust receipt is a document of security pursuant to
which a bank acquires a “security interest” in the goods under trust receipt.—A trust
receipt is considered as a security transaction intended to aid in financing importers
and retail dealers who do not have sufficient funds or resources to finance the
importation or purchase of merchandise, and who may not be able to acquire credit
except through utilization, as collateral of the merchandise imported or purchased. A
trust receipt, therefor, is a document of security pursuant to which a bank acquires a
“security interest” in the goods under trust receipt. Under a letter of credit-trust
receipt arrangement, a bank extends a loan covered by a letter of credit, with the
trust receipt as a security for the loan. The transaction involves a loan feature
represented by a letter of credit, a security feature which is in the covering trust
receipt which secures an indebtedness.
PETITIONS for review of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
DE LEON, JR., J.:
Before us is the joint and consolidated petition for review of the
Decision dated June 15, 1994 of the Court of Appeals in CA-G.R. CV No.
27480 entitled, “Philippine Bank of Communications vs. Mico Metals Corporation,
Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap, Richard Velasco and Alfonso
Co,” which reversed the decision of the Regional Trial Court (RTC) of Manila, Branch
55 dismissing the complaint for a sum of money filed by private respondent
Philippine Bank of Communications against herein petitioners, Mico Metals
Corporation (MICO, for brevity), Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso
Yap, Richard Velasco and Alfonso Co. The dispositive portion of the said Decision of
the Court of Appeals, reads:
WHEREFORE, the decision of the Regional Trial Court is hereby reversed and in lieu
thereof, a new one is entered:
a. Ordering the defendants-appellees jointly and severally to pay plaintiff PBCom
the sum of Five million four hundred fifty-one thousand six hundred sixty-three
pesos and ninety centavos (P5,451,663.90) representing defendants-appellees
unpaid obligations arising from ordinary loans granted by the plaintiff plus legal
interest until fully paid.
b. Ordering defendants-appellees jointly and severally to pay PBCom the sum of
Four hundred sixty-one thousand six hundred pesos and sixty-six centavos
(P461,600.66) representing defendants-appellees unpaid obligations arising from
their letters of credit and trust receipt transactions with plaintiff PBCom plus
legal interest until fully paid.
c. Ordering defendants-appellees jointly and severally to pay PBCom the sum of
P50,000.00 as attorney’s fees.
No pronouncement as to costs.
The facts of the case are as follows:
 On March 2, 1979, Charles Lee, as President of MICO wrote private respondent
Philippine Bank of Communications (PBCom) requesting for a grant of a discounting
loan/credit line in the sum of Three Million Pesos (P3,000,000.00) for the purpose
of carrying out MICO’s line of business as well as to maintain its volume of business.
On the same day, Charles Lee requested for another discounting loan/credit line
of Three Million Pesos (P3,000,000.00) from PBCom for the purpose of opening
letters of credit and trust receipts.
In connection with the requests for discounting loan/credit lines, PBCom was
furnished by MICO the following resolution which was adopted unanimously by
MICO’s Board of Directors:
RESOLVED, that the President, Mr. Charles Lee, and the Vice-President and
General Manager, Mr. Mariana A. Sio, singly or jointly, be and they are duly
authorized and empowered for and in behalf of this Corporation to apply for,
negotiate and secure the approval of commercial loans and other banking facilities
and accommodations, such as, but not limited to discount loans, letters of credit,
trust receipts, lines for marginal deposits on foreign and domestic letters of credit,
negotiate out-of-town checks, etc. from the Philippine Bank of Communications, 216
Juan Luna, Manila in such sums as they shall deem advantageous, the principal of all
of which shall not exceed the total amount of TEN MILLION PESOS
(P10,000,000.00), Philippine Currency, plus any interests that may be agreed upon
with said Bank in such loans and other credit lines of the same kind and such further
terms and conditions as may, upon granting of said loans and other banking facilities,
be imposed by the Bank; and to make, execute, sign and deliver any contracts of
mortgage, pledge or sale of one, some or all of the properties of the Company, or any
other agreements or documents of whatever nature or kind, including the signing,
indorsing, cashing, negotiation and execution of promissory notes, checks, money
orders or other negotiable instruments, which may be necessary and proper in
connection with said loans and other banking facilities, or with their amendments,
renewals and extensions of payment of the whole or any part thereof.
On March 26, 1979, MICO availed of the first loan of One Million Pesos
(P1,000,000.00) from PBCom. Upon maturity of the loan, MICO caused the same to
be renewed, the last renewal of which was made on May 21, 1982 under Promissory
Note BNA No. 26218.
Another loan of One Million Pesos (P1,000,000.00) was availed of by MICO from
PBCom which was likewise later on renewed, the last renewal of which was made on
May 21, 1982 under Promissory Note BNA No. 26219. To complete MICO’s availment
of Three Million Pesos (P3,000,000.00) discounting loan/credit line with PBCom,
MICO availed of another loan from PBCom in the sum of One Million Pesos
(P1,000,000.00) on May 24, 1979. As in previous loans, this was rolled over or
renewed, the last renewal of which was made on May 25, 1982 under Promissory
Note BNA No. 26253.
As security for the loans, MICO through its Vice-President and General Manager,
Mariano Sio, executed on May 16, 1979 a Deed of Real Estate Mortgage over its
properties situated in Pasig, Metro Manila covered by Transfer Certificates of Title
(TCT) Nos. 11248 and 11250.
On March 26, 1979 Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap and
Richard Velasco, in their personal capacities executed a Surety Agreement in favor of
PBCom whereby the petitioners jointly and severally, guaranteed the prompt
payment on due dates or at maturity of overdrafts, promissory notes, discounts,
drafts, letters of credit, bills of exchange, trust receipts, and other obligations of every
kind and nature, for which MICO may be held accountable by PBCom. It was
provided, however, that the liability of the sureties shall not at any one time exceed
the principal amount of Three Million Pesos (P3,000,000.00) plus interest, costs,
losses, charges and expenses including attorney’s fees incurred by PBCom in
connection therewith.
On July 14, 1980, petitioner Charles Lee, in his capacity as president of MICO,
wrote PBCom and applied for an additional loan in the sum of Four Million Pesos
(P4,000,000.00). The loan was intended for the expansion and modernization of the
company’s machineries. Upon approval of the said application for loan, MICO
availed of the additional loan of Four Million Pesos (P4,000,000.00) as evidenced by
Promissory Note TA No. 094.
As per agreement, the proceeds of all the loan availments were credited to MICO’s
current checking account with PBCom. To induce the PBCom to increase the credit
line of MICO, Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap, Richard Velasco
and Alfonso Co (hereinafter referred to as petitioners-sureties), executed another
surety agreement in favor of PBCom on July 28, 1980, whereby they jointly and
severally guaranteed the prompt payment on due dates or at maturity of overdrafts,
promissory notes, discounts, drafts, letters of credit, bills of exchange, trust receipts
and all other obligations of any kind and nature for which MICO may be held
accountable by PBCom. It was provided, however, that their liability shall not at any
one time exceed the sum of Seven Million Five Hundred Thousand Pesos
(P7,500,000.00) including interest, costs, charges, expenses and attorney’s fees
incurred by MICO in connection therewith.
On July 29, 1980, MICO furnished PBCom with a notarized certification issued by
its corporate secretary, Atty. P.B. Barrera, that Chua Siok Suy was duly authorized by
the Board of Directors to negotiate on behalf of MICO for loans and other credit
availments from PBCom. Indicated in the certification was the following resolution ($11,960.00). As in past transactions, MICO executed in favor of PBCom a
unanimously approved by the Board of Directors: corresponding trust receipt.

RESOLVED, AS IT IS HEREBY RESOLVED, That Mr. Chua Siok Suy be, as he is On January 4, 1982, MICO applied, for authority to open a foreign letter of credit
hereby authorized and empowered, on behalf of MICO METALS CORPORATION in the sum of One Thousand Nine Hundred US Dollars ($1,900.00), with
from time to time, to borrow money and obtain other credit facilities, with or without PBCom. Upon approval, the corresponding letter of credit denominated as LC No.
security, from the PHILIPPINE BANK OF COMMUNICATIONS in such amount(s)
62293 was issued whereupon PBCom advised its correspondent bank and MICO of
and under such terms and conditions as he may determine, with full power and
authority to execute, sign and deliver such contracts, instruments and papers in the same. Negotiation and proper acceptance of the letter of credit were then made
connection therewith, including real estate and chattel mortgages, pledges and by MICO. Again, a corresponding trust receipt was executed by MICO in favor of
assignments over the properties of the Corporation; and to renew and/or extend PBCom.
and/or roll-over and/or reavail of the credit facilities granted thereunder, either for
lesser or for greater amount(s), the intention being that such credit facilities and all In all the transactions involving foreign letters of credit, PBCom turned over to
securities of whatever kind given as collaterals therefor shall be a continuing security. MICO the necessary documents such as the bills of lading and commercial invoices to
enable the latter to withdraw the goods from the port of Manila.
RESOLVED FURTHER, That said bank is hereby authorized, empowered and
directed to rely on the authority given hereunder, the same to continue in full force On May 21, 1982 MICO obtained from PBCom another loan in the sum of Three
and effect until written notice of its revocation shall be received by said Bank.
Hundred Seventy-Seven Thousand Pesos (P377,000.00) covered by Promissory Note
BA No. 7458.
On July 2, 1981, MICO filed with PBCom an application for a domestic letter of
Upon maturity of all credit availments obtained by MICO from PBCom, the latter
credit in the sum of Three Hundred Forty-Eight Thousand Pesos (P348,000.00). The
made a demand for payment. For failure of petitioner MICO to pay the obligations
corresponding irrevocable letter of credit was approved and opened under LC No. L-
incurred despite repeated demands, private respondent PBCom extrajudicially
16060. Thereafter, the domestic letter of credit was negotiated and accepted by
foreclosed MICO’s real estate mortgage and sold the said mortgaged properties in a
MICO as evidenced by the corresponding bank draft issued for the purpose. After the
public auction sale held on November 23, 1982. Private respondent PBCom which
supplier of the merchandise was paid, a trust receipt upon MICO’s own initiative,
emerged as the highest bidder in the auction sale, applied the proceeds of the
was executed in favor of PBCom.
purchase price at public auction of Three Million Pesos (P3,000,000.00) to the
expenses of the foreclosure, interest and charges and part of the principal of the
On September 14, 1981, MICO applied for another domestic letter of credit with
loans, leaving an unpaid balance of Five Million Four Hundred Forty-One Thousand
PBCom in the sum of Two Hundred Ninety Thousand Pesos (P290,000.00). The
Six Hundred Sixty-Three Pesos and Ninety Centavos (P5,441,663.90) exclusive of
corresponding irrevocable letter of credit was issued on September 22, 1981 under
penalty and interest charges. Aside from the unpaid balance of Five Million Four
LC No. L-16334. After the beneficiary of the said letter of credit was paid by PBCom
Hundred Forty-One Thousand Six Hundred Sixty-Three Pesos and Ninety Centavos
for the price of the merchandise, the goods were delivered to MICO which executed a
(P5,441,663.90), MICO likewise had another standing obligation in the sum of Four
corresponding trust receipt in favor of PBCom.
Hundred Sixty-One Thousand Six Hundred Pesos and Six Centavos (P461, 600.06)
representing its trust receipts liabilities to private respondent. PBCom then
On November 10, 1981, MICO applied for authority to open a foreign letter of
demanded the settlement of the aforesaid obligations from herein petitioners-
credit in favor of Ta Jih Enterprises Co., Ltd., and thus, the corresponding letter of
sureties who, however, refused to acknowledge their obligations to PBCom under the
credit was then issued by PBCom with a cable sent to the beneficiary, Ta Jih
surety agreements. Hence, PBCom filed a complaint with prayer for writ of
Enterprises Co., Ltd. advising that said beneficiary may draw funds from the account
preliminary attachment before the Regional Trial Court of Manila, which was raffled
of PBCom in its correspondent bank’s New York Office. PBCom also informed its
to Branch 55, alleging that MICO was no longer in operation and had no properties to
corresponding bank in Taiwan, the Irving Trust Company, of the approved letter of
answer for its obligations. PBCom further alleged that petitioner Charles Lee has
credit. The correspondent bank acknowledged PBCom’s advice through a
disposed or concealed his properties with intent to defraud his creditors. Except for
confirmation letter and by debiting from PBCom’s account with the said
MICO and Charles Lee, the sheriff of the RTC failed to serve the summons on herein
correspondent bank the sum of Eleven Thousand Nine Hundred Sixty US Dollars
petitioners-sureties since they were all reportedly abroad at the time. An alias
summons was later issued but the sheriff was not able to serve the same to
petitioners Alfonso Co and Chua Siok Suy who was already sickly at the time and
reportedly in Taiwan where he later died.
Petitioners (MICO and herein petitioners-sureties) denied all the allegations of
the complaint filed by respondent PBCom, and alleged that: a) MICO was not
granted the alleged loans and neither did it receive the proceeds of the aforesaid
loans; b) Chua Siok Suy was never granted any valid Board Resolution to sign for and
in behalf of MICO; c) PBCom acted in bad faith in granting the alleged loans and in
releasing the proceeds thereof; d) petitioners were never advised of the alleged grant
of loans and the subsequent releases therefor, if any; e) since no loan was ever
released to or received by MICO, the corresponding real estate mortgage and the
surety agreements signed concededly by the petitioners-sureties are null and void.
The trial court gave credence to the testimonies of herein petitioners and
dismissed the complaint filed by PBCom. The trial court likewise declared the real
estate mortgage and its foreclosure null and void. In ruling for herein petitioners, the
trial court said that PBCom failed to adequately prove that the proceeds of the loans
were ever delivered to MICO. The trial court pointed out, among others, that while
PBCom claimed that the proceeds of the Four Million Pesos (P4,000,000.00) loan
covered by promissory note TA 094 were deposited to the current account of
petitioner MICO, PBCom failed to produce the ledger account showing such deposit.
The trial court added that while PBCom may have loaned to MICO the other sums of
Three Hundred Forty-Eight Thousand Pesos (P348,000.00) and Two Hundred
Ninety Thousand Pesos (P290,000.00), no proof has been adduced as to the
existence of the goods covered and paid by the said amounts. Hence, inasmuch as no
consideration ever passed from PBCom to MICO, all the documents involved therein,
such as the promissory notes, real estate mortgage including the surety agreements
were all void or nonexistent for lack of cause or consideration. The trial court said
that the lack of proof as regards the existence of the merchandise covered by the
letters of credit bolstered the claim of herein petitioners that no purchases of the
goods were really made and that the letters of credit transactions were simply
resorted to by the PBCom and Chua Siok Suy to accommodate the latter in his
financial requirements.
The Court of Appeals reversed the ruling of the trial court, saying that the latter
committed an erroneous application and appreciation of the rules governing the
burden of proof. Citing Section 24 of the Negotiable Instruments Law which provides
that “Every negotiable instrument is deemed prima facie to have been issued for
valuable consideration and every person whose signature appears thereon to have
become a party thereto for value,”the Court of Appeals said that while the subject
promissory notes and letters of credit issued by the PBCom made no mention of
delivery of cash, it is presumed that said negotiable instruments were issued for
valuable consideration. The Court of Appeals also cited the case of Gatmaitan vs.
Court of Appeals which holds that “there is a presumption that an instrument sets
out the true agreement of the parties thereto and that it was executed for valuable
consideration.” The appellate court noted and found that a notarized Certification
was issued by MICO’s corporate secretary, P.B. Barrera, that Chua Siok Suy, was duly
authorized by the Board of Directors of MICO to borrow money and obtain credit
facilities from PBCom.
Petitioners filed a motion for reconsideration of the challenged decision of the
Court of Appeals but this was denied in a Resolution dated November 7, 1994 issued
by its Former Second Division. Petitioners-sureties then filed a petition for review on
certiorari with this Court, docketed as G.R. No. 117913, assailing the decision of the
Court of Appeals. MICO likewise filed a separate petition for review on certiorari,
docketed as G.R. No. 117914, with this Court assailing the same decision rendered by
the Court of Appeals. Upon motion filed by petitioners, the two (2) petitions were
consolidated on January 11, 1995.
Petitioners contend that there was no proof that the proceeds of the loans or the
goods under the trust receipts were ever delivered to and received by MICO. But the
record shows otherwise. Petitioners-sureties further contend that assuming that
there was delivery by PBCom of the proceeds of the loans and the goods, the
contracts were executed by an unauthorized person, more specifically Chua Siok Suy
who acted fraudulently and in collusion with PBCom to defraud MICO.
The pertinent issues raised in the consolidated cases at bar are: a) whether or not
the proceeds of the loans and letters of credit transactions were ever delivered to
MICO; and b) whether or not the individual petitioners, as sureties, may be held
liable under the two (2) Surety Agreements executed on March 26, 1979 and July 28,
1980.
In civil cases, the party having the burden of proof must establish his case by
preponderance of evidence. Preponderance of evidence means evidence which is
more convincing to the court as worthy of belief than that which is offered in
opposition thereto. Petitioners contend that the alleged promissory notes, trust
receipts and surety agreements attached to the complaint filed by PBCom did not
ripen into valid and binding contracts inasmuch as there is no evidence of the
delivery of money or loan proceeds to MICO or to any of the petitioners-sureties.
Petitioners claim that under normal banking practice, borrowers are required to
accomplish promissory notes in blank even before the grant of the loans applied for
and such documents become valid written contracts only when the loans are actually
released to the borrower.
We are not convinced.
 During the trial of an action, the party who has the burden of proof upon an issue
may be aided in establishing his claim or defense by the operation of a presumption,
or, expressed differently, by the probative value which the law attaches to a specific
state of facts. A presumption may operate against his adversary who has not
introduced proof to rebut the presumption. The effect of a legal presumption upon a
burden of proof is to create the necessity of presenting evidence to meet the legal
presumption or the prima facie case created thereby, and which if no proof to the
contrary is presented and offered, will prevail. The burden of proof remains where it
is, but by the presumption the one who has that burden is relieved for the time being
from introducing evidence in support of his averment, because the presumption
stands in the place of evidence unless rebutted.
Under Section 3, Rule 131 of the Rules of Court the following presumptions,
among others, are satisfactory if uncontradicted: a) That there was a sufficient
consideration for a contract; and b) That a negotiable instrument was given or
indorsed for sufficient consideration. As observed by the Court of Appeals, a similar
presumption is found in Section 24 of the Negotiable Instruments Law which
provides that every negotiable instrument is deemed prima facie to have been issued
for valuable consideration and every person whose signature appears thereon to have
become a party for value. Negotiable instruments which are meant to be substitutes
for money, must conform to the following requisites to be considered as such a) it
must be in writing; b) it must be signed by the maker or drawer; c) it must contain an
unconditional promise or order to pay a sum certain in money; d) it must be payable
on demand or at a fixed or determinable future time; e) it must be payable to order or
bearer; and f) where it is a bill of exchange, the drawee must be named or otherwise
indicated with reasonable certainty. Negotiable instruments include promissory
notes, bills of exchange and checks. Letters of credit and trust receipts are, however,
not negotiable instruments. But drafts issued in connection with letters of credit are
negotiable instruments.
Private respondent PBCom presented the following documentary evidence to
prove petitioners’ credit availments and liabilities:
1) Promissory Note No. BNA -26218 dated May 21, 1982 in the sum of
P1,000,000.00 executed by MICO in favor of PBCom.
2) Promissory Note No. BNA -26219 dated May 21, 1982 in the sum of
P1,000,000.00 executed by MICO in favor of PBCom
3) Promissory Note No. BNA -26253 dated May 25, 1982 in the sum of
P1,000,000.00 executed by MICO in favor of PBCom.
4) Promissory Note No. BNA -7458 dated May 21, 1982 in the sum of
P377,000.00 executed by MICO in favor of PBCom.
5) Promissory Note No. TA -094 dated July 29, 1980 in the sum of
P4,000,000.00 executed by MICO in favor of PBCom.
6) Irrevocable letter of credit No. L-16060 dated July 2, 1981 issued in favor
of Perez Battery Center for account of Mico Metals Corp
7) Draft dated July 2, 1981 in the sum of P348,000.00 issued by Perez
Battery Center, beneficiary of irrevocable Letter of Credit No. L-16060
and accepted by MICO Metals corporation.
8) Letter dated July 2, 1981 from Perez Battery Center addressed to private
respondent PBCom showing that proceeds of the irrevocable letter of
credit No. L-16060 was received by Mr. Moises Rosete, representative of
Perez Battery Center.
9) Trust receipt dated July 2, 1981 executed by MICO in favor of PBCom
covering the merchandise purchased under Letter of Credit No. 16060.
10) Irrevocable letter of credit No. L-16334 dated September 22, 1981 issued
in favor of Perez Battery Center for account of MICO Metals Corp.
11) Draft dated September 22, 1981 in the sum of P290,000.00 issued by
Perez Battery Center and accepted by MICO.
12) Letter dated September 17, 1981 from Perez Battery addressed to PBCom
showing that the proceeds of credit No. L-16344 was received by Mr.
Moises Rosete, a representative of Perez Battery Center.
13) Trust Receipt dated September 22, 1981 executed by MICO in favor of
PBCom covering the merchandise under Letter of Credit No. L-16334.
14) Irrevocable Letter of Credit No. 61873 dated November 10, 1981 for
US$11,960.00 issued by PBCom in favor of TA JIH Enterprises Co. Ltd.,
through its correspondent bank, Irving Trust Company of Taipei,
Taiwan.
15) Trust Receipt dated December 15, 1981 executed by MICO in favor of
PBCom showing that possession of the merchandise covered by
Irrevocable Letter of Credit No. 61873 was released by PBCom to MICO.
16) Letters dated March 2, 1979 from MICO signed by its president, Charles
Lee showing that MICO sought credit line from PBCom in the form of
loans, letters of credit and trust receipt in the sum of P7,500,000.00.
17) Letter dated July 14, 1980 from MICO signed by its president, Charles
Lee, showing that MICO requested for additional financial assistance in
the sum of P4,000,000.00.
18) Board resolution dated March 6, 1979 of MICO authorizing Charles Lee
and Mariano Sio singly or jointly to act and sign for and in behalf of
MICO relative to the obtention of credit facilities from PBCom.
19) Duly notarized Deed of Mortgage dated May 16, 1979 executed by MICO
in favor of PBCom over MICO’s real properties covered by TCT Nos.
11248 and 11250 located in Pasig.
20) Duly notarized Surety Agreement dated March 26, 1979 executed by
herein petitioners Charles Lee, Mariano Sio, Alfonso Yap, Richard
Velasco and Chua Siok Suy in favor of PBCom.
 21) Duly notarized Surety Agreement dated July 28, 1980 executed by
herein petitioners Charles Lee, Mariano Sio, Alfonso Yap, Richard
Velasco and Chua Siok Suy in favor of PBCom.
22) Duly notarized certification dated July 28, 1980 issued by MICO’s
corporate secretary, Mr. P.B. Barrera, attesting to the adoption of a
board resolution authorizing Chua Siok Suy to sign, for and in behalf of
MICO, all the necessary documents including contracts, loan
instruments and mortgages relative to the obtention of various credit
facilities from PBCom.
The above-cited documents presented have not merely created a prima facie case
but have actually proved the solidary obligation of MICO and the petitioners, as
sureties of MICO, in favor of respondent PBCom. While the presumption found
under the Negotiable Instruments Law may not necessarily be applicable to trust
receipts and letters of credit, the presumption that the drafts drawn in connection
with the letters of credit have sufficient consideration. Under Section 3(r), Rule 131 of
the Rules of Court there is also a presumption that sufficient consideration was given
in a contract. Hence, petitioners should have presented credible evidence to rebut
that presumption as well as the evidence presented by private respondent PBCom.
The letters of credit show that the pertinent materials/merchandise have been
received by MICO. The drafts signed by the beneficiary/suppliers in connection with
the corresponding letters of credit proved that said suppliers were paid by PBCom for
the account of MICO. On the other hand, aside from their bare denials petitioners did
not present sufficient and competent evidence to rebut the evidence of private
respondent PBCom. Petitioner MICO did not proffer a single piece of evidence, apart
from its bare denials, to support its allegation that the loan transactions, real estate
mortgage, letters of credit and trust receipts were issued allegedly without any
consideration.
Petitioners-sureties, for their part, presented the By-Laws of Mico Metals
Corporation (MICO) to prove that only the president of MICO is authorized to
borrow money, arrange letters of credit, execute trust receipts, and promissory notes
and consequently, that the loan transactions, letters of credit, promissory notes and
trust receipts, most of which were executed by Chua Siok Suy in representation of
MICO were not allegedly authorized and hence, are not binding upon MICO. A
perusal of the By-Laws of MICO, however, shows that the power to borrow money for
the company and issue mortgages, bonds, deeds of trust and negotiable instruments
or securities, secured by mortgages or pledges of property belonging to the company
is not confined solely to the president of the corporation. The Board of Directors of
MICO can also borrow money, arrange letters of credit, execute trust receipts and
promissory notes on behalf of the corporation. Significantly, this power of the Board
of Directors according to the by-laws of MICO, may be delegated to any of its
standing committee, officer or agent. Hence, PBCom had every right to rely on the
Certification issued by MICO’s corporate secretary, P.B. Barrera, that Chua Siok Suy
was duly authorized by its Board of Directors to borrow money and obtain credit
facilities in behalf of MICO from PBCom.
Petitioners-sureties also presented a letter of their counsel dated October 9, 1982,
addressed to private respondent PBCom purportedly to show that PBCom knew that
Chua Siok Suy allegedly used the credit and good names of the petitioner-sureties for
his benefit, and that petitioner-sureties were made to sign blank documents and were
furnished copies of the same. The letter, however, is in fact merely a reply of
petitioners-sureties’ counsel to PBCom’s demand for payment of MICO’s obligations,
and appears to be an inconsequential piece of self-serving evidence.
In addition to the foregoing, MICO and petitioners-sureties cited the decision of
the trial court which stated that there was no proof that the proceeds of the loans
were ever delivered to MICO. Although the private respondent’s witness, Mr.
Gardiola, testified that the proceeds of the loans were deposited in MICO’s current
account with PBCom, his testimony was allegedly not supported by any bank record,
note or memorandum. A careful scrutiny of the record including the transcript of
stenographic notes reveals, however, that although private respondent PBCom was
willing to produce the corresponding account ledger showing that the proceeds of the
loans were credited to MICO’s current account with PBCom, MICO in fact vigorously
objected to the presentation of said document. That point is shown in the testimony
of PBCom’s witness, Gardiola, thus:
Q: Now, all of these promissory note Exhibits “I” and “J” which as
you have said previously (sic) availed originally by defendant
Mico Metals Corp. sometime in 1979, my question now is, do
you know what happened to the proceeds of the original
availment?
A: Well, it was credited to the current account of Mico Metals
Corp.
Q: Why did it was credited to the proceeds to the account of Mico
Metals Corp? (sic)
A: Well, that is our understanding.
ATTY. DURAN:
Your honor, may we be given a chance to object, the best
evidence is the so-called current account . . .
COURT:
Can you produce the ledger account?
A: Yes, Your Honor, I will bring.
COURT:
 The ledger or record of the current account of Mico Metals
Corp.
A: Yes, Your Honor.
ATTY. ACEJAS:
Your Honor, these are a confidential record, and they might
not be disclosed without the consent of the person concerned,
(sic)
ATTY. SANTOS:
Well, you are the one who is asking that.
ATTY. DURAN:
Your Honor, I’m precisely want to show for the . . . (sic)
COURT:
But the amount covered by the current account of defendant
Mico Metals Corp. is the subject matter of this case.
xxx xxx xxx
Q: Are those availments were release? (sic)
A: Yes, Your Honor, to the defendant corporation.
Q: By what means?
A: By the credit to their current account.
ATTY. ACEJAS:
We object to that, your Honor, because the disclose is the
secrecy of the bank deposit. (sic)
xxx xxx xxx
Q: Before the recess Mr. Gardiola, you stated that the proceeds of
the three (3) promissory notes were credited to the accounts of
Mico Metals Corporation, now do you know what kind of
current account was that which you are referring to?
ATTY. ACEJAS:
Objection your Honor, that is the disclose of the deposit of
defendant Mico Metals Corporation and it cannot disclosed
without the authority of the depositor. (sic)
That proceeds of the loans which were originally availed of in 1979 were
delivered to MICO is bolstered by the fact that more than a year later, specifically on
July 14, 1980, MICO through its president, petitioner-surety Charles Lee, requested
for an additional loan of Four Million Pesos (P4,000,000.00) from PBCom. The fact
that MICO was requesting for an additional loan implied that it has already availed of
earlier loans from PBCom.
Petitioners allege that PBCom presented no evidence that it remitted
payments to cover the domestic and foreign letters of credit. Petitioners placed much
reliance on the erroneous decision of the trial court which stated that private
respondent PBCom allegedly failed to prove that it actually made payments under
the letters of credit since the bank drafts presented as evidence show that they were
made in favor of the Bank of Taiwan and First Commercial Bank.
Petitioners’ allegations are untenable.
Modern letters of credit are usually not made between natural persons. They
involve bank-to-bank transactions. Historically, the letter of credit was developed to
facilitate the sale of goods between, distant and unfamiliar buyers and sellers. It was
an arrangement under which a bank, whose credit was acceptable to the seller, would
at the instance of the buyer agree to pay drafts drawn on it by the seller, provided
that certain documents are presented such as bills of lading accompanied the
corresponding drafts. Expansion in the use of letters of credit was a natural
development in commercial banking. Parties to a commercial letter of credit include
(a) the buyer or the importer, (b) the seller, also referred to as beneficiary, (c) the
opening bank which is usually the buyer’s bank which actually issues the letter of
credit, (d) the notifying bank which is the correspondent bank of the opening bank
through which it advises the beneficiary of the letter of credit, (e) negotiating bank
which is usually any bank in the city of the beneficiary. The services of the notifying
bank must always be utilized if the letter of credit is to be advised to the beneficiary
through cable, (f) the paying bank which buys or discounts the drafts contemplated
by the letter of credit, if such draft is to be drawn on the opening bank or on another
designated bank not in the city of the beneficiary. As a rule, whenever the facilities of
the opening bank are used, the beneficiary is supposed to present his drafts to the
notifying bank for negotiation, and (g) the confirming bank which, upon the request
of the beneficiary, confirms the letter of credit issued by the opening bank.
From the foregoing, it is clear that letters of credit, being usually bank-to-bank
transactions, involve more than just one bank. Consequently, there is nothing
unusual in the fact that the drafts presented in evidence by respondent bank were not
made payable to PBCom. As explained by respondent bank, a draft was drawn on the
Bank of Taiwan by Ta Jih Enterprises Co., Ltd. of Taiwan, supplier of the goods
covered by the foreign letter of credit. Having paid the supplier, the Bank of Taiwan
then presented the bank draft for reimbursement by PBCom’s correspondent bank in
Taiwan, the Irving Trust Company—which explains the reason why on its face, the
draft was made payable to the Bank of Taiwan. Irving Trust Company accepted and
endorsed the draft to PBCom. The draft was later transmitted to PBCom to support
the latter’s claim for payment from MICO. MICO accepted the draft upon
presentment and negotiated it to PBCom.
 Petitioners further aver that MICO never requested that legal possession of the
merchandise be transferred to PBCom by way of trust receipts. Petitioners insist that
assuming that MICO transferred possession of the merchandise to PBCom by way of
trust receipts, the same would be illegal since PBCom, being a banking institution, is
not authorized by law to engage in the business of importing and selling goods.
A trust receipt is considered as a security transaction intended to aid in financing
importers and retail dealers who do not have sufficient funds or resources to finance
the importation or purchase of merchandise, and who may not be able to acquire
credit except through utilization, as collateral of the merchandise imported or
purchased. A trust receipt, therefor, is a document of security pursuant to which a
bank acquires a “security interest” in the goods under trust receipt. Under a letter of
credit-trust receipt arrangement, a bank extends a loan covered by a letter of credit,
with the trust receipt as a security for the loan. The transaction involves a loan
feature represented by a letter of credit, a security feature which is in the covering
trust receipt which secures an indebtedness.
Petitioners’ averments with regard to the second issue are no less incredulous.
Petitioners’ contend that the letters of credit, surety agreements and loan
transactions did not ripen into valid and binding contracts since no part of the
proceeds of the loan transactions were delivered to MICO or to any of the petitioners-
sureties. Petitioners-sureties allege that Chua Siok Suy was the beneficiary of the
proceeds of the loans and that the latter made them sign the surety agreements in
blank. Thus, they maintain that they should not be held accountable for any liability
that might arise therefrom.
It has not escaped our notice that it was petitioner-surety Charles Lee, as
president of MICO Metals Corporation, who first requested for a discounting loan of
Three Million Pesos (P3,000,000.00) from PBCom as evidenced by his letter dated
March 2, 1979. On the same day, Charles Lee, as President of MICO, requested for a
Letter of Credit and Trust Receipt line in the sum of Three Million Pesos
(P3,000,000.00). Still, on the same day, Charles Lee again as President of MICO,
wrote another letter to PBCOM requesting for a financing line in the sum of One
Million Five Hundred Thousand Pesos (P1,500,000.00) to be used exclusively as
marginal deposit for the opening of MICO’s foreign and local letters of credit with
PBCom. More than a year later, it was also Charles Lee, again in his capacity as
president of MICO, who asked for an additional loan in the sum of Four Million
Pesos (P4,000,000.00). The claim, therefore, of petitioners that it was Chua Siok
Suy, in connivance with the respondent PBCom, who applied for and obtained the
loan transactions and letters of credit strains credulity considering that even the
Deed of the Real Estate Mortgage in favor of PBCom was executed by petitioner-
surety Mariano Sio in his capacity as general manager of MICO to secure the loan
accommodations obtained by MICO from PBCom.
Petitioners-sureties allege that they were made to sign the surety agreements in
blank by Chua Siok Suy. Petitioner Alfonso Yap, the corporate treasurer, for his part
testified that he signed booklets of checks, surety agreements and promissory notes
in blank; that he signed the documents in blank despite his misgivings since Chua
Siok Suy assured him that the transaction can easily be taken cared of since Chua
Siok Suy personally knew the Chairman of the Board of PBCom; that he was not
receiving salary as treasurer of Mico Metals and since Chua Siok Suy had a direct
hand in the management of Malayan Sales Corporation, of which Yap is an employee,
he (Yap) signed the documents in blank as consideration for his continued
employment in Malayan Sales Corporation. Petitioner Antonio Co testified that he
worked as office manager for MICO from 1978-1982. As office manager, he was the
one in charge of transacting business like purchasing, selling and paying the salary of
the employees. He was also in charge of the handling of documents pertaining to
surety agreements, trust receipts and promissory notes; that when he first joined
MICO Metals Corporation, he was able to read the by-laws of the corporation and he
came to know that only the chairman and the president can borrow money in behalf
of the corporation; that Chua Siok Suy once called him up and told him to secure an
invoice so that a credit line can be opened in the bank with a local letter of credit;
that when the invoice was secured, he (Co) brought it together with the application
for a credit line to Chua Siok Suy, and that he questioned the authority of Chua Siok
Suy pointing out that he (Co) is not empowered to sign the document inasmuch as
only the latter, as president, was authorized to do so. However, Chua Siok Suy
allegedly just said that he had already talked with the Chairman of the Board of
PBCom; and that Chua Siok Suy reportedly said that he needed the money to finance
a project that he had with the Taipei government. Co also testified that he knew of
the application for domestic letter of credit in the sum of Three Hundred Forty-Eight
Thousand Pesos (P348,000.00); and that a certain Moises Rosete was authorized to
claim the check covering the Three Hundred Forty-Eight Thousand Pesos
(P348,000.00) from PBCom; and that after claiming the check Rosete brought it to
Perez Battery Center for indorsement after which the same was deposited to the
personal account of Chua Siok Suy.
We consider as incredible and unacceptable the claim of petitioners-sureties that
the Board of Directors of MICO was so careless about the business affairs of MICO as
well as about their own personal reputation and money that they simply relied on the
say so of Chua Siok Suy on matters involving millions of pesos. 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 but several documents
were executed at different times and at different places by the petitioner sureties and
Chua Siok Suy as president of MICO.
 MICO and herein petitioners-sureties insist that Chua Siok Suy was not duly
authorized to negotiate for loans in behalf of MICO from PBCom. Petitioners’
allegation, however, is belied by the July 28, 1980 Certification issued by the
corporate secretary of PBCom, Atty. P.B. Barrera, that MICO’s Board of Directors
gave Chua Siok Suy full authority to negotiate for loans in behalf of MICO with
PBCom. In fact, the Certification even provided that Chua Siok Suy’s authority
continues until and unless PBCom is notified in writing of the withdrawal thereof by
the said Board. Notably, petitioners failed to contest the genuineness of the said
Certification which is notarized and to show any written proof of any alleged
withdrawal of the said authority given by the Board of Directors to Chua Siok Suy to
negotiate for loans in behalf of MICO.
There was no need for PBCom to personally inform the petitioners-sureties
individually about the terms of the loans, letters of credit and other loan documents.
The petitioners-sureties themselves happen to comprise the Board of Directors of
MICO, which gave full authority to Chua Siok Suy to negotiate for loans in behalf of
MICO. Notice to MICO’s authorized representative, Chua Siok Suy, was notice to
MICO. The Certification issued by PBCom’s corporate secretary, Atty. P.B. Barrera,
indicated that Chua Siok Suy had full authority to negotiate and sign the necessary
documents, in behalf of MICO, for loans from PBCom. Respondent PBCom therefore
had the right to rely on the said notarized Certification of MICO’s Corporate
Secretary.
Anent petitioners-sureties contention that they obtained no consideration
whatsoever on the surety agreements, we need only point out that the consideration
for the sureties is the very consideration for the principal obligor, MICO, in the
contracts of loan. In the case of Willex Plastic Industries Corporation vs. Court of
Appeals, we ruled that the consideration necessary to support a surety obligation
need not pass directly to the surety, a consideration moving to the principal alone
being sufficient. For a guarantor or surety is bound by the same consideration that
makes the contract effective between the parties thereto. It is not necessary that a
guarantor or surety should receive any part or benefit, if such there be, accruing to
his principal.
Petitioners placed too much reliance on the rule in evidence that the burden of
proof does not shift whereas the burden of going forward with the evidence does pass
from party to party. It is true that said rule is not changed by the fact that the party
having the burden of proof has introduced evidence which established prima
facie his assertion because such evidence does not shift the burden of proof; it merely
puts the adversary to the necessity of producing evidence to meet the prima
facie case. Where the defendant merely denies, either generally or otherwise, the
allegations of the plaintiff’s pleadings, the burden of proof continues to rest on the
plaintiff throughout the trial and does not shift to the defendant until the plaintiff’s
evidence has been presented and duly offered. The defendant has then no burden
except to produce evidence sufficient to create a state of equipoise between his proof
and that of the plaintiff to defeat the latter, whereas the plaintiff has the burden, as in
the beginning, of establishing his case by a preponderance of evidence. But where the
defendant has failed to present and marshall evidence sufficient to create a states of
equipoise between his proof and that of plaintiff, the prima facie case presented by
the plaintiff will prevail.
In the case at bar, respondent PBCom, as plaintiff in the trial court, has in fact
presented sufficient documentary and testimonial evidence that proved by
preponderance of evidence its subject collection case against the defendants who are
the petitioners herein. In view of all the foregoing, the Court of Appeals committed
no reversible error in its appealed Decision.
WHEREFORE, the assailed Decision of the Court of Appeals in CA-G.R. CV No.
27480 entitled, “Philippine Bank of Communications vs. Mico Metals Corporation,
Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap, Richard Velasco and Alfonso
Co,” is AFFIRMED in toto.
Costs against the petitioners.
SO ORDERED.
Judgment affirmed in toto.
Note.—In a letter of credit, there are three distinct and independent contracts: (1)
the contract of sale between the buyer and the seller; (2) the contract of the buyer
with the issuing bank; and (3) the letter of credit proper in which the bank promises
to pay the seller pursuant to the terms and conditions stated therein. (Keng Hua
Paper Products Co., Inc. vs. Court of Appeals, 286 SCRA 257 [1998])
——o0o——
 G.R. No. 154947. August 11, 2004.*
LEODEGARIO BAYANI, petitioner, vs. PEOPLE OF THE PHILIPPINES,
respondent.
Commercial Law; Negotiable Instruments Law; Holder in Due Course; The
evidence on record shows that Evangelista rediscounted the check and gave
P55,000.00 to Rubia after the latter endorsed the same—as such, Evangelista is a
holder of the check in due course; Under Section 28 of the Negotiable Instruments
Law, absence or failure of consideration is a matter of defense only as against any
person not a holder in due course.—The evidence on record shows that Evangelista
rediscounted the check and gave P55,000.00 to Rubia after the latter endorsed the
same. As such, Evangelista is a holder of the check in due course. Under Section 28 of
the Negotiable Instruments Law (NIL), absence or failure of consideration is a matter
of defense only as against any person not a holder in due course, thus: SECTION
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.
Criminal Law; Special Law; Violation of B.P. Blg. 22; For the accused to be
guilty of violation of Section 1 of B.P. Blg. 22, the prosecution is mandated to prove
the essential elements thereof, to wit: (1) that a person makes or draws and issues
any check; (2) that the check is made or drawn and issued to apply on account or
for value; (3) that the person who makes or draws and issues the check knows 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; (4) that the 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.—For the accused to be guilty of
violation of Section 1 of B.P. Blg. 22, the prosecution is mandated to prove the
essential elements thereof, to wit: 1. That a person makes or
draws and issues any check; 2. That the check is made or drawn and issued to apply
on account or for value; 3. That the person who makes or draws and issues the
check knows 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; 4.
That the 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.
PETITION for review on certiorari of the decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
CALLEJO, SR., J.:
This is a petition for review on certiorari of the Decision1of the Court of Appeals
in CA-G.R. CR No. 22861 affirming on appeal the Decision2 of the Regional Trial
Court of Lucena City, Branch 59, in Criminal Case No. 93-135 convicting the accused
therein, now the petitioner, for violation of Batas Pambansa (B.P.) Blg. 22.
On February 9, 1993, Leodegario Bayani was charged with violation of B.P. Blg.
22 in an Information which reads:
“That on or about the 20th day of August 1992, in the Municipality of Candelaria,
Province of Quezon, Philippines, and within the jurisdiction of this Honorable Court,
the above-named accused did then and there willfully, unlawfully and feloniously
issue and make out Check No. 054936 dated August 29, 1992, in the amount of
FIFTY-FIVE THOUSAND PESOS (P55,000.00) Philippine Currency, drawn against
the PSBank, Candelaria Branch, Candelaria, Quezon, payable to “Cash” and give the
said check to one Dolores Evangelista in exchange for cash although the said accused
knew fully well at the time of issuance of said check that he did not have sufficient
funds in or credit with the drawee bank for payment of said check in full upon
presentment; that upon presentation of said check to the bank for payment, the same
was dishonored and refused payment for the reason that the drawer thereof, the
herein accused, had no sufficient fund therein, and that despite due notice, said
accused failed to deposit the necessary amount to cover said check or to pay in full the
amount of said check, to the damage and prejudice of said Dolores Evangelista in the
aforesaid amount.
Contrary to law.”
The Case for the Prosecution
At about noon on August 20, 1992, Alicia Rubia arrived at the grocery store of
Dolores Evangelista in Candelaria, Quezon, and asked the latter to rediscount
Philippine Savings Bank (PSBank) Check No. 054936 in the amount of P55,000.00.
The check was drawn by Leodegario Bayani against his account with the PSBank and
postdated August 29, 1992. Rubia told Evangelista that Bayani asked her to
rediscount the check for him because he needed the money. Considering that Rubia
and Bayani were long-time customers at the store and she knew Bayani to be a good
man, Evangelista agreed to rediscount the check. After Rubia endorsed the check,
Evangelista gave her the amount of P55,000.00. However, when Evangelista
deposited the check in her account with the Far East Bank & Trust Company on
September 11, 1992, it was dishonored by the drawee bank for the reason that on
September 1, 1992, Bayani closed his account with the PSBank. The reason for the
dishonor of the check was stamped at its dorsal portion. As of August 27, 1992, the
balance of Bayani’s account with the bank was P2,414.96. Evangelista then informed
Rubia of the dishonor of the check and demanded the return of her P55,000.00.
Rubia replied that she was only requested by Bayani to have the check rediscounted
and advised Evangelista to see him. When Evangelista talked to Bayani, she was told
that Rubia borrowed the check from him.
Thereafter, Evangelista, Rubia, Bayani and his wife, Aniceta, had a conference in
the office of Atty. Emmanuel Velasco, Evangelista’s lawyer. Later, in the Office of the
Barangay Captain Nestor Baera, Evangelista showed Bayani a photocopy of the
dishonored check and demanded payment thereof. Bayani and Aniceta, on one hand,
and Rubia, on the other, pointed to each other and denied liability thereon. Aniceta
told Rubia that she should be the one to pay since the P55,000.00 was with her, but
the latter insisted that the said amount was in payment of the pieces of jewelry
Aniceta purchased from her. Upon Atty. Velasco’s prodding, Evangelista suggested
Bayani and Rubio to pay P25,000.00 each. Still, Bayani and Rubio pointed to the
other as the one solely liable for the amount of the check. Rubia reminded Aniceta
that she was given the check as payment of the pieces of jewelry Aniceta bought from
her.
The Case for the Petitioner
Bayani testified that he was the proprietor of a funeral parlor in Candelaria,
Quezon. He maintained an account with the PSBank in Candelaria, Quezon, and was
issued a checkbook which was kept by his wife, Aniceta Bayani. Sometime in 1992, he
changed his residence. In the process, his wife lost four (4) blank checks, one of
which was Check No. 054936 which formed part of the checks in the checkbook
issued to him by the PSBank. He did not report the loss to the police authorities. He
reported such loss to the bank after Evangelista demanded the refund of the
P55,000.00 from his wife. He then closed his account with the bank on September
11, 1992, but was informed that he had closed his account much earlier. He denied
ever receiving the amount of P55,000.00 from Rubia.
Bayani further testified that his wife discovered the loss of the checks when he
brought his wife to the office of Atty. Emmanuel Velasco. He did not see Evangelista
in the office of the lawyer, and was only later informed by his wife that she had a
conference with Evangelista. His wife narrated that according to Evangelista, Rubia
had rediscounted a check he issued, which turned out to be the check she (Aniceta)
had lost. He was also told that Evangelista had demanded the refund of the amount
of the check. He later tried to contact Rubia but failed. He finally testified that he
could not recall having affixed his signature on the check.
Aniceta Bayani corroborated the testimony of her husband. She testified that she
was invited to go to the office of Atty. Velasco where she, Rubia and Evangelista had a
conference. It was only then that she met Evangelista. Rubia admitted that she
rediscounted the complainant’s check with Evangelista. When Evangelista asked her
to pay the amount of the check, she asked that the check be shown to her, but
Evangelista refused to do so. She further testified that her husband was not with her
and was in their office at the time.
At the conclusion of the trial, the court rendered judgment finding Bayani guilty
beyond reasonable doubt of violation of Section 1 of B.P. Blg. 22. The decretal portion
of the decision reads:
“WHEREFORE, premises considered, the Court finds the accused Leodegario
Bayani guilty beyond reasonable doubt of violation of Section 1, Batas Pambansa
Bilang 22 and hereby sentences him to suffer an imprisonment of ONE (1) YEAR, or to
pay a fine of ONE HUNDRED TEN THOUSAND PESOS (P110,000.00), to pay to
complaining witness Dolores Evangelista the sum of FIFTY-FIVE THOUSAND PESOS
(P55,000.00), the value of the check and to pay the costs.
SO ORDERED.”
On appeal, the petitioner averred that the prosecution failed to adduce evidence
that he affixed his signature on the check, or received from Rubia the amount of
P55,000.00, thus negating his guilt of the crime charged.
The petitioner asserts that even Teresita Macabulag, the bank manager of PSB
who authenticated his specimen signatures on the signature card he submitted upon
opening his account with the bank, failed to testify that the signature on the check
was his genuine signature.
On January 30, 2002, the Court of Appeals rendered judgment affirming the
decision of the RTC with modification as to the penalty imposed on the petitioner.
The petitioner asserts in the petition at bar that—
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN AFFIRMING
WITH MODIFICATION THE CONVICTION OF PETITIONER BY THE TRIAL
COURT FOR ALLEGED VIOLATION OF BATAS PAMBANSA BLG. 22
NOTWITHSTANDING THAT THE PROSECUTION MISERABLY FAILED TO
PROVE THAT THE CHECK WAS ISSUED FOR A VALUABLE CONSIDERATION.
The petitioner contends that the prosecution failed to prove all the essential
elements of the crime of violation of Section 1, B.P. Blg. 22. He asserts that the
prosecution failed to prove that he issued the check. He avers that even assuming
that he issued the check, the prosecution failed to prove that it was issued for
valuable consideration, and that he received the amount of P55,000.00 from Rubia.
Hence, in light of the ruling of this Court in Magno vs. Court of Appeals, he is
entitled to an acquittal on such grounds.
 The petitioner further contends that Evangelista’s testimony, that Rubia told her
that it was the petitioner who asked her to have the check rediscounted, is hearsay
and, as such, even if he did not object thereto is inadmissible in evidence against him.
He avers that the prosecution failed to present Rubia as a witness, depriving him of
his right to cross-examine her. He contends that any declaration made by Rubia to
Evangelista is inadmissible in evidence against him.
The petition is denied.
We agree with the submission of the petitioner that Evangelista’s testimony, that
Rubia told her that the petitioner requested that the subject check be rediscounted, is
hearsay. Evangelista had no personal knowledge of such request of the petitioner to
Rubia. Neither is the information relayed by Rubia to Evangelista as to the
petitioner’s request admissible in evidence against the latter, because the prosecution
failed to present Rubia as a witness, thus, depriving the petitioner of his right of
cross-examination.
However, the evidence belies the petitioner’s assertion that the prosecution failed
to adduce evidence that he issued the subject check. Evangelista testified that when
she talked to the petitioner upon Rubia’s suggestion, the petitioner admitted that he
gave the check to Rubia, but claimed that the latter “borrowed” the check from him.
Q When this check in question was returned to you because of the
closed account, what did you do, if you did anything?
A I talked to Alicia Rubia, Sir.
Q And what did Alicia Rubia tell you in connection with the check
in question?
A Alicia Rubia told me that she was just requested by Leodegario
Bayani, Sir.
Q And what else did she tell you?
A She advised me to go to Leodegario Bayani, Sir.
Q Did you go to Leodegario Bayani as per instruction of Alicia
Rubia?
A Yes, Sir.
Q And what did Leodegario Bayani tell you in connection with this
check?
A He told me that Alicia Rubia borrowed the check from him, Sir.
Evangelista testified that she showed to the petitioner and his wife, Aniceta, a
photocopy of the subject check in the office of Atty. Velasco, where they admitted to
her that they owned the check:
ATTY. ALZAGA (TO WITNESS)
Q When you shown (sic) the check to Leodegario Bayani and his
wife in the law office of Atty. Velasco, what did they tell you?
ATTY. VELASCO:
Misleading. The question is misleading because according to
the question, Your Honor, he had shown the check but that
was not the testimony. The testimony was the xerox copy of the
check was the one shown.
ATTY. ALZAGA
“The xerox copy of the check.”
COURT
As modified, answer the question.
WITNESS
A They told me they owned the check but they were pointing to
each other as to who will pay the amount, Sir.
The petitioner cannot escape criminal liability by denying that he received the
amount of P55,000.00 from Rubia after he issued the check to her. As we ruled
in Lozano vs. Martinez:
The gravamen of the offense punished by BP 22 is the act of making and issuing a
worthless check or a check that is dishonored upon its presentation for payment. It is
not the non-payment of an obligation which the law punishes. The law is not
intended or designed to coerce a debtor to pay his debt. The thrust of the law is to
prohibit, under pain of penal sanctions, the making of worthless checks and putting
them in circulation. Because of its deleterious effects on the public interest, the
practice is proscribed by the law. The law punishes the act not as an offense against
property, but an offense against public order.
The evidence on record shows that Evangelista rediscounted the check and gave
P55,000.00 to Rubia after the latter endorsed the same. As such, Evangelista is a
holder of the check in due course. Under Section 28 of the Negotiable Instruments
Law (NIL), absence or failure of consideration is a matter of defense only as against
any person not a holder in due course, thus:
SECTION 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.
Moreover, Section 24 of the NIL provides the presumption of consideration, viz.:
 SECTION 24. Presumption of consideration.—Every negotiable instrument is the fact that at the time the petitioner drew and issued the check, he knew that the
deemed prima facie to have been issued for a valuable consideration; and every residue of the funds in his account with the drawee bank was insufficient to pay the
person whose signature appears thereon to have become a party thereto for value. amount of the check.
Such presumption cannot be overcome by the petitioner’s bare denial of receipt of IN LIGHT OF ALL THE FOREOING, the petition is DENIED DUE COURSE. The
the amount of P55,000.00 from Rubia. decision of the Court of Appeals is AFFIRMED.
The petitioner cannot, likewise, seek refuge in the ruling of this Court in Magno No costs.
vs. Court of Appeals because the facts and issues raised therein are substantially
different from those extant in this case. Indeed, the Court ruled in the said case that: SO ORDERED.
It is intriguing to realize that Mrs. Teng did not want the petitioner to know that
Petition denied, judgment affirmed.
it was she who “accommodated” petitioner’s request for Joey Gomez, to source out
the needed funds for the “warranty deposit.” Thus, it unfolds the kind of transaction
that is shrouded with mystery, gimmickry and doubtful legality. It is in simple Notes.—B.P. Blg. 22 was purposely enacted to prevent the proliferation of
language, a scheme whereby Mrs. Teng as the supplier of the equipment in the name worthless checks in the mainstream of daily business and to avert not only the
of her corporation, Mancor, would be able to “sell or lease” its goods as in this case, undermining of the banking system of the country but also the infliction of damage
and at the same time, privately financing those who desperately need petty and injury upon trade and commerce occasioned by the indiscriminate issuances of
accommodations as this one. This modus operandi has in so many instances such checks. (Cueme vs. People, 334 SCRA 795 [2000])
victimized unsuspecting businessmen, who likewise need protection from the law,
by availing of the deceptively called “warranty deposit” not realizing that they also In cases for violation of B.P. Blg. 22, it is necessary that the prosecution prove that
fall prey to leasing equipment under the guise of leasepurchase agreement when it is the issuer had received a notice of dishonor. Since service of notice is an issue, the
a scheme designed to skim off business clients.
person alleging that the notice was served must prove the fact of service. (Victor Ting
vs. Court of Appeals, 344 SCRA 551[2000])
Equally futile is the petitioner’s contention that the prosecution failed to prove the
crime charged. For the accused to be guilty of violation of Section 1 of B.P. Blg. 22,
the prosecution is mandated to prove the essential elements thereof, to wit:
——o0o——
1. That a person makes or draws and issues anycheck.
2. That the check is made or drawn and issued to apply on account or for value.
3. That the person who makes or draws and issues the check knows 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.
4. That the 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.

In this case, the prosecution adduced documentary evidence that when the
petitioner issued the subject check on or about August 20, 1992, the balance of his
account with the drawee bank was only P2,414.96. During the conference in the
office of Atty. Emmanuel Velasco, Evangelista showed to the petitioner and his wife a
photocopy of the subject check, with the notation at its dorsal portion that it was
dishonored for the reason “account closed.” Despite Evangelista’s demands, the
petitioner refused to pay the amount of the check and, with his wife, pointed to Rubia
as the one liable for the amount. The collective evidence of the prosecution points to
 G.R. No. 166405. August 6, 2008.*
CLAUDE P. BAUTISTA, petitioner, vs. AUTO PLUS TRADERS, INCORPORATED
and COURT OF APPEALS (Twenty-First Division), respondents.
Corporation Law; Generally, the stockholders and officers are not personally
liable for the obligations of the corporation except only when the veil of corporate
fiction is being used as a cloak or cover for fraud or illegality, or to work injustice.—
Juridical entities have personalities separate and distinct from its officers and the
persons composing it. Generally, the stockholders and officers are not personally
liable for the obligations of the corporation except only when the veil of corporate
fiction is being used as a cloak or cover for fraud or illegality, or to work
injustice.These situations, however, do not exist in this case. The evidence shows that
it is Cruiser Bus Lines and Transport Corporation that has obligations to Auto Plus
Traders, Inc. for tires. There is no agreement that petitioner shall be held liable for
the corporation’s obligations in his personal capacity. Hence, he cannot be held liable
for the value of the two checks issued in payment for the corporation’s obligation in
the total amount of P248,700.
Negotiable Instruments Law; Words and Phrases; Accommodation Party;
Section 29 of the Negotiable Instruments Law defines an accommodation party as a
person who has signed the instrument as maker, drawer, acceptor, or endorser,
without receiving value therefor, and for the purpose of lending his name to some
other person.—Contrary to private respondent’s contentions, petitioner cannot be
considered liable as an accommodation party for Check No. 58832. Section 29 of the
Negotiable Instruments Law defines an accommodation party as a person “who has
signed the instrument as maker, drawer, acceptor, or indorser, without receiving
value therefor, and for the purpose of lending his name to some other person.” As
gleaned from the text, an accommodation party is one who meets all the three
requisites, viz.: (1) he must be a party to the instrument, signing as maker, drawer,
acceptor, or indorser; (2) he must not receive value therefor; and (3) he must sign for
the purpose of lending his name or credit to some other person. An accommodation
party lends his name to enable the accommodated party to obtain credit or to raise
money; he receives no part of the consideration for the instrument but assumes
liability to the other party/ies thereto. The first two elements are present here,
however there is insufficient evidence presented in the instant case to show the
presence of the third requisite. All that the evidence shows is that petitioner signed
Check No. 58832, which is drawn against his personal account. The said check, dated
December 15, 2000, corresponds to the value of 24 sets of tires received by Cruiser
Bus Lines and Transport Corporation on August 29, 2000. There is no showing of
when petitioner issued the check and in what capacity. In the absence of concrete
evidence it cannot just be assumed that petitioner intended to lend his name to the
corporation. Hence, petitioner cannot be considered as an accommodation party.
PETITION for review on certiorari of the decision and resolution of the Court of
Appeals.
The facts are stated in the opinion of the Court.
QUISUMBING, J.:
This petition for review on certiorari assails the Decision1 dated August 10, 2004
of the Court of Appeals in CA-G.R. CR No. 28464 and the Resolution2 dated October
29, 2004, which denied petitioner’s motion for reconsideration. The Court of Appeals
affirmed the February 24, 2004 Decision and May 11, 2004 Order of the Regional
Trial Court (RTC), Davao City, Branch 16, in Criminal Case Nos. 52633-03 and
52634-03.
The antecedent facts are as follows:
Petitioner Claude P. Bautista, in his capacity as President and Presiding Officer of
Cruiser Bus Lines and Transport Corporation, purchased various spare parts from
private respondent Auto Plus Traders, Inc. and issued two postdated checks to cover
his purchases. The checks were subsequently dishonored. Private respondent then
executed an affidavit-complaint for violation of Batas Pambansa Blg. 22 against
petitioner. Consequently, two Informations for violation of BP Blg. 22 were filed with
the Municipal Trial Court in Cities (MTCC) of Davao City against the petitioner.
These were docketed as Criminal Case Nos. 102,004-B-2001 and 102,005-B-2001.
The Informations read:
Criminal Case No. 102,004-B-2001:
“The undersigned accuses the above-named accused for violation of Batas
Pambansa Bilang 22, committed as follows:
That on or about December 15, 2000, in the City of Davao, Philippines, and within
the jurisdiction of this Honorable Court, the above-mentioned accused, knowing fully
well that he had no sufficient funds and/or credit with the drawee bank, wilfully,
unlawfully and feloniously issued and made out Rural Bank of Digos, Inc. Check No.
058832, dated December 15, 2000, in the amount of P151,200.00, in favor of Auto
Plus Traders, Inc., but when said check was presented to the drawee bank for
encashment, the same was dishonored for the reason “DRAWN AGAINST
INSUFFICIENT FUNDS” and despite notice of dishonor and demands upon said
accused to make good the check, accused failed and refused to make payment to the
damage and prejudice of herein complainant.
CONTRARY TO LAW.”
Criminal Case No. 102,005-B-2001:
“The undersigned accuses the above-named accused for violation of Batas
Pambansa Bilang 22, committed as follows:
That on or about October 30, 2000, in the City of Davao, Philippines, and within
the jurisdiction of this Honorable Court, the above-mentioned accused, knowing fully
well that he had no sufficient funds and/or credit with the drawee bank, wilfully,
unlawfully and feloniously issued and made out Rural Bank of Digos, Inc. Check No.
059049, dated October 30, 2000, in the amount of P97,500.00, in favor of Auto Plus
Traders, [Inc.], but when said check was presented to the drawee bank for
encashment, the same was dishonored for the reason “DRAWN AGAINST
INSUFFICIENT FUNDS” and despite notice of dishonor and demands upon said
accused to make good the check, accused failed and refused to make payment, to the
damage and prejudice of herein complainant.
CONTRARY TO LAW.”
Petitioner pleaded not guilty. Trial on the merits ensued. After the presentation of
the prosecution’s evidence, petitioner filed a demurrer to evidence. On April 21,
2003, the MTCC granted the demurrer, thus:
“WHEREFORE, the demurrer to evidence is granted, premised on reasonable doubt as
to the guilt of the accused. Cruiser Bus Line[s] and Transport Corporation, through the
accused is directed to pay the complainant the sum of P248,700.00 representing the
value of the two checks, with interest at the rate of 12% per annum to be computed
from the time of the filing of these cases in Court, until the account is paid in full;
ordering further Cruiser Bus Line[s] and Transport Corporation, through the accused,
to reimburse complainant the expense representing filing fees amounting to P1,780.00
and costs of litigation which this Court hereby fixed at P5,000.00.
SO ORDERED.”
Petitioner moved for partial reconsideration but his motion was denied.
Thereafter, both parties appealed to the RTC. On February 24, 2004, the trial
court ruled:
“WHEREFORE, the assailed Order dated April 21, 2003 is hereby MODIFIED to
read as follows: Accused is directed to pay and/or reimburse the complainant the
following sums: (1) P248,700.00 representing the value of the two checks, with
interest at the rate of 12% per annum to be computed from the time of the filing of
these cases in Court, until the account is paid in full; (2) P1,780.00 for filing fees and
P5,000.00 as cost of litigation.
SO ORDERED.”
Petitioner moved for reconsideration, but his motion was denied on May 11, 2004.
Petitioner elevated the case to the Court of Appeals, which affirmed the February 24,
2004 Decision and May 11, 2004 Order of the RTC:
“WHEREFORE, premises considered, the instant petition is DENIED. The
assailed Decision of the Regional Trial Court, Branch 16, Davao City, dated February
24, 2004 and its Order dated May 11, 2004 are AFFIRMED.
SO ORDERED.”
Petitioner now comes before us, raising the sole issue of whether the Court of
Appeals erred in upholding the RTC’s ruling that petitioner, as an officer of the
corporation, is personally and civilly liable to the private respondent for the value of
the two checks.
Petitioner asserts that BP Blg. 22 merely pertains to the criminal liability of the
accused and that the corporation, which has a separate personality from its officers,
is solely liable for the value of the two checks.
Private respondent counters that petitioner should be held personally liable for
both checks. Private respondent alleged that petitioner issued two postdated checks:
a personal check in his name for the amount of P151,200 and a corporation check
under the account of Cruiser Bus Lines and Transport Corporation for the amount of
P97,500. According to private respondent, petitioner, by issuing his check to cover
the obligation of the corporation, became an accommodation party. Under Section
29 of the Negotiable Instruments Law, an accommodation party is liable on the
instrument to a holder for value. Private respondent adds that petitioner should also
be liable for the value of the corporation check because instituting another civil
action against the corporation would result in multiplicity of suits and delay.
At the outset, we note that private respondent’s allegation that petitioner issued a
personal check disputes the factual findings of the MTCC. The MTCC found that the
two checks belong to Cruiser Bus Lines and Transport Corporation while the RTC
found that one of the checks was a personal check of the petitioner. Generally this
Court, in a petition for review on certiorari under Rule 45 of the Rules of Court, has
no jurisdiction over questions of facts. But, considering that the findings of the
MTCC and the RTC are at variance, we are compelled to settle this issue.
A perusal of the two check return slips in conjunction with the Current Account
Statements would show that the check for P151,200 was drawn against the current
account of Claude Bautista while the check for P97,500 was drawn against the
current account of Cruiser Bus Lines and Transport Corporation. Hence, we sustain
the factual finding of the RTC.
 Nonetheless, we find the appellate court in error for affirming the decision of the
RTC holding petitioner liable for the value of the checks considering that petitioner
was acquitted of the crime charged and that the debts are clearly corporate debts for
which only Cruiser Bus Lines and Transport Corporation should be held liable.
Juridical entities have personalities separate and distinct from its officers and the
persons composing it. Generally, the stockholders and officers are not personally
liable for the obligations of the corporation except only when the veil of corporate
fiction is being used as a cloak or cover for fraud or illegality, or to work
injustice. These situations, however, do not exist in this case. The evidence shows
that it is Cruiser Bus Lines and Transport Corporation that has obligations to Auto
Plus Traders, Inc. for tires. There is no agreement that petitioner shall be held liable
for the corporation’s obligations in his personal capacity. Hence, he cannot be held
liable for the value of the two checks issued in payment for the corporation’s
obligation in the total amount of P248,700.
Likewise, contrary to private respondent’s contentions, petitioner cannot be
considered liable as an accommodation party for Check No. 58832. Section 29 of the
Negotiable Instruments Law defines an accommodation party as a person “who has
signed the instrument as maker, drawer, acceptor, or indorser, without receiving
value therefor, and for the purpose of lending his name to some other person.” As
gleaned from the text, an accommodation party is one who meets all the three
requisites, viz.: (1) he must be a party to the instrument, signing as maker, drawer,
acceptor, or indorser; (2) he must not receive value therefor; and (3) he must sign for
the purpose of lending his name or credit to some other person. An accommodation
party lends his name to enable the accommodated party to obtain credit or to raise
money; he receives no part of the consideration for the instrument but assumes
liability to the other party/ies thereto. The first two elements are present here,
however there is insufficient evidence presented in the instant case to show the
presence of the third requisite. All that the evidence shows is that petitioner signed
Check No. 58832, which is drawn against his personal account. The said check, dated
December 15, 2000, corresponds to the value of 24 sets of tires received by Cruiser
Bus Lines and Transport Corporation on August 29, 2000. There is no showing of
when petitioner issued the check and in what capacity. In the absence of concrete
evidence it cannot just be assumed that petitioner intended to lend his name to the
corporation. Hence, petitioner cannot be considered as an accommodation party.
Cruiser Bus Lines and Transport Corporation, however, remains liable for the checks
especially since there is no evidence that the debts covered by the subject checks have
been paid.
WHEREFORE, the petition is GRANTED. The Decision dated August 10, 2004
and the Resolution dated October 29, 2004 of the Court of Appeals in CA-G.R. CR
No. 28464 are REVERSED and SET ASIDE. Criminal Case Nos. 52633-03 and
52634-03 are DISMISSED, without prejudice to the right of private respondent Auto
Plus Traders, Inc., to file the proper civil action against Cruiser Bus Lines and
Transport Corporation for the value of the two checks.
No pronouncement as to costs.
SO ORDERED.
DISSENTING OPINION
VELASCO, JR., J.:
With due respect, I register my dissent to the ponenciaof my esteemed colleague.
I submit that petitioner Bautista is civilly liable for the amounts of the two checks he
issued; hence, the Court of Appeals’ Decision affirming that of the Regional Trial
Court should be upheld and the instant petition be dismissed.
To support its position absolving petitioner from civil liability arising from the
bad checks, the ponencia made the following ratiocination, viz.:
“Juridical entities have personalities separate and distinct from its officers and
the persons composing it. Generally, the stock-holders and officers are not personally
liable for the obligations of the corporation except only when the veil of corporate
fiction is being used as a cloak or cover for fraud or illegality, or to work injustice.
These situations, however, do not exist in this case. The evidence shows that it is
Cruiser Bus Lines and Transport Corporation that has obligations to Auto Plus
Traders, Inc. for tires. There is no agreement that petitioner shall be held liable for
the corporation’s obligations in his personal capacity. Hence, he cannot be held liable
for the value of the two checks issued in payment for the corporation’s obligation in
the total amount of P248,700.”
I register the view, however, that the drawer of the bounced checks is civilly liable
for the amounts of the checks drawn to pay the said obligations of the corporations
for the following reasons:
1. Section 1 of B.P. Blg. 22 is quite unequivocal regarding the liability of the
signatory to the check drawn by a corporation, thus:
“x x x Where the check is drawn by a corporation, company or entity, the person
who actually signed the check in behalf of such drawer shall be liable under this Act.”
One can contend, however, that the aforequoted section does not clearly say the
signatory is both criminally and civilly liable for the dishonored checks.
 This issue of the civil liability of the signatory was squarely resolved in the case
of Llamado v. Court of Appeals1 where it was held:

“Petitioner’s argument that he should not be held personally liable for the amount
of the check because it was a check of the Pan Asia Finance Corporation and he
signed the same in his capacity as Treasurer of the corporation, is also untenable. The
third paragraph of Section 1 of BP Blg. 22 states:

“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 the case of Lee v. Court of Appeals,2 Lee signed a check in the amount of Php
980,000.00 for the payment of the loan of a company owned by another. The check
was dishonored due to “account closed.” Lee was made civilly liable for the check
even though he issued the check in payment of the obligation of a company, thus:

“WHEREFORE, the decision of the Court of Appeals is AFFIRMED with the

following MODIFICATIONS: The sentence of imprisonment is deleted. Instead,
petitioner [Lee] is ordered to pay a fine of P200,000.00, subject to subsidiary
imprisonment in case of insolvency pursuant to Article 39 of the Revised Penal
Code; and petitioner is ordered to pay the private complainant the amount of
P980,000.00 with 12% legal interest per annum from the date of finality of herein
judgment.” (Emphasis supplied).

2. The civil aspect is deemed instituted with the criminal case. To require the
payee to institute a civil case against the corporation for the amount of the bad check
would lead to multiplicity of suits. In addition, this will unduly burden the offended
party since Rule 141 requires the payment of filing fees for a crime involving a breach
of BP Blg. 22. A second case, this time a civil case against the corporation, will expose
the offended party to the payment of filing fees for the second time.

Lastly, even assuming arguendo that the petitioner is not liable for the obligation
of the corporation, yet he should at least be made liable for the amount of Php
151,200 which was covered by his personal check according to
the ponencia. Responsibility under BP Blg. 22 is personal to the accused and Section
1 of said law is clear that the person who actually signed the bad check is liable.
 G.R. No. 56169. June 26, 1992.*
TRAVEL-ON, INC., petitioner, vs. COURT OF APPEALS and ARTURO S.
MIRANDA, respondents.
Evidence; Accounting; Obligations; Courts below erred in considering only the
variances in the statement of respondent’s account payables rather than latter’s
checks which were unpaid.—The appellate court erred in considering only the
statements of account in determining whether private respondent was indebted to
petitioner under the checks. By doing so, it failed to give due importance to the most
telling piece of evidence of private respondent’s indebtedness—the checks themselves
which he had issued. Contrary to the view held by the Court of Appeals, this Court
finds that the checks are the all important evidence of petitioner’s case; that these
checks clearly established private respondent’s indebtedness to petitioner; that
private respondent was liable thereunder.
Same; Same; Same; Drawer of check, not payee, has burden of proof to show
that he no longer owes payee any amount.—In the case at bar, the Court of Appeals,
contrary to these established rules, placed the burden of proving the existence of
valuable consideration upon petitioner. This cannot be countenanced; it was up to
private respondent to show that he had indeed issued the checks without sufficient
consideration. The Court considers that private respondent was unable to rebut
satisfactorily this legal presumption.
Same; Negotiable Instruments Law; Only clear and convincing evidence, not
the mere self-serving testimony of drawer, can rebut presumption of holder in due
course.—Travel-On was entitled to the benefit of the statutory presumption that it
was a holder in due course, that the checks were supported by valuable
consideration. Private respondent maker of the checks did not successfully rebut
these presumptions. The only evidence aliundethat private respondent offered was
his own self-serving uncorroborated testimony. He claimed that he had issued the
checks to Travel-On as payee to “accommodate” its General Manager who allegedly
wished to show those checks to the Board of Directors of Travel-On to “prove” that
Travel-On’s account receivables were somehow “still good.” It will be seen that this
claim was in fact a claim that the checks were merely simulated, that private
respondent did not intend to bind himself thereon. Only evidence of the clearest and
most convincing kind will suffice for that purpose; no such evidence was submitted
by private respondent. The latter’s explanation was denied by Travel-On’s General
Manager; that explanation, in any case, appears merely contrived and quite hollow to
us. Upon the other hand, the “accommodation” or assistance extended to Travel-On’s
passengers abroad as testified by petitioner’s General Manager involved, not the
accommodation transactions recognized by the NIL, but rather the circumvention of
then existing foreign exchange regulations by passengers booked by Travel-On,
which incidentally involved receipt of full consideration by private respondent.
PETITION for review on certiorari of the decision of the Court of Appeals.
The facts are stated in the resolution of the Court.
RESOLUTION
FELICIANO, J.:
Petitioner Travel-On, Inc. (“Travel-On”) is a travel agency selling airline tickets on
commission basis for and in behalf of different airline companies. Private respondent
Arturo S. Miranda had a revolving credit line with petitioner. He procured tickets
from petitioner on behalf of airline passengers and derived commissions therefrom.
On 14 June 1972, Travel-On filed suit before the Court of First Instance (“CFI”) of
Manila to collect on six (6) checks issued by private respondent with a total face
amount of P115,000.00. The complaint, with a prayer for the issuance of a writ of
preliminary attachment and attorney’s fees, averred that from 5 August 1969 to 16
January 1970, petitioner sold and delivered various airline tickets to respondent at a
total price of P278,201.57; that to settle said account, private respondent paid various
amounts in cash and in kind, and thereafter issued six (6) postdated checks
amounting to P115,000.00 which were all dishonored by the drawee banks. Travel-
On further alleged that in March 1972, private respondent made another payment of
P10,000.00 reducing his indebtedness to P105,000.00. The writ of attachment was
granted by the court a quo.
In his answer, private respondent admitted having had transactions with Travel-
On during the period stipulated in the complaint. Private respondent, however,
claimed that he had already fully paid and even overpaid his obligations and that
refunds were in fact due to him. He argued that he had issued the postdated checks
for purposes of accommodation, as he had in the past accorded similar favors to
petitioner. During the proceedings, private respondent contested several tickets
alleged to have been erroneously debited to his account. He claimed reimbursement
of his alleged overpayments, plus litigation expenses, and exemplary and moral
damages by reason of the allegedly improper attachment of his properties.
In support of his theory that the checks were issued for accommodation, private
respondent testified that he had issued the checks in the name of Travel-On in order
that its General Manager, Elita Montilla, could show to Travel-On’s Board of
Directors that the accounts receivable of the company were still good. He further
stated that Elita Montilla tried to encash the same, but that these were dishonored
and were subsequently returned to him after the accommodation purpose had been
attained.
 Travel-On’s witness, Elita Montilla, on the other hand explained that the
“accommodation” extended to Travel-On by private respondent related to situations
where one or more of its passengers needed money in Hongkong, and upon request
of Travel-On respondent would contact his friends in Hongkong to advance
Hongkong money to the passenger. The passenger then paid Travel-On upon his
return to Manila and which payment would be credited by Travel-On to respondent’s
running account with it.
In its decision dated 31 January 1975, the court a quoordered Travel-On to pay
private respondent the amount of P8,894.91 representing net overpayments by
private respondent, moral damages of P10,000.00 for the wrongful issuance of the
writ of attachment and for the filing of this case, P5,000.00 for attorney’s fees and
the costs of the suit.
The trial court ruled that private respondent’s indebtedness to petitioner was not
satisfactorily established and that the postdated checks were issued not for the
purpose of encashment to pay his indebtedness but to accommodate the General
Manager of Travel-On to enable her to show to the Board of Directors that Travel-On
was financially stable.
Petitioner filed a motion for reconsideration that was, however, denied by the trial
court, which in fact then increased the award of moral damages to P50,000.00.
On appeal, the Court of Appeals affirmed the decision of the trial court, but
reduced the award of moral damages to P20,000.00, with interest at the legal rate
from the date of the filing of the Answer on 28 August 1972.
Petitioner moved for reconsideration of the Court of Appeals’ decision, without
success.
In the instant Petition for Review, it is urged that the postdated checks are per
se evidence of liability on the part of private respondent. Petitioner further argues
that even assuming that the checks were for accommodation, private respondent is
still liable thereunder considering that petitioner is a holder for value.
Both the trial and appellate courts had rejected the checks as evidence of
indebtedness on the ground that the various statements of account prepared by
petitioner did not show that private respondent had an outstanding balance of
P115,000.00 which is the total amount of the checks he issued. It was pointed out
that while the various exhibits of petitioner showed various accountabilities of
private respondent, they did not satisfactorily establish the amount of the
outstanding indebtedness of private respondent. The appellate court made much of
the fact that the figures representing private respondent’s unpaid accounts found in
the “Schedule of Outstanding Account” dated 31 January 1970 did not tally with the
figures found in the statement which showed private respondent’s transactions with
petitioner for the years 1969 and 1970; that there was no satisfactory explanation as
to why the total outstanding amount of P278,432.74 was still used as basis in the
accounting of 7 April 1972 considering that according to the table of transactions for
the year 1969 and 1970, the total unpaid account of private respondent amounted
to P239,794.57.
We have, however, examined the record and it shows that the 7 April 1972
Statement of Account had simply not been updated; that if we use as basis the figure
as of 31 January 1970 which is P278,432.74 and from it deduct P38,638.17 which
represents some of the payments subsequently made by private respondent, the
figure—P239,794.57 will be obtained.
Also, the fact alone that the various statements of account had variances in
figures, simply did not mean that private respondent had no more financial
obligations to petitioner. It must be stressed that private respondent’s account with
petitioner was a running or open one, which explains the varying figures in each of
the statements rendered as of a given date.
The appellate court erred in considering only the statements of account in
determining whether private respondent was indebted to petitioner under the
checks. By doing so, it failed to give due importance to the most telling piece of
evidence of private respondent’s indebtedness—the checks themselves which he had
issued.
Contrary to the view held by the Court of Appeals, this Court finds that the checks
are the all important evidence of petitioner’s case; that these checks clearly
established private respondent’s indebtedness to petitioner; that private respondent
was liable thereunder.
It is important to stress that a check which is regular on its face is deemed prima
facie to have been issued for a valuable consideration and every person whose
signature appears thereon is deemed to have become a party thereto for value.1 Thus,
the mere introduction of the instrument sued on in evidence prima facie entitles the
plaintiff to recovery. Further, the rule is quite settled that a negotiable instrument is
presumed to have been given or indorsed for a sufficient consideration unless
otherwise contradicted and overcome by other competent evidence.2
In the case at bar, the Court of Appeals, contrary to these established rules, placed
the burden of proving the existence of valuable consideration upon petitioner. This
cannot be countenanced; it was up to private respondent to show that he had indeed
issued the checks without sufficient consideration. The Court considers that private
respondent was unable to rebut satisfactorily this legal presumption. It must also be
noted that those checks were issued immediately after a letter demanding payment
had been sent to private respondent by petitioner Travel-On.
The fact that all the checks issued by private respondent to petitioner were
presented for payment by the latter would lead to no other conclusion than that these
checks were intended for encashment. There is nothing in the checks themselves (or
in any other document for that matter) that states otherwise.
We are unable to accept the Court of Appeals’ conclusion that the checks here
involved were issued for “accommodation” and that accordingly private respondent
maker of those checks was not liable thereon to petitioner payee of those checks.
In the first place, while the Negotiable Instruments Law does refer to
accommodation transactions, no such transaction was here shown. Section 29 of the
Negotiable Instruments Law provides as follows:
“Section 29. Liability of accommodation party.—1An accommodation party is one
who has signed the instrument as maker, drawer, acceptor, or indorser, without
receiving value therefor, and for the purpose of lending his name to some other
person. Such a person is liable on the instrument to a holder for value,
notwithstanding such holder, at the time of taking the instrument, knew him to be
only an accommodation party.
In accommodation transactions recognized by the Negotiable Instruments Law,
an accommodating party lends his credit to the accommodated party, by issuing or
indorsing a check which is held by a payee or indorsee as a holder in due course, who
gave full value therefor to the accommodated party. The latter, in other words,
receives or realizes full value which the accommodated party then must repay to the
accommodating party, unless of course the accommodating party intended to make a
donation to the accommodated party. But the accommodating party is bound on the
check to the holder in due course who is necessarily a third party and is not the
accommodated party. Having issued or indorsed the check, the accommodating party
has warranted to the holder in due course that he will pay the same according to its
tenor.
In the case at bar, Travel-On was payee of all six (6) checks; it presented these
checks for payment at the drawee bank but the checks bounced. Travel-On obviously
was not an accommodated party; it realized no value on the checks which bounced.
Travel-On was entitled to the benefit of the statutory presumption that it was a
holder in due course, that the checks were supported by valuable consideration.
Private respondent maker of the checks did not successfully rebut these
presumptions. The only evidence aliunde that private respondent offered was his
own self-serving uncorroborated testimony. He claimed that he had issued the
checks to Travel-On as payee to “accommodate” its General Manager who allegedly
wished to show those checks to the Board of Directors of Travel-On to “prove” that
Travel-On’s account receivables were somehow “still good.” It will be seen that this
claim was in fact a claim that the checks were merely simulated, that private
respondent did not intend to bind himself thereon. Only evidence of the clearest and
most convincing kind will suffice for that purpose, no such evidence was submitted
by private respondent. The latter’s explanation was denied by Travel-On’s General
Manager; that explanation, in any case, appears merely contrived and quite hollow to
us. Upon the other hand, the “accommodation” or assistance extended to Travel-On’s
passengers abroad as testified by petitioner’s General Manager involved, not the
accommodation transactions recognized by the NIL, but rather the circumvention of
then existing foreign exchange regulations by passengers booked by Travel-On,
which incidentally involved receipt of full consideration by private respondent.
Thus, we believe and so hold that private respondent must be held liable on the
six (6) checks here involved. Those checks in themselves constituted evidence of
indebtedness of private respondent, evidence not successfully overturned or rebutted
by private respondent.
Since the checks constitute the best evidence of private respondent’s liability to
petitioner Travel-On, the amount of such liability is the face amount of the checks,
reduced only by the P10,000.00 which Travel-On admitted in its complaint to have
been paid by private respondent sometime in March 1992.
The award of moral damages to private respondent must be set aside, for the
reason that petitioner’s application for the writ of attachment rested on sufficient
basis and no bad faith was shown on the part of Travel-On. If anyone was in bad
faith, it was private respondent who issued bad checks and then pretended to have
“accommodated” petitioner’s General Manager by assisting her in a supposed scheme
to deceive petitioner’s Board of Directors and to misrepresent Travel-On’s financial
condition.
ACCORDINGLY, the Court Resolved to GRANT due course to the Petition for
Review on Certiorari and to REVERSE and SET ASIDE the Decision dated 22
October 1980 and the Resolution of 23 January 1981 of the Court of Appeals, as well
as the Decision dated 31 January 1975 of the trial court, and to enter a new decision
requiring private respondent Arturo S. Miranda to pay to petitioner Travel-On the
amount of P105,000.00 with legal interest thereon from 14 June 1972, plus ten
percent (10%) of the total amount due as attorney’s fees. Costs against private
respondent.
 Decision reversed and set aside; petition granted.

Note.—A holder for value under Section 29 of the Negotiable Instruments Law is
one who must meet all the requirements of a holder in due course under Section 52
of the same law except notice of want of consideration (Prudencio vs. Court of
Appeals, 143 SCRA 7).

———o0o———
 G.R. No. 117660. December 18, 2000.*
AGRO CONGLOMERATES, INC. and MARIO SORIANO, petitioners, vs. THE HON.
COURT OF APPEALS and REGENT SAVINGS and LOAN BANK, INC, respondents.
Contracts; Sales; A contract of sale is a reciprocal transaction, the obligation
or promise of each party being the cause or consideration for the obligation or
promise of the other.—A contract of sale is a reciprocal transaction. The obligation or
promise of each party is the cause or consideration for the obligation or promise by
the other. The vendee is obliged to pay the price, while the vendor must deliver actual
possession of the land. In the instant case the original plan was that the initial
payments would be paid in cash. Subsequently, the parties (with the participation of
respondent bank) executed an addendum providing instead, that the petitioners
would secure a loan in the name of Agro Conglomerates Inc. for the total amount of
the initial payments, while the settlement of said loan would be assumed by
Wonderland. Thereafter, petitioner Soriano signed several promissory notes and
received the proceeds in behalf of petitioner-company.
Same; Same; Suretyships; Accommodation Parties; Words and Phrases; An
accommodation party is a person who has signed the instrument as maker,
acceptor, or indorser, without receiving value therefor, and for the purpose of
lending his name to some other person and is liable on
_______________
*SECOND DIVISION.
451
VOL. 348, DECEMBER 18, 2000 4 Agro Conglomerates, Inc. vs. Court of Appeals
51
Agro Conglomerates, Inc. vs. Court of Appeals
the instrument to a holder for value, notwithstanding such holder at the time of
taking the instrument knew (the signatory) to be an accommodation party;
Suretyship is defined as the relation which exists where one person has undertaken
an obligation and another person is also under the obligation or other duty to the
obligee, who is entitled to but one performance, and as between the two who are
bound, one rather than the other should perform.—By this time, we note a
subsidiary contract of suretyship had taken effect since petitioners signed the
promissory notes as maker and accommodation party for the benefit of Wonderland.
Petitioners became liable as accommodation party. An accommodation party is a
person who has signed the instrument as maker, acceptor, or indorser, without
receiving value therefor, and for the purpose of lending his name to some other
person and is liable on the instrument to a holder for value, notwithstanding such
holder at the time of taking the instrument knew (the signatory) to be an
accommodation party. He has the right, after paying the holder, to obtain
reimbursement from the party accommodated, since the relation between them has
in effect become one of principal and surety, the accommodation party being the
surety. Suretyship is defined as the relation which exists where one person has
undertaken an obligation and another person is also under the obligation or other
duty to the obligee, who is entitled to but one performance, and as between the two
who are bound, one rather than the other should perform. The surety’s liability to the
creditor or promisee of the principal is said to be direct, primary and absolute; in
other words, he is directly and equally bound with the principal. And the creditor
may proceed against any one of the solidary debtors.
Same; Novation; Requisites; Words and Phrases; Novation is the
extinguishment of an obligation by the substitution or change of the obligation by a
subsequent one which extinguishes or modifies the first, either by changing the
object or principal conditions, or by substituting another in place of the debtor, or
by subrogating a third person in the rights of the creditor.—Novation is the
extinguishment of an obligation by the substitution or change of the obligation by a
subsequent one which extinguishes or modifies the first, either by changing the
object or principal conditions, or by substituting another in place of the debtor, or by
subrogating a third person in the rights of the creditor. In order that a novation can
take place, the concurrence of the following requisites are indispensable: 1) There
must be a previous valid obligation; 2) There must be an agreement of the parties
concerned to a new contract; 3) There must be the extinguishment of the old
contract; and 4) There must be the validity of the new contract.
452
4 SUPREME COURT REPORTS ANNOTATED
52
Same; Same; There is no novation by “substitution” of debtor where there is no
prior obligation which is substituted by a new contract.—In the instant case, the
first requisite for a valid novation is lacking. There was no novation by “substitution”
of debtor because there was no prior obligation which was substituted by a new
contract. It will be noted that the promissory notes, which bound the petitioners to
pay were executed after the addendum. The addendum modified the contract of sale,
not the stipulations in the promissory notes which pertain to the surety contract. At
this instance, Wonderland apparently assured the payment of future debts to be
incurred by the petitioners. Consequently, only a contract of surety arose. It was
wrong for petitioners to presume a novation had taken place. The well-settled rule is
that novation is never presumed, it must be clearly and unequivocally shown.
Same; Interpretation of Contracts; In order to judge the intention of the
parties, their contemporaneous and subsequent acts should be considered.—It is
true that the basic and fundamental rule in the interpretation of contract is that, if
the terms thereof are clear and leave no doubt as to the intention of the contracting
parties, the literal meaning shall control. However, in order to judge the intention of
the parties, their contemporaneous and subsequent acts should be considered.
 Actions; Parties; Pleadings and Practice; The non-inclusion of a necessary
party does not prevent the court from proceeding in the action, and the judgment
rendered therein shall be without prejudice to the rights of such necessary party.—
Petitioners had no legal or just ground to retain the proceeds of the loan at the
expense of private respondent. Neither could petitioners excuse themselves and hold
Wonderland still liable to pay the loan upon the rescission of their sales contract. If
petitioners sustained damages as a result of the rescission, they should have
impleaded Wonderland and asked damages. The non-inclusion of a necessary party
does not prevent the court from proceeding in the action, and the judgment rendered
therein shall be without prejudice to the rights of such necessary party. But
respondent appellate court did not err in holding that petitioners are duty-bound
under the law to pay the claims of respondent bank from whom they had obtained
the loan proceeds.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Quiason, Makalintal, Barot, Torres and Ibarra for petitioners.
453
VOL. 348, DECEMBER 18, 2000 453
Agro Conglomerates, Inc. vs. Court of Appeals
Cesar M. Cariño for private respondent.
QUISUMBING, J.:
This is a petition for review challenging the decision1 dated October 17, 1994 of the
Court of Appeals in CA-G.R. No. 32933, which affirmed in toto the judgment of the
Manila Regional Trial Court, Branch 27, in consolidated Cases Nos. 86-37374, 86-
37388, 86-37543.
This petition springs from three complaints for sums of money filed by
respondent bank against herein petitioners. In the decision of the Court of Appeals,
petitioners were ordered to pay respondent bank, as follows:
Wherefore, judgment is hereby rendered in favor of plaintiff and against defendants,
as follows:
1. 1)In Civil Case No. 86-37374, defendants [petitioners, herein] are ordered
jointly and severally, to pay to plaintiff the amount of P78,212.29, together
with interest and service charge thereon, at the rates of 14% and 3% per
annum, respectively, computed from November 10, 1982, until fully paid,
plus stipulated penalty on unpaid principal at the rate of 6% per annum,
computed from November 10, 1982, plus 15% as liquidated damage plus
10% of the total amount due, as attorney’s fees, plus costs;
2. 2)In Civil Case No. 86-37388, defendant is ordered to pay plaintiff the
amount of P632,911.39, together with interest and service charge thereon at
the rate of 14% and 3% per annum, respectively, computed from January 15,
1983, until fully paid, plus stipulated penalty on unpaid principal at the rate
of 6% per annum, computed from January 15, 1983, plus liquidated
damages equivalent to 15% of the total amount due, plus attorney’s fees
equivalent to 10% of the total amount due, plus costs; and
3. 3)In Civil Case No. 86-37543, defendant is ordered to pay plaintiff, on the
first cause of action, the amount of P510,000.00, together with interest and
service charge thereon, at the rates of 14% and 2% per annum,respectively,
computed from March 13, 1983, until fully paid, plus a penalty of 6% per
annum, based on the outstanding principal of the loan, computed from
March 13, 1983, until fully paid; and on the second cause of action, the
amount of P494,936.71, together with interest and service charge thereon at
the rates of 14% and 2%, per annum, respectively, com-
_______________
1Rollo, pp. 49-55.
454
454 SUPREME COURT REPORTS ANNOTATED
Agro Conglomerates, Inc. vs. Court of Appeals
1. puted from March 30, 1983, until fully paid, plus penalty of charge 6% per
annum, based on the unpaid principal, computed from March 30, 1983,
until fully paid, plus (on both causes of action) an amount equal to 15% of
the total amounts due, as liquidated damages, plus attorney’s fees equal to
10% of the total amounts due, plus costs.2
Based on the records, the following are the factual antecedents.
On July 17, 1982, petitioner Agro-Conglomerates, Inc. as vendor, sold two parcels
of land to Wonderland Food Industries, Inc. In their Memorandum of
Agreement,3 the parties covenanted that the purchase price of Five Million
(P5,000,000.00) Pesos would be settled by the vendee, under the following terms
and conditions: (1) One Million (P1,000,000.00) Pesos shall be paid in cash upon the
signing of the agreement; (2) Two Million (P2,000,000.00) Pesos worth of common
shares of stock of the Wonderland Food Industries, Inc.; and (3) The balance of
P2,000,000.00 shall be paid in four equal installments, the first installment falling
due, 180 days after the signing of the agreement and every six months thereafter,
with an interest rate of 18% per annum, to be advanced by the vendee upon the
signing of the agreement.
 On July 19, 1982, the vendor, the vendee, and the respondent bank Regent This addendum was not notarized.
Savings & Loan Bank (formerly Summa Savings & Loan Association), executed an Consequently, petitioner Mario Soriano signed as maker several promissory
Addendum4 to the previous Memorandum of Agreement. The new arrangement notes,6 payable to the respondent bank. Thereafter, the bank released the proceeds of
pertained to the revision of settlement of the initial payments of P1,000,000.00 and the loan to petitioners. However, petitioners failed to meet their obligations as they
prepaid interest of P360,000.00 (18% of P2,000,000.00) as follows: fell due. During that time, the bank was experiencing financial turmoil and was
Whereas, the parties have agreed to qualify the stipulated terms for the payment of under the supervision of the Central Bank. Central Bank examiner and liquidator
the said ONE MILLION THREE HUNDRED SIXTY THOUSAND (P1,360,000.00) Cordula de Jesus endorsed the subject promissory notes to the bank’s counsel for
PESOS. collection. The bank gave petitioners opportunity to settle their account by extending
WHEREFORE, in consideration of the mutual covenant and agreement of the payment due dates. Mario Soriano manifested his intention to re-structure the loan,
parties, they do further covenant and agree as follows: yet did not show up nor submit his formal written request.
Respondent bank filed three separate complaints before the Regional Trial Court
1. 1.That the VENDEE instead of paying the amount of ONE MILLION THREE of Manila for Collection of Sums of money. The corresponding case histories are
HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS in cash, hereby illustrated in the table below:
authorizes the VENDOR to obtain a loan
_______________
_______________
5Id. at 74 only.
2 Id. at 68-70.
6Records, pp. 159, 162, 167, 171.
3 Id. at 71-73. 456
4 Id. at 74-75. 456 SUPREME COURT REPORTS
455 ANNOTATED
VOL. 348, DECEMBER 18, 2000 455 Agro Conglomerates, Inc. vs. Court of Appeals
Agro Conglomerates, Inc. vs. Court of Appeals Date of Loan Amount Payment Due Payment
Date Extension
1. from Summa Savings and Loan Association with office address at Valenzuela, Dates
Metro Manila, being represented herein by its President, Mr. Jaime Cariño
and referred to hereafter as Financier; in the amount of ONE MILLION
Civil Case 86- P 78,212.29 Nov. 10, 1982 Feb. 8, 1983
THREE HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS, plus
interest thereon at such rate as the VENDEE and the Financier may agree, 37374
which amount shall cover the ONE MILLION (P1,000,000.00) PESOS cash August 12, 1982 May 9, 1983
which was agreed to be paid upon signing of the Memorandum of Aug. 7, 1983
Agreement, plus 18% interest on the balance of two million pesos stipulated
upon in Item No. 1(c) of the said agreement; provided however, that said Civil Case 86- P 632,911.39 Jan. 15, 1983 May 16, 1983
loan shall be made for and in the name of the VENDOR. 37388
2. 2.The VENDEE also agrees that the full amount of ONE MILLION THREE
HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS be paid directly to July 19, 1982 Aug. 14, 1983
the VENDOR; however, the VENDEE hereby undertakes to pay the foil
amount of the said loan to the Financier on such terms and conditions Civil Case 86- P March 13, 1983 June 11, 1983
agreed upon by the Financier and the VENDOR, it being understood that 37543 510,000.00
while the loan will be secured from and in the name of the VENDOR, the September 14, Sept. 9, 1983
VENDEE will be the one liable to pay the entire proceeds thereof including 1982
interest and other charges.5

October 1, 1982 P March 30, 1983 June 28, 1983
494,936.71
Sept. 26, 1983
In their answer, petitioners interposed the defense of novation and insisted there was
a valid substitution of debtor. They alleged that the addendum specifically states that
although the promissory notes were in their names, Wonderland shall be responsible
for the payment thereof.
The trial court held that petitioners are liable, to wit:
The evidences, however, disclose that Wonderland did not comply with its obligation
under said ‘Addendum’ (Exh. ‘S’) as the agreement to turn over the farmland to it,
did not materialize (57 tsn, May 29, 1990), and there was, actually no sale of the land
(58 tsn, ibid.). Hence, Wonderland is not answerable. And since the loans obtained
under the four promissory notes (Exhs. ‘A’ ‘C,’ ‘G,’ and ‘E’) have not been paid,
despite opportunities given by plaintiff to defendants to make payments, it stands to
reason that defendants are liable to pay their obligations thereunder to plaintiff. In
fact, defendants failed to file a third-party complaint against Wonderland, which
shows the weakness of its stand that Wonderland is answerable to make said
payments.7
Petitioners appealed to the Court of Appeals. The trial court’s decision was affirmed
by the appellate court.
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7 Rollo, p. 68.
457
VOL. 348, DECEMBER 18, 2000 457
Agro Conglomerates, Inc. vs. Court of Appeals
Hence, this recourse, wherein petitioners raise the sole issue of:
WHETHER THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE
ADDENDUM, SIGNED BY THE PETITIONERS, RESPONDENT BANK AND
WONDERLAND INC., CONSTITUTES A NOVATION OF THE CONTRACT BY
SUBSTITUTION OF DEBTOR, WHICH EXEMPTS THE PETITIONERS FROM ANY
LIABILITY OVER THE PROMISSORY NOTES.
Revealed by the facts on record, the conflict among the parties started from a
contract of sale of a farmland between petitioners and Wonderland Food Industries,
Inc. As found by the trial court, no such sale materialized.
A contract of sale is a reciprocal transaction. The obligation or promise of each
party is the cause or consideration for the obligation or promise by the other. The
vendee is obliged to pay the price, while the vendor must deliver actual possession of
the land. In the instant case the original plan was that the initial payments would be
paid in cash. Subsequently, the parties (with the participation of respondent bank)
executed an addendum providing instead, that the petitioners would secure a loan in
the name of Agro Conglomerates Inc. for the total amount of the initial payments,
while the settlement of said loan would be assumed by Wonderland. Thereafter,
petitioner Soriano signed several promissory notes and received the proceeds in
behalf of petitioner-company.
By this time, we note a subsidiary contract of suretyship had taken effect since
petitioners signed the promissory notes as maker and accommodation party for the
benefit of Wonderland. Petitioners became liable as accommodation party. An
accommodation party is a person who has signed the instrument as maker, acceptor,
or indorser, without receiving value therefor, and for the purpose of lending his name
to some other person and is liable on the instrument to a holder for value,
notwithstanding such holder at the time of taking the instrument knew (the
signatory) to be an accommodation party.8 He has the right, after paying the holder,
to obtain reimbursement from the party accommodated, since the
_______________
8 The Negotiable Instruments Law, Section 29.
458
458 SUPREME COURT REPORTS ANNOTATED
Agro Conglomerates, Inc. vs. Court of Appeals
relation between them has in effect become one of principal and surety, the
accommodation party being the surety.9Suretyship is defined as the relation which
exists where one person has undertaken an obligation and another person is also
under the obligation or other duty to the obligee, who is entitled to but one
performance, and as between the two who are bound, one rather than the other
should perform.10 The surety’s liability to the creditor or promisee of the principal is
said to be direct, primary and absolute; in other words, he is directly and equally
bound with the principal.11 And the creditor may proceed against any one of the
solidary debtors.12
We do not give credence to petitioners’ assertion that, as provided by the
addendum, their obligation to pay the promissory notes was novated by
“substitution” of a new debtor, Wonderland. Contrary to petitioners’ contention, the
attendant facts herein do not make a case of novation.
Novation is the extinguishment of an obligation by the substitution or change of
the obligation by a subsequent one which extinguishes or modifies the first, either by
changing the object or principal conditions, or by substituting another in place of the
debtor, or by subrogating a third person in the rights of the creditor. 13 In order that a
novation can take place, the concurrence of the following requisites14 are
indispensable:
1. 1)There must be a previous valid obligation;
 2. 2)There must be an agreement of the parties concerned to a new contract;
3. 3)There must be the extinguishment of the old contract; and
_______________
9 People vs. Maniego, 148 SCRA 30, 35 (1987); Philippine National Bank vs.
Maza and Mecenas, 48 Phil. 207 (1925).
10 74 Am Jur 2d, Suretyship, Sec. 1.
11 Garcia, Jr. vs. Court of Appeals, 191 SCRA 493, 496 (1990).
12 Civil Code of the Philippines, Art. 1216.
13 Ajax Marketing & Development Corporation vs. Court of Appeals, 248 SCRA
222, 226 (1995); citing FRANCISCO, V. J. Civil Code of the Philippines Annotated
and Commented, Bk IV Part 1, p. 676, citing 8 Manresa 417; De Cortes vs.
Venturanza, 79 SCRA 709, 722-723 (1977).
14 Reyes vs. Court of Appeals, 264 SCRA 35, 43 (1996).
459
VOL. 348, DECEMBER 18, 2000 459
Agro Conglomerates, Inc. vs. Court of Appeals
1. 4)There must be the validity of the new contract.
In the instant case, the first requisite for a valid novation is lacking. There was no
novation by “substitution” of debtor because there was no prior obligation which was
substituted by a new contract. It will be noted that the promissory notes, which
bound the petitioners to pay, were executed after the addendum. The addendum
modified the contract of sale, not the stipulations in the promissory notes which
pertain to the surety contract. At this instance, Wonderland apparently assured the
payment of future debts to be incurred by the petitioners. Consequently, only a
contract of surety arose. It was wrong for petitioners to presume a novation had
taken place. The well-settled rule is that novation is never presumed,15 it must be
clearly and unequivocally shown.16
As it turned out, the contract of surety between Wonderland and the petitioners
was extinguished by the rescission of the contract of sale of the farmland. With the
rescission, there was confusion or merger in the persons of the principal obligor and
the surety, namely the petitioners herein. The addendum which was dependent
thereon likewise lost its efficacy.
It is true that the basic and fundamental rule in the interpretation of contract is
that, if the terms thereof are clear and leave no doubt as to the intention of the
contracting parties, the literal meaning shall control. However, in order to judge the
intention of the parties, their contemporaneous and subsequent acts should be
considered.17
_______________
15 Ajax Marketing and Development Corporation vs. Court of Appeals, 248 SCRA
222, 227 (1995); Goñi vs. Court of Appeals, 144 SCRA 222, (1986).
16 Mercantile Insurance Co., Inc. vs. Court of Appeals, 196 SCRA 197, 204 (1991).
17 Manila Surety & Fidelity Co., Inc. vs. Court of Appeals, 191 SCRA 805, 812
(1990); citing Mercantile Insurance Co., Inc. vs. Felipe Ysmael, Jr. & Co., Inc., 169
SCRA 66, 74 (1989); Sy vs. Court of Appeals, 131 SCRA 116 (1984); GSIS vs. Court of
Appeals, et al., 145 SCRA 311 (1986).
460
460 SUPREME COURT REPORTS ANNOTATED
Agro Conglomerates, Inc. vs. Court of Appeals
The contract of sale between Wonderland and petitioners did not materialize. But it
was admitted that petitioners received the proceeds of the promissory notes obtained
from respondent bank.
Sec. 22 of the Civil Code provides:
Every person who through an act of performance by another, or any other means,
acquires or comes into possession of something at the expense of the latter without
just or legal ground, shall return the same to him.
Petitioners had no legal or just ground to retain the proceeds of the loan at the
expense of private respondent. Neither could petitioners excuse themselves and hold
Wonderland still liable to pay the loan upon the rescission of their sales contract. If
petitioners sustained damages as a result of the rescission, they should have
impleaded Wonderland and asked damages. The non-inclusion of a necessary party
does not prevent the court from proceeding in the action, and the judgment rendered
therein shall be without prejudice to the rights of such necessary party. 18But
respondent appellate court did not err in holding that petitioners are duty-bound
under the law to pay the claims of respondent bank from whom they had obtained
the loan proceeds.
WHEREFORE, the petition is DENIED for lack of merit. The assailed decision of
the Court of Appeals dated October 17, 1994 is AFFIRMED. Costs against petitioners.
SO ORDERED.
Bellosillo (Chairman), Mendoza, Buena and De Leon, Jr., JJ., concur.
Petition denied, judgment affirmed.
Notes.—A party to a contract cannot just evade compliance with his contractual
obligations by the simple expedient of denying the execution of such
contract. (Hemedes vs. Court of Appeals, 316 SCRA 347 [1999])
_______________
18Revised Rules of Court, Civil Procedure, Sec. 9, Rule 3, par. 3.
461
 VOL. 348, DECEMBER 18, 2000 461
People vs. Dumanon
While it is true that contracts are respected as the law between the contracting
parties, this principle is tempered by the rule that the intention of the parties is
primordial. (Golden Diamond, Inc. vs. Court of Appeals, 332 SCRA 605[2000])

——o0o——
 G.R. No. 163720. December 16, 2004.*
GENEVIEVE LIM, petitioner, vs. FLORENCIO SABAN, respondent.
Civil Law; Agency; The right of a broker to his commission for finding a
suitable buyer for the seller’s property even though the seller himself consummated
the sale with the buyer recognized by the Court.—In Macondray & Co. v. Sellner, the
Court recognized the right of a broker to his commission for finding a suitable buyer
for the seller’s property even though the seller himself consummated the sale with
the buyer. The Court held that it would be in the height of injustice to permit the
principal to terminate the contract of agency to the prejudice of the broker when he
had already reaped the benefits of the broker’s efforts.
Same; Same; The seller’s withdrawal in bad faith of the broker’s authority
cannot unjustly deprive the brokers of their commission as the seller’s duly
constituted agents.—In Infante v. Cunanan, et al., the Court upheld the right of the
brokers to their commissions although the seller revoked their authority to act in his
behalf after they had found a buyer for his properties and negotiated the sale directly
with the buyer whom he met through the brokers’ efforts. The Court ruled that the
seller’s withdrawal in bad faith of the brokers’ authority cannot unjustly deprive the
brokers of their commissions as the seller’s duly constituted agents.
Same; Same; Agency Coupled with an Interest; An agency is deemed as one
coupled with an interest where it is established for the mutual benefit of the
principal and of the agent, or for the interest of the principal and of third persons,
and it cannot be revoked by the principal so long as the interest of the agent or of a
third person subsists.—Under Article 1927 of the Civil Code, an agency cannot be
revoked if a bilateral contract depends upon it, or if it is the means of fulfilling an
obligation already contracted, or if a partner is appointed manager of a partnership
in the contract of partnership and his removal from the management is unjustifiable.
Stated differently, an agency is deemed as one coupled with an interest where it
_______________
*SECOND DIVISION.
233
VOL. 447, DECEMBER 16, 2004 23
3 Sell (Agency Agreement) with respondent Florencio Saban (Saban) on February 8,
Lim vs. Saban
is established for the mutual benefit of the principal and of the agent, or for the
interest of the principal and of third persons, and it cannot be revoked by the
principal so long as the interest of the agent or of a third person subsists. In an
agency coupled with an interest, the agent’s interest must be in the subject matter of
the power conferred and not merely an interest in the exercise of the power because
it entitles him to compensation. When an agent’s interest is confined to earning his
agreed compensation, the agency is not one coupled with an interest, since an agent’s
interest in obtaining his compensation as such agent is an ordinary incident of the
agency relationship.
Commercial Law; Negotiable Instruments Law; Requisites of an
Accommodation Party.—As gleaned from the text of Section 29 of the Negotiable
Instruments Law, the accommodation party is one who meets all these three
requisites, viz.: (1) he signed the instrument as maker, drawer, acceptor, or indorser;
(2) he did not receive value for the signature; and (3) he signed for the purpose of
lending his name to some other person. In the case at bar, while Lim signed as
drawer of the checks she did not satisfy the two other remaining requisites.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Palermo C. Belciña, Jr. for petitioner.
Basilio E. Duaban for private respondent.
TINGA, J.:
Before the Court is a Petition for Review on Certiorari assailing the Decision1 dated
October 27, 2003 of the Court of Appeals, Seventh Division, in CA-G.R. V No.
60392.2
_______________
1 Penned by Associate Justice Edgardo P. Cruz and concurred in by Associate
Justices Ruben T. Reyes and Noel G. Tijam.
2 Florencio Saban, Plaintiff-Appellant v. Eduardo Ybanez and Genevieve Lim,
Defendants; Genevieve Lim, Defendant-Appellee.
234
234 SUPREME COURT REPORTS ANNOTATED
Lim vs. Saban
The late Eduardo Ybañez (Ybañez), the owner of a 1,000-square meter lot in Cebu
City (the “lot”), entered into an Agreement and Authority to Negotiate and
1994. Under the Agency Agreement, Ybañez authorized Saban to look for a buyer of
the lot for Two Hundred Thousand Pesos (P200,000.00) and to mark up the selling
price to include the amounts needed for payment of taxes, transfer of title and other
expenses incident to the sale, as well as Saban’s commission for the sale.3
Through Saban’s efforts, Ybañez and his wife were able to sell the lot to the
petitioner Genevieve Lim (Lim) and the spouses Benjamin and Lourdes Lim (the
Spouses Lim) on March 10, 1994. The price of the lot as indicated in the Deed of
Absolute Sale is Two Hundred Thousand Pesos (P200,000.00).4 It appears, however,
that the vendees agreed to purchase the lot at the price of Six Hundred Thousand
Pesos (P600,000.00), inclusive of taxes and other incidental expenses of the sale.
After the sale, Lim remitted to Saban the amounts of One Hundred Thirteen
Thousand Two Hundred Fifty Seven Pesos (P113,257.00) for payment of taxes due on
the transaction as well as Fifty Thousand Pesos
_______________
3 The agency agreement between Ybañez and Saban provides:
. . . That I[,] Engr. Eduardo Ybañez . . . have agreed and allowed to (sic) Mr. Florencio
Saban, Sr. and his associate to look for a buyer, and further agreed to sell and dispose
the above-mention (sic) lot, at the price of P200.00 per square meters [sic]
(equivalent to P200,000.00) net, and any amount over and above for the stated price
resulting from the sale shall belong to Mr. Florencio Saban, Sr. and his associate.
Furthermore it is agreed and covenanted that the total expenses covering the sale
and transfer of the title such as, capital gain (sic) tax, documentary stamp, transfer
tax and other relative expenses, for the said sale shall be borne to the agent, and or to
the buyer, except the payment of realty taxes. (RTC Records, p. 5)
4 RTC Records, p. 6.
235
VOL. 447, DECEMBER 16, 2004 235
Lim vs. Saban
(P50,000.00) as broker’s commission.5 Lim also issued in the name of Saban four
postdated checks in the aggregate amount of Two Hundred Thirty Six Thousand
Seven Hundred Forty Three Pesos (P236,743.00). These checks were Bank of the
Philippine Islands (BPI) Check No. 1112645 dated June 12, 1994 for P25,000.00; BPI
Check No. 1112647 dated June 19, 1994 for P18,743.00; BPI Check No. 1112646 dated
June 26, 1994 for P25,000.00; and Equitable PCI Bank Check No. 021491B dated
June 20, 1994 for P168,000.00.
Subsequently, Ybañez sent a letter dated June 10, 1994 addressed to Lim. In the
letter Ybañez asked Lim to cancel all the checks issued by her in Saban’s favor and to
“extend another partial payment” for the lot in his (Ybañez’s) favor.6
After the four checks in his favor were dishonored upon presentment, Saban filed
a Complaint for collection of sum of money and damages against Ybañez and Lim
with the Regional Trial Court (RTC) of Cebu City on August 3, 1994.7 The case was
assigned to Branch 20 of the RTC.
In his Complaint, Saban alleged that Lim and the Spouses Lim agreed to purchase
the lot for P600,000.00, i.e., with a mark-up of Four Hundred Thousand Pesos
(P400,000.00) from the price set by Ybañez. Of the total purchase price of
P600,000.00, P200,000.00 went to Ybañez, P50,000.00 allegedly went to Lim’s
agent, and P113,257.00 was given to Saban to cover taxes and other expenses
incidental to the sale. Lim also issued four (4) postdated checks8 in favor of Saban for
the remaining P236,743.00.9
_______________
5 Lim on direct examination, TSN, March 3, 1997, p. 8; Rose Villarosa (Lim’s
broker) on direct examination, TSN, October 22, 1996, p. 7.
6 RTC Records, p. 25.
7 Id., at p. 1.
8 Annexes “B” to “E”, RTC Records, pp. 32-35.
9 Id., at p. 2.
236
236 SUPREME COURT REPORTS ANNOTATED
Lim vs. Saban
Saban alleged that Ybañez told Lim that he (Saban) was not entitled to any
commission for the sale since he concealed the actual selling price of the lot from
Ybañez and because he was not a licensed real estate broker. Ybañez was able to
convince Lim to cancel all four checks.
Saban further averred that Ybañez and Lim connived to deprive him of his sales
commission by withholding payment of the first three checks. He also claimed that
Lim failed to make good the fourth check which was dishonored because the account
against which it was drawn was closed.
In his Answer, Ybañez claimed that Saban was not entitled to any commission
because he concealed the actual selling price from him and because he was not a
licensed real estate broker.
Lim, for her part, argued that she was not privy to the agreement between Ybañez
and Saban, and that she issued stop payment orders for the three checks because
Ybañez requested her to pay the purchase price directly to him, instead of coursing it
through Saban. She also alleged that she agreed with Ybañez that the purchase price
of the lot was only P200,000.00.
Ybañez died during the pendency of the case before the RTC. Upon motion of his
counsel, the trial court dismissed the case only against him without any objection
from the other parties.10
On May 14, 1997, the RTC rendered its Decision11dismissing Saban’s complaint,
declaring the four (4) checks issued by Lim as stale and non-negotiable, and
absolving Lim from any liability towards Saban.
Saban appealed the trial court’s Decision to the Court of Appeals.
_______________
10Order dated March 6, 1995, RTC Records, p. 48.
Rollo, pp. 29-39.
11
237
VOL. 447, DECEMBER 16, 2004 237
Lim vs. Saban
On October 27, 2003, the appellate court promulgated its Decision12 reversing the
trial court’s ruling. It held that Saban was entitled to his commission amounting to
P236,743.00.13
The Court of Appeals ruled that Ybañez’s revocation of his contract of agency with
Saban was invalid because the agency was coupled with an interest and Ybañez
effected the revocation in bad faith in order to deprive Saban of his commission and
to keep the profits for himself.14
The appellate court found that Ybañez and Lim connived to deprive Saban of his
commission. It declared that Lim is liable to pay Saban the amount of the purchase
price of the lot corresponding to his commission because she issued the four checks
knowing that the total amount thereof corresponded to Saban’s commission for the
sale, as the agent of Ybañez. The appellate court further ruled that, in issuing the
checks in payment of Saban’s commission, Lim acted as an accommodation party.
She signed the checks as drawer, without receiving value therefor, for the purpose of
lending her name to a third person. As such, she is liable to pay Saban as the holder
for value of the checks.15
Lim filed a Motion for Reconsideration of the appellate court’s Decision, but
her Motion was denied by the Court of Appeals in a Resolution dated May 6, 2004.16
Not satisfied with the decision of the Court of Appeals, Lim filed the present
petition.
Lim argues that the appellate court ignored the fact that after paying her agent
and remitting to Saban the amounts
_______________
12 Rollo, pp. 22-28.
13 The amount of the purchase price less the P200,000.00 payable to Ybañez and
the incidental expenses of the sale.
14 Rollo, pp. 25-26.
15 Id., at p. 27.
16 Rollo, p. 46.
238
238 SUPREME COURT REPORTS ANNOTATED
Lim vs. Saban
due for taxes and transfer of title, she paid the balance of the purchase price directly
to Ybañez.17
She further contends that she is not liable for Ybañez’s debt to Saban under the
Agency Agreement as she is not privy thereto, and that Saban has no one but himself
to blame for consenting to the dismissal of the case against Ybañez and not moving
for his substitution by his heirs.18
Lim also assails the findings of the appellate court that she issued the checks as an
accommodation party for Ybañez and that she connived with the latter to deprive
Saban of his commission.19
Lim prays that should she be found liable to pay Saban the amount of his
commission, she should only be held liable to the extent of one-third (1/3) of the
amount, since she had two co-vendees (the Spouses Lim) who should share such
liability.20
In his Comment, Saban maintains that Lim agreed to purchase the lot for
P600,000.00, which consisted of the P200,000.00 which would be paid to Ybañez,
the P50,000.00 due to her broker, the P113,257.00 earmarked for taxes and other
expenses incidental to the sale and Saban’s commission as broker for Ybañez.
According to Saban, Lim assumed the obligation to pay him his commission. He
insists that Lim and Ybañez connived to unjustly deprive him of his commission from
the negotiation of the sale.21
The issues for the Court’s resolution are whether Saban is entitled to receive his
commission from the sale; and, assuming that Saban is entitled thereto, whether it is
Lim who is liable to pay Saban his sales commission.
_______________
17 Petition, Id., at p. 17.
18 Id., at pp. 14 and 16.
19 Id., at p. 18.
20 Id., at p. 17.
21 Id., at pp. 114-115.
239
VOL. 447, DECEMBER 16, 2004 239
Lim vs. Saban
The Court gives due course to the petition, but agrees with the result reached by the
Court of Appeals.
The Court affirms the appellate court’s finding that the agency was not revoked
since Ybañez requested that Lim make stop payment orders for the checks payable to
Saban only after the consummation of the sale on March 10, 1994. At that time,
Saban had already performed his obligation as Ybañez’s agent when, through his
(Saban’s) efforts, Ybañez executed the Deed of Absolute Sale of the lot with Lim and
the Spouses Lim.
To deprive Saban of his commission subsequent to the sale which was
consummated through his efforts would be a breach of his contract of agency with
Ybañez which expressly states that Saban would be entitled to any excess in the
purchase price after deducting the P200,000.00 due to Ybañez and the transfer taxes
and other incidental expenses of the sale.22
 In Macondray & Co. v. Sellner,23 the Court recognized the right of a broker to his
commission for finding a suitable buyer for the seller’s property even though the
seller himself consummated the sale with the buyer.24 The Court held that it would be
in the height of injustice to permit the principal to terminate the contract of agency to
the prejudice of the broker when he had already reaped the benefits of the broker’s
efforts.
In Infante v. Cunanan, et al.,25 the Court upheld the right of the brokers to their
commissions although the seller revoked their authority to act in his behalf after they
had found a buyer for his properties and negotiated the sale directly with the buyer
whom he met through the brokers’ efforts. The Court ruled that the seller’s
withdrawal in bad faith of the
_______________
22 Supranote 3.
23 33 Phil. 370 (1916).
24 Id., at p. 377.
25 93 Phil. 691 (1953).
240
240 SUPREME COURT REPORTS ANNOTATED
Lim vs. Saban
brokers’ authority cannot unjustly deprive the brokers of their commissions as the
seller’s duly constituted agents.
The pronouncements of the Court in the aforecited cases are applicable to the
present case, especially considering that Saban had completely performed his
obligations under his contract of agency with Ybañez by finding a suitable buyer to
preparing the Deed of Absolute Sale between Ybañez and Lim and her co-vendees.
Moreover, the contract of agency very clearly states that Saban is entitled to the
excess of the markup of the price of the lot after deducting Ybañez’s share of
P200,000.00 and the taxes and other incidental expenses of the sale.
However, the Court does not agree with the appellate court’s pronouncement that
Saban’s agency was one coupled with an interest. Under Article 1927 of the Civil
Code, an agency cannot be revoked if a bilateral contract depends upon it, or if it is
the means of fulfilling an obligation already contracted, or if a partner is appointed
manager of a partnership in the contract of partnership and his removal from the
management is unjustifiable. Stated differently, an agency is deemed as one coupled
with an interest where it is established for the mutual benefit of the principal and of
the agent, or for the interest of the principal and of third persons, and it cannot be
revoked by the principal so long as the interest of the agent or of a third person
subsists. In an agency coupled with an interest, the agent’s interest must be in the
subject matter of the power conferred and not merely an interest in the exercise of
the power because it entitles him to compensation. When an agent’s interest is
confined to earning his agreed compensation, the agency is not one coupled with an
interest, since an agent’s interest in obtaining his compensation as such agent is an
ordinary incident of the agency relationship.26
_______________
26 See I RESTATEMENT OF THE LAW IN AGENCY 2d 340 (1957).
241
VOL. 447, DECEMBER 16, 2004 241
Lim vs. Saban
Saban’s entitlement to his commission having been settled, the Court must now
determine whether Lim is the proper party against whom Saban should address his
claim.
Saban’s right to receive compensation for negotiating as broker for Ybañez arises
from the Agency Agreement between them. Lim is not a party to the contract.
However, the record reveals that she had knowledge of the fact that Ybañez set the
price of the lot at P200,000.00 and that the P600,000.00—the price agreed upon by
her and Saban—was more than the amount set by Ybañez because it included the
amount for payment of taxes and for Saban’s commission as broker for Ybañez.
According to the trial court, Lim made the following payments for the lot:
P113,257.00 for taxes, P50,000.00 for her broker, and P400.000.00 directly to
Ybañez, or a total of Five Hundred Sixty Three Thousand Two Hundred Fifty Seven
Pesos (P563,257.00).27 Lim, on the other hand, claims that on March 10, 1994, the
date of execution of the Deed of Absolute Sale, she paid directly to Ybañez the
amount of One Hundred Thousand Pesos (P100,000.00) only, and gave to Saban
P113,257.00 for payment of taxes and P50,000.00 as his commission,28 and One
Hundred Thirty Thousand Pesos (P130,000.00) on June 28, 1994,29 or a total of
Three Hundred Ninety Three Thousand Two Hundred Fifty Seven Pesos
(P393,257.00). Ybañez, for his part, acknowledged that Lim and her co-vendees paid
him P400,000.00 which he said was the full amount for the sale of the lot. 30 It thus
appears that he received P100,000.00 on March 10, 1994, acknowledged receipt
(through Saban) of the P113,257.00 earmarked for taxes and P50,000.00 for
commission, and received the bal-
_______________
27 RTC Decision, Rollo, p. 33.
28 TSN, March 3, 1997, p. 8.
29 Id., see also, Acknowledgement Receipt issued by Ybañez in favor of Lim, RTC
Records, p. 114.
30 See Acknowledgement Receipt dated June 28, 1994, Id., and Ybañez’s Affidavit
dated June 28, 1994, Id., at p. 115.
 242
242 SUPREME COURT REPORTS ANNOTATED
Lim vs. Saban
ance of P130,000.00 on June 28, 1994. Thus, a total of P230,000.00 went directly to
Ybañez. Apparently, although the amount actually paid by Lim was P393,257.00,
Ybañez rounded off the amount to P400,000.00 and waived the difference.
Lim’s act of issuing the four checks amounting to P236,743.00 in Saban’s favor
belies her claim that she and her co-vendees did not agree to purchase the lot at
P600,000.00. If she did not agree thereto, there would be no reason for her to issue
those checks which is the balance of P600,000.00 less the amounts of P200,000.00
(due to Ybañez), P50,000.00 (commission), and the P113,257.00 (taxes). The only
logical conclusion is that Lim changed her mind about agreeing to purchase the lot at
P600,000.00 after talking to Ybañez and ultimately realizing that Saban’s
commission is even more than what Ybañez received as his share of the purchase
price as vendor. Obviously, this change of mind resulted to the prejudice of Saban
whose efforts led to the completion of the sale between the latter, and Lim and her
covendees. This the Court cannot countenance.
The ruling of the Court in Infante v. Cunanan, et al.,cited earlier, is enlightening
for the facts therein are similar to the circumstances of the present case. In that case,
Consejo Infante asked Jose Cunanan and Juan Mijares to find a buyer for her two
lots and the house built thereon for Thirty Thousand Pesos (P30,000.00). She
promised to pay them five percent (5%) of the purchase price plus whatever overprice
they may obtain for the property. Cunanan and Mijares offered the properties to Pio
Noche who in turn expressed willingness to purchase the properties. Cunanan and
Mijares thereafter introduced Noche to Infante. However, the latter told Cunanan
and Mijares that she was no longer interested in selling the property and asked them
to sign a document stating that their written authority to act as her agents for the sale
of the properties was already cancelled. Subsequently, Infante sold the properties
directly to Noche for Thirty One
243
VOL. 447, DECEMBER 16, 2004 243
Lim vs. Saban
Thousand Pesos (P31,000.00). The Court upheld the right of Cunanan and Mijares to
their commission, explaining that—
. . . [Infante] had changed her mind even if respondent had found a buyer who was
willing to close the deal, is a matter that would not give rise to a legal consequence if
[Cunanan and Mijares] agreed to call off the transaction in deference to the request
of [Infante]. But the situation varies if one of the parties takes advantage of the
benevolence of the other and acts in a manner that would promote his own selfish
interest. This act is unfair as would amount to bad faith. This act cannot be
sanctioned without according the party prejudiced the reward which is due him. This
is the situation in which [Cunanan and Mijares] were placed by [Infante]. [Infante]
took advantage of the services rendered by [Cunanan and Mijares], but believing that
she could evade payment of their commission, she made use of a ruse by inducing
them to sign the deed of cancellation . . . . This act of subversion cannot be
sanctioned and cannot serve as basis for [Infante] to escape payment of the
commission agreed upon.31
The appellate court therefore had sufficient basis for concluding that Ybañez and Lim
connived to deprive Saban of his commission by dealing with each other directly and
reducing the purchase price of the lot and leaving nothing to compensate Saban for
his efforts.
Considering the circumstances surrounding the case, and the undisputed fact that
Lim had not yet paid the balance of P200,000.00 of the purchase price of
P600,000.00, it is just and proper for her to pay Saban the balance of P200,000.00.
Furthermore, since Ybañez received a total of P230,000.00 from Lim, or an
excess of P30,000.00 from his asking price of P200,000.00, Saban may claim such
excess from Ybañez’s estate, if that remedy is still available,32 in view of the trial
court’s dismissal of Saban’s complaint as against Ybañez,
_______________
31 Supranote 25, at pp. 695-96.
32 Rule 86 (Claims Against Estate), Revised Rules of Court.
244
244 SUPREME COURT REPORTS ANNOTATED
Lim vs. Saban
with Saban’s express consent, due to the latter’s demise on November 11, 1994.33
The appellate court however erred in ruling that Lim is liable on the checks
because she issued them as an accommodation party. Section 29 of the Negotiable
Instruments Law defines an accommodation party as a person “who has signed the
negotiable instrument as maker, drawer, acceptor or in-dorser, without receiving
value therefor, for the purpose of lending his name to some other person.” The
accommodation party is liable on the instrument to a holder for value even though
the holder at the time of taking the instrument knew him or her to be merely an
accommodation party. The accommodation party may of course seek reimbursement
from the party accommodated.34
As gleaned from the text of Section 29 of the Negotiable Instruments Law, the
accommodation party is one who meets all these three requisites, viz.: (1) he signed
the instrument as maker, drawer, acceptor, or indorser; (2) he did not receive value
for the signature; and (3) he signed for the purpose of lending his name to some
other person. In the case at bar, while Lim signed as drawer of the checks she did not
satisfy the two other remaining requisites.
The absence of the second requisite becomes pellucid when it is noted at the
outset that Lim issued the checks in question on account of her transaction, along
with the other purchasers, with Ybañez which was a sale and, therefore, a reciprocal
contract. Specifically, she drew the checks in payment of the balance of the purchase
price of the lot subject of the transaction. And she had to pay the agreed purchase
price in consideration for the sale of the lot to her and her co-vendees. In other
words, the amounts covered by the checks form part

_______________
33 Order of the RTC dated March 6, 1995, RTC Records, p. 48.
34 Agro Conglomerates, Inc. v. Court of Appeals, G.R. No. 117660, December 18,
2000, 348 SCRA 450; Bank of the Philippine Islands v. Court of Appeals, 383 Phil.
538; 326 SCRA 641 (2000).
245
VOL. 447, DECEMBER 16, 2004 245
Lim vs. Saban
of the cause or consideration from Ybañez’s end, as vendor, while the lot represented
the cause or consideration on the side of Lim, as vendee.35 Ergo, Lim received value
for her signature on the checks.
Neither is there any indication that Lim issued the checks for the purpose of
enabling Ybañez, or any other person for that matter, to obtain credit or to raise
money, thereby totally debunking the presence of the third requisite of an
accommodation party.
WHEREFORE, in view of the foregoing, the petition is DISMISSED.
SO ORDERED.
Puno (Chairman), Austria-Martinez and Chico-Nazario, JJ.,concur.
Callejo, Sr., J., On Leave.
Petition dismissed.
Note.—Agents working on commission basis will not normally pass up a
commission by not informing their principal of a referred buyer. (People vs.
Castillo, 333 SCRA 506 [2000])

——o0o——

_______________
35 SeeArts. 1350 and 1458, Civil Code.
EUSEBIO GONZALES, petitioner, vs. PHILIPPINE COMMERCIAL AND
INTERNATIONAL BANK, EDNA OCAMPO, and ROBERTO NOCEDA, respondents.
Negotiable Instruments Law; Accommodation Party; An accommodation
party is a person who has signed the instrument as maker, drawer, acceptor or
indorser without receiving value therefor and for the purpose of lending his name
to some other person.—As an accommodation party, Gonzales is solidarily liable with
the spouses Panlilio for the loans. In Ang v. Associated Bank, 532 SCRA 244 (2007),
quoting the definition of an accommodation party under Section 29 of the Negotiable
Instruments Law, the Court cited that an accommodation party is a person “who has
signed the instrument as maker, drawer, acceptor, or indorser, without receiving
value therefor, and for the purpose of lending his name to some other person.”
Same; Same; While not exonerating his solidary liability, Gonzales has right to
be properly apprised of the default or delinquency of the loan precisely because he
is co-signatory of the promissory notes and of his solidary liability.—There was no
proper notice to Gonzales of the default and delinquency of the PhP 1,800,000 loan.
It must be borne in mind that while solidarily liable with the spouses Panlilio on the
PhP 1,800,000 loan covered by the three promissory notes, Gonzales is only an
accommodation party and as such only lent his name and credit to the spouses
Panlilio. While not exonerating his solidary liability, Gonzales has a right to be
properly apprised of the default or delinquency of the loan precisely because he is a
co-signatory of the promissory notes and of his solidary liability.
Same; Same; In business more so for banks, the amounts demanded from the
debtor or borrower have to be definite, clear and without ambiguity.—In business,
more so for banks, the amounts demanded from the debtor or borrower have to be
definite, clear, and without ambiguity. It is not sufficient simply to be informed that
one
_______________
* FIRST DIVISION.
181
VOL. 644, FEBRUARY 23, 2011 1 actionable, the following elements must be present: “(1) the existence of a legal right
81
Gonzales vs. Philippine Commercial and International Bank
must pay over a hundred thousand aggregate outstanding interest dues without
clear and certain figures. Thus, We find PCIB negligent in not properly informing
Gonzales, who is an accommodation party, about the default and the exact
outstanding periodic interest dues. Without being properly apprised, Gonzales was
not given the opportunity to properly act on them.
Banks and Banking; Extraordinary Diligence; The business of banking is
impressed with public interest and great reliance is made on the bank’s sworn
profession of diligence and meticulousness in giving irreproachable service; Like a
common carrier whose business is imbued with public interest, a bank should
exercise extraordinary diligence to negate its liability to the depositors.—The
business of banking is impressed with public interest and great reliance is made on
the bank’s sworn profession of diligence and meticulousness in giving irreproachable
service. Like a common carrier whose business is imbued with public interest, a bank
should exercise extraordinary diligence to negate its liability to the depositors. In this
instance, PCIB is sorely remiss in the diligence required in treating with its client,
Gonzales. It may not wantonly exercise its rights without respecting and honoring
the rights of its clients.
Same; Same; The law imposes on bank a high degree of obligation to treat the
accounts of its depositors with meticulous care always having in mind the fiduciary
nature of banking.—With banks, the degree of diligence required is more than that of
a good father of the family considering that the business of banking is imbued with
public interest due to the nature of their function. The law imposes on banks a high
degree of obligation to treat the accounts of its depositors with meticulous care,
always having in mind the fiduciary nature of banking. Had Gonzales been properly
notified of the delinquencies of the PhP 1,800,000 loan and the process of
terminating his credit line under the COHLA, he could have acted accordingly and
the dishonor of the check would have been avoided.
Actions; Abuse of Rights; The basis of the principle of abuse of right is Art. 19
of the new Civil Code; Elements in Order for Art. 19 to be Actionable.—Art. 19 of the
New Civil Code clearly provides that “[e]very person must, in the exercise of his
rights and in the performance of his duties, act with justice, give everyone his due,
and observe honesty and good faith.” This is the basis of the principle of
182
1 SUPREME COURT REPORTS ANNOTATED
82
Gonzales vs. Philippine Commercial and International Bank
abuse of right which, in turn, is based upon the maxim suum jus summa
injuria (the abuse of right is the greatest possible wrong). In order for Art. 19 to be
or duty, (2) which is exercised in bad faith, and (3) for the sole intent of prejudicing
or injuring another.” We find that such elements are present in the instant case.
Same; Same; Malice or bad faith is at the core of Art.19; Malice or bad faith
implies a conscious and intentional design to do a wrongful act for a dishonest
purpose or moral obliquity.—Malice or bad faith is at the core of Art. 19. Malice or
bad faith “implies a conscious and intentional design to do a wrongful act for a
dishonest purpose or moral obliquity.” In the instant case, PCIB was able to send a
letter advising Gonzales of the unpaid interest on the loans but failed to mention
anything about the termination of the COHLA. More significantly, no letter was ever
sent to him about the termination of the COHLA. The failure to give prior notice on
the part of PCIB is already prima facieevidence of bad faith. Therefore, it is
abundantly clear that this case falls squarely within the purview of the principle of
abuse of rights as embodied in Art. 19.
Damages; Nominal Damages.—This Court finds that such acts warrant the
payment of indemnity in the form of nominal damages. Nominal damages “are
recoverable where a legal right is technically violated and must be vindicated against
an invasion that has produced no actual present loss of any kind x x x.” We further
explained the nature of nominal damages in Almeda v. Cariño, 395 SCRA 144
(2003): “x x x Its award is thus not for the purpose of indemnification for a loss but
for the recognition and vindication of a right. Indeed, nominal damages are damages
in name only and not in fact. When granted by the courts, they are not treated as an
equivalent of a wrong inflicted but simply a recognition of the existence of a technical
injury. A violation of the plaintiff’s right, even if only technical, is sufficient to
support an award of nominal damages. Conversely, so long as there is a
showing of a violation of the right of the plaintiff, an award of nominal
damages is proper.”
Same; Moral Damages; Moral damages may be recovered in acts referred to
in Art. 21 of the Code.—As We held in MERALCO v. CA, 157 SCRA 243 (1988), failure
to give prior notice when required,
183
VOL. 644, FEBRUARY 23, 2011 18
3 Edna Ocampo (Ocampo) until she was replaced by respondent Roberto Noceda
Gonzales vs. Philippine Commercial and International Bank
such as in the instant case, constitutes a breach of contract and is a clear
violation of Art. 21 of the Code. In cases such as this, Art. 2219 of the Code provides
that moral damages may be recovered in acts referred to in its Art. 21. Further, Art.
2220 of the Code provides that “[w]illful 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.” Similarly, “every person who, contrary
to law, willfully or negligently causes damage to another, shall indemnify the latter
for the same.” Evidently, Gonzales is entitled to recover moral damages.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
De Jesus & Associates for petitioner.
Siguion Reyna, Montecillo & Ongsiako for respondents.
VELASCO, JR., J.:
The Case
This is an appeal via a Petition for Review on Certiorariunder Rule 45 from the
Decision1 dated October 22, 2007 of the Court of Appeals (CA) in CA-G.R. CV No.
74466, which denied petitioner’s appeal from the December 10, 2001 Decision2 in
Civil Case No. 99-1324 of the Regional Trial Court (RTC), Branch 138 in Makati City.
The RTC found justification for respondents’ dishonor of petitioner’s check and
found petitioner solidarily liable with the spouses Jose and Jocelyn Panlilio (spouses
Panlilio) for the three promissory notes they
_______________
1 Rollo, pp. 28-44. Penned by Associate Justice Arturo G. Tayag and concurred in
by Associate Justices Rodrigo V. Cosico and Hakim S. Abdulwahid.
2 Records, pp. 751-764. Penned by Judge Sixto Marella, Jr.
184
184 SUPREME COURT REPORTS ANNOTATED
Gonzales vs. Philippine Commercial and International Bank
executed in favor of respondent Philippine Commercial and International Bank
(PCIB).
The Facts
Petitioner Eusebio Gonzales (Gonzales) was a client of PCIB for a good 15 years
before he filed the instant case. His account with PCIB was handled by respondent
(Noceda).
In October 1992, PCIB granted a credit line to Gonzales through the execution of a
Credit-On-Hand Loan Agreement3 (COHLA), in which the aggregate amount of the
accounts of Gonzales with PCIB served as collateral for and his availment limit under
the credit line. Gonzales drew from said credit line through the issuance of check. At
the institution of the instant case, Gonzales had a Foreign Currency Deposit (FCD) of
USD 8,715.72 with PCIB.
On October 30, 1995, Gonzales and his wife obtained a loan for PhP 500,000.
Subsequently, on December 26, 1995 and January 3, 1999, the spouses Panlilio and
Gonzales obtained two additional loans from PCIB in the amounts of PhP 1,000,000
and PhP 300,000, respectively. These three loans amounting to PhP 1,800,000 were
covered by three promissory notes.4 To secure the loans, a real estate mortgage
(REM) over a parcel of land covered by Transfer Certificate of Title (TCT) No. 38012
was executed by Gonzales and the spouses Panlilio. Notably, the promissory notes
specified, among others, the solidary liability of Gonzales and the spouses Panlilio for
the payment of the loans. However, it was the spouses Panlilio who received the loan
proceeds of PhP 1,800,000.
The monthly interest dues of the loans were paid by the spouses Panlilio through
the automatic debiting of their ac-
_______________
3 Id., at pp. 157, 159.
4 Id., at pp. 10-15.
185
VOL. 644, FEBRUARY 23, 2011 185
Gonzales vs. Philippine Commercial and International Bank
count with PCIB. But the spouses Panlilio, from the month of July 1998, defaulted in
the payment of the periodic interest dues from their PCIB account which apparently
was not maintained with enough deposits. PCIB allegedly called the attention of
Gonzales regarding the July 1998 defaults and the subsequent accumulating periodic
interest dues which were left still left unpaid.
In the meantime, Gonzales issued a check dated September 30, 1998 in favor of
Rene Unson (Unson) for PhP 250,000 drawn against the credit line (COHLA).
However, on October 13, 1998, upon presentment for payment by Unson of said
check, it was dishonored by PCIB due to the termination by PCIB of the credit line
under COHLA on October 7, 1998 for the unpaid periodic interest dues from the
loans of Gonzales and the spouses Panlilio. PCIB likewise froze the FCD account of
Gonzales.
Consequently, Gonzales had a falling out with Unson due to the dishonor of the
check. They had a heated argument in the premises of the Philippine Columbian
Association (PCA) where they are both members, which caused great embarrassment
and humiliation to Gonzales. Thereafter, on November 5, 1998, Unson sent a
demand letter5 to Gonzales for the PhP 250,000. And on December 3, 1998, the
counsel of Unson sent a second demand letter6to Gonzales with the threat of legal
action. With his FCD account that PCIB froze, Gonzales was forced to source out and
pay the PhP 250,000 he owed to Unson in cash.
On January 28, 1999, Gonzales, through counsel, wrote PCIB insisting that the
check he issued had been fully funded, and demanded the return of the proceeds of
his FCD as well as damages for the unjust dishonor of the check.7 PCIB replied on
March 22, 1999 and stood its ground in freez-
_______________
5 Id., at p. 38.
6 Id., at p. 39.
7 Id., at pp. 40-41.
186
186 SUPREME COURT REPORTS ANNOTATED
Gonzales vs. Philippine Commercial and International Bank
ing Gonzales’ accounts due to the outstanding dues of the loans. 8 On May 26, 1999,
Gonzales reiterated his demand, reminding PCIB that it knew well that the actual
borrowers were the spouses Panlilio and he never benefited from the proceeds of the
loans, which were serviced by the PCIB account of the spouses Panlilio.9
PCIB’s refusal to heed his demands compelled Gonzales to file the instant case for
damages with the RTC, on account of the alleged unjust dishonor of the check issued
in favor of Unson.
The Ruling of the RTC
After due trial, on December 10, 2001, the RTC rendered a Decision in favor of
PCIB. The decretal portion reads:
“WHEREFORE, judgment is rendered as follows—
(a) on the first issue, plaintiff is liable to pay defendant Bank as principal under
the promissory notes, Exhibits A, B and C;
(b) on the second issue, the Court finds that there is justification on part of the
defendant Bank to dishonor the check, Exhibit H;
(c) on the third issue, plaintiff and defendants are not entitled to damages from
each other.
No pronouncement as to costs.
SO ORDERED.”10
The RTC found Gonzales solidarily liable with the spouses Panlilio on the three
promissory notes relative to the outstanding REM loan. The trial court found no fault
in the termination by PCIB of the COHLA with Gonzales and in freezing the latter’s
accounts to answer for the past due PhP 1,800,000 loan. The trial court ruled that
the dishonor of the check issued by Gonzales in favor of Unson was proper con-
_______________
8 Id., at p. 42.
9 Id., at pp. 43-44.
10 Id., at p. 760.
187
VOL. 644, FEBRUARY 23, 2011 187
Gonzales vs. Philippine Commercial and International Bank
sidering that the credit line under the COHLA had already been terminated or
revoked before the presentment of the check.
Aggrieved, Gonzales appealed the RTC Decision before the CA.
The Ruling of the CA
On September 26, 2007, the appellate court rendered its Decision dismissing
Gonzales’ appeal and affirming in totothe RTC Decision. The fallo reads:
 “WHEREFORE, in view of the foregoing, the decision, dated December 10, 2001,
in Civil Case No. 99-1324 is hereby AFFIRMED in toto.
SO ORDERED.”11
In dismissing Gonzales’ appeal, the CA, first, confirmed the RTC’s findings that
Gonzales was indeed solidarily liable with the spouses Panlilio for the three
promissory notes executed for the REM loan; second, it likewise found neither fault
nor negligence on the part of PCIB in dishonoring the check issued by Gonzales in
favor of Unson, ratiocinating that PCIB was merely exercising its rights under the
contractual stipulations in the COHLA brought about by the outstanding past dues of
the REM loan and interests for which Gonzales was solidarily liable with the spouses
Panlilio to pay under the promissory notes.
Thus, we have this petition.
The Issues
Gonzales, as before the CA, raises again the following assignment of errors:
_______________
11 Rollo, p. 43.
188
188 SUPREME COURT REPORTS ANNOTATED
Gonzales vs. Philippine Commercial and International Bank
I – IN NOT CONSIDERING THAT THE LIABILITY ARISING FROM PROMISSORY
NOTES (EXHIBITS “A”, “B” AND “C”, PETITIONER; EXHIBITS “1”, “2” AND “3”,
RESPONDENT) PERTAINED TO BORROWER JOSE MA. PANLILIO AND NOT TO
APPELLANT AS RECOGNIZED AND ACKNOWLEDGE[D] BY RESPONDENT
PHILIPPINE COMMERCIAL & INDUSTRIAL BANK (RESPONDENT BANK).
II – IN FINDING THAT THE RESPONDENTS WERE NOT AT FAULT NOR GUILTY
OF GROSS NEGLIGENCE IN DISHONORING PETITIONER’S CHECK DATED 30
SEPTEMBER 1998 IN THE AMOUNT OF P250,000.00 FOR THE REASON
“ACCOUNT CLOSED”, INSTEAD OF MERELY “REFER TO DRAWER” GIVEN THE
FACT THAT EVEN AFTER DISHONOR, RESPONDENT SIGNED A
CERTIFICATION DATED 7 DECEMBER 1998 THAT CREDIT ON HAND (COH)
LOAN AGREEMENT WAS STILL VALID WITH A COLLATERAL OF FOREIGN
CURRENCY DEPOSIT (FCD) OF [USD] 48,715.72.
III – IN NOT AWARDING DAMAGES AGAINST RESPONDENTS DESPITE
PRESENTATION OF CLEAR PROOF TO SUPPORT ACTION FOR DAMAGES.12
The Court’s Ruling
The core issues can be summarized, as follows: first, whether Gonzales is liable
for the three promissory notes covering the PhP 1,800,000 loan he made with the
spouses Panlilio where a REM over a parcel of land covered by TCT No. 38012 was
constituted as security; and second, whether PCIB properly dishonored the check of
Gonzales drawn against the COHLA he had with the bank.
The petition is partly meritorious.
_______________
12 Id., at p. 12.
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Gonzales vs. Philippine Commercial and International Bank
First Issue: Solidarily Liability on Promissory Notes
A close perusal of the records shows that the courts a quo correctly found
Gonzales solidarily liable with the spouses Panlilio for the three promissory notes.
The promissory notes covering the PhP 1,800,000 loan show the following:
(1) Promissory Note BD-090-1766-95,13 dated October 30, 1995, for PhP
500,000 was signed by Gonzales and his wife, Jessica Gonzales;
(2) Promissory Note BD-090-2122-95,14 dated December 26, 1995, for PhP
1,000,000 was signed by Gonzales and the spouses Panlilio; and
(3) Promissory Note BD-090-011-96,15 dated January 3, 1996, for PhP 300,000
was signed by Gonzales and the spouses Panlilio.
Clearly, Gonzales is liable for the loans covered by the above promissory
notes. First, Gonzales admitted that he is an accommodation party which PCIB did
not dispute. In his testimony, Gonzales admitted that he merely accommodated the
spouses Panlilio at the suggestion of Ocampo, who was then handling his accounts, in
order to facilitate the fast release of the loan. Gonzales testified:
ATTY. DE JESUS:
Now in this case you filed against the bank you mentioned there was a loan
also applied for by the Panlilio’s in the sum of P1.8 Million Pesos. Will you
please tell this Court how this came about?
_______________
13 Records, pp. 10-11.
14 Id., at pp. 12-13.
15 Id., at pp. 14-15.
190
190 SUPREME COURT REPORTS ANNOTATED
Gonzales vs. Philippine Commercial and International Bank
GONZALES:
 Mr. Panlilio requested his account officer . . . . at that time it is a P42.0 Million
loan and if he secures another P1.8 Million loan the release will be longer
because it has to pass to XO.
Q: After that what happened?
A: So as per suggestion since Mr. Panlilio is a good friend of mine and we co-
owned the property I agreed initially to use my name so that the loan can be
utilized immediately by Mr. Panlilio.
Q: Who is actually the borrower of this P1.8 Million Pesos?
A: Well, in paper me and Mr. Panlilio.
Q: Who received the proceeds of said loan?
A: Mr. Panlilio.
Q: Do you have any proof that it was Mr. Panlilio who actually received the
proceeds of this P1.8 Million Pesos loan?
A: A check was deposited in the account of Mr. Panlilio.16
xxxx
Q: By the way upon whose suggestion was the loan of Mr. Panlilio also placed
under your name initially?
A: Well it was actually suggested by the account officer at that time Edna
Ocampo.
Q: How about this Mr. Rodolfo Noceda?
A: As you look at the authorization aspect of the loan Mr. Noceda is the boss
of Edna so he has been familiar with my account ever since its inception.
Q: So these two officers Ocampo and Noceda knew that this was actually the
account of Mr. Panlilio and not your account?
A: Yes, sir. In fact even if there is a change of account officer they are always
informing me that the account will be debited to Mr. Panlilio’s account.17
Moreover, the first note for PhP 500,000 was signed by Gonzales and his wife as
borrowers, while the two subsequent
_______________
16 Id., at pp. 222-224, TSN, January 13, 2000, pp. 12-14.
17 Id., at pp. 247-248, TSN, January 13, 2000, pp. 37-38.
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Gonzales vs. Philippine Commercial and International Bank
notes showed the spouses Panlilio sign as borrowers with Gonzales. It is, thus,
evident that Gonzales signed, as borrower, the promissory notes covering the PhP
1,800,000 loan despite not receiving any of the proceeds.
Second, the records of PCIB indeed bear out, and was admitted by Noceda, that
the PhP 1,800,000 loan proceeds went to the spouses Panlilio, thus:
ATTY. DE JESUS: [on Cross-Examination]
Is it not a fact that as far as the records of the bank [are] concerned the
proceeds of the 1.8 million loan was received by Mr. Panlilio?
NOCEDA:
Yes sir.18
The fact that the loans were undertaken by Gonzales when he signed as borrower
or co-borrower for the benefit of the spouses Panlilio—as shown by the fact that the
proceeds went to the spouses Panlilio who were servicing or paying the monthly
dues—is beside the point. For signing as borrower and co-borrower on the
promissory notes with the proceeds of the loans going to the spouses Panlilio,
Gonzales has extended an accommodation to said spouses.
Third, as an accommodation party, Gonzales is solidarily liable with the spouses
Panlilio for the loans. In Ang v. Associated Bank,19 quoting the definition of an
accommodation party under Section 29 of the Negotiable Instruments Law, the
Court cited that an accommodation party is a person “who has signed the instrument
as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the
purpose of lending his name to some other person.”20 The Court further explained:
_______________
18 Id., at p. 377, TSN, July 6, 2000, p. 4.
19 G.R. No. 146511, September 5, 2007, 532 SCRA 244.
20 Id., at pp. 272-273.
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192 SUPREME COURT REPORTS ANNOTATED
Gonzales vs. Philippine Commercial and International Bank
“[A]n accommodation party is one who meets all the three requisites, viz.: (1) he
must be a party to the instrument, signing as maker, drawer, acceptor, or indorser;
(2) he must not receive value therefor; and (3) he must sign for the purpose of
lending his name or credit to some other person. An accommodation party lends his
name to enable the accommodated party to obtain credit or to raise money; he
receives no part of the consideration for the instrument but assumes liability to the
other party/ies thereto. The accommodation party is liable on the instrument to a
holder for value even though the holder, at the time of taking the instrument, knew
him or her to be merely an accommodation party, as if the contract was not for
accommodation.
As petitioner acknowledged it to be, the relation between an accommodation
party and the accommodated party is one of principal and surety—the
accommodation party being the surety. As such, he is deemed an original promisor
and debtor from the beginning; he is considered in law as the same party as the
debtor in relation to whatever is adjudged touching the obligation of the latter since
their liabilities are interwoven as to be inseparable. Although a contract of suretyship
is in essence accessory or collateral to a valid principal obligation, the surety’s
liability to the creditor is immediate, primary and absolute; he
is directly and equally bound with the principal. As an equivalent of a regular party
to the undertaking, a surety becomes liable to the debt and duty of the principal
obligor even without possessing a direct or personal interest in the obligations nor
does he receive any benefit therefrom.”21
Thus, the knowledge, acquiescence, or even demand by Ocampo for an
accommodation by Gonzales in order to extend the credit or loan of PhP 1,800,000
to the spouses Panlilio does not exonerate Gonzales from liability on the three
promissory notes.
Fourth, the solidary liability of Gonzales is clearly stipulated in the promissory
notes which uniformly begin, “For value received, the undersigned (the
“BORROWER”) jointly and severally promise to pay x x x.” Solidary liability
cannot
_______________
21 Id., at pp. 273-274; citations omitted.
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Gonzales vs. Philippine Commercial and International Bank
be presumed but must be established by law or contract. 22Article 1207 of the Civil
Code pertinently states that “there is solidary liability only when the obligation
expressly so states, or when the obligation requires solidarity.” This is true in the
instant case where Gonzales, as accommodation party, is immediately, equally, and
absolutely bound with the spouses Panlilio on the promissory notes which
indubitably stipulated solidary liability for all the borrowers. Moreover, the three
promissory notes serve as the contract between the parties. Contracts have the force
of law between the parties and must be complied with in good faith.23
Second Issue: Improper Dishonor of Check
Having ruled that Gonzales is solidarily liable for the three promissory notes, We
shall now touch upon the question of whether it was proper for PCIB to dishonor the
check issued by Gonzales against the credit line under the COHLA.
We answer in the negative.
As a rule, an appeal by certiorari under Rule 45 of the Rules of Court is limited to
review of errors of law.24 The factual findings of the trial court, especially when
affirmed by the appellate court, are generally binding on us unless there was a
misapprehension of facts or when the inference drawn from the facts was manifestly
mistaken.25 The instant case falls within the exception.
The courts a quo found and held that there was a proper dishonor of the PhP
250,000 check issued by Gonzales against
_______________
22 Hi-Cement Corporation v. Insular Bank of Asia and America, G.R. No.
132403, September 28, 2007, 534 SCRA 269, 283.
23 Panlilio v. Citibank, N.A., G.R. No. 156335, November 28, 2007, 539 SCRA 69,
82-83; citing Civil Code, Art. 1159.
24 Usero v. Court of Appeals, G.R. No. 152115, January 26, 2005, 449 SCRA 352,
358.
25 Casol v. Purefoods Corporation, G.R. No. 166550, September 22, 2005, 470
SCRA 585, 589.
194
194 SUPREME COURT REPORTS ANNOTATED
Gonzales vs. Philippine Commercial and International Bank
the credit line, because the credit line was already closed prior to the presentment of
the check by Unson; and the closing of the credit line was likewise proper pursuant to
the stipulations in the promissory notes on the bank’s right to set off or apply all
moneys of the debtor in PCIB’s hand and the stipulations in the COHLA on the
PCIB’s right to terminate the credit line on grounds of default by Gonzales.
Gonzales argues otherwise, pointing out that he was not informed about the
default of the spouses Panlilio and that the September 21, 1998 account statement of
the credit line shows a balance of PhP 270,000 which was likewise borne out by the
December 7, 1998 PCIB’s certification that he has USD 8,715.72 in his FCD account
which is more than sufficient collateral to guarantee the PhP 250,000 check, dated
September 30, 1998, he issued against the credit line.
A careful scrutiny of the records shows that the courts a quo committed reversible
error in not finding negligence by PCIB in the dishonor of the PhP 250,000 check.
First. There was no proper notice to Gonzales of the default and delinquency of
the PhP 1,800,000 loan. It must be borne in mind that while solidarily liable with the
spouses Panlilio on the PhP 1,800,000 loan covered by the three promissory notes,
Gonzales is only an accommodation party and as such only lent his name and credit
to the spouses Panlilio. While not exonerating his solidary liability, Gonzales has a
right to be properly apprised of the default or delinquency of the loan precisely
because he is a co-signatory of the promissory notes and of his solidary liability.
We note that it is indeed understandable for Gonzales to push the spouses Panlilio
to pay the outstanding dues of the PhP 1,800,000 loan, since he was only an
accommodation party and was not personally interested in the loan. Thus, a meeting
was set by Gonzales with the spouses Panlilio and the PCIB officers, Noceda and
Ocampo, in the spouses Panlilio’s jewelry shop in SM Megamall on October 5, 1998.
195
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Gonzales vs. Philippine Commercial and International Bank
Unfortunately, the meeting did not push through due to the heavy traffic Noceda and
Ocampo encountered.
 Such knowledge of the default by Gonzales was, however, not enough to properly
apprise Gonzales about the default and the outstanding dues. Verily, it is not enough
to be merely informed to pay over a hundred thousand without being formally
apprised of the exact aggregate amount and the corresponding dues pertaining to
specific loans and the dates they became due.
Gonzales testified that he was not duly notified about the outstanding interest
dues of the loan:
ATTY. DE JESUS:
Now when Mr. Panlilio’s was encountering problems with the bank did the
defendant bank [advise] you of any problem with the same account?
GONZALES:
They never [advised] me in writing.
Q: How did you come to know that there was a problem?
A: When my check bounced sir.26
On the other hand, the PCIB contends otherwise, as Corazon Nepomuceno
testified:
ATTY. PADILLA:
Can you tell this Honorable Court what is it that you told
Mr. Gonzales when you spoke to him at the celphone?
NEPOMUCENO:
I just told him to update the interest so that we would not have to cancel the
COH Line and he could withdraw the money that was in the deposit because
technically, if an account is past due we are not allowed to let the client
withdraw funds because they are allowed to offset funds so, just to help him get
his money, just to update the interest so that we could allow him to withdraw.
_______________
26 Records, pp. 384-A-386, TSN, January 13, 2000, pp. 35-36.
196
196 SUPREME COURT REPORTS ANNOTATED
Gonzales vs. Philippine Commercial and International Bank
Q Withdraw what?
A: His money on the COH, whatever deposit he has with us.
Q: Did you inform him that if he did not update the interest he would not be able
to withdraw his money?
A: Yes sir, we will be forced to hold on to any assets that he has with us so that’s
why we suggested just to update the interest because at the end of everything,
he would be able to withdraw more funds than the interest that the money he
would be needed to update the interest.27
From the foregoing testimonies, between the denial of Gonzales and the assertion
by PCIB that Gonzales was properly apprised, we find for Gonzales. We find the
testimonies of the former PCIB employees to be self-serving and tenuous at best, for
there was no proper written notice given by the bank. The record is bereft of any
document showing that, indeed, Gonzales was formally informed by PCIB about the
past due periodic interests.
PCIB is well aware and did not dispute the fact that Gonzales is an
accommodation party. It also acted in accordance with such fact by releasing the
proceeds of the loan to the spouses Panlilio and likewise only informed the spouses
Panlilio of the interest dues. The spouses Panlilio, through their account28 with PCIB,
were paying the periodic interest dues and were the ones periodically informed by
the bank of the debiting of the amounts for the periodic interest payments. Gonzales
never paid any of the periodic interest dues. PCIB’s Noceda admitted as much in his
cross-examination:
ATTY. DE JESUS: [on Cross-Examination]
And there was no instance that Mr. Gonzales ever made even interest for this
loan, is it not, it’s always Mr. Panlilio who was paying the interest for this loan?
_______________
27 Id., at pp. 612-614, TSN, July 20, 2000, pp. 9-11.
28 Id., at pp. 26-37, Account No. 00-1423-01005-3 in the name of the spouses
Panlilio with the PCIBank Forbes-Edsa Branch (issued in lieu of Passbook 142-
868324).
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Gonzales vs. Philippine Commercial and International Bank
NOCEDA:
Yes sir.29
Indeed, no evidence was presented tending to show that Gonzales was
periodically sent notices or notified of the various periodic interest dues covering the
three promissory notes. Neither do the records show that Gonzales was aware of
amounts for the periodic interests and the payment for them. Such were serviced by
the spouses Panlilio.
Thus, PCIB ought to have notified Gonzales about the status of the default or
delinquency of the interest dues that were not paid starting July 1998. And such
notification must be formal or in written form considering that the outstanding
periodic interests became due at various dates, i.e., on July 8, 17, and 28, 1998, and
the various amounts have to be certain so that Gonzales is not only properly apprised
but is given the opportunity to pay them being solidarily liable for the loans covered
by the promissory notes.
 It is the bank which computes these periodic interests and such dues must be put _______________
into writing and formally served to Gonzales if he were asked to pay them, more so
when the payments by the spouses Panlilio were charged through the account of the 30 Id., at p. 160.
spouses Panlilio where the interest dues were simply debited. Such arrangement did
not cover Gonzales’ bank account with PCIB, since he is only an accommodation 199
party who has no personal interest in the PhP 1,800,000 loan. Without a clear and VOL. 644, FEBRUARY 23, 2011 199
determinate demand through a formal written notice for the exact periodic interest Gonzales vs. Philippine Commercial and International Bank
dues for the loans, Gonzales cannot be expected to pay for them. Second. PCIB was grossly negligent in not giving prior notice to Gonzales about
In business, more so for banks, the amounts demanded from the debtor or its course of action to suspend, terminate, or revoke the credit line, thereby violating
borrower have to be definite, clear, and without ambiguity. It is not sufficient simply the clear stipulation in the COHLA.
to be informed that one must pay over a hundred thousand aggregate outstanding The COHLA, in its effectivity clause, clearly provides:
interest dues without clear and certain figures. “4. EFFECTIVITY — The COH shall be effective for a period of one (1) year
_______________ commencing from the receipt by the CLIENT of the COH checkbook issued by the
BANK, subject to automatic renewals for same periods unless terminated by the
29 Id., at p. 384-A, TSN, July 6, 2000, p. 13. BANK upon prior notice served on CLIENT.”31 (Emphasis ours.)
198 It is undisputed that the bank unilaterally revoked, suspended, and terminated
198 SUPREME COURT REPORTS ANNOTATED the COHLA without giving Gonzales prior notice as required by the above stipulation
Gonzales vs. Philippine Commercial and International Bank in the COHLA. Noceda testified on cross-examination on the Offering
Thus, We find PCIB negligent in not properly informing Gonzales, who is an Ticket32 recommending the termination of the credit line, thus:
accommodation party, about the default and the exact outstanding periodic interest
dues. Without being properly apprised, Gonzales was not given the opportunity to ATTY. DE JESUS: [on Cross-Examination]
properly act on them. This Exhibit 8, you have not furnished at anytime a copy to
It was only through a letter30 sent by PCIB dated October 2, 1998 but the plaintiff Mr. Gonzales is it not?
incongruously showing the delinquencies of the PhP 1,800,000 loan at a much later NOCEDA:
date, i.e., as of October 31, 1998, when Gonzales was formally apprised by PCIB. In it, No sir but verbally it was relayed to him.
the interest due was PhP 106,1616.71 and penalties for the unpaid interest due of PhP Q: But you have no proof that Mr. Gonzales came to know about this Exhibit 8?
64,766.66, or a total aggregate due of PhP 171,383.37. But it is not certain and the A: It was relayed to him verbally.
records do not show when the letter was sent and when Gonzales received it. What is Q: But there is no written proof?
clear is that such letter was belatedly sent by PCIB and received by Gonzales after the A: No sir.
fact that the latter’s FCD was already frozen, his credit line under the COHLA was Q: And it is only now that you claim that it was verbally relayed to him, it’s only
terminated or suspended, and his PhP 250,000 check in favor of Unson was now when you testified in Court?
dishonored. A: Before . . .
And way much later, or on May 4, 1999, was a demand letter from the counsel of Q: To whom did you relay this information?
PCIB sent to Gonzales demanding payment of the PhP 1,800,000 loan. Obviously, _______________
these formal written notices sent to Gonzales were too late in the day for Gonzales to
act properly on the delinquency and he already suffered the humiliation and 31 Id., at p. 157.
embarrassment from the dishonor of his check drawn against the credit line. 32 Id., at p. 162.
To reiterate, a written notice on the default and deficiency of the PhP 1,800,000
loan covered by the three promissory notes was required to apprise Gonzales, an 200
accommodation party. PCIB is obliged to formally inform and apprise Gonzales of
200 SUPREME COURT REPORTS ANNOTATED
the defaults and the outstanding obligations, more so when PCIB was invoking the
solidary liability of Gonzales. This PCIB failed to do. Gonzales vs. Philippine Commercial and International Bank
 A: It was during the time that we were going to Megamall, it was relayed by Liza
that he has to pay his obligations or else it will adversely affect the status of the
account.33
On the other hand, the testimony of Corazon Nepomuceno shows:
ATTY. DE JESUS: [on Cross-Examination]
Now we go to the other credit facility which is the credit on
hand extended solely of course to Mr. Eusebio Gonzales who
is the plaintiff here, Mr. Panlilio is not included in this credit
on hand facility. Did I gather from you as per your Exhibit 7
as of October 2, 1998 you were the one who recommended the
cancellation of this credit on hand facility?
NEPOMUCENO:
It was recommended by the account officer and I supported it.
Q: And you approved it?
A: Yes sir.
Q: Did you inform Mr. Gonzales that you have already cancelled his credit on
hand facility?
A: As far as I know, it is the account officer who will inform him.
Q: But you have no record that he was informed?
A: I don’t recall and we have to look at the folder to determine if they were
informed.
Q: If you will notice, this letter . . . what do you call this letter of yours?
A: That is our letter advising them or reminding them of their unpaid interest
and that if he is able to update his interest he can extend the promissory note
or restructure the outstanding.
Q: Now, I call your attention madam witness, there is nothing in this letter to the
clients advising them or Mr. Gonzales that his credit on hand facility was
already cancelled?
_______________
33 Id., at p. 377, TSN, July 6, 2000, pp. 13-16.
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Gonzales vs. Philippine Commercial and International Bank
A: I don’t know if there are other letters aside from this.
Q: So in this letter there is nothing to inform or to make Mr. Eusebio aware that
his credit on hand facility was already cancelled?
A: No actually he can understand it from the last sentence. “If you will be able to
update your outstanding interest, we can apply the extention of your
promissory note” so in other words we are saying that if you don’t, you cannot
extend the promissory note.
Q: You will notice that the subject matter of this October 2, 1998 letter is only the
loan of 1.8 million is it not, as you can see from the letter? Okay?
A: Ah . . .
Q: Okay. There is nothing there that will show that that also refers to the credit
on hand facility which was being utilized by Mr. Gonzales is it not?
A: But I don’t know if there are other letters that are not presented to me now.34
The foregoing testimonies of PCIB officers clearly show that not only did PCIB fail
to give prior notice to Gonzales about the Offering Ticket for the process of
termination, suspension, or revocation of the credit line under the COHLA, but PCIB
likewise failed to inform Gonzales of the fact that his credit line has been terminated.
Thus, we find PCIB grossly negligent in the termination, revocation, or suspension of
the credit line under the COHLA. While PCIB invokes its right on the so-called “cross
default provisions,” it may not with impunity ignore the rights of Gonzales under the
COHLA.
Indeed, the business of banking is impressed with public interest and great
reliance is made on the bank’s sworn profession of diligence and meticulousness in
giving irreproachable service. Like a common carrier whose business is imbued with
public interest, a bank should exercise extraordinary
_______________
34 Id., at pp. 695-700, TSN, October 26, 2000, pp. 18-23.
202
202 SUPREME COURT REPORTS ANNOTATED
Gonzales vs. Philippine Commercial and International Bank
diligence to negate its liability to the depositors.35 In this instance, PCIB is sorely
remiss in the diligence required in treating with its client, Gonzales. It may not
wantonly exercise its rights without respecting and honoring the rights of its clients.
Art. 19 of the New Civil Code clearly provides that “[e]very person must, in the
exercise of his rights and in the performance of his duties, act with justice, give
everyone his due, and observe honesty and good faith.” This is the basis of the
principle of abuse of right which, in turn, is based upon the maxim suum jus summa
injuria (the abuse of right is the greatest possible wrong).36
In order for Art. 19 to be actionable, the following elements must be present: “(1)
the existence of a legal right or duty, (2) which is exercised in bad faith, and (3) for
the sole intent of prejudicing or injuring another.”37 We find that such elements are
present in the instant case. The effectivity clause of the COHLA is crystal clear that
termination of the COH should be done only upon prior notice served on the
CLIENT. This is the legal duty of PCIB––to inform Gonzales of the termination.
However, as shown by the above testimonies, PCIB failed to give prior notice to
Gonzales.
Malice or bad faith is at the core of Art. 19. Malice or bad faith “implies a
conscious and intentional design to do a wrongful act for a dishonest purpose or
moral obliquity.”38 In the instant case, PCIB was able to send a letter advising
Gonzales of the unpaid interest on the loans39 but failed to
_______________
35 Solidbank Corporation/Metropolitan Bank and Trust Company v. Tan, G.R.
No. 167346, April 2, 2007, 520 SCRA 123, 129-130; citations omitted.
36 Arlegui v. Court of Appeals, G.R. No. 126437, March 6, 2002, 378 SCRA 322,
337.
37 ABS-CBN Broadcasting Corporation v. CA, G.R. No. 128690, January 21,
1999, 301 SCRA 572, 603.
38 Id., at p. 604.
39 Records, p. 160.
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Gonzales vs. Philippine Commercial and International Bank
mention anything about the termination of the COHLA. More significantly, no letter
was ever sent to him about the termination of the COHLA. The failure to give prior
notice on the part of PCIB is already prima facie evidence of bad faith.40 Therefore, it
is abundantly clear that this case falls squarely within the purview of the principle of
abuse of rights as embodied in Art. 19.
Third. There is no dispute on the right of PCIB to suspend, terminate, or revoke
the COHLA under the “cross default provisions” of both the promissory notes and the
COHLA. However, these cross default provisions do not confer absolute unilateral
right to PCIB, as they are qualified by the other stipulations in the contracts or
specific circumstances, like in the instant case of an accommodation party.
The promissory notes uniformly provide:
“The lender is hereby authorized, at its option and without notice, to
set off or apply to the payment of this Note any and all moneys which may
be in its hands on deposit or otherwise belonging to the Borrower. The
Borrower irrevocably appoint/s the Lender, effective upon the nonpayment of this
Note on demand/at maturity or upon the happening of any of the events of default,
but without any obligation on the Lender’s part should it choose not to perform this
mandate, as the attorney-in-fact of the Borrower, to sell and dispose of any property
of the Borrower, which may be in the Lender’s possession by public or private sale,
and to apply the proceeds thereof to the payment of this Note; the Borrower,
however, shall remain liable for any deficiency.”41 (Emphasis ours.)
The above provisos are indeed qualified with the specific circumstance of an
accommodation party who, as such, has not been servicing the payment of the dues
of the loans, and
_______________
40 Manila Electric Company v. Hon. Navarro-Domingo, G.R. No. 161893, June
27, 2006, 493 SCRA 363, 371.
41 Records, p. 10.
204
204 SUPREME COURT REPORTS ANNOTATED
Gonzales vs. Philippine Commercial and International Bank
must first be properly apprised in writing of the outstanding dues in order to answer
for his solidary obligation.
The same is true for the COHLA, which in its default clause provides:
16. DEFAULT — The CLIENT shall be considered in default under the COH if any of
the following events shall occur:
1. x x x
2. Violation of the terms and conditions of this Agreement or any contract of the
CLIENT with the BANK or any bank, persons, corporations or entities for the
payment of borrowed money, or any other event of default in such contracts.42
The above pertinent default clause must be read in conjunction with the effectivity
clause (No. 4 of the COHLA, quoted above), which expressly provides for the right of
client to prior notice. The rationale is simple: in cases where the bank has the right to
terminate, revoke, or suspend the credit line, the client must be notified of such
intent in order for the latter to act accordingly—whether to correct any ground giving
rise to the right of the bank to terminate the credit line and to dishonor any check
issued or to act in accord with such termination, i.e., not to issue any check drawn
from the credit line or to replace any checks that had been issued. This, the bank—
with gross negligence—failed to accord Gonzales, a valued client for more than 15
years.
Fourth. We find the testimony43 of Ocampo incredible on the point that the
principal borrower of the PhP 1,800,000 loan covered by the three promissory notes
is Gonzales for which the bank officers had special instructions to grant and that it
was through the instructions of Gonzales that the
_______________
42 Id., at p. 159.
43 Id., at pp. 470-482, TSN, July 7, 2000, pp. 9-21.
205
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 Gonzales vs. Philippine Commercial and International Bank
payment of the periodic interest dues were debited from the account of the spouses
Panlilio.
For one, while the first promissory note dated October 30, 1995 indeed shows
Gonzales as the principal borrower, the other promissory notes dated December 26,
1995 and January 3, 1996 evidently show that it was Jose Panlilio who was the
principal borrower with Gonzales as co-borrower. For another, Ocampo cannot feign
ignorance on the arrangement of the payments by the spouses Panlilio through the
debiting of their bank account. It is incredulous that the payment arrangement is
merely at the behest of Gonzales and at a mere verbal directive to do so. The fact that
the spouses Panlilio not only received the proceeds of the loan but were servicing the
periodic interest dues reinforces the fact that Gonzales was only an accommodation
party.
Thus, due to PCIB’s negligence in not giving Gonzales—an accommodation
party—proper notice relative to the delinquencies in the PhP 1,800,000 loan covered
by the three promissory notes, the unjust termination, revocation, or suspension of
the credit line under the COHLA from PCIB’s gross negligence in not honoring its
obligation to give prior notice to Gonzales about such termination and in not
informing Gonzales of the fact of such termination, treating Gonzales’ account as
closed and dishonoring his PhP 250,000 check, was certainly a reckless act by PCIB.
This resulted in the actual injury of PhP 250,000 to Gonzales whose FCD account
was frozen and had to look elsewhere for money to pay Unson.
With banks, the degree of diligence required is more than that of a good father of
the family considering that the business of banking is imbued with public interest
due to the nature of their function. The law imposes on banks a high degree of
obligation to treat the accounts of its depositors with meticulous care, always having
in mind the fiduciary nature
206
206 SUPREME COURT REPORTS ANNOTATED
Gonzales vs. Philippine Commercial and International Bank
of banking.44 Had Gonzales been properly notified of the delinquencies of the PhP
1,800,000 loan and the process of terminating his credit line under the COHLA, he
could have acted accordingly and the dishonor of the check would have been avoided.
Third Issue: Award of Damages
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—banks have
attained a ubiquitous presence among the people, who have come to regard them
with respect and even gratitude and most of all, confidence, and it is for this reason,
banks should guard against injury attributable to negligence or bad faith on its part.45
In the instant case, Gonzales suffered from the negligence and bad faith of PCIB.
From the testimonies of Gonzales’ witnesses, particularly those of Dominador
Santos46 and Freddy Gomez,47 the embarrassment and humiliation Gonzales has to
endure not only before his former close friend Unson but more from the members
and families of his friends and associates in the PCA, which he continues to
experience considering the confrontation he had with Unson and the consequent loss
of standing and credibility among them from the fact of the apparent bouncing check
he issued. Credit is very important to businessmen and its loss or impairment needs
to be recognized and compensated.48
_______________
44 Philippine National Bank v. Pike, G.R. No. 157845, September 20, 2005, 470
SCRA 328, 347.
45 Sandejas v. Ignacio, Jr., G.R. No. 155033, December 19, 2007, 541 SCRA 61,
82.
46 Records, pp. 274-286, TSN, March 9, 2000, pp. 2-13.
47 Id., at pp. 287-298, TSN, March 9, 2000, pp. 13-25.
48 Prudential Bank v. Lim, G.R. No. 136371, November 11, 2005, 474 SCRA 485,
497; citing Samson v. Bank of the Philippine Islands, G.R. No. 154087, July 10,
2003, 405 SCRA 607.
207
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Gonzales vs. Philippine Commercial and International Bank
The termination of the COHLA by PCIB without prior notice and the subsequent
dishonor of the check issued by Gonzales constitute acts of contra bonus mores. Art.
21 of the Civil Code refers to such acts when it says, “Any person who willfully causes
loss or injury to another in a manner that is contrary to morals, good customs or
public policy shall compensate the latter for damage.”
Accordingly, this Court finds that such acts warrant the payment of indemnity in
the form of nominal damages. Nominal damages “are recoverable where a legal right
is technically violated and must be vindicated against an invasion that has produced
no actual present loss of any kind x x x.”49 We further explained the nature of
nominal damages in Almeda v. Cariño:
“x x x Its award is thus not for the purpose of indemnification for a loss but for the
recognition and vindication of a right. Indeed, nominal damages are damages in
name only and not in fact. When granted by the courts, they are not treated as an
equivalent of a wrong inflicted but simply a recognition of the existence of a technical
injury. A violation of the plaintiff’s right, even if only technical, is sufficient to
support an award of nominal damages. Conversely, so long as there is a
showing of a violation of the right of the plaintiff, an award of nominal
damages is proper.”50 (Emphasis Ours.)
 In the present case, Gonzales had the right to be informed of the accrued interest
and most especially, for the suspension of his COHLA. For failure to do so, the bank
is liable to pay nominal damages. The amount of such damages is addressed to the
sound discretion of the court, taking into account the
_______________
49 Francisco v. Ferrer, Jr., G.R. No. 142029, February 28, 2001, 353 SCRA 261,
267.
50 G.R. No. 152143, January 13, 2003, 395 SCRA 144, 150.
208
208 SUPREME COURT REPORTS ANNOTATED
Gonzales vs. Philippine Commercial and International Bank
relevant circumstances.51 In this case, the Court finds that the grant of PhP 50,000 as
nominal damages is proper.
Moreover, as We held in MERALCO v. CA,52 failure to give prior notice when
required, such as in the instant case, constitutes a breach of contract and is a clear
violation of Art. 21 of the Code. In cases such as this, Art. 2219 of the Code provides
that moral damages may be recovered in acts referred to in its Art. 21. Further, Art.
2220 of the Code provides that “[w]illful 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.” Similarly, “every person who, contrary
to law, willfully or negligently causes damage to another, shall indemnify the latter
for the same.”53 Evidently, Gonzales is entitled to recover moral damages.
Even in the absence of malice or bad faith, a depositor still has the right to recover
reasonable moral damages, if the depositor suffered mental anguish, serious anxiety,
embarrassment, and humiliation.54 Although incapable of pecuniary estimation,
moral damages are certainly recoverable if they are the proximate result of the
defendant’s wrongful act or omission. The factual antecedents bolstered by
undisputed testimonies likewise show the mental anguish and anxiety Gonzales had
to endure with the threat of Unson to file a suit. Gonzales had to pay Unson PhP
250,000, while his FCD account in PCIB was frozen, prompting Gonzales to demand
from PCIB and to file the instant suit.
_______________
51 Ancheta v. Destiny Financial Plans, Inc., G.R. No. 179702, February 16, 2010,
612 SCRA 648, 664; citing Agabon v. NLRC, G.R. No. 158693, November 17, 2004,
442 SCRA 616.
52 No. L-39019, January 22, 1988, 157 SCRA 243, 248.
53 Civil Code, Art. 20.
54 Bank of Philippine Islands v. Court of Appeals, G.R. No. 136202, January 25,
2007, 512 SCRA 620, 641.
209
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Gonzales vs. Philippine Commercial and International Bank
The award of moral damages is aimed at a restoration within the limits of the
possible, of the spiritual status quo ante—it must always reasonably approximate the
extent of injury and be proportional to the wrong committed.55 Thus, an award of
PhP 50,000 is reasonable moral damages for the unjust dishonor of the PhP 250,000
which was the proximate cause of the consequent humiliation, embarrassment,
anxiety, and mental anguish suffered by Gonzales from his loss of credibility among
his friends, colleagues and peers.
Furthermore, the initial carelessness of the bank’s omission in not properly
informing Gonzales of the outstanding interest dues––aggravated by its gross neglect
in omitting to give prior notice as stipulated under the COHLA and in not giving
actual notice of the termination of the credit line––justifies the grant of exemplary
damages of PhP 10,000. Such an award is imposed by way of example or correction
for the public good.
Finally, an award for attorney’s fees is likewise called for from PCIB’s negligence
which compelled Gonzales to litigate to protect his interest. In accordance with Art.
2208(1) of the Code, attorney’s fees may be recovered when exemplary damages are
awarded. We find that the amount of PhP 50,000 as attorney’s fees is reasonable.
WHEREFORE, this petition is PARTLY GRANTED. Accordingly, the CA Decision
dated October 22, 2007 in CA-G.R. CV No. 74466 is hereby REVERSED and SET
ASIDE. The Philippine Commercial and International Bank (now Banco De Oro) is
ORDERED to pay Eusebio Gonzales PhP 50,000 as nominal damages, PhP 50,000
as moral damages, PhP 10,000 as exemplary damages, and PhP 50,000 as attorney’s
fees.
No pronouncement as to costs.
_______________
55 Solidbank Corporation v. Arrieta, G.R. No. 152727, February 17, 2005, 451
SCRA 711, 721-722; citations omitted.
210
210 SUPREME COURT REPORTS ANNOTATED
Gonzales vs. Philippine Commercial and International Bank
SO ORDERED.
Corona (C.J., Chairperson), Nachura,** Del Castillo and Perez, JJ., concur.
Petition partly granted, judgment reversed and set aside.
Note.—A bank is “under obligation to treat the accounts of its depositors with
meticulous care.” (Philippine Savings Bank vs. Chowking Food Corporation, 557
SCRA 318 [2008])
——o0o——
 G.R. No. 80599.September 15, 1989.*
ERNESTINA CRISOLOGO-JOSE, petitioner, vs. COURT OF APPEALS and
RICARDO S. SANTOS, JR. in his own behalf and as Vice-President for Sales of
Mover Enterprises, Inc., respondents.
Negotiable Instruments Law; Corporations; Rule that an accommodation
party liable on the instrument to a holder for value does not apply to corporations
which are accommodation parties; Reasons.—The aforequoted provision of the
Negotiable Instruments Law which holds an accommodation party liable on the
instrument to a holder for value, although such holder at the time of taking the
instrument knew him to be only an accommodation party, does not include nor apply
to corporations which are accommodation parties. This is because the issue or
indorsement of negotiable paper by a corporation without consideration and for the
accommodation of another is ultra vires. Hence, one who has taken the instrument
with knowledge of the accommodation nature thereof cannot recover against a
corporation where it is only an accommodation party. If the form of the instrument,
or the nature of the transaction, is such as to charge the indorsee with knowledge
that the issue or indorsement of the instrument by the corporation is for the
accommodation of another, he cannot recover against the corporation thereon.
Same; Same; Same; Same; Exception; An officer or agent of a corporation
shall have the power to execute or indorse a negotiable paper in the name of the
corporation for accommodation only if specifically authorized to do so; Personal
liability of signatories in the instrument.—By way of exception, an officer or agent of
a corporation shall have the power to execute or indorse a negotiable paper in the
name of the corporation for the accommodation of a third person only if specifically
authorized to do so. Corollarily, corporate officers, such as the president and vice-
president, have no power to execute for mere
_______________
*SECOND DIVISION.
595
VOL. 177, SEPTEMBER 15 ,1989 59
5 court2dismissing the complaint for consignation filed by therein plaintiff Ricardo S.
Crisologo-Jose vs. Court of Appeals
accommodation a negotiable instrument of the corporation for their individual
debts or transactions arising from or in relation to matters in which the corporation
has no legitimate concern. Since such accommodation paper cannot thus be enforced
against the corporation, especially since it is not involved in any aspect of the
corporate business or operations, the inescapable conclusion in law and in logic is
that the signatories thereof shall be personally liable therefor, as well as the
consequences arising from their acts in connection therewith.
Same; Same; Same; Same; Consignation; Payment; Remedy of consignation,
proper; Case at bar; Effects of consignation.—We interpose the caveat,however, that
by holding that the remedy of consignation is proper under the given circumstances,
we do not thereby rule that all the operative facts for consignation which would
produce the effect of payment are present in this case. Those are factual issues that
are not clear in the records before us and which are for the Regional Trial Court of
Quezon City to ascertain in Civil Case No. Q-33160, for which reason it has advisedly
been directed by respondent court to give due course to the complaint for
consignation, and which would be subject to such issues or claims as may be raised
by defendant and the counterclaim filed therein which is hereby ordered similarly
revived.
Checks; B.P. 22; Presumptive rule to determine whether or not there was
insufficiency of funds in or credit with the drawee bank.—These are aside the
considerations that the disputed period involved in the criminal case is only a
presumptive rule, juris tantum at that, to determine whether or not there was
knowledge of insufficiency of funds in or credit with the drawee bank; that payment
of civil liability is not a mode for extinguishment of criminal liability; and that the
requisite quantum of evidence in the two types of cases are not the same.
PETITION to review the decision of the Court of Appeals. Torres, Jr., J.
The facts are stated in the opinion of the Court.
Melquiades P. de Leon for petitioner.
Rogelio A. Ajes for private respondent.
596
596 SUPREME COURT REPORTS ANNOTATED
Crisologo-Jose vs. Court of Appeals
REGALADO, J.:
Petitioner seeks the annulment of the decision1 of respondent Court of Appeals,
promulgated on September 8, 1987, which reversed the decision of the trial
Santos, Jr.
The parties are substantially agreed on the following facts as found by both lower
courts:
“In 1980, plaintiff Ricardo S. Santos, Jr. was the vice-president of Mover Enterprises,
Inc. incharge of marketing and sales; and the president of the said corporation was
Atty. Oscar Z. Benares. On April 30, 1980, Atty. Benares, in accommodation of his
clients, the spouses Jaime and Clarita Ong, issued Check No. 093553 drawn against
Traders Royal Bank, dated June 14, 1980, in the amount of P45,000.00 (Exh. ‘1’)
payable to defendant Ernestina Crisologo-Jose. Since the check was under the
account of Mover Enterprises, Inc., the same was to be signed by its president, Atty.
Oscar Z. Benares, and the treasurer of the said corporation. However, since at that
time, the treasurer of Mover Enterprises was not available, Atty. Benares prevailed
upon the plaintiff, Ricardo S. Santos, Jr., to sign the aforesaid check as an alternate
signatory. Plaintiff Ricardo S. Santos, Jr. did sign the check.
“It appears that the check (Exh. ‘1’) was issued to defendant Ernestina Crisologo-
Jose in consideration of the waiver or quitclaim by said defendant over a certain
property which the Government Service Insurance System (GSIS) agreed to sell to
the clients of Atty. Oscar Benares, the spouses Jaime and Clarita Ong, with the
understanding that upon approval by the GSIS of the compromise agreement with
the spouses Ong, the check will be encashed accordingly. However, since the
compromise agreement was not approved within the expected period of time, the
aforesaid check for P45,000.00 (Exh. ‘1’) was replaced by Atty. Benares with another
Traders Royal Bank check bearing No. 379299 dated August 10, 1980, in the same
amount of P45,000.00 (Exhs. ‘A’ and ‘2’), also payable to the defendant Jose. This
replacement check was also signed by Atty. Oscar Z. Benares and
_______________
1 Penned by Justice Justo P. Torres, Jr. and concurred in by Associate Justices
Leonor Ines Luciano and Oscar M. Herrera; Rollo, 18.
2 Civil Case No. Q-33160, Regional Trial Court of Quezon City, Branch XCVI.
597
VOL. 177, SEPTEMBER 15, 1989 597
Crisologo-Jose vs. Court of Appeals
by the plaintiff Ricardo S. Santos, Jr. When defendant deposited this replacement
check (Exhs. ‘A’ and ‘2’) with her account at Family Savings Bank, Mayon Branch, it
was dishonored for insufficiency of funds. A subsequent redepositing of the said
check was likewise dishonored by the bank for the same reason. Hence, defendant
through counsel was constrained to file a criminal complaint for violation of Batas
Pambansa Blg. 22 with the Quezon City Fiscal’s Office against Atty. Oscar Z. Benares
and plaintiff Ricardo S. Santos, Jr. The investigating Assistant City Fiscal, Alfonso
Llamas, accordingly filed an amended information with the court charging both
Oscar Benares and Ricardo S. Santos, Jr., for violation of Batas Pambansa Blg. 22
docketed as Criminal Case No. Q-14867 of then Court of First Instance of Rizal,
Quezon City.
“Meanwhile, during the preliminary investigation of the criminal charge against
Benares and the plaintiff herein, before Assistant City Fiscal Alfonso T. Llamas,
plaintiff Ricardo S. Santos, Jr. tendered cashier’s check No. CC 160152 for
P45,000.00 dated April 10, 1981 to the defendant Ernestina Crisologo-Jose, the
complainant in that criminal case. The defendant refused to receive the cashier’s
check in payment of the dishonored check in the amount of P45,000.00. Hence,
plaintiff encashed the aforesaid cashier’s check and subsequently deposited said
amount of P45,000.00 with the Clerk of Court on August 14, 1981 (Exhs. ‘D’ and ‘E’).
Incidentally, the cashier’s check adverted to above was purchased by Atty. Oscar Z.
Benares and given to the plaintiff herein to be applied in payment of the dishonored
check.”3
After trial, the court a quo, holding that it was “not persuaded to believe that
consignation referred to in Article 1256 of the Civil Code is applicable to this case,”
rendered judgment dismissing plaintiff’s complaint and defendant’s counterclaim.4
As earlier stated, respondent court reversed and set aside said judgment of
dismissal and revived the complaint for consignation, directing the trial court to give
due course thereto. Hence, the instant petition, the assignment of errors wherein are
prefatorily stated and discussed seriatim.
1. Petitioner contends that respondent Court of Appeals erred in holding that
private respondent, one of the signatories of the check issued under the account of
Mover Enterprises, Inc., is an accommodation party under the Negotiable Instru-
_______________
3 Rollo, 19-20.
4 Rollo, 18.
598
598 SUPREME COURT REPORTS ANNOTATED
Crisologo-Jose vs. Court of Appeals
amount of said check.
Petitioner avers that the accommodation party in this case is Mover Enterprises,
Inc. and not private respondent who merely signed the check in question in a
representative capacity, that is, as vice-president of said corporation, hence he is not
liable thereon under the Negotiable Instruments Law.
The pertinent provision of said law referred to provides:
“Sec. 29. Liability of accommodation party.—An accommodation party is one who
has signed the instrument as maker, drawer, acceptor, or indorser, without receiving
value therefor, and for the purpose of lending his name to some other person. Such a
person is liable on the instrument to a holder for value, notwithstanding such holder,
at the time of taking the instrument, knew him to be only an accommodation party.”
Consequently, to be considered an accommodation party, a person must (1) be a
party to the instrument, signing as maker, drawer, acceptor, or indorser, (2) not
receive value therefor, and (3) sign for the purpose of lending his name for the credit
of some other person.
Based on the foregoing requisites, it is not a valid defense that the
accommodation party did not receive any valuable consideration when he executed
the instrument. From the standpoint of contract law, he differs from the ordinary
concept of a debtor therein in the sense that he has not received any valuable
consideration for the instrument he signs. Nevertheless, he is liable to a holder for
value as if the contract was not for accommodation,5 in whatever capacity such
accommodation party signed the instrument, whether primarily or secondarily. Thus,
it has been held that in lending his name to the accommodated party, the
accommodation party is in effect a surety for the latter.6
Assuming arguendo that Mover Enterprises, Inc. is the accommodation party in
this case, as petitioner suggests, the inevitable question is whether or not it may be
held liable on
_______________
5 Ang Tiong vs. Ting, et al., 22 SCRA 713 (1968).
6 Philipine Bank of Commerce vs. Aruego, 102 SCRA 530 (1981).
599
VOL. 177, SEPTEMBER 15, 1989 599
Crisologo-Jose vs. Court of Appeals
the accommodation instrument, that is, the check issued in favor of herein petitioner.
We hold in the negative.
The aforequoted provision of the Negotiable Instruments Law which holds an
accommodation party liable on the instrument to a holder for value, although such
holder at the time of taking the instrument knew him to be only an accommodation
party, does not include nor apply to corporations which are accommodation
parties.7 This is because the issue or indorsement of negotiable paper by a
corporation without consideration and for the accommodation of another is ultra
vires.8 Hence, one who has taken the instrument with knowledge of the
accommodation nature thereof cannot recover against a corporation where it is only
an accommodation party. If the form of the instrument, or the nature of the
transaction, is such as to charge the indorsee with knowledge that the issue or
indorsement of the instrument by the corporation is for the accommodation of
another, he cannot recover against the corporation thereon.9
By way of exception, an officer or agent of a corporation shall have the power to
execute or indorse a negotiable paper in the name of the corporation for the
accommodation of a third person only if specifically authorized to do so.10 Corollarily,
corporate officers, such as the president and vice-president, have no power to execute
for mere accommodation a negotiable instrument of the corporation for their
individual debts or transactions arising from or in relation to matters in which the
corporation has no legitimate concern. Since such accommodation paper cannot thus
be enforced against the corporation, especially since it is not involved in any aspect of
the corporate business or operations, the inescapable conclusion in law and in logic is
that the signatories thereof shall be personally liable therefor, as well as the
consequences arising from their acts in connection therewith.
_______________
7 11 C.J.S. 309.
8 14A C.J. 732.
9 Oppenheim vs. Simon Reigel Cigar Co., 90 N.Y.S. 355, cited in 11 C.J.S. 309.
10 In re Wrentham Mfg. Co., 2 Low. 119; Hall vs. Auburn Turnp. Co., 27 Cal. 255,
cited in 14A C.J. 461.
600
600 SUPREME COURT REPORTS ANNOTATED
Crisologo-Jose vs. Court of Appeals
The instant case falls squarely within the purview of the aforesaid decisional rules. If
we indulge petitioner in her aforesaid postulation, then she is effectively barred from
recovering from Mover Enterprises, Inc. the value of the check. Be that as it may,
petitioner is not without recourse.
The fact that for lack of capacity the corporation is not bound by an
accommodation paper does not thereby absolve, but should render personally liable,
the signatories of said instrument where the facts show that the accommodation
involved was for their personal account, undertaking or purpose and the creditor was
aware thereof.
Petitioner, as hereinbefore explained, was evidently charged with the knowledge
that the check was issued at the instance and for the personal account of Atty.
Benares who merely prevailed upon respondent Santos to act as co-signatory in
accordance with the arrangement of the corporation with its depository bank. That it
was a personal undertaking of said corporate officers was apparent to petitioner by
reason of her personal involvement in the financial arrangement and the fact that,
while it was the corporation’s check which was issued to her for the amount involved,
she actually had no transaction directly with said corporation.
There should be no legal obstacle, therefore, to petitioner’s claims being directed
personally against Atty. Oscar Z. Benares and respondent Ricardo S. Santos, Jr.,
president and vice-president, respectively, of Mover Enterprises, Inc.
1. 2.On her second assignment of error, petitioner argues that the Court of
Appeals erred in holding that the consignation of the sum of P45,000.00,
made by private respondent after his tender of payment was refused by
petitioner, was proper under Article 1256 of the Civil Code.
Petitioner’s submission is that no creditor-debtor relationship exists between the
parties, hence consignation is not proper. Concomitantly, this argument was
premised on the assumption that private respondent Santos is not an
accommodation party.
As previously discussed, however, respondent Santos is an accommodation party
and is, therefore, liable for the value of the check. The fact that he was only a co-
signatory does not detract from his personal liability. A co-maker or co-drawer under
the circumstances in this case is as much an accommoda-
601
VOL. 177, SEPTEMBER 15, 1989 601
Crisologo-Jose vs. Court of Appeals
tion party as the other co-signatory or, for that matter, as a lone signatory in an
accommodation instrument. Under the doctrine in Philippine Bank of Commerce vs.
Aruego, supra, he is in effect a co-surety for the accommodated party with whom he
and his co-signatory, as the other co-surety, assume solidary liabilityex lege for the
debt involved. With the dishonor of the check, there was created a debtor-creditor
relationship, as between Atty. Benares and respondent Santos, on the one hand, and
petitioner, on the other. This circumstance enables respondent Santos to resort to an
action of consignation where his tender of payment had been refused by petitioner.
We interpose the caveat,however, that by holding that the remedy of consignation
is proper under the given circumstances, we do not thereby rule that all the operative
facts for consignation which would produce the effect of payment are present in this
case. Those are factual issues that are not clear in the records before us and which are
for the Regional Trial Court of Quezon City to ascertain in Civil Case No. Q-33160,
for which reason it has advisedly been directed by respondent court to give due
course to the complaint for consignation, and which would be subject to such issues
or claims as may be raised by defendant and the counterclaim filed therein which is
hereby ordered similarly revived.
3. That respondent court virtually prejudged Criminal Case No. Q-14687 of the
Regional Trial Court of Quezon City filed against private respondent for violation of
Batas Pambansa Blg. 22, by holding that no criminal liability had yet attached to
private respondent when he deposited with the court the amount of P45,000.00 is
the final plaint of petitioner.
We sustain petitioner on this score.
Indeed, respondent court went beyond the ratiocination called for in the appeal to
it in CA-G.R. CV. No. 05464. In its own decision therein, it declared that “(t)he lone
issue dwells in the question of whether an accommodation party can validly consign
the amount of the debt due with the court after his tender of payment was refused by
the creditor.” Yet, from the commercial and civil law aspects determinative of said
issue, it digressed into the merits of the aforesaid Criminal Case No. Q-14867, thus:
602
602 SUPREME COURT REPORTS ANNOTATED
Crisologo-Jose vs. Court of Appeals
“Section 2 of B.P. 22 establishes the prima facie evidence of knowledge of such
insufficiency of funds or credit. Thus, the making, drawing and issuance of a check,
payment of which is refused by the drawee because of insufficient funds in or credit
with such bank is prima facie evidence of knowledge of insufficiency of funds or
credit, when the check is presented within 90 days from the date of the check.
“It will be noted that the last part of Section 2 of B.P. 22 provides that the element
of knowledge of insufficiency of funds or credit is not present and, therefore, the
crime does not exist, when the drawer pays the holder the amount due or makes
arrangements for payment in full by the drawee of such check within five (5) banking
days after receiving notice that such check has not been paid by the drawee.
“Based on the foregoing consideration, this Court finds that the plaintiff-appellant
acted within his legal rights when he consigned the amount of P45,000.00 on August
14, 1981, between August 7, 1981, the date when plaintiff-appellant receive (sic) the
notice of non-payment, and August 14, 1981, the date when the debt due was
deposited with the Clerk of Court (a Saturday and a Sunday which are not banking
days) intervened. The fifth banking day fell on August 14, 1981. Hence, no criminal
liability has yet attached to plaintiff-appellant when he deposited the amount of
P45,000.00 with the Court a quo on August 14, 1981.”11
That said observations made in the civil case at bar and the intrusion into the merits
of the criminal case pending in another court are improper do not have to be
belabored. In the latter case, the criminal trial court has to grapple with such factual
issues as, for instance, whether or not the period of five banking days had expired, in
the process determining whether notice of dishonor should be reckoned from any
prior notice if any has been given or from receipt by private respondents of the
subpoena therein with supporting affidavits, if any, or from the first day of actual
preliminary investigation; and whether there was a justification for not making the
requisite arrangements for payment in full of such check by the drawee bank within
the said period. These are matters alien to the present controversy on tender and
consignation of payment, where no such period and its legal effects are involved.
These are aside from the considerations that the disputed
_______________
11Rollo, 21-22.
603
VOL. 177, SEPTEMBER 15, 1989 603
Crisologo-Jose vs. Court of Appeals
period involved in the criminal case is only a presumptive rule, juris tantum at that,
to determine whether or not there was knowledge of insufficiency of funds in or
credit with the drawee bank; that payment of civil liability is not a mode for
extinguishment of criminal liability; and that the requisite quantum of evidence in
the two types of cases are not the same.
To repeat, the foregoing matters are properly addressed to the trial court in
Criminal Case No. Q-14867, the resolution of which should not be interfered with by
respondent Court of Appeals at the present posture of said case, much less
preempted by the inappropriate and unnecessary holdings in the aforequoted portion
of the decision of said respondent court. Consequently, we modify the decision of
respondent court in CA-G.R. CV No. 05464by setting aside and declaring without
force and effect its pronouncements and findings insofar as the merits of Criminal
Case No. Q-14867 and the liability of the accused therein are concerned.
WHEREFORE, subject to the aforesaid modifications, the judgment of
respondent Court of Appeals is AFFIRMED.
SO ORDERED.
Paras, Padilla and Sarmiento, JJ., concur.
Melencio-Herrera J., No part. Did not participate in deliberations.
Judgment affirmed with modifications.
Notes.—In order that consignation may be effective, the debtor must first comply
with certain requirements prescribed by law. (Soco vs. Militante, 123 SCRA 160.)
Without prior notice, consignation is void as payment. (Soco vs. Militante, 123
SCRA 160.)
——o0o——
604
604 SUPREME COURT REPORTS ANNOTATED
Guzman vs. Court of Appeals
G.R. No. 81949.September 15, 1989.*
SPOUSES EMETERIO and LOLITA GUZMAN, petitioners, vs. HONORABLE
COURT OF APPEALS and SPOUSES GUILLERMO and GERARDA EVANGELISTA,
respondents.
Agrarian Reform; Urban Land Reform Law; Right of First Refusal; Only
legitimate tenants who have resided for ten years or more on specific parcels of
land in declared urban land reform zones or urban zones, and who have built their
houses thereon, have the right of first refusal.—It is clear from the language of the
law that only legitimate tenants who have resided for ten years or more on specific
parcels of land situated in declared Urban Land Reform Zones or Urban Zones, and
who have built their homes thereon, have the right not to be dispossessed therefrom
and the “right of first refusal” to purchase the property under reasonable terms and
conditions to be determined by the appropriate government agency. At the time of
the sale of the subject property to petitioners, Proclamation No. 1967 [Amending
Proclamation No. 1893 by specifying 244 sites in Metropolitan Manila as Areas for
Priority Development (APDs) and Urban Land Reform Zones], promulgated on May
14, 1980, was the prevailing law enumerating the parcels of land affected by Pres.
Dec. Nos. 1517, 1640 and 1642, and LOI No. 935. A simple reading of the list of 244
sites described in the annex to Proclamation No. 1967 reveals that the subject
property was not among the APDs or Urban Land Reform Zones in Navotas. Thus,
when the subject property was sold to petitioners, it was neither covered by, nor
subject, to the conditions set forth in, the Urban Land Reform Law.
Same; Same; Tenants, Defined; Tenants, as defined in Pres. Decree No. 1517
does not include those whose possession of the property is under litigation.—
Secondly, private respondents are not even “tenants” within the purview of Pres. Dec.
No. 1517. Section 3 (f) of this decree, which defines the term “tenant,” provides:
Tenant refers to the rightful occupant of land and its structures, but does not include
those whose presence on the land is merely tolerated and without the benefit of
contract, those who enter the land by force or deceit, or those whose possession is
under litigation [italics supplied.] It cannot be denied that at the time the subject
property was declared an APD in December 1987, the right of private respondents to
occupy and possess the subject property was then an issue under litigation in the
action
_______________
*THIRD DIVISION.
605
VOL. 177, SEPTEMBER 15, 1989 60
5
Guzman vs. Court of Appeals
for ejectment filed against them by petitioners.
Civil Law; Contracts; Lease; Suspension of Rental Payments; Private
respondent’s belief that the subject property should have been sold to them, does not
justify the unilateral withholding of rental payments due the new owner.—Upon the
purchase of the leased property and proper notice by the vendee to the lessee, the
latter must pay the agreed monthly rentals to the new owner since, by virtue of the
sale, the vendee steps into the shoes of the original lessor to whom the lessee bound
himself to pay [Mirasol v. Magsuci, G.R. No. L-17125, November 28, 1966, 18 SCRA
801]. In the instant case, despite their receipt of the demand letter dated March 21,
1986 informing them of the change of property ownership, private respondents
unjustifiably failed to pay the monthly rentals which accrued for the account of the
new owner. Their belief that the subject property should have been sold to them does
not justify the unilateral withholding of rental payments due to Lolita Guzman as
new owner of the property. Private respondents must be reminded that Article 1658
of the New Civil Code provides only two instances wherein the lessee may suspend
payment of rent, namely, in case the lessor fails to make the necessary repairs or to
maintain the lessee in peaceful and adequate enjoyment of the property leased [See
Reyes v. Arca, G.R. No. L-21447, November 29, 1965, 15 SCRA 442].
Same; Same; Same; Ejectment; Private respondents’ continued stay in the
property without having paid a single monthly rental is a sufficient cause for
ejectment.—Private respondents should have at the very least replied to Lolita
Guzman’s letter and tendered payment of the monthly rentals which accrued in her
favor beginning March 1986, and if such were to be refused by her, then private
respondents should have made a consignation thereof or deposited the rentals due
pending the resolution of their alleged claim against the administratrix of the estate
of the late Mercedes Policarpio [SeeIpapo v. IAC, G.R. No. 72740, January 27, 1987,
147 SCRA 342]. Instead, they opted to take a hard-line stance in refusing to
acknowledge Lolita Guzman as owner and lessor, and, in so doing, gave cause to be
declared in default in their obligation to pay rentals due her. [SeeLandicho v.
Tensuan, G.R. No. 51216, June 30, 1987, 151 SCRA 410]. Thus, when petitioners filed
their action for ejectment, the rentals (which were payable in advance within the first
five days of each month) corresponding to the months of March, April and May, 1986
had not been paid. And the glaring situation to date is that private respondents
continue to occupy the subject property without having paid a single monthly rental
which accrued pending litigation. Under these circumstances,
606
6 SUPREME COURT REPORTS ANNOTATED
06
Guzman vs. Court of Appeals
the Court finds that sufficient cause for their ejectment under Section 5 (b) of
Batas Pambansa Blg. 877 has been established. [SeeRoxas v. IAC, G.R. Nos. 74279
and 74801-03, January 20, 1988, 157 SCRA 166].
Civil Procedure; Prejudicial Question; Ejectment; Possession; Mere allegation
of ownership by the defendant in an ejectment case or the pendency of an action for
reconveyance does not divest the inferior court of jurisdiction over the ejectment
suit; Exceptions.—Finally, the Court is not unaware of Civil Case No. 957-MN
pending in the Regional Trial Court of Malabon. This action was instituted by private
respondents on July 1, 1987 against petitioners and administratrix Rufina Samaniego
for the annulment of the sale and the reconveyance of the subject property in favor of
private respondents. As correctly held by respondent appellate court, Civil Case No.
957-MN poses no prejudicial question to the resolution of the instant petition. Well
settled is the rule that the mere allegation of ownership of the property in dispute by
the defendant in an ejectment suit or the pendency of an action for reconveyance of
title over the same property does not divest the inferior court of its jurisdiction over
the ejectment suit [Alilaya v. Espanola, G.R. No. L-36208, September 18, 1981, 107
SCRA 564; De la Cruz v. Court of Appeals, G.R. No. 57454, November 29, 1984, 133
SCRA 520; Drilon v. Gaurana, G.R. No. L-35482, April 30, 1987, 149 SCRA 342]. The
only exception to this rule is where the question of de facto possession cannot be
determined properly without settling that of de jure possession and ownership
because the latter is inseparably linked with the former [Andres v. Soriano, 101 Phil.
848 (1957); Castro v. de los Reyes, 109 Phil. 64 (1960); Alvir v. Vera, G.R. No. L-
39338, July 16, 1984, 130 SCRA 357; De la Santa v. Court of Appeals, G.R. Nos. L-
30560 and L-31078, November 18, 1985, 140 SCRA 44].
Contracts; Lease; Right of Removal; Useful Improvements; Private
respondents have the right to remove their house and other useful improvements
should petitioner refuse to reimburse the amount thereof; ornamental objects may
be removed if no damage shall be caused to the principal and that the owner of the
principal do not choose to retain them by paying their value.—Moreover, since
private respondents had built in good faith their house on the leased subject
property, it is appropriate to mention that Article 1678 of the New Civil Code governs
the parties’ rights thereto. As the new lessors, petitioners have the option to
appropriate the house and other useful improvements made by private respondents
by paying one-half of their value. But private respondents do not have the right to
compel petitioners to appropriate the improvements and make reimbursement, nor
to retain possession
607
VOL. 177, SEPTEMBER 15, 1989 60
7
Guzman vs. Court of Appeals
of the subject property until such reimbursement. Their right under the law is
the removal of the house and other useful improvements in the event that petitioners
refuse to reimburse the above amount [Lapena v. Morfe, 101 Phil. 997 (1957);
Balucanag v. Francisco, G.R. No. L-33422, May 30, 1983, 122 SCRA 498].
Incidentally, as regards ornamental objects, private respondents may remove the
same provided that no damage is caused to the principal thing and petitioners do not
choose to retain them by paying their value at the time the lease is extinguished.
PETITION for certiorari to review the decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Eleazar S. Calasan for petitioners.
Bienvenido J. Medel for private respondents.
CORTÉS, J.:
This is a petition for review on certiorari which seeks the reversal of the decision of
the Court of Appeals rendered in CA-G.R. SP No. 13475 setting aside the decisions of
the Regional Trial Court and Metropolitan Trial Court, and dismissing the complaint
for ejectment filed by petitioners against private respondents.
The facts of the case are as follows:
Since 1937, private respondents have been in possession of a 184 sq. m. parcel of
land situated at M. Policarpio Street, Bagong Barrio, Navotas, Metro Manila by virtue
of an oral lease agreement with the late Mercedes Policarpio whereby the former
agreed to pay a monthly rental of thirty eight pesos (P38.00), payable in advance
within the first five (5) days of each month.
Petitioner Lolita Guzman, on the other hand, is presently the registered owner of
the same property, having acquired the same from the Estate of the late Mercedes
Policarpio by virtue of a Deed of Absolute Sale dated March 3, 1986 executed in her
favor by the administratrix Rufina Samaniego. This sale was judicially approved by
the probate court in Special Proceedings No. 2640 entitled “Testate Estate of
Mercedes Policarpio.” Lolita Guzman’s ownership is evidenced by TCT No. T-134078
issued by the Register of Deeds of Caloocan City on March 17, 1986. Soon after the
sale, Lolita Guzman, through her counsel, sent
608
608 SUPREME COURT REPORTS ANNOTATED
Guzman vs. Court of Appeals
private respondents a letter dated March 21, 1986 informing them that she is the new
owner of the subject property and demanding that they vacate it in view of their
failure to pay the monthly rentals since October 1983 despite previous demands by
the former owner and pay the rentals in arrears.
Due to the failure of private respondents to reply to, or comply with, the above
demand, peitioner spouses brought their complaint before the Barangay Chairman,
but no amicable settlement was reached. Petitioners then filed on May 7, 1986 a
complaint for ejectment against private respondents in the Metropolitan Trial Court,
invoking Section 5(b) of Batas Pambansa Blg. 877. The case was docketed as Civil
Case No. 2839.
Private respondents, in their verified answer, alleged that they had been
religiously paying their monthly rentals for the subject property upon which they
constructed their home until the middle part of 1984 when they were advised by the
administratrix Rufina Samaniego to cease making payments because the estate was
then being partitioned and the subdivided units were to be offered for sale to the
respective occupants at twentyfive thousand pesos (P25,000.00). They had offered to
pay the amount in cash on the condition that a clear title would be given, but were
informed that it would be sometime before titles could be issued for the individual
units. But in violation of their “right of first refusal” under Pres. Dec. No. 1517
[otherwise known as the Urban Land Reform Law], the administratrix executed an
absolute deed of sale over the property in favor of petitioner Lolita Guzman. They
finally concluded that petitioners had no cause of action against them in view of the
nullity of this deed of sale.
On May 5, 1987, the court rendered judgment against private respondents
ordering them to vacate the subject property and to pay the sum of one thousand one
hundred seventy-eight pesos (P1,178.00) representing unpaid rentals from October
1983 until April 1986 and the sum of thirty-eight pesos (P38.00) for every month
thereafter until they have completely surrendered possession of the property to the
petitioners. The court held that:
xxx
The defendant admitted in his answer (par. 3) that he received
609
VOL. 177, SEPTEMBER 15, 1989 609
Guzman vs. Court of Appeals
the letter of demand dated March 17, 1986 (sic) sent by the plaintiffs’ counsel, but
there is (sic) no reply or answer was made by the defendant to the aforesaid letter of
demand, to explain why he should not pay the rentals claimed by the plaintiffs. Thus,
the plaintiffs were constrained to file the present action under Section 5 (b) of BP
877.
The plaintiffs being the registered owner of the property in question, as evidence
(sic) by TCT No. T-134078, they have the better right of possession as adverse to the
defendant. Moreover, the defendant cannot be considered as a legitimate tenant as
contemplated by the Urban Land Reform Act, he having failed to comply religiously
with his obligation to pay the agreed rentals on time, he became a possessor in bad
faith and his ejectment from the premises is allowed by BP 877 and therefore not
entitled to the protection of P.D. No. 1517 as amended and its implemented (sic)
proclamations of the Rental Control Law.
xxx
[MTC Decision, p. 3; Rollo, p. 52.]
On Appeal, this decision was affirmed in toto by the Regional Trial Court on October
16, 1987 in Appealed Civil Case No. 262-MN.
Private respondents then filed on December 11, 1987 a petition for review with the
Court of Appeals. In a decision promulgated on January 28, 1988, the Court of
Appeals1 set aside the decisions of the lower courts and dismissed for lack of merit
petitioners complaint for ejectment. The Court of Appeals held that the ejectment of
private respondents from the subject property on the ground of non-payment of
rentals was baseless and improper, finding that:
xxx
... [private respondents] have been leasing and actually occupying subject lot since
1937 at a meager rental of P38.00 a month, and did even offer to pay cash of
P25,000.00 therefor, it is simply unbelievable that they defaulted or failed to pay the
measly rental of P38.00 a month as [petitioners] would like the court to understand.
[Private respondents’] theory that they were told to stop paying their rents sometime
in October 1984 is more in accord with reason and human experience. If they were
really told by the administratrix of the estate
_______________
1Penned by Fidel P. Purisima with Segundino G. Chua and Nicolas P. Lapena, Jr.
concurring.
610
610 SUPREME COURT REPORTS ANNOTATED
Guzman vs. Court of Appeals
of the deceased owner-lessor to hold or defer their rental payments, it stands to
reason that [they] never defaulted in the payment of their rental for the lot in
question. Indeed, if they were not advised to pay their rents, why should [they] falter
in their rental payments when they have their house thereon, are actually residing
therein and have the financial capacity to buy the lot in dispute on spot cash basis?
... If they stopped paying the monthly rental therefor since October 1984, it was
not due to inability or refusal on their part to pay; but was upon the advice of the
administratrix of the estate of the late owner-lessor Mercedes Policarpio. The latter
unequivocably [sic] told [private respondents] not to pay their rents anymore
because the area would be subdivided and sold to the actual occupants, including the
[private respondents] with respect to the lot in question which they have been
renting and occupying for around fifty (50) years already. With the foregoing
explanation of [private respondents] for their failure to pay their rental starting
October 1984, an assertion inducing faith and reliance and which has not been
effectively controverted, [their] ejectment on the ground of non-payment of rental is
improper and cannot be sanctioned.
xxx
[CA Decision, pp. 5-6; Rollo, pp. 18-19.]
Moreover, the Court of Appeals upheld private respondents’ contention that they
have the “right of first refusal” to purchase the property pursuant to Section 6 of
Pres. Dec. No. 1517.
Hence, petitioners filed the instant petition, assigning the following as errors:
1. I.THE HONORABLE COURT OF APPEALS ERRED IN APPLYING SECTION
6 OF PRESIDENTIAL DECREE NO. 1517, OTHERWISE KNOWN AS
URBAN LAND REFORM LAW IN FAVOR OF PRIVATE RESPONDENTS
IN UTTER DISREGARD OF THE EXPRESS PROVISIONS OF
PROCLAMATION NO. 1967 WHICH SPECIFIES THE AREAS OF
APPLICABILITY OF THE “URBAN ZONES” MENTIONED IN SAID
SECTION 6 OF P.D. NO. 1517;
2. II.THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT
PRIVATE RESPONDENTS WERE NOT GUILTY OF NON-PAYMENT OF
RENTALS [Petition, p. 5; Rollo, p. 6.]
After a careful consideration of the issues raised in the pleadings and the various
laws applicable to the case at hand, this Court finds merit in the instant petition.
611
VOL. 177, SEPTEMBER 15, 1989 611
Guzman vs. Court of Appeals
I.
The Court holds that there is no basis to the claim that the sale of the subject
property between the estate of the late Mercedes Policarpio and petitioner Lolita
Guzman is null and void for being violative of the “right of first refusal” granted to
tenants under Section 6 of Pres. Dec. No. 1517.
Section 6 of Pres. Dec. No. 1517 reads as follows:
SECTION 6. Land Tenancy in Urban Land Reform Areas.—Within the Urban Zones,
legitimate tenants who have resided on the land for ten years or more, who have built
their homes on the land, and residents who have legally occupied the lands by
contract continuously for the last ten years shall not be dispossessed of the land and
shall be allowed the right of first refusal to purchase the same within a reasonable
time and at reasonable prices, under terms and conditions to be determined by the
Urban Zone Expropriation and Land Management Committee created by Section 8 of
this Decree.
It is clear from the language of the law that only legitimate tenants who have resided
for ten years or more on specific parcels of land situated in declared Urban Land
Reform Zones or Urban Zones, and who have built their homes thereon, have the
right not to be dispossessed therefrom and the “right of first refusal” to purchase the
property under reasonable terms and conditions to be determined by the appropriate
government agency.
At the time of the sale of the subject property to petitioners, Proclamation No.
1967 [Amending Proclamation No. 1893 by specifying 244 sites in Metropolitan
Manila as Areas for Priority Development (APDs) and Urban Land Reform Zones],
promulgated on May 14, 1980, was the prevailing law enumerating the parcels of
land affected by Pres. Dec. Nos. 1517, 16402 and 1642,3 and LOI No. 935. A simple
reading of the list of 244 sites described in the annex to Proclamation No. 1967
reveals that
_______________
2Freezing the prices of land in Metropolitan Manila at current value. (1979)
3Freezing the rates of rental, above three hundred pesos a month, of residential
and commercial buildings, houses, apartments, and dwelling units in Metropolitan
Manila at current levels. (1979)
612
612 SUPREME COURT REPORTS ANNOTATED
Guzman vs. Court of Appeals
Reform Zones in Navotas. Thus, when the subject property was sold to petitioners, it
was neither covered by, nor subject, to the conditions set forth in, the Urban Land
Reform Law.
 This is made all the more obvious by the fact that Resolution No. 1369 of the
National Housing Authority Board of Directors which proclaimed the Estate of the
late Mercedes Policarpio in Navotas an APD was passed only on December 18, 1987
[Rollo, p. 81], long after the sale was executed between administratrix Rufina
Samaniego and petitioners and judicially approved by the probate court. Private
respondents, therefore, have no basis in claiming that the sale violated the “right of
first refusal” granted to tenants by Pres. Dec. No. 1517.
Furthermore, notwithstanding the fact that, as provided by the above resolution,
the subject property is presently an APD or Urban Land Reform Zone, private
respondents still do not enjoy the protective mantle of Pres. Dec. No. 1517.
In the first place, petitioners’ cause of action to evict private respondents accrued,
and the complaint on the basis thereof was filed, while the subject property had not
yet been declared an APD and subject to Pres. Dec. No. 1517. In addition, prior to the
issuance of Resolution No. 1369, the Metropolitan Trial Court in Civil Case No. 2839
had already rendered a decision in favor of petitioners ordering private respondents
to vacate the property for non-payment of rentals pursuant to Section 5 (b) of Batas
Pambansa Blg. 877.
Secondly, private respondents are not even “tenants” within the purview of Pres.
Dec. No. 1517, Section 3 (f) of this decree, which defines the term “tenant,” provides:
Tenant refers to the rightful occupant of land and its structures, but does not include
those whose presence on the land is merely tolerated and without the benefit of
contract, those who enter the land by force or deceit, or those whose possession is
under litigation [Italics supplied.]
It cannot be denied that at the time the subject property was declared an APD in
December 1987, the right of private respondents to occupy and possess the subject
property was then an issue under litigation in the action for ejectment filed against
them by petitioners.
613
VOL. 177, SEPTEMBER 15, 1989 613
Guzman vs. Court of Appeals
Thirdly, private respondents are not the “legitimate tenants” envisaged in Section 6
of Pres. Dec. No. 1517 considering that their possession of the subject property has
been rendered illegal by their stubborn and unjustifiable refusal to comply with their
obligation to pay their monthly rentals to petitioners. 4
Consequently, the Court holds that respondent appellate court committed a
reversible error in applying the provisions of Pres. Dec. No. 1517 to sustain private
respondents’ defense in the action for ejectment.
II.
Anent the second error raised, the record of the case does not support respondent
appellate court’s conclusion that private respondents’ were not in default in the
payment of their monthly rentals due to petitioners.
While discussion was made concerning private respondents’ explanation for non-
payment of the rentals due to the estate of the late Mercedes Policarpio, this is
irrelevant to the issue at hand. What is palpably clear from the record of the case is
the fact that private respondents had failed to pay the monthly rentals which accrued
from the time petitioner Lolita Guzman acquired ownership of the subject property
in March 1986.
Upon the purchase of the leased property and proper notice by the vendee to the
lessee, the latter must pay the agreed monthly rentals to the new owner since, by
virtue of the sale, the vendee steps into the shoes of the original lessor to whom the
lessee bound himself to pay [Mirasol v. Magsuci, G.R. No. L-17125, November 28,
1966, 18 SCRA 801]. In the instant case, despite their receipt of the demand letter
dated March 21, 1986 informing them of the change of property ownership, private
respondents unjustifiably failed to pay the monthly rentals which accrued for the
account of the new owner. Their belief that the subject property should have been
sold to them does not justify the unilateral withholding of rental payments due to
Lolita Guzman as new owner of the property. Private respondents
_______________
4 This point will be discussed in length in the following section of this decision.
614
614 SUPREME COURT REPORTS ANNOTATED
Guzman vs. Court of Appeals
provides only two instances wherein the lessee may suspend payment of rent,
namely, in case the lessor fails to make the necessary repairs or to maintain the
lessee in peaceful and adequate enjoyment of the property leased [See Reyes v.
Arca, G.R. No. L-21447, November 29, 1965, 15 SCRA 442].
Private respondents should have, at the very least, replied to Lolita Guzman’s
letter and tendered payment of the monthly rentals which accrued in her favor
beginning March 1986, and if such were to be refused by her, then private
respondents should have made a consignation thereof or deposited the rentals due
pending the resolution of their alleged claim against the administratrix of the estate
of the late Mercedes Policarpio [See Ipapo v. IAC, G.R. No. 72740, January 27,
1987, 147 SCRA 342]. Instead, they opted to take a hard-line stance in refusing to
acknowledge Lolita Guzman as owner and lessor, and, in so doing, gave cause to be
declared in default in their obligation to pay rentals due her. [See Landicho v.
Tensuan, G.R. No. 51216, June 30, 1987, 151 SCRA 410]. Thus, when petitioners filed
their action for ejectment, the rentals (which were payable in advance within the first
five days of each month) corresponding to the months of March, April and May, 1986
had not been paid. And the glaring situation to date is that private respondents
continue to occupy the subject property without having paid a single monthly rental
which accrued pending litigation. Under these circumstances, the Court finds that
sufficient cause for their ejectment under Section 5 (b) of Batas Pambansa Blg. 8775
_______________
5 SEC. 5. Grounds For Judicial Ejectment.—Ejectment shall be allowed on the
following grounds:
xxx
(b) Arrears in payment of rent for a total of three (3) months: Provided, That in
case of refusal by the lessor to accept payment of the rental agreed upon, the lessee
may either deposit, by way of consignation, the amount in court, or with the city or
municipal treasurer, as the case may be, or in a bank in the name of and with notice
to the lessor, within one month after the refusal of the lessor to accept payment.
The lessee shall thereafter deposit the rental within ten days of every current
month. Failure to deposit rentals for three months shall constitute a ground for
ejectment. x x x
615
VOL. 177, SEPTEMBER 15, 1989 615
Guzman vs. Court of Appeals
has been established. [See Roxas v. IAC, G.R. Nos. 74279 and 74801-03, January 20,
1988, 157 SCRA 166].
It might be argued that petitioners’ action for ejectment was prematurely filed on
May 7, 1986 because less than three (3) months had elapsed since private
respondents failed to tender payment of the March 1986 rental in favor of the new
lessor Lolita Guzman.
However, this point was never raised as an issue in the proceedings below by
private respondents, and, therefore, cannot be passed upon for the first time on
appeal [Matienzo v. Servidad, G.R. No. L-28135, September 10, 1981, 107 SCRA
276; Dulos Realty & Development Corporation v. Court of Appeals, G.R. No. 76668,
January 28, 1988, 157 SCRA 425]. And, even assuming that the action for ejectment
was indeed prematurely filed in the court a quo, such will not in anyway change the
conclusion reached by this Court that petitioners have established a right to evict
private respondents from the subject property for non-payment of rentals. For if the
Court were to dismiss petitioners’ complaint based on this point, there would be
more than sufficient basis for petitioners to file another complaint for ejectment
against private respondents as delinquent lessees under Section 5(b) Batas
Pambansa Blg. 877 in view of the latter’s inexcusable failure to pay, deposit or
consign for the account of petitioners monthly rentals since March 1986 up to the
present. It must be borne in mind that ejectment cases must be expeditiously
resolved and terminated. Certainly, it will serve the ends of justice for the Court to
promptly settle the issue of non-payment of rentals in the case at bar, rather than to
require the parties to litigate anew. Otherwise, as the Court has had occasion to state,
“further proceedings will undoubtedly be only a waste of effort and time and to the
continuing, prejudice of the petitioners. It will only prolong the already unjustified
stay of the private respondent[s] and provide [them] an unwarranted excuse to
remain in the leased premises, notwithstanding her non-payment of the
corresponding rentals for the past several years” [Ipapo v. IAC, supra].
Finally, the Court is not unaware of Civil Case No. 957-MN pending in the
Regional Trial Court of Malabon. This action was instituted by private respondents
on July 1, 1987 against petitioners and administratrix Rufina Samaniego for the
annul-
616
616 SUPREME COURT REPORTS ANNOTATED
Guzman vs. Court of Appeals
favor of private respondents.
As correctly held by respondent appellate court, Civil Case No. 957-MN poses no
prejudicial question to the resolution of the instant petition. Well settled is the rule
that the mere allegation of ownership of the property in dispute by the defendant in
an ejectment suit or the pendency of an action for reconveyance of title over the same
property does not divest the inferior court of its jurisdiction over the ejectment suit
[Alilaya v. Espanola, G.R. No. L-36208, September 18, 1981, 107 SCRA 564; De la
Cruz v. Court of Appeals, G.R. No. 57454, November 29, 1984, 133 SCRA 520; Drilon
v. Gaurana, G.R. No. L-35482, April 30, 1987, 149 SCRA 342]. The only exception to
this rule is where the question of de facto possession cannot be determined properly
without settling that of de jure possession and ownership because the latter is
inseparably linked with the former [Andres v. Soriano, 101 Phil. 848(1957); Castro v.
de los Reyes, 109 Phil. 64 (1960); Alvir v. Vera, G.R. No. L-39338, July 16, 1984, 130
SCRA 357; De la Santa v. Court of Appeals, G.R. Nos. L-30560 and L-31078,
November 18, 1985, 140 SCRA 44].
Such exception is unavailing in the case at bar. Petitioner Lolita Guzman was at
the time of the institution of the ejectment suit the titled owner of the property,
having acquired the same by absolute deed of sale which was judicially approved by
the probate court. Private respondents’ claim of preference, on the other hand, rests
on the mere allegation that an agreement to purchase and sell existed between them
and the administratrix Rufina Samaniego. Yet, no written document evidencing this
agreement has been presented by them to enforce, much less support, their claim.
From the facts thus presented, the claim of preference is without concrete basis in
fact and in law and does not preclude the courts from assuming, and continuing to
exercise, jurisdiction over the ejectment suit [De la Cruz v. Court of Appeals, supra].
Premises considered, the Court finds that petitioners have established a cause of
action for the ejectment of private respondents for non-payment of rentals pursuant
to Section 5(b) of Batas Pambansa Blg. 877.
 But inasmuch as no evidence has been presented by petitioners to the effect that
the original owner or vendor of the subject
617
VOL. 177, SEPTEMBER 15, 1989 617
Guzman vs. Court of Appeals
property had assigned to them her rights under the lease agreement with the lessees,
i.e. the collection of rentals in arrears, there is no legal basis for ordering private
respondents to pay monthly rentals which accrued prior to March 1986.
Moreover, since private respondents had built in good faith their house on the
leased subject property, it is appropriate to mention that Article 1678 of the New Civil
Code6 governs the parties’ rights thereto. As the new lessors, petitioners have the
option to appropriate the house and other useful improvements made by private
respondents by paying one-half of their value. But private respondents do not have
the right to compel petitioners to appropriate the improvements and make
reimbursement, nor to retain possession of the subject property until such
reimbursement. Their right under the law is the removal of the house and other
useful improvements in the event that petitioners refuse to reimburse the above
amount [Lapena v. Morfe, 101 Phil. 997 (1957); Balucanag v. Francisco, G.R. No. L-
33422, May 30, 1983, 122 SCRA 498]. Incidentally, as regards ornamental objects,
private respondents may remove the same provided that no damage is caused to the
principal thing and petitioners do not choose to retain them by paying their value at
the time the lease is extinguished.
WHEREFORE, the judgment of respondent appellate court rendered in CA-G.R.
SP No. 13475 is REVERSED. Private respondents and all persons claiming rights
under them are hereby ordered to immediately vacate the subject property and
_______________
6 ARTICLE 1678. If the lessee makes, in good faith, useful improvements which
are suitable to the use for which the lease is intended, without altering the form or
substance of the property leased, the lessor upon the termination of the lease shall
pay the lessee onehalf of the value of the improvements at that time. Should the
lessor refuse to reimburse said amount, the lessee may remove the improvements,
even though the principal thing may suffer damage thereby. He shall not, however,
cause any more impairment upon the property leased than is necessary.
With regard to ornamental expenses, the lessee shall not be entitled to any
reimbursement, but he may remove the ornamental objects, provided no damage is
caused to the principal thing, and the lessor does not choose to retain them by paying
their value at the time the lease is extinguished.
618
618 SUPREME COURT REPORTS ANNOTATED
Andres vs. Manufacturers Hanover & Trust Corporation
surrender possession thereof to petitioners, and to pay petitioners rentals in arrears
in the monthly sum of thirty-eight pesos (P38.00) to be computed only from March
1986 until they have completely vacated the subject property, the further sum of two
thousand pesos (P2,000.00) as attorney’s fees, and costs of the suit. This case is
REMANDED to the Regional Trial Court for the determination of the value of the
improvements made by private respondents on the subject property, in accordance
with Article 1678 of the New Civil Code.
SO ORDERED.
Fernan, (C.J.), Gutierrez, Jr., and Bidin, JJ., concur. Feliciano, J., on leave.
Judgment reversed. Case remanded to trial court for determination of the value
of improvements made by private respondents on the subject property.
Note.—Persons who are not tenants on the property are not covered by Pres.
Decree No. 316 which prohibits the ejectment of tenant farmers in agricultural lands
primarily devoted to rice and corn. (Geronimo vs. Court of Appeals, 121 SCRA 859.)
——o0o——
G.R. No. 185945. December 5, 2012.*
FIDELIZA J. AGLIBOT, petitioner, vs. INGERSOL L. SANTIA, respondent.
Civil Law; Contracts; Guaranty; The liability of the guarantor is only
subsidiary, and all the properties of the principal debtor must first be exhausted
before the guarantor may be held answerable for the debt. Thus, the creditor may
hold the guarantor liable only after judgment has been obtained against the
principal debtor and the latter is unable to pay.—It is settled that the liability of the
guarantor is only subsidiary, and all the properties of the principal debtor, the PLCC
in this case, must first be exhausted before the guarantor may be held answerable for
the debt. Thus, the creditor may hold the guarantor liable only after judgment has
been obtained against the principal debtor and the latter is unable to pay, “for
obviously the ‘exhaustion of the principal’s property’—the benefit of which the
guarantor claims—cannot even begin to take place before judgment has been
obtained.” This rule is contained in Article 2062 of the Civil Code, which provides
that the action brought by the creditor must be filed against the principal debtor
alone, except in some instances mentioned in Article 2059 when the action may be
brought against both the guarantor and the principal debtor.
_______________
* FIRST DIVISION.
284
2 SUPREME COURT REPORTS ANNOTATED
84
Aglibot vs. Santia
Same; Same; Same; A guaranty agreement is a promise to answer for the debt
or default of another, the law clearly requires that it, or some note or memorandum
thereof, be in writing. Otherwise, it would be unenforceable unless ratified,
although it does not have to appear in a public document.—Concerning a guaranty
agreement, which is a promise to answer for the debt or default of another, the law
clearly requires that it, or some note or memorandum thereof, be in writing.
Otherwise, it would be unenforceable unless ratified, although under Article 1358 of
the Civil Code, a contract of guaranty does not have to appear in a public document.
Contracts are generally obligatory in whatever form they may have been entered into,
provided all the essential requisites for their validity are present, and the Statute of
Frauds simply provides the method by which the contracts enumerated in Article
1403(2) may be proved, but it does not declare them invalid just because they are not
reduced to writing. Thus, the form required under the Statute is for convenience or
evidentiary purposes only.
Same; Same; Same; Article 2055 of the Civil Code provides that a guaranty is
not presumed, but must be express, and cannot extend to more than what is
stipulated therein.—Article 2055 of the Civil Code also provides that a guaranty is not
presumed, but must be express, and cannot extend to more than what is stipulated
therein. This is the obvious rationale why a contract of guarantee is unenforceable
unless made in writing or evidenced by some writing. For as pointed out by Santia,
Aglibot has not shown any proof, such as a contract, a secretary’s certificate or a
board resolution, nor even a note or memorandum thereof, whereby it was agreed
that she would issue her personal checks in behalf of the company to guarantee the
payment of its debt to Santia. Certainly, there is nothing shown in the Promissory
Note signed by Aglibot herself remotely containing an agreement between her and
PLCC resembling her guaranteeing its debt to Santia. And neither is there a showing
that PLCC thereafter ratified her act of “guaranteeing” its indebtedness by issuing her
own checks to Santia.
Mercantile Law; Negotiable Instruments Law; “Checks,” Defined; “Bills of
Exchange,” Defined; Words and Phrases.—Section 185 of the Negotiable
Instruments Law defines a check as “a bill of exchange drawn on a bank payable on
demand,” while Section 126 of the said law defines a bill of exchange as “an
unconditional order in
285
VOL. 687, DECEMBER 5, 2012 28
5 The facts are stated in the opinion of the Court.
Aglibot vs. Santia
writing addressed by one person to another, signed by the person giving it,
requiring the person to whom it is addressed to pay on demand or at a fixed or
determinable future time a sum certain in money to order or to bearer.”
Same; Same; Accommodation Party; Suretyship; The relation between an
accommodation party and the party accommodated is, in effect, one of principal
and surety—the accommodation party being the surety. It is a settled rule that a
surety is bound equally and absolutely with the principal and is deemed an original
promisor and debtor from the beginning. The liability is immediate and direct.—
The relation between an accommodation party and the party accommodated is, in
effect, one of principal and surety—the accommodation party being the surety. It is a
settled rule that a surety is bound equally and absolutely with the principal and is
deemed an original promisor and debtor from the beginning. The liability is
immediate and direct. It is not a valid defense that the accommodation party did not
receive any valuable consideration when he executed the instrument; nor is it correct
to say that the holder for value is not a holder in due course merely because at the
time he acquired the instrument, he knew that the indorser was only an
accommodation party.
Same; Same; Same; Unlike in a contract of suretyship, the liability of the
accommodation party remains not only primary but also unconditional to a holder
for value, such that even if the accommodated party receives an extension of the
period for payment without the consent of the accommodation party, the latter is
still liable for the whole obligation and such extension does not release him because
as far as a holder for value is concerned, he is a solidary co-debtor.—It was held
in Aruego that unlike in a contract of suretyship, the liability of the accommodation
party remains not only primary but also unconditional to a holder for value, such that
even if the accommodated party receives an extension of the period for payment
without the consent of the accommodation party, the latter is still liable for the whole
obligation and such extension does not release him because as far as a holder for
value is concerned, he is a solidary co-debtor. The mere fact, then, that Aglibot issued
her own checks to Santia made her personally liable to the latter on her checks
without the need for Santia to first go after PLCC for the payment of its loan. It would
have been otherwise had it been shown that Aglibot was a
286
2 SUPREME COURT REPORTS ANNOTATED
86
Aglibot vs. Santia
mere guarantor, except that since checks were issued ostensibly in payment for
the loan, the provisions of the Negotiable Instruments Law must take primacy in
application.
PETITION for review on certiorari of a decision of the Court of Appeals.
Regino, Palma, Raagas, Esguerra & Associates Law
Office for petitioner.
Villamor A. Tolete for respondent.
REYES, J.:
Before the Court is a Petition for Review on Certiorariunder Rule 45 of the 1997
Rules of Civil Procedure seeking to annul and set aside the Decision1 dated March 18,
2008 of the Court of Appeals (CA) in CA-G.R. SP No. 100021, which reversed the
Decision2 dated April 3, 2007 of the Regional Trial Court (RTC) of Dagupan City,
Branch 40, in Criminal Case Nos. 2006-0559-D to 2006-0569-D and entered a new
judgment. The fallo reads as follows:
WHEREFORE, the instant petition is GRANTED and the assailed Joint
Decision dated April 3, 2007 of the RTC of Dagupan City, Branch 40, and its Order
dated June 12, 2007 are REVERSED AND SET ASIDE and a new one is entered
ordering private respondent Fideliza J. Aglibot to pay petitioner the total amount of
[P]3,000,000.00 with 12% interest per annumfrom the filing of the Informations
until the finality of this Decision, the sum of which, inclusive of interest, shall be
subject thereafter to 12% annual interest until fully paid.
_______________
1 Penned by Associate Justice Estela M. Perlas-Bernabe (now a member of this
Court), with Associate Justices Portia Aliño-Hormachuelos and Lucas P. Bersamin
(now also a member of this Court), concurring: Rollo, pp. 88-94.
2 Id., at pp. 40-44.
287
VOL. 687, DECEMBER 5, 2012 287
Aglibot vs. Santia
SO ORDERED.3
On December 23, 2008, the appellate court denied herein petitioner’s motion for
reconsideration.
Antecedent Facts
Private respondent-complainant Engr. Ingersol L. Santia (Santia) loaned the
amount of P2,500,000.00 to Pacific Lending & Capital Corporation (PLCC), through
its Manager, petitioner Fideliza J. Aglibot (Aglibot). The loan was evidenced by a
Promissory Note dated July 1, 2003, issued by Aglibot in behalf of PLCC, payable in
one year subject to interest at 24% per annum. Allegedly as a guaranty or security for
the payment of the note, Aglibot also issued and delivered to Santia eleven (11) post-
dated personal checks drawn from her own demand account maintained at
Metrobank, Camiling Branch. Aglibot is a major stockholder of PLCC, with
headquarters at 27 Casimiro Townhouse, Casimiro Avenue, Zapote, Las Piñas, Metro
Manila, where most of the stockholders also reside.4
Upon presentment of the aforesaid checks for payment, they were dishonored by
the bank for having been drawn against insufficient funds or closed account. Santia
thus demanded payment from PLCC and Aglibot of the face value of the checks, but
neither of them heeded his demand. Consequently, eleven (11) Informations for
violation of Batas Pambansa Bilang 22 (B.P. 22), corresponding to the number of
dishonored checks, were filed against Aglibot before the Municipal Trial Court in
Cities (MTCC), Dagupan City, Branch 3, docketed as Criminal Case Nos. 47664 to
47674. Each Information, except as to the amount, number and date of the checks,
and the reason for the dishonor, uniformly alleged, as follows:
_______________
3 Id., at p. 93.
4 Id., at pp. 75-80.
288
288 SUPREME COURT REPORTS ANNOTATED
Aglibot vs. Santia
That sometime in the month of September, 2003 in the City of Dagupan,
Philippines and within the jurisdiction of this Honorable Court, the above-named
accused, FIDELIZA J. AGLIBOT, did then and there, willfully, unlawfully and
criminally, draw, issue and deliver to one Engr. Ingersol L. Santia, a METROBANK
Check No. 0006766, Camiling Tarlac Branch, postdated November 1, 2003, in the
amount of [P]50,000.00, Philippine Currency, payable to and in payment of an
obligation with the complainant, although the said accused knew full[y] well that she
did not have sufficient funds in or credit with the said bank for the payment of such
check in full upon its presentment, such [t]hat when the said check was presented to
the drawee bank for payment within ninety (90) days from the date thereof, the same
was dishonored for reason “DAIF”, and returned to the complainant, and despite
notice of dishonor, accused failed and/or refused to pay and/or make good the
amount of said check within five (5) days banking days [sic], to the damage and
prejudice of one Engr. Ingersol L. Santia in the aforesaid amount of [P]50,000.00
and other consequential damages.5
Aglibot, in her counter-affidavit, admitted that she did obtain a loan from Santia,
but claimed that she did so in behalf of PLCC; that before granting the loan, Santia
demanded and obtained from her a security for the repayment thereof in the form of
the aforesaid checks, but with the understanding that upon remittance in cash of the
face amount of the checks, Santia would correspondingly return to her each check so
paid; but despite having already paid the said checks, Santia refused to return them
to her, although he gave her assurance that he would not deposit them; that in breach
of his promise, Santia deposited her checks, resulting in their dishonor; that she did
not receive any notice of dishonor of the checks; that for want of notice, she could not
be held criminally liable under B.P. 22 over the said checks; and that the reason
Santia filed the criminal cases against her was because she refused to agree to his
demand for higher interest.
_______________
5 Id., at pp. 10-11.
289
VOL. 687, DECEMBER 5, 2012 289
Aglibot vs. Santia
On August 18, 2006, the MTCC in its Joint Decision decreed as follows:
WHEREFORE, in view of the foregoing, the accused, FIDELIZA J. AGLIBOT,
is hereby ACQUITTED of all counts of the crime of violation of the bouncing checks
law on reasonable doubt. However, the said accused is ordered to pay the private
complainant the sum of [P]3,000,000.00 representing the total face value of the
eleven checks plus interest of 12% per annumfrom the filing of the cases on
November 2, 2004 until fully paid, attorney’s fees of [P]30,000.00 as well as the
cost of suit.
SO ORDERED.6
On appeal, the RTC rendered a Decision dated April 3, 2007 in Criminal Case
Nos. 2006-0559-D to 2006-0569-D, which further absolved Aglibot of any civil
liability towards Santia, to wit:
WHEREFORE, premises considered, the Joint Decision of the court a
quo regarding the civil aspect of these cases is reversed and set aside and a new one is
entered dismissing the said civil aspect on the ground of failure to fulfill, a condition
precedent of exhausting all means to collect from the principal debtor.
SO ORDERED.7
Santia’s motion for reconsideration was denied in the RTC’s Order dated June 12,
2007.8 On petition for review to the CA docketed as CA-G.R. SP No. 100021, Santia
interposed the following assignment of errors, to wit:
“In brushing aside the law and jurisprudence on the matter, the Regional Trial
Court seriously erred:
1. In reversing the joint decision of the trial court by dismissing the civil aspect of
these cases;
_______________
6 Id., at p. 26.
7 Id., at p. 44.
8 Id., at p. 90.
290
290 SUPREME COURT REPORTS ANNOTATED
Aglibot vs. Santia
2. In concluding that it is the Pacific Lending and Capital Corporation and not
the private respondent which is principally responsible for the amount of the
checks being claimed by the petitioner;
3. In finding that the petitioner failed to exhaust all available legal remedies
against the principal debtor Pacific Lending and Capital Corporation;
4. In finding that the private respondent is a mere guarantor and not an
accommodation party, and thus, cannot be compelled to pay the petitioner
unless all legal remedies against the Pacific Lending and Capital Corporation
have been exhausted by the petitioner;
5. In denying the motion for reconsideration filed by the petitioner.”9
In its now assailed decision, the appellate court rejected the RTC’s dismissal of the
civil aspect of the aforesaid B.P. 22 cases based on the ground it cited, which is that
the “failure to fulfill a condition precedent of exhausting all means to collect from the
principal debtor.” The appellate court held that since Aglibot’s acquittal by the MTCC
in Criminal Case Nos. 47664 to 47674 was upon a reasonable doubt 10 on whether the
prosecution was able to satisfactorily establish that she did receive a notice of
dishonor, a requisite to hold her criminally liable under B.P. 22, her acquittal did not
operate to bar Santia’s recovery of civil indemnity.
It is axiomatic that the “extinction of penal action does not carry with it the
eradication of civil liability, unless the extinction proceeds from a declaration in the
final judgment that the fact from which the civil liability might arise did not exist.
Acquittal will not bar a civil action in the following cases: (1) where the acquittal is
based on reasonable doubt as only preponderance of evidence is required in civil
cases; (2) where the court declared the accused’s liability is not criminal but only civil
in nature[;] and (3) where the
_______________
9 Id., at p. 91.
10 Id.
291
VOL. 687, DECEMBER 5, 2012 291
Aglibot vs. Santia
civil liability does not arise from or is not based upon the criminal act of which the
accused was acquitted.”11 (Citation omitted)
The CA therefore ordered Aglibot to personally pay Santia P3,000,000.00 with
interest at 12% per annum, from the filing of the Informations until the finality of its
decision. Thereafter, the sum due, to be compounded with the accrued interest, will
in turn be subject to annual interest of 12% from the finality of its judgment until full
payment. It thus modified the MTCC judgment, which simply imposed a straight
interest of 12% per annum from the filing of the cases on November 2, 2004 until the
P3,000,000.00 due is fully paid, plus attorney’s fees of P30,000.00 and the costs of
the suit.
Issue
Now before the Court, Aglibot maintains that it was error for the appellate court
to adjudge her personally liable for issuing her own eleven (11) post-dated checks to
Santia, since she did so in behalf of her employer, PLCC, the true borrower and
beneficiary of the loan. Still maintaining that she was a mere guarantor of the said
debt of PLCC when she agreed to issue her own checks, Aglibot insists that Santia
failed to exhaust all means to collect the debt from PLCC, the principal debtor, and
therefore he cannot now be permitted to go after her subsidiary liability.
Ruling of the Court
The petition is bereft of merit.
Aglibot cannot invoke the benefit
of excussion
 The RTC in its decision held that, “It is obvious, from the face of the Promissory
Note x x x that the accused-appellant
_______________
11 Id.
292
292 SUPREME COURT REPORTS ANNOTATED
Aglibot vs. Santia
signed the same on behalf of PLCC as Manager thereof and nowhere does it appear
therein that she signed as an accommodation party.”12 The RTC further ruled that
what Aglibot agreed to do by issuing her personal checks was merely to guarantee the
indebtedness of PLCC. So now petitioner Aglibot reasserts that as a guarantor she
must be accorded the benefit of excussion—prior exhaustion of the property of the
debtor—as provided under Article 2058 of the Civil Code, to wit:
Art. 2058. The guarantor cannot be compelled to pay the creditor unless the latter
has exhausted all the property of the debtor, and has resorted to all the legal
remedies against the debtor.
It is settled that the liability of the guarantor is only subsidiary, and all the
properties of the principal debtor, the PLCC in this case, must first be exhausted
before the guarantor may be held answerable for the debt.13 Thus, the creditor may
hold the guarantor liable only after judgment has been obtained against the principal
debtor and the latter is unable to pay, “for obviously the ‘exhaustion of the principal’s
property’—the benefit of which the guarantor claims—cannot even begin to take place
before judgment has been obtained.”14 This rule is contained in Article 206215 of the
Civil Code, which
_______________
12 Id., at p. 43.
13 Baylon v. Court of Appeals, 371 Phil. 435, 443; 312 SCRA 502, 510 (1999),
citing World Wide Insurance and Surety Co., Inc. v. Jose, 96 Phil. 45
(1954); Visayan Surety and Insurance Corp. v. De Laperal, 69 Phil. 688 (1940).
14 Id., at pp. 443-444, citing Viuda de Syquia v. Jacinto, 60 Phil. 861, 868 (1934).
15 Art. 2062. In every action by the creditor, which must be against the
principal debtor alone, except in the cases mentioned in Article 2059, the former
shall ask the court to notify the guarantor of the action. The guarantor may appear so
that he may, if he so desire, set up such defenses as are granted him by law. The
benefit of excussion mentioned in Article 2058 shall always be unimpaired, even
293
VOL. 687, DECEMBER 5, 2012 293
Aglibot vs. Santia
provides that the action brought by the creditor must be filed against the principal
debtor alone, except in some instances mentioned in Article 205916 when the action
may be brought against both the guarantor and the principal debtor.
The Court must, however, reject Aglibot’s claim as a mere guarantor of the
indebtedness of PLCC to Santia for want of proof, in view of Article 1403(2) of the
Civil Code, embodying the Statute of Frauds, which provides:
Art. 1403. The following contracts are unenforceable, unless they are ratified:
xxxx
(2) Those that do not comply with the Statute of Frauds as set forth in this
number. In the following cases an agreement hereafter made shall be unenforceable
by action, unless the same, or some note or memorandum thereof, be in writing, and
subscribed by the party charged, or by his agent; evidence, therefore, of the
agreement cannot be received without the writing, or a secondary evidence of its
contents:
a) An agreement that by its terms is not to be performed within a year from the
making thereof;
b) A special promise to answer for the debt, default, or miscarriage of another;
c) An agreement made in consideration of marriage, other than a mutual
promise to marry;
_______________
if judgment should be rendered against the principal debtor and the guarantor in
case of appearance by the latter.
16 Art. 2059. This excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
(3) In case of insolvency of the debtor;
(4) When he has absconded, or cannot be sued within the Philippines unless he
has left manager or representative;
(5) If it may be presumed that an execution on the property of the principal
debtor would not result in the satisfaction of the obligation.
294
294 SUPREME COURT REPORTS ANNOTATED
Aglibot vs. Santia
d) An agreement for the sale of goods, chattels or things in action, at a price not
less than five hundred pesos, unless the buyer accept and receive part of such
goods and chattels, or the evidences, or some of them, or such things in action,
or pay at the time some part of the purchase money; but when a sale is made
by auction and entry is made by the auctioneer in his sales book, at the time of
the sale, of the amount and kind of property sold, terms of sale, price, names of
purchasers and person on whose account the sale is made, it is a sufficient
memorandum;
e) An agreement for the leasing of a longer period than one year, or for the sale
of real property or of an interest therein;
f) A representation to the credit of a third person. (Italics ours)
 Under the above provision, concerning a guaranty agreement, which is a promise
to answer for the debt or default of another,17 the law clearly requires that it, or some
note or memorandum thereof, be in writing. Otherwise, it would be unenforceable
unless ratified,18although under Article 135819
_______________
17 Article 2047 of the Civil Code defines it as follows:
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.
18 Prudential Bank v. Intermediate Appellate Court, G.R. No. 74886, December
8, 1992, 216 SCRA 257, 275-276.
19 Art. 1358. The following must appear in a public document:
(1) Acts and contracts which have for their object the creation, transmission,
modification or extinguishment of real rights over immovable property; sales of real
property or of an interest therein are governed by Articles 1403, No. 2 and 1405;
(2) The cession, repudiation or renunciation of hereditary rights or of those of
the conjugal partnership of gains;
(3) The power to administer property, or any other power which has for its
object an act appearing or which should appear in a public document, or should
prejudice a third person; and
295
VOL. 687, DECEMBER 5, 2012 295
Aglibot vs. Santia
of the Civil Code, a contract of guaranty does not have to appear in a public
document.20 Contracts are generally obligatory in whatever form they may have been
entered into, provided all the essential requisites for their validity are present, and
the Statute of Frauds simply provides the method by which the contracts enumerated
in Article 1403(2) may be proved, but it does not declare them invalid just because
they are not reduced to writing. Thus, the form required under the Statute is for
convenience or evidentiary purposes only.21
On the other hand, Article 2055 of the Civil Code also provides that a guaranty is
not presumed, but must be express, and cannot extend to more than what is
stipulated therein. This is the obvious rationale why a contract of guarantee is
unenforceable unless made in writing or evidenced by some writing. For as pointed
out by Santia, Aglibot has not shown any proof, such as a contract, a secretary’s
certificate or a board resolution, nor even a note or memorandum thereof, whereby it
was agreed that she would issue her personal checks in behalf of the company to
guarantee the payment of its debt to Santia. Certainly, there is nothing shown in the
Promissory Note signed by Aglibot herself remotely containing an agreement
between her and PLCC resembling her guaranteeing its debt to Santia. And neither is
there a showing that PLCC thereafter ratified her act of “guaranteeing” its
indebtedness by issuing her own checks to Santia.
Thus did the CA reject the RTC’s ruling that Aglibot was a mere guarantor of the
indebtedness of PLCC, and as such
_______________
(4) The cession of actions or rights proceeding from an act appearing in a public
document. All other contracts where the amount involved exceeds five hundred pesos
must appear in writing, even a private one. But sales of goods, chattels or things in
action are governed by Articles 1403, No. 2 and 1405.
20 Supra note 18.
21 Orduña v. Fuentebella, G.R. No. 176841, June 29, 2010, 622 SCRA 146,
158; Municipality of Hagonoy, Bulacan v. Dumdum, Jr., G.R. No. 168289, March
22, 2010, 616 SCRA 315.
296
296 SUPREME COURT REPORTS ANNOTATED
Aglibot vs. Santia
could not “be compelled to pay [Santia], unless the latter has exhausted all the
property of PLCC, and has resorted to all the legal remedies against PLCC x x x.”22
Aglibot is an accommodation party
and therefore liable to Santia
Section 185 of the Negotiable Instruments Law defines a check as “a bill of
exchange drawn on a bank payable on demand,” while Section 126 of the said law
defines a bill of exchange as “an unconditional order in writing addressed by one
person to another, signed by the person giving it, requiring the person to whom it is
addressed to pay on demand or at a fixed or determinable future time a sum certain
in money to order or to bearer.”
The appellate court ruled that by issuing her own post-dated checks, Aglibot
thereby bound herself personally and solidarily to pay Santia, and dismissed her
claim that she issued her said checks in her official capacity as PLCC’s manager
merely to guarantee the investment of Santia. It noted that she could have issued
PLCC’s checks, but instead she chose to issue her own checks, drawn against her
personal account with Metrobank. It concluded that Aglibot intended to personally
assume the repayment of the loan, pointing out that in her Counter-Affidavit, she
even admitted that she was personally indebted to Santia, and only raised payment
as her defense, a clear admission of her liability for the said loan.
The appellate court refused to give credence to Aglibot’s claim that she had an
understanding with Santia that the checks would not be presented to the bank for
payment, but were to be returned to her once she had made cash payments for their
face values on maturity. It noted that Aglibot failed to present any proof that she had
indeed paid cash on the above checks as she claimed. This is precisely why Santia
_______________
22 Rollo, p. 92.
297
VOL. 687, DECEMBER 5, 2012 297
 Aglibot vs. Santia
decided to deposit the checks in order to obtain payment of his loan.
The facts below present a clear situation where Aglibot, as the manager of PLCC,
agreed to accommodate its loan to Santia by issuing her own post-dated checks in
payment thereof. She is what the Negotiable Instruments Law calls an
accommodation party.23 Concerning the liability of an accommodation party, Section
29 of the said law provides:
Sec. 29. Liability of an accommodation party.—An accommodation party is one
who has signed the instrument as maker, drawer, acceptor, or indorser, without
receiving value therefor, and for the purpose of lending his name to some other
person. Such a person is liable on the instrument to a holder for value
notwithstanding such holder at the time of taking the instrument knew him to be
only an accommodation party.
As elaborated in The Phil. Bank of Commerce v. Aruego:24
An accommodation party is one who has signed the instrument as maker, drawer,
indorser, without receiving value therefor and for the purpose of lending his name to
some other person. Such person is liable on the instrument to a holder for value,
notwithstanding such holder, at the time of the taking of the instrument knew him to
be only an accommodation party. In lending his name to the accommodated party,
the accommodation party is in effect a surety for the latter. He lends his name to
enable the accommodated party to obtain credit or to raise money. He receives no
part of the consideration for the instrument but assumes liability to the other parties
thereto because he wants to accommodate another. x x x.25 (Citation omitted)
The relation between an accommodation party and the party accommodated is, in
effect, one of principal and surety
_______________
23 See Stelco Marketing Corporation v. Court of Appeals, G.R. No. 96160, June
17, 1992, 210 SCRA 51, 57 citing Agbayani, Commercial Laws of the Philippines, 1975
ed., Vol. I.
24 102 SCRA 530 (1981).
25 Id., at pp. 539-540.
298
298 SUPREME COURT REPORTS ANNOTATED
Aglibot vs. Santia
—the accommodation party being the surety. It is a settled rule that a surety is bound
equally and absolutely with the principal and is deemed an original promisor and
debtor from the beginning. The liability is immediate and direct.26It is not a valid
defense that the accommodation party did not receive any valuable consideration
when he executed the instrument; nor is it correct to say that the holder for value is
not a holder in due course merely because at the time he acquired the instrument, he
knew that the indorser was only an accommodation party.27
Moreover, it was held in Aruego that unlike in a contract of suretyship, the
liability of the accommodation party remains not only primary but also
unconditional to a holder for value, such that even if the accommodated party
receives an extension of the period for payment without the consent of the
accommodation party, the latter is still liable for the whole obligation and such
extension does not release him because as far as a holder for value is concerned, he is
a solidary co-debtor.
The mere fact, then, that Aglibot issued her own checks to Santia made her
personally liable to the latter on her checks without the need for Santia to first go
after PLCC for the payment of its loan.28 It would have been otherwise had it been
shown that Aglibot was a mere guarantor, except that since checks were issued
ostensibly in payment for the loan, the provisions of the Negotiable Instruments Law
must take primacy in application.
WHEREFORE, premises considered, the Petition for Review on Certiorari is
DENIED and the Decision dated March
_______________
26 Garcia v. Llamas, 462 Phil. 779, 794; 417 SCRA 292, 305 (2003),
citing Spouses Gardose v. Tarroza, 352 Phil. 797; 290 SCRA 186 (1998), Palmares v.
Court of Appeals, 351 Phil. 664; 288 SCRA 422 (1998).
27 Ang Tiong v. Ting, 130 Phil. 741, 744; 22 SCRA 713, 716 (1968).
28 Sps. Gardose v. Tarroza, 352 Phil. 797; 290 SCRA 186 (1998).
299
VOL. 687, DECEMBER 5, 2012 299
Aglibot vs. Santia
18, 2008 of the Court of Appeals in CA-G.R. SP No. 100021 is hereby AFFIRMED.
SO ORDERED.
Leonardo-De Castro (Acting Chairperson), Del Castillo,** Villarama,
Jr. and Perez,*** JJ., concur.
Petition denied, judgment affirmed.
Notes.—The extent of a surety’s liability is determined by the language of the
suretyship contract or bond itself. It cannot be extended by implication, beyond the
terms of the contract. (First Lepanto-Taisho Insurance Corporation vs. Chevron
Philippines, Inc., 663 SCRA 309 [2012])
The law is clear that a surety contract should be read and interpreted together
with the contract entered into between the creditor and the principal. A surety
contract is merely a collateral one, its basis is the principal contract or undertaking
which it secures. (Id.)
——o0o——
_______________
** Additional member per Raffle dated November 7, 2012 viceAssociate Justice
Lucas P. Bersamin.
 *** Acting member per Special Order No. 1385 dated December 4,
2012 vice Chief Justice Maria Lourdes P. A. Sereno
 G.R. No. 170865. April 25, 2012.*
PHILIPPINE NATIONAL BANK, petitioner, vs. SPOUSES CHEAH CHEE CHONG
and OFELIA CAMACHO CHEAH, respondents.
G.R. No. 170892. April 25, 2012.*
SPOUSES CHEAH CHEE CHONG and OFELIA CAMACHO CHEAH,
petitioners, vs. PHILIPPINE NATIONAL BANK, respondent.
Civil Law; Quasi-Delicts; Damages; Proximate Cause; Words and Phrases;
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.’—“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.’ x x x To
determine the proximate cause of a controversy, the question that needs to be asked
is: If the event did not happen, would the injury have resulted? If the answer is no,
then the event is the proximate cause.”
Banks and Banking; Checks; The payment of the amounts of checks without
previously clearing them with the drawee bank especially so where the drawee
bank is a foreign bank and the amounts involved were large is contrary to normal
or ordinary banking practice.—This Court already held that the payment of the
amounts of checks without previously clearing them with the drawee bank especially
so where the drawee bank is a foreign bank and the amounts involved were large is
contrary to normal or ordinary banking practice. Also, in Associated Bank v. Tan,
446 SCRA 282 (2004), wherein the bank allowed the withdrawal of the value of a
check prior to its clearing, we said that “[b]efore the check shall have been cleared for
deposit, the collecting bank can only ‘assume’ at its own risk x x x
_______________
* FIRST DIVISION.
50
5 SUPREME COURT REPORTS ANNOTATED
0 Same; Contributory Negligence; Contributory negligence is conduct on the
Philippine National Bank vs. Cheah Chee Chong
that the check would be cleared and paid out.” The delay in the receipt by PNB
Buendia Branch of the November 13, 1992 SWIFT message notifying it of the
dishonor of the subject check is of no moment, because had PNB Buendia Branch
waited for the expiration of the clearing period and had never released during that
time the proceeds of the check, it would have already been duly notified of its
dishonor. Clearly, PNB’s disregard of its preventive and protective measure against
the possibility of being victimized by bad checks had brought upon itself the injury of
losing a significant amount of money.
Same; Same; A bank is expected to be an expert in banking procedures and it
has the necessary means to ascertain whether a check, local or foreign, is
sufficiently funded.—It bears stressing that “the diligence required of banks is more
than that of a Roman pater familias or a good father of a family. The highest degree
of diligence is expected.” PNB miserably failed to do its duty of exercising
extraordinary diligence and reasonable business prudence. The disregard of its own
banking policy amounts to gross negligence, which the law defines as “negligence
characterized by the want of even slight care, acting or omitting to act in a situation
where there is duty to act, not inadvertently but wilfully and intentionally with a
conscious indifference to consequences in so far as other persons may be affected.”
With regard to collection or encashment of checks, suffice it to say that the law
imposes on the collecting bank the duty to scrutinize diligently the checks deposited
with it for the purpose of determining their genuineness and regularity. “The
collecting bank, being primarily engaged in banking, holds itself out to the public as
the expert on this field, and the law thus holds it to a high standard of conduct.” A
bank is expected to be an expert in banking procedures and it has the necessary
means to ascertain whether a check, local or foreign, is sufficiently funded.
Civil Law; Solutio Indebiti; The indispensable requisites of the juridical
relation known as solutio indebiti, are, (a) that he who paid was not under
obligation to do so; and (b) that the payment was made by reason of an essential
mistake of fact.—“[T]he indispensable requisites of the juridical relation known
as solutioindebiti, are, (a) that he who paid was not under obligation to do so; and (b)
that the payment was made by reason of an essential mistake of fact. In the case at
bench, PNB cannot recover the proceeds of the check under the
51
VOL. 671, APRIL 25, 2012 5
1
Philippine National Bank vs. Cheah Chee Chong
principle it invokes. In the first place, the gross negligence of PNB, as earlier
discussed, can never be equated with a mere mistake of fact, which must be
something excusable and which requires the exercise of prudence. No recovery is due
if the mistake done is one of gross negligence.
part of the injured party, contributing as a legal cause to the harm he has suffered,
which falls below the standard to which he is required to conform for his own
protection.—“Contributory negligence is conduct on the part of the injured party,
contributing as a legal cause to the harm he has suffered, which falls below the
standard to which he is required to conform for his own protection.” The CA found
Ofelia’s credulousness blameworthy. We agree. Indeed, Ofelia failed to observe
caution in giving her full trust in accommodating a complete stranger and this led her
and her husband to be swindled. Considering that Filipina was not personally known
to her and the amount of the foreign check to be encashed was $300,000.00, a
higher degree of care is expected of Ofelia which she, however, failed to exercise
under the circumstances. Another circumstance which should have goaded Ofelia to
be more circumspect in her dealings was when a bank officer called her up to inform
that the Bank of America check has already been cleared way earlier than the 15-day
clearing period. The fact that the check was cleared after only eight banking days
from the time it was deposited or contrary to what Garin told her that clearing takes
15 days should have already put Ofelia on guard. She should have first verified the
regularity of such hasty clearance considering that if something goes wrong with the
transaction, it is she and her husband who would be put at risk and not the
accommodated party. However, Ofelia chose to ignore the same and instead actively
participated in immediately withdrawing the proceeds of the check. Thus, we are one
with the CA in ruling that Ofelia’s prior consultation with PNB officers is not enough
to totally absolve her of any liability. In the first place, she should have shunned any
participation in that palpably shady transaction.
PETITIONS for review on certiorari of the decision and resolution of the Court of
Appeals.
The facts are stated in the opinion of the Court.52
52 SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Cheah Chee Chong
The Chief Legal Counsel for PNB.
Castro & Associates for Spouses Cheah.
DEL CASTILLO, J.:
Law favoreth diligence, and therefore, hateth folly
and negligence.—Wingate’s Maxim.
In doing a friend a favor to help the latter’s friend collect the proceeds of a foreign
check, a woman deposited the check in her and her husband’s dollar account. The
local bank accepted the check for collection and immediately credited the proceeds
thereof to said spouses’ account even before the lapse of the clearing period. And just
when the money had been withdrawn and distributed among different beneficiaries,
it was discovered that all along, to the horror of the woman whose intention to
accommodate a friend’s friend backfired, she and her bank had dealt with a rubber
check.
These consolidated1 Petitions for Review on Certiorarifiled by the Philippine
National Bank (PNB)2 and by the spouses Cheah Chee Chong and Ofelia Camacho
Cheah (spouses Cheah)3 both assail the August 22, 2005 Decision4and December 21,
2005 Resolution5 of the Court of Appeals (CA) in CA-G.R. CV No. 63948 which
declared both parties equally negligent and, hence, should equally suffer the resulting
loss.
_______________
1 Consolidated pursuant to our Resolution dated April 26, 2006, Rollo(G.R. No.
170865), p. 392 and Rollo (G.R. No. 170892), p. 95.
2 Docketed as G.R. No. 170865, Rollo, pp. 105-129.
3 Docketed as G.R. No. 170892, id., at pp. 11-39.
4 CA Rollo, pp. 172-188; penned by Associate Justice Jose Catral Mendoza (now a
member of this Court) and concurred in by Presiding Justice Romeo A. Brawner and
Associate Justice Mario L. Guariña III.
5 Id., at p. 261; penned by Associate Justice Jose Catral Mendoza and concurred
in by Associate Justices Mario L. Guariña III and Celia C. Librea-Leagogo.
53
VOL. 671, APRIL 25, 2012 53
Philippine National Bank vs. Cheah Chee Chong
For its part, PNB questions why it was declared blameworthy together with its
depositors, spouses Cheah, for the amount wrongfully paid the latter, while the
spouses Cheah plead that they be declared entirely faultless.
Factual Antecedents
On November 4, 1992, Ofelia Cheah (Ofelia) and her friend Adelina Guarin
(Adelina) were having a conversation in the latter’s office when Adelina’s friend,
Filipina Tuazon (Filipina), approached her to ask if she could have Filipina’s check
cleared and encashed for a service fee of 2.5%. The check is Bank of America Check
No. 1906 under the account of Alejandria Pineda and Eduardo Rosales and drawn by
Atty. Eduardo Rosales against Bank of America Alhambra Branch in California, USA,
with a face amount of $300,000.00, payable to cash. Because Adelina does not have
a dollar account in which to deposit the check, she asked Ofelia if she could
accommodate Filipina’s request since she has a joint dollar savings account with her
Malaysian husband Cheah Chee Chong (Chee Chong) under Account No. 265-
705612-2 with PNB Buendia Branch.
Ofelia agreed.
That same day, Ofelia and Adelina went to PNB Buendia Branch. They met with
Perfecto Mendiola of the Loans Department who referred them to PNB Division
Chief Alberto Garin (Garin). Garin discussed with them the process of clearing the
subject check and they were told that it normally takes 15 days. 7 Assured that the
deposit and subsequent clearance of the check is a normal transaction, Ofelia
deposited Filipina’s check. PNB then sent it for clearing through its correspondent
bank, Philadelphia National Bank. Five days
_______________
6 Records, p. 199.
7 TSN, July 3, 1998, pp. 14-17.
54
54 SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Cheah Chee Chong
later, PNB received a credit advice8 from Philadelphia National Bank that the
proceeds of the subject check had been temporarily credited to PNB’s account as of
November 6, 1992. On November 16, 1992, Garin called up Ofelia to inform her that
the check had already been cleared.9 The following day, PNB Buendia Branch, after
deducting the bank charges, credited $299,248.37 to the account of the spouses
Cheah.10 Acting on Adelina’s instruction to withdraw the credited amount, Ofelia that
day personally withdrew $180,000.00.11 Adelina was able to withdraw the remaining
amount the next day after having been authorized by Ofelia.12 Filipina received all the
proceeds.
In the meantime, the Cable Division of PNB Head Office in Escolta, Manila
received on November 16, 1992 a SWIFT13 message from Philadelphia National Bank
dated November 13, 1992 with Transaction Reference Number (TRN) 46506218,
informing PNB of the return of the subject check for insufficient funds. 14 However,
the PNB Head Office could not ascertain to which branch/office it should forward the
same for proper action. Eventually, PNB Head Office sent Philadelphia National
Bank a SWIFT message informing the
_______________
8 Records, p. 200.
9 TSN, July 3, 1998, pp. 18-19; July 24, 1998, pp. 32-33.
10 Records, pp. 201 and 425.
11 Id., at p. 202.
12 Id., at p. 206.
13 Stands for ‘Society for Worldwide Interbank Financial Telecommunication.’ It
is an international transaction processing system owned by and serving the financial
community worldwide. It handles financial messages such as: a. customer transfers
or payment orders; b. bank transfers; c. foreign exchange confirmation; d. debit
confirmation; e. credit confirmation; f. statement of account; g. collections; h.
documentary credits; i. syndications; j. traveler’s checks; See Joint Affidavit of
Gregorio SC Termulo and Leoncio M. David, Assistant Department Manager II and
Division Chief III of the Cable Division, International Department of PNB, id., at pp.
312-315.
14 Id., at p. 316.
55
VOL. 671, APRIL 25, 2012 55
Philippine National Bank vs. Cheah Chee Chong
latter that SWIFT message with TRN 46506218 has been relayed to PNB’s various
divisions/departments but was returned to PNB Head Office as it seemed misrouted.
PNB Head Office thus requested for Philadelphia National Bank’s advice on said
SWIFT message’s proper disposition.15 After a few days, PNB Head Office ascertained
that the SWIFT message was intended for PNB Buendia Branch.
PNB Buendia Branch learned about the bounced check when it received on
November 20, 1992 a debit advice,16followed by a letter17 on November 24, 1992,
from Philadelphia National Bank to which the November 13, 1992 SWIFT message
was attached. Informed about the bounced check and upon demand by PNB Buendia
Branch to return the money withdrawn, Ofelia immediately contacted Filipina to get
the money back. But the latter told her that all the money had already been given to
several people who asked for the check’s encashment. In their effort to recover the
money, spouses Cheah then sought the help of the National Bureau of Investigation.
Said agency’s Anti-Fraud and Action Division was later able to apprehend some of
the beneficiaries of the proceeds of the check and recover from them $20,000.00.
Criminal charges were then filed against these suspect beneficiaries.18
_______________
15 Id., at p. 317.
16 Id., at p. 384.
17 Id., at pp. 386-387.
18 Based on the records of the case at bar, upon the NBI’s investigation, the
withdrawn money was divided among Transmedian Management (Adelina Guarin’s
office), Nilo Montalban, Patricio Valleser, and Lucresio Semblante, who all received a
part of the proceeds as commissions, while the rest of the amount was divided
between Felix Sajot and Eduardo Rosales, id., at pp. 76-277. The NBI, suspecting a
conspiracy among the bank officers and the beneficiaries, filed an estafacase against
Adelina Guarin and PNB officials Lorenzo Bal, Ponciano Felix, Teresita Gregorio, and
Domingo Posadas before the Office of the Ombudsman, but this was dismissed, id.,
at pp. 402-407. Criminal case for estafa was likewise
56
56 SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Cheah Chee Chong
Meanwhile, the spouses Cheah have been constantly meeting with the bank
officials to discuss matters regarding the incident and the recovery of the value of the
check while the cases against the alleged perpetrators remain pending. Chee Chong
in the end signed a PNB drafted19 letter20 which states that the spouses Cheah are
offering their condominium units as collaterals for the amount withdrawn. Under
this setup, the amount withdrawn would be treated as a loan account with deferred
interest while the spouses try to recover the money from those who defrauded them.
Apparently, Chee Chong signed the letter after the Vice President and Manager of
PNB Buendia Branch, Erwin Asperilla (Asperilla), asked the spouses Cheah to help
him and the other bank officers as they were in danger of losing their jobs because of
the incident. Asperilla likewise assured the spouses Cheah that the letter was a mere
formality and that the mortgage will be disregarded once PNB receives its claim for
indemnity from Philadelphia National Bank.
Although some of the officers of PNB were amenable to the proposal,21 the same
did not materialize. Subsequently, PNB sent a demand letter to spouses Cheah for the
return of the amount of the check,22 froze their peso and dollar deposits in the
amounts of P275,166.80 and $893.46,23 and filed a complaint24 against them for Sum
of Money with Branch 50 of the Regional Trial Court (RTC) of Manila, docketed as
Civil Case No. 94-71022. In said complaint, PNB demanded payment of
_______________
 filed by the Makati Prosecutor against Filipina Tuazon, Nilo Montalban, Patricio
Vallaser, Lucresio Semblante, Eduardo Rosales and Felix Sajot before the Regional
Trial Court of Makati, id., at pp. 426-427.
19 TSN, July 3, 1998, pp. 43-48; July 24, 1998, p. 9.
20 Records, pp. 207-208.
21 Id., at pp. 388-395.
22 Id., at p. 399.
23 Under Account Nos. 265-560184-0 and 265-705612-2.
24 Records, pp. 1-9.
57
VOL. 671, APRIL 25, 2012 57
Philippine National Bank vs. Cheah Chee Chong
around P8,202,220.44, plus interests25 and attorney’s fees, from the spouses Cheah.
As their main defense, the spouses Cheah claimed that the proximate cause of
PNB’s injury was its own negligence of paying a US dollar denominated check
without waiting for the 15-day clearing period, in violation of its bank practice as
mandated by its own bank circular, i.e., PNB General Circular No. 52-
101/88.26 Because of this, spouses Cheah averred that PNB is barred from claiming
what it had lost. They further averred that it is unjust for them to pay back the
amount disbursed as they never really benefited therefrom. As counterclaim, they
prayed for the return of their frozen deposits, the recoupment of P400,000.00
representing the amount they had so far spent in recovering the value of the check,
and payment of moral and exemplary damages, as well as attorney’s fees.
Ruling of the Regional Trial Court
The RTC ruled in PNB’s favor. The dispositive portion of its Decision27 dated May
20, 1999 reads:
_______________
25 Converted to peso at a rate of $1 = P27.695. The amount recovered was
deducted from the $300,000, then computed at an interest rate of 7.5% per annum.
26 Said Circular dated August 31, 1988, states:
The existing cash letter services of our foreign correspondents [sic] bank make it
possible for PNB to obtain immediate credit, subject to final payment for US dollar
denominated checks withdrawn on banks in the U.S.A. negotiated with us by clients.
The guarantee period ‘and’ notice of non-payment by telex features under such
clearing item is made known to PNB within 15 days from date of receipts of checks by
our collecting agent bank. Records, p. 525 as incorporated in the RTC Decision, p.
20.
27 Id., at pp. 506-541; penned by Judge Urbano Victorio, Sr.
58
58 SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Cheah Chee Chong
“WHEREFORE, premises considered, judgment is hereby rendered in favor of the
plaintiff Philippine National Bank [and] against defendants Mr. Cheah Chee Chong
and Ms. Ofelia Camacho Cheah, ordering the latter to pay jointly and severally the
herein plaintiffs’ bank the amount:
1. of US$298,950.25 or its peso equivalent based on Central Bank Exchange
Rate prevailing at the time the proceeds of the BA Check No. 190 were withdrawn or
the prevailing Central Bank Rate at the time the amount is to be reimbursed by the
defendants to plaintiff or whatever is lower. This is without prejudice however, to the
rights of the defendants (accommodating parties) to go against the group of Adelina
Guarin, Atty. Eduardo Rosales, Filipina Tuazon, etc., (Beneficiaries- accommodated
parties) who are privy to the defendants.
No pronouncement as to costs.
No other award of damages for non[e] has been proven.
SO ORDERED.”28
The RTC held that spouses Cheah were guilty of contributory negligence. Because
Ofelia trusted a friend’s friend whom she did not know and considering the amount
of the check made payable to cash, the RTC opined that Ofelia showed lack of
vigilance in her dealings. She should have exercised due care by investigating the
negotiability of the check and the identity of the drawer. While the court found that
the proximate cause of the wrongful payment of the check was PNB’s negligence in
not observing the 15-day guarantee period rule, it ruled that spouses Cheah still
cannot escape liability to reimburse PNB the value of the check as an accommodation
party pursuant to Section 29 of the Negotiable Instruments Law. 29 It likewise applied
the principle of solutio
_______________
28 Id., at pp. 540-541.
29 Sec. 29. Liability of accommodation party.—An accommodation party is
one who has signed the instrument as maker, drawer, acceptor, or indorser, without
receiving value therefor, and for the purpose of lending his name to some other
person. Such a person is liable on the instrument to a holder for value,
notwithstanding such
59
VOL. 671, APRIL 25, 2012 59
Philippine National Bank vs. Cheah Chee Chong
indebiti under the Civil Code. With regard to the award of other forms of damages,
the RTC held that each party must suffer the consequences of their own acts and thus
left both parties as they are.
Unwilling to accept the judgment, the spouses Cheah appealed to the CA.
Ruling of the Court of Appeals
While the CA recognized the spouses Cheah as victims of a scam who nevertheless
have to suffer the consequences of Ofelia’s lack of care and prudence in immediately
trusting a stranger, the appellate court did not hold PNB scot-free. It ruled in its The petitions for review lack merit. Hence, we affirm the ruling of the CA.
August 22, 2005 Decision,30 viz.: _______________
“As both parties were equally negligent, it is but right and just that both parties 31 CA Rollo, pp. 187-188.
should equally suffer and shoulder the loss. The scam would not have been possible 32 See PNB’s Motion for Reconsideration, id., at pp. 194-207 and the spouses
without the negligence of both parties. As earlier stated, the complaint of PNB cannot Cheah’s Motion for Reconsideration, id., at pp. 208-231.
be dismissed because the Cheah spouses were negligent and Ms. Cheah took an 33 Supra note 5.
active part in the deposit of the check and the withdrawal of the subject amounts. On 61
the other hand, the Cheah spouses cannot entirely bear the loss because PNB allowed VOL. 671, APRIL 25, 2012 61
her to withdraw without waiting for the clearance of the check. The remedy of the Philippine National Bank vs. Cheah Chee Chong
parties is to go after those who perpetrated, and benefited from, the scam. PNB’s act of releasing the proceeds
WHEREFORE, the May 20, 1999 Decision of the Regional Trial Court, Branch 5, of the check prior to the lapse of the
Manila, in Civil Case No. 94-71022, is hereby REVERSED and SET ASIDE and 15-day clearing period was the
another one entered DECLARING both parties equally negligent and should suffer proximate cause of the loss.
and shoulder the loss. “Proximate cause is ‘that cause, which, in natural and continuous sequence,
Accordingly, PNB is hereby ordered to credit to the peso and dollar accounts of unbroken by any efficient intervening cause, produces the injury and without which
the Cheah spouses the amount due to them. the result would not have occurred.’ x x x To determine the proximate cause of a
_______________ controversy, the question that needs to be asked is: If the event did not happen,
holder, at the time of taking the instrument, knew him to be only an would the injury have resulted? If the answer is no, then the event is the proximate
accommodation party. cause.”34
30 Supra note 4. Here, while PNB highlights Ofelia’s fault in accommodating a stranger’s check
60 and depositing it to the bank, it remains mum in its release of the proceeds thereof
60 SUPREME COURT REPORTS ANNOTATED without exhausting the 15-day clearing period, an act which contravened established
Philippine National Bank vs. Cheah Chee Chong banking rules and practice.
SO ORDERED.”31 It is worthy of notice that the 15-day clearing period alluded to is construed as 15
In so ruling, the CA ratiocinated that PNB Buendia Branch’s non-receipt of the banking days. As declared by Josephine Estella, the Administrative Service Officer
SWIFT message from Philadelphia National Bank within the 15-day clearing period is who was the bank’s Remittance Examiner, what was unusual in the processing of the
not an acceptable excuse. Applying the last clear chance doctrine, the CA held that check was that the “lapse of 15 banking days was not observed.”35 Even PNB’s
PNB had the last clear opportunity to avoid the impending loss of the money and yet, agreement with Philadelphia National Bank36 regarding the rules on the collection of
it glaringly exhibited its negligence in allowing the withdrawal of funds without the proceeds of US dollar checks refers to “business/banking days.” Ofelia deposited
exhausting the 15-day clearing period which has always been a standard banking the subject check on November 4, 1992. Hence, the 15th banking day from the date of
practice as testified to by PNB’s own officers, and as provided in its own General said deposit should fall on November 25, 1992. However, what happened was that
Circular No. 52/101/88. To the CA, PNB cannot claim from spouses Cheah even if the PNB Buendia Branch, upon calling up Ofelia that the check had been cleared, allowed
latter are accommodation parties under the law as the bank’s own negligence is the the proceeds thereof
proximate cause of the damage it sustained. Nevertheless, it also found Ofelia guilty _______________
of contributory negligence. Thus, both parties should be made equally responsible for 34 Allied Banking Corporation v. Lim Sio Wan, G.R. No. 133179, March 27,
the resulting loss. 2008, 549 SCRA 504, 518.
Both parties filed their respective Motions for Reconsideration 32 but same were 35 TSN, July 5, 1995, p. 26.
denied in a Resolution33dated December 21, 2005. 36 Records, pp. 281-285.
Hence, these Petitions for Review on Certiorari. 62
62 SUPREME COURT REPORTS ANNOTATED
Our Ruling Philippine National Bank vs. Cheah Chee Chong
to be withdrawn on November 17 and 18, 1992, a week before the lapse of the
standard 15-day clearing period.
This Court already held that the payment of the amounts of checks without
previously clearing them with the drawee bank especially so where the drawee bank
is a foreign bank and the amounts involved were large is contrary to normal or
ordinary banking practice.37 Also, in Associated Bank v. Tan,38 wherein the bank
allowed the withdrawal of the value of a check prior to its clearing, we said that
“[b]efore the check shall have been cleared for deposit, the collecting bank can only
‘assume’ at its own risk x x x that the check would be cleared and paid out.” The delay
in the receipt by PNB Buendia Branch of the November 13, 1992 SWIFT message
notifying it of the dishonor of the subject check is of no moment, because had PNB
Buendia Branch waited for the expiration of the clearing period and had never
released during that time the proceeds of the check, it would have already been duly
notified of its dishonor. Clearly, PNB’s disregard of its preventive and protective
measure against the possibility of being victimized by bad checks had brought upon
itself the injury of losing a significant amount of money.
It bears stressing that “the diligence required of banks is more than that of a
Roman pater familias or a good father of a family. The highest degree of diligence is
expected.”39PNB miserably failed to do its duty of exercising extraordinary diligence
and reasonable business prudence. The disregard of
_______________
37 Banco Atlantico v. Auditor General, 171 Phil. 298, 304; 81 SCRA 335, 340-341
(1978).
38 487 Phil. 512, 525; 446 SCRA 282, 293 (2004).
39 Philippine Savings Bank v. Chowking Food Corporation, G.R. No. 177526,
July 4, 2008, 557 SCRA 318, 330, citing Bank of the Philippine Islands v. Court of
Appeals, 383 Phil. 538, 554; 326 SCRA 641, 657 (2000); Philippine Bank of
Commerce v. Court of Appeals, 336 Phil. 667, 681; 269 SCRA 695, 708-709 (1997)
and Philippine Commercial International Bank v. Court of Appeals, 403 Phil. 361,
388; 350 SCRA 446, 472 (2001).
63
VOL. 671, APRIL 25, 2012 63
Philippine National Bank vs. Cheah Chee Chong
its own banking policy amounts to gross negligence, which the law defines as
“negligence characterized by the want of even slight care, acting or omitting to act in
a situation where there is duty to act, not inadvertently but wilfully and intentionally
with a conscious indifference to consequences in so far as other persons may be
affected.”40With regard to collection or encashment of checks, suffice it to say that
the law imposes on the collecting bank the duty to scrutinize diligently the checks
deposited with it for the purpose of determining their genuineness and regularity.
“The collecting bank, being primarily engaged in banking, holds itself out to the
public as the expert on this field, and the law thus holds it to a high standard of
conduct.”41 A bank is expected to be an expert in banking procedures and it has the
necessary means to ascertain whether a check, local or foreign, is sufficiently funded.
Incidentally, PNB obliges the spouses Cheah to return the withdrawn money
under the principle of solutioindebiti, which is laid down in Article 2154 of the Civil
Code:42
“Art. 2154. If something is received when there is no right to demand it, and it
was unduly delivered through mistake, the obligation to return it arises.”
“[T]he indispensable requisites of the juridical relation known as solutio indebiti,
are, (a) that he who paid was not
_______________
40 Victoriano v. People, G.R. Nos. 171322-24, November 30, 2006, 509 SCRA
483, 493, citing Fonacier v. Sandiganbayan, G.R. Nos. 50691, 52263, 52766, 52821,
53350, 53397, 53415 and 53520, December 5, 1994, 238 SCRA 655, 687-688.
41 Metropolitan Bank and Trust Company v. Philippine Bank of
Communications, G.R. Nos. 141408 and 141429, October 18, 2007, 536 SCRA 556,
563, citing Banco de Oro Savings and Mortgage Bank v. Equitable Banking
Corporation, 241 Phil. 187, 200; 157 SCRA 188, 200 (1988).
42 N.B. Solutio indebiti also covers mistake in law under Article 2155 of the Civil
Code.
64
64 SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Cheah Chee Chong
under obligation to do so; and (b) that the payment was made by reason of an
essential mistake of fact.”43
In the case at bench, PNB cannot recover the proceeds of the check under the
principle it invokes. In the first place, the gross negligence of PNB, as earlier
discussed, can never be equated with a mere mistake of fact, which must be
something excusable and which requires the exercise of prudence. No recovery is due
if the mistake done is one of gross negligence.
The spouses Cheah are guilty of
contributory negligence and are
bound to share the loss with the
bank
“Contributory negligence is conduct on the part of the injured party, contributing
as a legal cause to the harm he has suffered, which falls below the standard to which
he is required to conform for his own protection.”44
The CA found Ofelia’s credulousness blameworthy. We agree. Indeed, Ofelia
failed to observe caution in giving her full trust in accommodating a complete
stranger and this led her and her husband to be swindled. Considering that Filipina
was not personally known to her and the amount of the foreign check to be encashed
was $300,000.00, a higher degree of care is expected of Ofelia which she, however,
failed to exercise under the circumstances. Another circumstance which should have
goaded Ofelia to be more circumspect in her dealings was when a bank officer called fundamental principles of justice, equity and good conscience.” (Land Bank of the
her up to inform that the Bank of America check has already been cleared way earlier Philippines vs. Ong, 636 SCRA 266 [2010])
than the 15-day clearing period. The fact that the check was cleared after only eight Where the bank’s negligence is the proximate cause of the loss and the depositor
banking days from the time is guilty of contributory negligence, we allocated the damages between the bank and
_______________ the depositor on a 60-40 ratio. (Philippine National Bank vs. F.F. Cruz and Co., Inc.,
43 City of Cebu v. Judge Piccio, 110 Phil. 558, 563 (1960). 654 SCRA 333 [2011])
44 Valenzuela v. Court of Appeals, 323 Phil. 374, 388; 253 SCRA 303, 318 (1996).
65 ——o0o——
VOL. 671, APRIL 25, 2012 65
Philippine National Bank vs. Cheah Chee Chong
it was deposited or contrary to what Garin told her that clearing takes 15 days should
have already put Ofelia on guard. She should have first verified the regularity of such
hasty clearance considering that if something goes wrong with the transaction, it is
she and her husband who would be put at risk and not the accommodated party.
However, Ofelia chose to ignore the same and instead actively participated in
immediately withdrawing the proceeds of the check. Thus, we are one with the CA in
ruling that Ofelia’s prior consultation with PNB officers is not enough to totally
absolve her of any liability. In the first place, she should have shunned any
participation in that palpably shady transaction.
In any case, the complaint against the spouses Cheah could not be dismissed. As
PNB’s client, Ofelia was the one who dealt with PNB and negotiated the check such
that its value was credited in her and her husband’s account. Being the ones in privity
with PNB, the spouses Cheah are therefore the persons who should return to PNB the
money released to them.
All told, the Court concurs with the findings of the CA that PNB and the spouses
Cheah are equally negligent and should therefore equally suffer the loss. The two
must both bear the consequences of their mistakes.
WHEREFORE, premises considered, the Petitions for Review on Certiorari in
G.R. No. 170865 and in G.R. No. 170892 are both DENIED. The assailed August 22,
2005 Decision and December 21, 2005 Resolution of the Court of Appeals in CA-G.R.
CV No. 63948 are hereby AFFIRMED in toto.
SO ORDERED.
Corona (C.J, Chairperson), Leonardo-De Castro, Bersamin and Villarama, Jr.,
JJ., concur.
Petitions denied, judgment and resolution affirmed in toto.
66
66 SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Cheah Chee Chong
Notes.—The principle of solutio indebiti applies in case of erroneous payment of
undue interest. (Siga-an vs. Villanueva, 576 SCRA 696 [2009])
Unjust enrichment exists “when a person unjustly retains a benefit to the loss of
another, or when a person retains money or property of another against the
 G.R. No. 89252. May 24, 1993.*
RAUL SESBREÑO, petitioner, vs. HON. COURT OF APPEALS, DELTA MOTORS
CORPORATION and PILIPINAS BANK, respondents.
Commercial Law; Non-negotiable Promissory Notes; An instrument though
marked non-negotiable, may nevertheless be assigned or transferred.—A non-
negotiable instrument may, obviously, not be negotiated; but it may be assigned or
transferred, absent an express prohibition against assignment or transfer written in
the face of the instrument: “The words ‘not negotiable,’ stamped on the face of the
bill of lading, did not destroy its assignability, but the sole effect was to exempt the
bill from the statutory provisions relative thereto, and a bill, though not negotiable,
may be transferred by assignment; the assignee taking subject to the equities
between the original parties.” DMC PN No. 2731, while marked “non-negotiable,”
was not at the same time stamped “non-transferrable” or “non-assignable.” It
contained no stipulation which prohibited Philfinance from assigning or transferring,
in whole or in part, that Note.
Same; Assignment of Credit; Debtor’s consent not needed to effectuate
assignment.—Apropos Delta’s complaint that the partial assignment by Philfinance
of DMC PN No. 2731 had been effected without the consent of Delta, we note that
such consent was not necessary for the validity and enforceability of the assignment
in favor of petitioner. Delta’s argument that Philfinance’s sale or assignment of part
of its rights to DMC PN No. 2731 constituted conventional subrogation, which
required its (Delta’s) consent, is quite mistaken.
Same; Same; Agreement prohibiting transfer cannot be invoked against
assignee who, without notice parted with valuable consideration in good faith.—We
find nothing in his “Letter of Agreement” which can be reasonably construed as a
prohibition upon Philfinance assigning or transferring all or part of DMC PN No.
2731, before the maturity thereof. It is scarcely necessary to add that, even had this
“Letter of Agreement” set forth an explicit prohibition of transfer upon Philfinance,
such a prohibition cannot be invoked against an assignee or transferee of the Note
who parted with valuable consideration in good faith and without notice of such
prohibition. It is not disputed that
_______________
* THIRD DIVISION.
467
VOL. 222, MAY 24, 1993 467
Sesbreño vs. Court of Appeals
petitioner was such an assignee or transferee.
Same; Corporations; Grounds for piercing the veil of corporate fiction.—
Secondly, it is not disputed that Philfinance and private respondents Delta and
Pilipinas have been organized as separate corporate entities. Petitioner asks us to
pierce their separate corporate entities, but has been able only to cite the presence of
a common Director—Mr. Ricardo Silverio, Sr., sitting on the Boards of Directors of
all three (3) companies. Petitioner has neither alleged nor proved that one or another
of the three (3) concededly related companies used the other two (2) as mere alter
egos or that the corporate affairs of the other two (2) were administered and
managed for the benefit of one. There is simply not enough evidence of record to
justify disregarding the separate corporate personalities of Delta and Pilipinas and to
hold them liable for any assumed or undetermined liability of Philfinance to
petitioner.
Same; Civil Law; For the protection of investors, depositary or custodianship
agreements made an integral part of money market transactions.—We believe and
so hold that a contract of deposit was constituted by the act of Philfinance in
designating Pilipinas as custodian or depositary bank. The depositor was initially
Philfinance; the obligation of the depositary was owed, however, to petitioner
Sesbreño as beneficiary of the custodianship or depositary agreement. We do not
consider that this is a simple case of a stipulation pour autri. The custodianship or
depositary agreement was established as an integral part of the money market
transaction entered into by petitioner with Philfinance. Petitioner bought a portion of
DMC PN No. 2731; Philfinance as assignor-vendor deposited that Note with Pilipinas
in order that the thing sold would be placed outside the control of the vendor.
Same; Same; Extinguishment of Obligation; Compensation may defeat
assignee’s rights before notice of the assignment is given to the debtor.—In other
words, petitioner notified Delta of his rights as assignee after compensation had
taken place by operation of law because the offsetting instruments had both
reached maturity. It is a firmly settled doctrine that the rights of an assignee are not
any greater than the rights of the assignor, since the assignee is merely substituted in
the place of the assignor and that the assignee acquires his rights subject to the
equities—i.e., the defenses—which the debtor could have set up against the original
assignor before notice of the assignment was given to the debtor. At the time that
Delta was first put to notice of the assignment in petitioner’s favor on 14 July 1981,
DMC PN No. 2731 had already been discharged by compensation. Since the assignor
468
4 SUPREME COURT REPORTS ANNOTATED
68
Sesbreño vs. Court of Appeals
Philfinance could not have then compelled payment anew by Delta of DMC PN
No. 2731, petitioner, as assignee of Philfmance, is similarly disabled from collecting
from Delta the portion of the Note assigned to him.
Same; Same; Solidary Liability.—The solidary liability that petitioner seeks to
impute to Pilipinas cannot, however, be lightly inferred. Under Article 1207 of the
Civil Code, “there is a solidary liability only when the obligation expressly so states,
or when the law or the nature of the obligation requires solidarity.” The record here
exhibits no express assumption of solidary liability vis-a-vis petitioner, on the part of On 13 March 1981, petitioner sought to encash the postdated checks issued by
Pilipinas. Petitioner has not pointed us to any law which imposed such liability upon Philfinance. However, the checks were dishonored for having been drawn against
Pilipinas nor has petitioner argued that the very nature of the custodianship assumed insufficient funds.
by private respondent Pilipinas necessarily implies solidary liability under the On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issued
securities, custody of which was taken by Pilipinas. Accordingly, we are unable to by private respondent Pilipinas Bank (“Pilipinas”). It read as follows:
hold Pilipinas solidarity liable with Philfinance and private respondent Delta under
DMC PN No. 2731. “PILIPINAS BANK
Makati Stock Exchange Bldg.,
PETITION for review on certiorari of the decision of the Court of Appeals. Ayala Avenue, Makati,
Metro Manila
The facts are stated in the opinion of the Court.
Salva, Villanueva & Associates for Delta Motors Corporation. February 9, 1991
Reyes, Salazar & Associates for Pilipinas Bank. VALUE DATE
FELICIANO, J.:
TO Raul Sesbreño
On 9 February 1981, petitioner Raul Sesbreño made a money market placement in
the amount of P300,000.00 with the Philippine Underwriters Finance Corporation April 6, 1981
(“Philfinance”), Cebu Branch; the placement, with a term of thirty-two (32) days, MATURITY DATE
would mature on 13 March 1981. Philfinance, also on 9 February 1981, issued the
following documents to petitioner: NO. 10805
1. (a)the Certificate of Confirmation of Sale, “without recourse,” No. 20496 of DENOMINATED CUSTODIAN RECEIPT
one (1) Delta Motors Corporation Promissory Note (“DMC PN”) No. 2731 for
a term of 32 days at 17.0% per annum; ‘This confirms that as a duly Custodian Bank, and upon instruction of PHILIPPINE
2. (b)the Certificate of Securities Delivery Receipt No. 16587 indicating the sale UNDERWRITERS FINANCE CORPORATION, we have in our custody the following
of DMC PN No. 2731 to petitioner, with the notation that the said security securities to you [sic] the extent herein indicated.
was in custodianship of Pilipinas Bank, as per SERIAL MAT. FACE ISSUED REGISTERED AMOUNT
NUMBER DATE VALUE BY HOLDER PAYEE
469
2731 4-6- 2,300,833.34 DMC PHIL. 307,933.33
VOL. 222, MAY 24, 1993 469
81 UNDERWRITERS
Sesbreño vs. Court of Appeals
FINANCE CORP.
470
1. Denominated Custodian Receipt (“DCR”) No. 10805 dated 9 February 1981;
and 470 SUPREME COURT REPORTS ANNOTATED
2. (c)post-dated checks payable on 13 March 1981 (i.e., the maturity date of Sesbreño vs. Court of Appeals
petitioner’s investment), with petitioner as payee, Philfinance as drawer, We further certify that these securities may be inspected by you or your duly
and Insular Bank of Asia and America as drawee, in the total amount of authorized representative at any time during regular banking hours.
P304,533.33. Upon your written instructions we shall undertake physical delivery of the above
securities fully assigned to you should this Denominated Custodianship Receipt
remain outstanding in your favor thirty (30) days after its maturity.’
 PILIPINAS BANK
(By Elizabeth De Villa
Illegible Signature)”1
On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private respondent
Pilipinas, Makati Branch, and handed to her a demand letter informing the bank that
his placement with Philfinance in the amount reflected in the DCR No. 10805 had
remained unpaid and outstanding, and that he in effect was asking for the physical
delivery of the underlying promissory note. Petitioner then examined the original of
the DMC PN No. 2731 and found: that the security had been issued on 10 April 1980;
that it would mature on 6 April 1981; that it had a face value of P2,300,833.33, with
Philfinance as “payee” and private respondent Delta Motors Corporation (“Delta”) as
“maker;” and that on face of the promissory note was stamped “NON-
NEGOTIABLE.” Pilipinas did not deliver the Note, nor any certificate of participation
in respect thereof, to petitioner.
Petitioner later made similar demand letters, dated 3 July 1981 and 3 August
1981,2 again asking private respondent Pilipinas for physical delivery of the original
of DMC PN No. 2731. Pilipinas allegedly referred all of petitioner’s demand letters to
Philfinance for written instructions, as had been supposedly agreed upon in a
“Securities Custodianship Agreement” between Pilipinas and Philfinance. Philfinance
never did provide the appropriate instructions; Pilipinas never released DMC PN No.
2731, nor any other instrument in respect thereof, to petitioner.
______________
1 Exhibit “C”, Folder of Exhibits, p. 3; TSN, 14 June 1983, p. 41.
2 Records, p. 441; Plaintiff’s Memorandum, p. 3.
471
VOL. 222, MAY 24, 1993 471
Sesbreño vs. Court of Appeals
Petitioner also made a written demand on 14 July 19813upon private respondent
Delta for the partial satisfaction of DMC PN No. 2731, explaining that Philfinance, as
payee thereof, had assigned to him said Note to the extent of P307,933.33. Delta,
however, denied any liability to petitioner on the promissory note, and explained in
turn that it had previously agreed with Philfinance to offset its DMC PN No. 2731
(along with DMC PN No. 2730) against Philfinance PN No. 143-A issued in favor of
Delta.
In the meantime, Philfinance, on 18 June 1981, was placed under the joint
management of the Securities and Exchange Commission (“SEC”) and the Central
Bank. Pilipinas delivered to the SEC DMC PN No. 2731, which to date apparently
remains in the custody of the SEC.4
As petitioner had failed to collect his investment and interest thereon, he filed on
28 September 1982 an action for damages with the Regional Trial Court (“RTC”) of
Cebu City, Branch 21, against private respondents Delta and Pilipinas.5 The trial
court, in a decision dated 5 August 1987, dismissed the complaint and counterclaims
for lack of merit and for lack of cause of action, with costs against petitioner.
Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195. In
a decision dated 21 March 1989, the Court of Appeals denied the appeal and held: 6
“Be that as it may, from the evidence on record, if there is anyone that appears liable
for the travails of plaintiff-appellant, it is Philfinance. As correctly observed by the
trial court:
‘This act of Philfinance in accepting the investment of plaintiff and charging it
against DMC P.N. No. 2731 when its entire face value was already obligated or
earmarked for set-off or compensation is difficult to comprehend and may have been
_______________
3 Id., p. 451; Plaintiff’s Memorandum, p. 13.
4 TSN, 14 June 1983, p. 35.
5 Petitioner explained that he did not implead Philfinance as party defendant
because the latter was under rehabilitation by the Securities and Exchange
Commission (TSN of the Pre-trial Conference, pp. 6 and 30, dated 04 March 1983).
6 Court of Appeals’ Decision, p. 8; Rollo, p. 90.
472
472 SUPREME COURT REPORTS ANNOTATED
Sesbreño vs. Court of Appeals
motivated with bad faith. Philfinance, therefore, is solely and legally obligated to
return the investment of plaintiff, together with its earnings, and to answer all the
damages plaintiff has suffered incident thereto. Unfortunately for plaintiff,
Philfinance was not impleaded as one of the defendants in this case at bar; hence,
this Court is without jurisdiction to pronounce judgment against it. (p. 11, Decision).’
WHEREFORE, finding no reversible error in the decision appealed from, the
same is hereby affirmed in toto. Cost against plaintiff-appellant.”
Petitioner moved for reconsideration of the above Decision, without success.
Hence, this Petition for Review on Certiorari.
After consideration of the allegations contained and issues raised in the Pleadings,
the Court resolved to give due course to the petition and required the parties to file
their respective memoranda.7
Petitioner reiterates the assignment of errors he directed at the trial court
decision, and contends that respondent Court of Appeals gravely erred: (i) in
concluding that he cannot recover from private respondent Delta his assigned
portion of DMC PN No. 2731; (ii) in failing to hold private respondent Pilipinas
solidarity liable on the DMC PN No. 2731 in view of the provisions stipulated in DCR
No. 10805 issued in favor of petitioner; and (iii) in refusing to pierce the veil of
corporate entity between Philfinance, and private respondents Delta and Pilipinas,
considering that the three (3) entities belong to the “Silverio Group of Companies”
under the leadership of Mr. Ricardo Silverio, Sr.8
There are at least two (2) sets of relationships which we need to address: firstly,
the relationship of petitioner vis-a-vis Delta; secondly, the relationship of petitioner
in respect of Pilipinas. Actually, of course, there is a third relationship that is of
critical importance: the relationship of petitioner and Philfinance. However, since
Philfinance has not been impleaded in this case, neither the trial court nor the Court
of Appeals acquired jurisdic-
_______________
7 Private respondent Delta adopted as its own the Memorandum filed by private
respondent Pilipinas (Rollo, pp. 269-73).
8 Rollo, p. 6.; Petition, p. 5.
473
VOL. 222, MAY 24, 1993 473
Sesbreño vs. Court of Appeals
tion over the person of Philfinance. It is, consequently, not necessary for present
purposes to deal with this third relationship, except to the extent it necessarily
impinges upon or intersects the first and second relationships.
I instrument must be distinguished from the assignment or transfer of an instrument
We consider first the relationship between petitioner and Delta.
The Court of Appeals in effect held that petitioner acquired no rights vis-a-vis
Delta in respect of the Delta promissory note (DMC PN No. 2731) which Philfinance
sold “without recourse” to petitioner, to the extent of P304,533.33. The Court of
Appeals said on this point:
“Nor could plaintiff-appellant have acquired any right over DMC P.N. No. 2731 as the
same is ‘non-negotiable’ as stamped on its face (Exhibit ‘6’), negotiation being
defined as the transfer of an instrument from one person to another so as to
constitute the transferee the holder of the instrument (Sec. 30, Negotiable
Instruments Law). A person not a holder cannot sue on the instrument in his own
name and cannot demand or receive payment (Section 51, id.).”9
Petitioner admits that DMC PN No. 2731 was non-negotiable but contends that that
Note had been validly transferred, in part, to him by assignment and that as a result
of such transfer, Delta as debtor-maker of the Note, was obligated to pay petitioner
the portion of that Note assigned to him by the payee Philfinance.
Delta, however, disputes petitioner’s contention and argues:
1. (1)that DMC PN No. 2731 was not intended to be negotiated or otherwise
transferred by Philfinance as manifested by the word “non-negotiable”
stamp across the face of the Note10 and because maker Delta and payee
Philfinance intended that this Note would be offset against the outstanding
obligation of Philfinance represented by Philfinance PN No. 143-A issued to
Delta as payee;
2. (2)that the assignment of DMC PN No. 2731 by Philfinance was without
Delta’s consent, if not against its instructions; and
_______________
9Id., p. 88.
10TSN, 17 August 1983, p. 36.
474
474 SUPREME COURT REPORTS ANNOTATED
Sesbreño vs. Court of Appeals
1. (3)assuming (arguendo only) that the partial assignment in favor of
petitioner was valid, petitioner took that Note subject to the defenses
available to Delta, in particular, the offsetting of DMC PN No. 2731 against
Philfmance PN No. 143-A.11
We consider Delta’s arguments seriatim.
Firstly, it is important to bear in mind that the negotiation of a negotiable
whether that be negotiable or non-negotiable. Only an instrument qualifying as a
negotiable instrument under the relevant statute may be negotiated either by
indorsement thereof coupled with delivery, or by delivery alone where the negotiable
instrument is in bearer form. A negotiable instrument may, however, instead of being
negotiated, also be assigned or transferred. The legal consequences of negotiation as
distinguished from assignment of a negotiable instrument are, of course, different. A
non-negotiable instrument may, obviously, not be negotiated; but it may be assigned
or transferred, absent an express prohibition against assignment or transfer written
in the face of the instrument:
“The words ‘not negotiable,’ stamped on the face of the bill of lading, did not destroy
its assignability, but the sole effect was to exempt the bill from the statutory
provisions relative thereto, and a bill, though not negotiable, may be transferred by
assignment;the assignee taking subject to the equities between the original
parties.”12 (Italics added)
DMC PN No. 2731, while marked “non-negotiable,” was notat the same time stamped
“non-transferrable” or “non-assignable.” It contained no stipulation which prohibited
Philfinance from assigning or transferring, in whole or in part, that Note.
Delta adduced the “Letter of Agreement” which it had entered into with
Philfinance and which should be quoted in full:
_______________
 11Records, pp. 36-37. borrowed back the bulk of that placement, i.e., P4,000,000.00, by issuing its two (2)
12National Bank of Bristol v. Baltimore & O.R. Co., 59 A. 134, 138. See also, in this promissory notes: DMC PN No. 2730 and DMC PN No. 2731, both also dated 10 April
connection, Consolidated Plywood v. IFC Leasing, 149 SCRA 449 (1987). 1980. Thus, Philfinance was left with not P4,600,000.00 but only P600,000.00 in
475 cash and the two (2) Delta promissory notes.
VOL. 222, MAY 24, 1993 475 Apropos Delta’s complaint that the partial assignment by Philfinance of DMC PN
Sesbreño vs. Court of Appeals No. 2731 had been effected without the consent of Delta, we note that such consent
“April 10, 1980 was not necessary for the validity and enforceability of the assignment in favor of
Philippine Underwriters Finance Corp. petitioner.14 Delta’s argument that Philfinance’s sale or assignment of part of its
Benavidez St., Makati rights to DMC PN No. 2731 constituted conventional subrogation, which required its
Metro Manila (Delta’s) consent, is quite mistaken. Conventional subrogation, which in the first
Attention: Mr. Alfredo O. Banaria place is never lightly inferred,15 must be clearly established by the unequivocal terms
SVP-Treasurer of the subtituting obligation or by the evident incompatibility of the new and old
GENTLEMEN: obligations on every point.16 Nothing of the sort is present in the instant case.
This refers to our outstanding placement of P4,601,666.67 as evidenced by your It is in fact difficult to be impressed with Delta’s complaint, since it released its
Promissory Note No. 143-A, dated April 10, 1980, to mature on April 6, 1981. DMC PN No. 2731 to Philfinance, an entity engaged in the business of buying and
As agreed upon, we enclose our non-negotiable Promissory Note No. 2730 and selling debt instruments and other securities, and more generally, in money market
2731 for P2,000,000.00 each, dated April 10, 1980, to be offsetted [sic] against your transactions. In Perez v. Court of Appeals,17 the Court, speaking through Mme.
PN No. 143-A upon co-terminal maturity. Justice Herrera, made the following important statement:
Please deliver the proceeds of our PNs to our representative, Mr. Eric Castillo. “There is another aspect to this case. What is involved here is a money market
Very Truly Yours, transaction. As defined by Lawrence Smith ‘the money market is a market dealing in
(Sgd.) standardized short-term credit instruments (involving large amounts) where lenders
Florencio B. Biagan and borrowers do not deal directly with each other but through a middle man or
Senior Vice President”13 dealer in the open market.’ It involves ‘commercial papers’ which are instruments
We find nothing in his “Letter of Agreement” which can be reasonably construed as a ‘evidencing indebtedness of any person or entity . . . ., which are issued, endorsed,
prohibition upon Philfinance assigning or transferring all or part of DMC PN No. sold or transferred or in any manner conveyed to another person or entity, with or
2731, before the maturity thereof. It is scarcely necessary to add that, even had this without recourse.’ The fundamental
“Letter of Agreement” set forth an explicit prohibition of transfer upon Philfinance,
_______________
such a prohibition cannot be invoked against an assignee or transferee of the Note
who parted with valuable consideration in good faith and without notice of such 14 National Investment and Development Corporation v. De los Angeles, 40 SCRA
prohibition. It is not disputed that petitioner was such an assignee or transferee. Our
487 (1971); Bastida v. Dy Buncio & Co., 93 Phil. 195 (1953). See also Articles 1285 and
conclusion on this point is reinforced by the fact that what Philfinance and Delta
1626, Civil Code.
were doing by their exchange of promissory notes was this: Delta invested, by making 15 Article 1300, Civil Code.
a money market placement with Philfinance, approximately P4,600,000.00 on 10 16 Article 1292, id.
April 1980; but promptly, on the same day, 17 127 SCRA 636 (1984).

f
______________
477
13Exhibit “3,” Records, p. 240. VOL. 222, MAY 24, 1993 477
476 Sesbreño vs. Court of Appeals
476 SUPREME COURT REPORTS ANNOTATED function of the money market device in its operation is to match and bring together
Sesbreño vs. Court of Appeals in a most impersonal manner both the ‘fund users’ and the ‘fund suppliers.’ The
money market is an ‘impersonal market’, free from personal considerations.’ The
market mechanism is intended to provide quick mobility of money and securities.’
The impersonal character of the money market device overlooks the individuals or
entities concerned. The issuer of a commercial paper in the money market
necessarily knows in advance that it would be expeditiously transacted and
transferred to any investor/lender without need of notice to said issuer. In practice,
no notification is given to the borrower or issuer of commercial paper of the sale or
transfer to the investor.
xxx xxx xxx
There is no need to individuate a money market transaction, a relatively novel
institution in the Philippine commercial scene. It has been intended to facilitate the
flow and acquisition of capital on an impersonal basis. And as specifically required
by Presidential Decree No. 678, the investing public must be given adequate and
effective protection in availing of the credit of a borrower in the commercial paper
market.”18 (Citations omitted; italics supplied)
We turn to Delta’s arguments concerning alleged compensation or offsetting between
DMC PN No. 2731 and Philfinance PN No. 143-A. It is important to note that at the
time Philfinance sold part of its rights under DMC PN No. 2731 to petitioner on 9
February 1981, no compensation had as yet taken place and indeed none could have
taken place. The essential requirements of compensation are listed in the Civil Code
as follows:
“Art. 1279. In order that compensation may be proper, it is necessary:
1. (1)That each one of the obligors be bound principally, and that he be at the
same time a principal creditor of the other;
2. (2)That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;
3. (3)That the two debts are due;
4. (4)That they be liquidated and demandable;
5. (5)That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the debtor.”
(Italics supplied)
_______________
18127 SCRA at 645-646.
478
478 SUPREME COURT REPORTS ANNOTATED
Sesbreño vs. Court of Appeals
On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was
due. This was explicitly recognized by Delta in its 10 April 1980 “Letter of
Agreement” with Philfinance, where Delta acknowledged that the relevant
promissory notes were “to be offsetted (sic) against [Philfinance] PN No. 143-A upon
coterminal maturity.”
As noted, the assignment to petitioner was made on 9 February 1981 or from
forty-nine (49) days before the “co-terminal maturity” date, that is to say, before any
compensation had taken place. Further, the assignment to petitioner would have
prevented compensation from taking place between Philfinance and Delta, to the
extent of P304,533.33, because upon execution of the assignment in favor of
petitioner, Philfinance and Delta would have ceased to be creditors and debtors of
each other in their own right to the extent of the amount assigned by Philfinance to
petitioner. Thus, we conclude that the assignment effected by Philfinance in favor of
petitioner was a valid one and that petitioner accordingly became owner of DMC PN
No. 2731 to the extent of the portion thereof assigned to him.
The record shows, however, that petitioner notified Delta of the fact of the
assignment to him only on 14 July 1981,19 that is, after the maturity not only of the
money market placement made by petitioner but also of both DMC PN No. 2731 and
Philfinance PN No. 143-A. In other words, petitioner notified Delta of his rights as
assignee after compensation had taken place by operation of law because the
offsetting instruments had both reached maturity. It is a firmly settled doctrine that
the rights of an assignee are not any greater than the rights of the assignor, since the
assignee is merely substituted in the place of the assignor20 and that the assignee
acquires his rights subject to the equities—i.e., the defenses—which the debtor could
have set up
_______________
19Records, p. 451; Plaintiff’s Memorandum, p. 13.
20 Gonzales v. Land Bank of the Philippines, 183 SCRA 520 (1990); Philippine
National Bank v. General Acceptance and Finance Corp., 161 SCRA
449 (1988); National Investment and Development Corporation v. De los Angeles, 40
SCRA 489 (1971); Montinola v. Philippine National Bank, 88 Phil.
178 (1951); National Exchange Company, Ltd. v. Ramos, 51 Phil. 310 (1927); Sison v.
Yap-Tico, 37 Phil. 584 (1918).
479
VOL. 222, MAY 24, 1993 479
Sesbreño vs. Court of Appeals
against the original assignor before notice of the assignment was given to the debtor.
Article 1285 of the Civil Code provides that:
“ART. 1285. The debtor who has consented to the assignment of rights made by a
creditor in favor of a third person, cannot set up against the assignee the
compensation which would pertain to him against the assignor, unless the assignor
was notified by the debtor at the time he gave his consent, that he reserved his right
to the compensation.
If the creditor communicated the cession to him but the debtor did not
consent thereto, the latter may set up the compensation of debts previous to the
cession, but not of subsequent ones.
If the assignment is made without the knowledge of the debtor, he may set up the
compensation of all credits prior to the same and also later ones until he
had knowledge of the assignment.” (Italics supplied)
Article 1626 of the same Code states that: “the debtor who, before having knowledge
of the assignment, pays his creditor shall be released from the obligation.” In Sison v.
Yap-Tico,21 the Court explained that:
“[n]o man is bound to remain a debtor: he may pay to him with whom he contracted
to pay; and if he pay before notice that his debt has been assigned, the law holds him
exonerated, for the reason that it is the duty of the person who has acquired a title by
transfer to demand payment of the debt, to give his debtor notice.”22
At the time that Delta was first put to notice of the assignment in petitioner’s favor on
14 July 1981, DMC PN No. 2731 had already been discharged by compensation. Since
the assignor Philfinance could not have then compelled payment anew by Delta of
DMC PN No. 2731, petitioner, as assignee of Philfinance, is similarly disabled from
collecting from Delta the portion of the Note assigned to him.
It bears some emphasis that petitioner could have notified Delta of the
assignment in his favor as soon as that assignment
_______________
21 37 Phil. 584 (1918).
22 37 Phil. at 589. See also Rodriguez v. Court of Appeals, 207 SCRA 553, 559
(1992). See, generally, Philippine National Bank v. General Acceptance and Finance
Corp., 161 SCRA 449, 457 (1988).
480
480 SUPREME COURT REPORTS ANNOTATED
Sesbreño vs. Court of Appeals
or sale was effected on 9 February 1981. He could have also notified Delta as soon as
his money market placement matured on 13 March 1981 without payment thereof
being made by Philfinance; at that time, compensation had yet to set in and
discharge DMC PN No. 2731. Again, petitioner could have notified Delta on 26 March
1981 when petitioner received from Philfinance the Denominated Custodianship
Receipt (“DCR”) No. 10805 issued by private respondent Pilipinas in favor of
petitioner. Petitioner could, in fine, have notified Delta at any time before the
maturity date of DMC PN No. 2731. Because petitioner failed to do so, and because
the record is bare of any indication that Philfinance had itself notified Delta of the
assignment to petitioner, the Court is compelled to uphold the defense of
compensation raised by private respondent Delta. Of course, Philfinance remains
liable to petitioner under the terms of the assignment made by Philfinance to
petitioner.
II
We turn now to the relationship between petitioner and private respondent Pilipinas.
Petitioner contends that Pilipinas became solidarily liable with Philfinance and Delta
when Pilipinas issued DCR No. 10805 with the following words:
“Upon your written instructions, we [Pilipinas] shall undertakephysical delivery of
the above securities fully assigned to you—.”23
The Court is not persuaded. We find nothing in the DCR that establishes an
obligation on the part of Pilipinas to pay petitioner the amount of P307,933.33 nor
any assumption of liability in solidum with Philfinance and Delta under DMC PN No.
2731. We read the DCR as a confirmation on the part of Pilipinas that:
1. (1)it has in its custody, as duly constituted custodian bank, DMC PN No. 2731
of a certain face value, to mature on 6 April 1981 and payable to the order of
Philfinance;
2. (2)Pilipinas was, from and after said date of the assignment by Philfinance to
petitioner (9 February) 1981), holding that Note on
_______________
23Petitioner’s Memorandum, p. 12; Rollo, p. 221.
481
VOL. 222, MAY 24, 1993 481
Sesbreño vs. Court of Appeals
1. behalf and for the benefit of petitioner, at least to the extent it had been
assigned to petitioner by payee Philfinance;24
2. (3)petitioner may inspect the Note either “personally or by authorized
representative; at any time during regular bank hours; and
3. (4)upon written instructions of petitioner, Pilipinas would physically deliver
the DMC PN No. 2731 (or a participation therein to the extent of
P307,933.33)“should this Denominated Custodianship Receipt remain
outstanding in [petitioner’s] favor thirty (30) days after its maturity.”
Thus, we find nothing written in printers ink on the DCR which could reasonably be
read as converting Pilipinas into an obligor under the terms of DMC PN No. 2731
assigned to petitioner, either upon maturity thereof or at any other time. We note
that both in his complaint and in his testimony before the trial court, petitioner
referred merely to the obligation of private respondent Pilipinas to effect physical
delivery to him of DMC PN No. 2731.25Accordingly, petitioner’s theory that Pilipinas
had assumed a solidary obligation to pay the amount represented by the portion of
the Note assigned to him by Philfinance, appears to be a new theory constructed only
after the trial court had ruled against him. The solidary liability that petitioner seeks
to impute to Pilipinas cannot, however, be lightly inferred. Under Article 1207 of the
Civil Code, “there is a solidary liability only when the obligation expressly so states,
or when the law or the nature of the obligation requires solidarity.” The record here
exhibits no express assumption of solidary liability vis-a-vis petitioner, on the part of
Pilipinas. Petitioner has not pointed us to any law which imposed such liability upon
Pilipinas nor has petitioner argued that the very nature of the custodianship assumed
by private respondent Pilipinas necessarily implies solidary liability
_______________
24 The DCR specified the amount of P307,933.33 as the extent to which DMC PN
No. 2731 pertained to petitioner Raul Sesbreño. This amount probably refers to the
placement of P300,000.00 by petitioner plus interest from 9 February 1981 until the
maturity date of DMC PN No. 2731, i.e., 6 April 1981.
25 Complaint, pp. 2-3; Rollo, pp. 23-24; TSN of 11 April 1983, p. 51; TSN, 9
October 1986, pp. 15-16. See also Minutes of the Pre-trial Conference, dated 04
March, 1983, p. 9.
482
482 SUPREME COURT REPORTS ANNOTATED
Sesbreño vs. Court of Appeals
under the securities, custody of which was taken by Pilipinas. Accordingly, we are
unable to hold Pilipinas solidarity liable with Philfinance and private respondent
Delta under DMC PN No. 2731.
We do not, however, mean to suggest that Pilipinas has no responsibility and
liability in respect of petitioner under the terms of the DCR. To the contrary, we find,
after prolonged analysis and deliberation, that private respondent Pilipinas had
breached its undertaking under the DCR to petitioner Sesbreno.
We believe and so hold that a contract of deposit was constituted by the act of
Philfinance in designating Pilipinas as custodian or depositary bank. The depositor
was initially Philfinance; the obligation of the depositary was owed, however, to
petitioner Sesbreno as beneficiary of the custodianship or depositary agreement. We
do not consider that this is a simple case of a stipulation pour autri. The
custodianship or depositary agreement was established as an integral part of the
money market transaction entered into by petitioner with Philfinance. Petitioner
bought a portion of DMC PN No. 2731; Philfinance as assignor-vendor deposited that
Note with Pilipinas in order that the thing sold would be placed outside the control of
the vendor. Indeed, the constituting of the depositary or custodianship agreement
was equivalent to constructive delivery of the Note (to the extent it had been sold or
assigned to petitioner) to petitioner. It will be seen that custodianship agreements
are designed to facilitate transactions in the money market by providing a basis for
confidence on the part of the investors or placers that the instruments bought by
them are effectively taken out of the pocket, as it were, of the vendors and placed
safely beyond their reach, that those instruments will be there available to the placers
of funds should they have need of them. The depositary in a contract of deposit is
obliged to return the security or the thing deposited upon demand of the depositor
(or, in the presented case, of the beneficiary) of the contract, even though a term for
such return may have been established in the said contract.26 Accordingly, any
stipulation in the contract of deposit or custodianship that runs counter to the
fundamental purpose of that agreement or which
______________
26 Article 1988, Civil Code.
483
VOL. 222, MAY 24, 1993 483
Sesbreño vs. Court of Appeals
was not brought to the notice of and accepted by the placer-beneficiary, cannot be
enforced as against such beneficiary-placer.
We believe that the position taken above is supported by considerations of public
policy. If there is any party that needs the equalizing protection of the law in money
market transactions, it is the members of the general public who place their savings
in such market for the purpose of generating interest revenues.27 The custodian bank,
if it is not related either in terms of equity ownership or management control to the
borrower of the funds, or the commercial paper dealer, is normally a preferred or
traditional banker of such borrower or dealer (here, Philfinance). The custodian bank
would have every incentive to protect the interest of its client the borrower or dealer
as against the placer of funds. The providers of such funds must be safeguarded from
the impact of stipulations privately made between the borrowers or dealers and the
custodian banks, and disclosed to fund-providers only after trouble has erupted.
In the case at bar, the custodian-depositary bank Pilipinas refused to deliver the
security deposited with it when petitioner first demanded physical delivery thereof
on 2 April 1981. We must again note, in this connection, that on 2 April 1981, DMC
PN No. 2731 had not yet matured and therefore, compensation or offsetting against
Philfinance PN No. 143-A had not yet taken place. Instead of complying with the
demand of petitioner, Pilipinas purported to require and await the instructions of
Philfinance, in obvious contravention of its undertaking under the DCR to effect
physical delivery of the Note upon receipt of “written instructions” from petitioner
Sesbreño.The ostensible term written into the DCR (i.e., “should this [DCR] remain
outstanding in your favor thirty [30] days after its maturity”) was not a defense
against petitioner’s demand for physical surrender of the Note on at least three
grounds: firstly, such term was never brought to the attention of petitioner Sesbreño
at the time the money market placement with Philfinance was made; secondly, such
term runs counter to the very purpose of the custodianship
_______________
27 See, in this connection, the second and third “whereas” clauses of P.D. No. 678,
dated 2 April 1975.
484
484 SUPREME COURT REPORTS ANNOTATED
Sesbreño vs. Court of Appeals
or depositary agreement as an integral part of a money market transaction; and
thirdly, it is inconsistent with the provisions of Article 1988 of the Civil Code noted
above. Indeed, in principle, petitioner became entitled to demand physical delivery of
the Note held by Pilipinas as soon as petitioner’s money market placement matured
on 13 March 1981 without payment from Philfinance.
We conclude, therefore, that private respondent Pilipinas must respond to
petitioner for damages sustained by him arising out of its breach of duty. By failing to
deliver the Note to the petitioner as depositor-beneficiary of the thing deposited,
Pilipinas effectively and unlawfully deprived petitioner of the Note deposited with it.
Whether or not Pilipinas itself benefited from such conversion or unlawful
deprivation inflicted upon petitioner, is of no moment for present purposes. Prima
facie, the damages suffered by petitioner consisted of P304,533.33, the portion of the
DMC PN No. 2731 assigned to petitioner but lost by him by reason of discharge of the
Note by compensation, plus legal interest of six percent (6%) per annum counting
from 14 March 1981.
The conclusion we have here reached is, of course, without prejudice to such right
of reimbursement as Pilipinas may have vis-a-vis Philfinance.
III
The third principal contention of petitioner—that Philfinance and private
respondents Delta and Pilipinas should be treated as one corporate entity—need not
detain us for long.
In the first place, as already noted, jurisdiction over the person of Philfinance was
never acquired either by the trial court nor by the respondent Court of Appeals.
Petitioner similarly did not seek to implead Philfinance in the Petition before us.
Secondly, it is not disputed that Philfinance and private respondents Delta and
Pilipinas have been organized as separate corporate entities. Petitioner asks us to
pierce their separate corporate entities, but has been able only to cite the presence of
a common Director—Mr. Ricardo Silverio, Sr., sitting on the Boards of Directors of
all three (3) companies. Petitioner has neither alleged nor proved that one or another
of the three (3) concededly
485
VOL. 222, MAY 24, 1993 485
Sesbreño vs. Court of Appeals
related companies used the other two (2) as mere alter egosor that the corporate
affairs of the other two (2) were administered and managed for the benefit of one.
There is simply not enough evidence of record to justify disregarding the separate
corporate personalities of Delta and Pilipinas and to hold them liable for any
assumed or undetermined liability of Philfinance to petitioner.28
WHEREFORE, for all the foregoing, the Decision and Resolution of the Court of
Appeals in C.A.-G.R. CV No. 15195 dated 21 March 1989 and 17 July 1989,
respectively, are hereby MODIFIED and SET ASIDE, to the extent that such Decision
and Resolution had dismissed petitioner’s complaint against Pilipinas Bank. Private
respondent Pilipinas Bank is hereby ORDERED to indemnify petitioner for damages
in the amount of P304,533.33, plus legal interest thereon at the rate of six percent
(6%) per annum counted from 2 April 1981. As so modified, the Decision and
Resolution of the Court of Appeals are hereby AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
Bidin, Davide, Jr., Romero and Melo, JJ., concur.
Decision and resolution affirmed with modification.
Notes.—An assignment of credit is the process of transferring the right of the
assignor to the assignee who would then have the right to proceed against the debtor
(Rodriguez vs. Court of Appeals, 207 SCRA 553).
Consent is not necessary in order that assignment may fully produce legal effects
(Rodriguez vs. Court of Appeals,207 SCRA 553).
——o0o——
_______________
28Pabalan v. National Labor Relations Commission, 184 SCRA 495(1990); Del
Rosario v. National Labor Relations Commission, 187 SCRA 777 (1990); Remo, Jr. v.
Intermediate Appellate Court, 172 SCRA 405(1989).
 G.R. No. 156262. July 14, 2005.*
MARIA TUAZON, ALEJANDRO P. TUAZON, MELECIO P. TUAZON, Spouses
ANASTACIO and MARY T. BUENA-VENTURA, petitioners, vs. HEIRS OF
BARTOLOME RAMOS, respondents.
Remedial Law; Appeals; Supreme Court’s role in a petition under Rule 45 is
limited to reviewing errors of law allegedly committed by the Court of Appeals.—
Well-entrenched is the rule that the Supreme Court’s role in a petition under Rule 45
is limited to reviewing errors of law allegedly committed by the Court of Appeals.
Factual findings of the trial court, especially when affirmed by the CA, are conclusive
on the parties and this Court. Petitioners have not given us sufficient reasons to
deviate from this rule.
Civil Law; Agency; In a contract of agency, one binds oneself to render some
service or to do something in representation or on behalf
_______________
* THIRD DIVISION.
409
VOL. 463, JULY 14, 2005 409
Tuazon vs. Heirs of Bartolome Ramos
of another, with the latter’s consent or authority; Elements of Agency.—In a
contract of agency, one binds oneself to render some service or to do something in
representation or on behalf of another, with the latter’s consent or authority. The
following are the elements of agency: (1) the parties’ consent, express or implied, to
establish the relationship; (2) the object, which is the execution of a juridical act in
relation to a third person; (3) the representation, by which the one who acts as an
agent does so, not for oneself, but as a representative; (4) the limitation that the
agent acts within the scope of his or her authority. As the basis of agency is
representation, there must be, on the part of the principal, an actual intention to
appoint, an intention naturally inferable from the principal’s words or actions. In the
same manner, there must be an intention on the part of the agent to accept the
appointment and act upon it. Absent such mutual intent, there is generally no
agency.
Same; Same; Declarations of agents alone are generally insufficient to
establish the fact or extent of their authority.—The declarations of agents alone are
generally insufficient to establish the fact or extent of their authority. The law makes
no presumption of agency; proving its existence, nature and extent is incumbent
upon the person alleging it. In the present case, petitioners raise the fact of agency as
an affirmative defense, yet fail to prove its existence.
Negotiable Instruments Law; After an instrument is dishonored by
nonpayment, indorsers cease to be merely secondarily liable, they become principal
debtors whose liability becomes identical to that of the original obligor.—As
indorser, Petitioner Maria Tuazon warranted that upon due presentment, the checks
were to be accepted or paid, or both, according to their tenor; and that in case they
were dishonored, she would pay the corresponding amount. After an instrument is
dishonored by nonpayment, indorsers cease to be merely secondarily liable; they
become principal debtors whose liability becomes identical to that of the original
obligor. The holder of a negotiable instrument need not even proceed against the
maker before suing the indorser. Clearly, Evangeline Santos—as the drawer of the
checks—is not an indispensable party in an action against Maria Tuazon, the indorser
of the checks.
PETITION for review on certiorari of a decision of the Court of Appeals.
410
410 SUPREME COURT REPORTS ANNOTATED
Tuazon vs. Heirs of Bartolome Ramos
The facts are stated in the opinion of the Court.
Habitan, Carbonell, Ferrer, Chan & Associates for petitioners.
Ireneo G. Calderon for respondents.
PANGANIBAN, J.:
Stripped of nonessentials, the present case involves the collection of a sum of money.
Specifically, this case arose from the failure of petitioners to pay respondents’
predecessor-in-interest. This fact was shown by the non-encashment of checks issued
by a third person, but indorsed by herein Petitioner Maria Tuazon in favor of the said
predecessor. Under these circumstances, to enable respondents to collect on the
indebtedness, the check drawer need not be impleaded in the Complaint. Thus, the
suit is directed, not against the drawer, but against the debtor who indorsed the
checks in payment of the obligation.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, challenging
the July 31, 2002 Decision2 of the Court of Appeals (CA) in CA-G.R. CV No. 46535.
The decretal portion of the assailed Decision reads:
“WHEREFORE, the appeal is DISMISSED and the appealed decision
is AFFIRMED.”
On the other hand, the affirmed Decision3 of Branch 34 of the Regional Trial Court
(RTC) of Gapan, Nueva Ecija, disposed as follows:
_______________
1 Rollo, pp. 8-21.
 2 Id., pp. 24-33. Seventeenth Division. Penned by Justice Roberto A. Barrios
(Division chairman) and concurred in by Justices Bienvenido L. Reyes and Edgardo
F. Sundiam (members).
3 Id., pp. 153-175.
411
VOL. 463, JULY 14, 2005 411
Tuazon vs. Heirs of Bartolome Ramos
“WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against
the defendants, ordering the defendants spouses Leonilo Tuazon and Maria Tuazon
to pay the plaintiffs, as follows:
1. “1.The sum of P1,750,050.00, with interests from the filing of the second
amended complaint;
2. “2.The sum of P50,000.00, as attorney’s fees;
3. “3.The sum of P20,000.00, as moral damages;
4. “4.And to pay the costs of suit.
x x x x x x x x x”4
The Facts
The facts are narrated by the CA as follows:
“[Respondents] alleged that between the period of May 2, 1988 and June 5, 1988,
spouses Leonilo and Maria Tuazon purchased a total of 8,326 cavans of rice from
[the deceased Bartolome] Ramos [predecessor-in-interest of respondents]. That of
this [quantity,] x x x only 4,437 cavans [have been paid for so far], leaving unpaid
3,889 cavans valued at P1,211,919.00. In payment therefor, the spouses Tuazon
issued x x x [several] Traders Royal Bank checks.
xxx xxx xxx
[B]ut when these [checks] were encashed, all of the checks bounced due to
insufficiency of funds. [Respondents] advanced that before issuing said checks[,]
spouses Tuazon already knew that they had no available fund to support the checks,
and they failed to provide for the payment of these despite repeated demands made
on them.
“[Respondents] averred that because spouses Tuazon anticipated that they would
be sued, they conspired with the other [defendants] to defraud them as creditors by
executing x x x fictitious sales of their properties. They executed x x x simulated
sale[s] [of three lots] in favor of the x x x spouses Buenaventura x x x[,] as well as
their residential lot and the house thereon[,] all located at Nueva Ecija, and another
simulated deed of sale dated July 12, 1988 of a Stake Toyota registered with the Land
Transportation Office of
_______________
4 Id., p. 174. Citations omitted.
412
412 SUPREME COURT REPORTS ANNOTATED
Tuazon vs. Heirs of Bartolome Ramos
Cabanatuan City on September 7, 1988. [Co-petitioner] Melecio Tuazon, a son of
spouses Tuazon, registered a fictitious Deed of Sale on July 19, 1988 x x x over a
residential lot located at Nueva Ecija. Another simulated sale of a Toyota Willys was
executed on January 25, 1988 in favor of their other son, [co-petitioner] Alejandro
Tuazon x x x. As a result of the said sales, the titles of these properties issued in the
names of spouses Tuazon were cancelled and new ones were issued in favor of the
[co-]defendants spouses Buenaventura, Alejandro Tuazon and Melecio Tuazon.
Resultantly, by the said antedated and simulated sales and the corresponding
transfers there was no more property left registered in the names of spouses Tuazon
answerable to creditors, to the damage and prejudice of [respondents].
“For their part, defendants denied having purchased x x x rice from [Bartolome]
Ramos. They alleged that it was Magdalena Ramos, wife of said deceased, who owned
and traded the merchandise and Maria Tuazon was merely her agent. They argued
that it was Evangeline Santos who was the buyer of the rice and issued the checks to
Maria Tuazon as payments therefor. In good faith[,] the checks were received [by
petitioner] from Evangeline Santos and turned over to Ramos without knowing that
these were not funded. And it is for this reason that [petitioners] have been insisting
on the inclusion of Evangeline Santos as an indispensable party, and her non-
inclusion was a fatal error. Refuting that the sale of several properties were fictitious
or simulated, spouses Tuazon contended that these were sold because they were then
meeting financial difficulties but the disposals were made for value and in good faith
and done before the filing of the instant suit. To dispute the contention of plaintiffs
that they were the buyers of the rice, they argued that there was no sales invoice,
official receipts or like evidence to prove this. They assert that they were merely
agents and should not be held answerable.”5
The corresponding civil and criminal cases were filed by respondents against Spouses
Tuazon. Those cases were later consolidated and amended to include Spouses
Anastacio and Mary Buenaventura, with Alejandro Tuazon and Melecio Tuazon as
additional defendants. Having passed away before
_______________
5 Assailed Decision, pp. 5-7; Rollo, pp. 28-30.
413
VOL. 463, JULY 14, 2005 413
Tuazon vs. Heirs of Bartolome Ramos
the pretrial, Bartolome Ramos was substituted by his heirs, herein respondents.
 Contending that Evangeline Santos was an indispensable party in the case,
petitioners moved to file a third-party complaint against her. Allegedly, she was
primarily liable to respondents, because she was the one who had purchased the
merchandise from their predecessor, as evidenced by the fact that the checks had
been drawn in her name. The RTC, however, denied petitioners’ Motion.
Since the trial court acquitted petitioners in all three of the consolidated criminal
cases, they appealed only its decision finding them civilly liable to respondents.
Ruling of the Court of Appeals
Sustaining the RTC, the CA held that petitioners had failed to prove the existence of
an agency between respondents and Spouses Tuazon. The appellate court disbelieved
petitioners’ contention that Evangeline Santos should have been impleaded as an
indispensable party. Inasmuch as all the checks had been indorsed by Maria Tuazon,
who thereby became liable to subsequent holders for the amounts stated in those
checks, there was no need to implead Santos. Hence, this Petition.6
Issues
Petitioners raise the following issues for our consideration:
1. “1.Whether or not the Honorable Court of Appeals erred in ruling that
petitioners are not agents of the respondents.
_______________
6 The case was deemed submitted for decision on September 8, 2003, upon
receipt by this Court of petitioners’ Memorandum, signed by Atty. Leoncio P. Ferrer.
Respondents’ Memorandum, signed by Atty. Irineo G. Calderon, was received by the
Court on September 5, 2003.
414
414 SUPREME COURT REPORTS ANNOTATED
Tuazon vs. Heirs of Bartolome Ramos
1. “2.Whether or not the Honorable Court of Appeals erred in rendering
judgment against the petitioners despite x x x the failure of the respondents
to include in their action Evangeline Santos, an indispensable party to the
suit.”7
The Court’s Ruling
The Petition is unmeritorious.
First Issue:
Agency
Well-entrenched is the rule that the Supreme Court’s role in a petition under Rule 45
is limited to reviewing errors of law allegedly committed by the Court of Appeals.
Factual findings of the trial court, especially when affirmed by the CA, are conclusive
on the parties and this Court.8Petitioners have not given us sufficient reasons to
deviate from this rule.
In a contract of agency, one binds oneself to render some service or to do
something in representation or on behalf of another, with the latter’s consent or
authority.9 The following are the elements of agency: (1) the parties’ consent, express
or implied, to establish the relationship; (2) the object, which is the execution of a
juridical act in relation to a third person; (3) the representation, by which the one
who acts as an agent does so, not for oneself, but as a representative; (4)
the limitation that the agent acts within the scope of his or her authority. 10 As the
basis of agency is representation, there must be,
_______________
7 Petitioner’s Memorandum, pp. 9-10. Original in uppercase.
8 Ceballos v. Intestate Estate of the Late Emigdio Mercado, 430 SCRA 323, 331,
May 28, 2004 (citing Borromeo v. Sun, 375 Phil. 595; 317 SCRA 176, October 22,
1999; Go Ong v. Court of Appeals, 154 SCRA 270, September 24, 1987).
9 Article 1868 of the New Civil Code.
10 Manila Memorial Park Cemetery, Inc. v. Linsangan, G.R. No. 151319,
November 22, 2004, 443 SCRA 377; Spouses Yu Eng Cho v. Pan American World
Airways Inc., 385 Phil. 453, 465; 328 SCRA
415
VOL. 463, JULY 14, 2005 415
Tuazon vs. Heirs of Bartolome Ramos
on the part of the principal, an actual intention to appoint, an intention naturally
inferable from the principal’s words or actions. In the same manner, there must be
an intention on the part of the agent to accept the appointment and act upon it.
Absent such mutual intent, there is generally no agency.11
This Court finds no reversible error in the findings of the courts a quo that
petitioners were the rice buyers themselves; they were not mere agents of
respondents in their rice dealership. The question of whether a contract is one of sale
or of agency depends on the intention of the parties.12
The declarations of agents alone are generally insufficient to establish the fact or
extent of their authority.13 The law makes no presumption of agency; proving its
existence, nature and extent is incumbent upon the person alleging it.14 In the
present case, petitioners raise the fact of agency as an affirmative defense, yet fail to
prove its existence.
The Court notes that petitioners, on their own behalf, sued Evangeline Santos for
collection of the amounts represented by the bounced checks, in a separate civil case
that they sought to be consolidated with the current one. If, as they claim, they were
mere agents of respondents, petitioners should have brought the suit against Santos
for and on behalf of their alleged principal, in accordance with Section 2 of Rule
_______________
717, 728, March 27, 2000 (citing Tolentino, Civil Code of the Philippines, p. 396,
Vol. V, 1992 ed.).
11 Dominion Insurance Corporation v. Court of Appeals, 426 Phil. 620, 626; 376
SCRA 239, 243, February 6, 2002; Victorias Milling Co., Inc. v. Court of
Appeals, 389 Phil. 184, 196; 333 SCRA 663, 675, June 19, 2000.
12 Victorias Milling Co., Inc. v. Court of Appeals, supra, p. 197; p. 676.
13 Litonjua v. Fernandez, 427 SCRA 478, 493, April 14, 2004.
14 Victorias Milling Co., Inc. v. Court of Appeals, supra, p. 196; p. 676; Lim v.
Court of Appeals, 321 Phil. 782, 794; 251 SCRA 408, 417, December 19, 1995
(citing People v. Yabut, 76 SCRA 624, April 29, 1977).
416
416 SUPREME COURT REPORTS ANNOTATED
Tuazon vs. Heirs of Bartolome Ramos
3 of the Rules on Civil Procedure.15 Their filing a suit against her in their own
names negates their claim that they acted as mere agents in selling the rice obtained
from Bartolome Ramos.
Second Issue:
Indispensable Party
Petitioners argue that the lower courts erred in not allowing Evangeline Santos to be
impleaded as an indispensable party. They insist that respondents’ Complaint against
them is based on the bouncing checks she issued; hence, they point to her as the
person primarily liable for the obligation.
We hold that respondents’ cause of action is clearly founded on petitioners’ failure
to pay the purchase price of the rice. The trial court held that Petitioner Maria
Tuazon had indorsed the questioned checks in favor of respondents, in accordance
with Sections 31 and 63 of the Negotiable Instruments Law. 16 That Santos was the
drawer of the checks is thus immaterial to the respondents’ cause of action.
As indorser, Petitioner Maria Tuazon warranted that upon due presentment, the
checks were to be accepted or paid, or both, according to their tenor; and that in case
they were
_______________
15“SEC. 2. Parties in interest.—A real party in interest is the party who stands to
be benefited or injured by the judgment in the suit, or the party entitled to the avails
of the suit. Unless otherwise authorized by law or these Rules, every action must be
prosecuted or defended in the name of the real party in interest.”
16 “SEC. 31. Indorsement; how made.—The indorsement must be written on the
instrument itself or upon a paper attached thereto. The signature of the indorser,
without additional words, is a sufficient indorsement.”
SEC. 63. When a person deemed indorser.—A person placing his signature upon
an instrument otherwise than as maker, drawer, or acceptor, is deemed to be
indorser unless he clearly indicates by appropriate words his intention to be bound in
some other capacity.”
417
VOL. 463, JULY 14, 2005 417
Tuazon vs. Heirs of Bartolome Ramos
dishonored, she would pay the corresponding amount.17After an instrument is
dishonored by nonpayment, indorsers cease to be merely secondarily liable; they
become principal debtors whose liability becomes identical to that of the original
obligor. The holder of a negotiable instrument need not even proceed against the
maker before suing the indorser.18 Clearly, Evangeline Santos—as the drawer of the
checks—is not an indispensable party in an action against Maria Tuazon, the indorser
of the checks.
Indispensable parties are defined as “parties in interest without whom no final
determination can be had.”19 The instant case was originally one for the collection of
the purchase price of the rice bought by Maria Tuazon from respondents’
predecessor. In this case, it is clear that there is no privity of contract between
respondents and Santos. Hence, a final determination of the rights and interest of the
parties may be made without any need to implead her.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED.
Costs against petitioners.
SO ORDERED.
Sandoval-Gutierrez, Corona, Carpio-Morales and Garcia, JJ., concur.
Petition denied, assailed decision affirmed.
Note.—The declarations of the agent alone are generally insufficient to establish
the fact or extent of his authority. (Yu Eng Cho vs. Pan American World Airways,
Inc., 328 SCRA 717 [2000])
——o0o——
_______________
17§66, id.
18Metropol (Bacolod) Financing & Investment Corp. v. Sambok Motors
Company, 205 Phil. 758, 762; 120 SCRA 864, 868, February 28, 1983.
19 §7, Rule 3 of the Rules of Court.
 G.R. No. 92244. February 9, 1993.*
NATIVIDAD GEMPESAW, petitioner, vs. THE HONORABLE COURT OF APPEALS
and PHILIPPINE BANK OF COMMUNICATIONS, respondents.
Negotiable Instruments Law; Checks; Forged Indorsements; Effect of drawer's
negligence.—As a matter of practical significance, problems arising from forged
indorsements of checks may generally be broken into two types of cases: (1) where
forgery was accomplished by a person not associated with the drawer—for example a
mail robbery; and (2) where the indorsement was forged by an agent of the drawer.
This difference in situations would determine the effect of the drawer's negligence
with respect to forged indorsements. While there is no duty resting on the depositor
to look for forged indorsements on his cancelled checks in contrast to a duty imposed
upon him to look for forgeries of his own name, a depositor is under a duty to set up
an accounting system and a business procedure as are reasonably calculated to
prevent or render difficult the forgery of indorsements, particularly by the depositor's
own employees. And if the drawer (depositor) learns that a check drawn by him has
been paid under a forged indorsement, the drawer is under duty promptly to report
such fact to the drawee bank. For his negligence or failure either to discover or to
report promptly the fact of such forgery to the drawee, the drawer loses his right
against the drawee who has debited his account under the forged indorsement. In
other words, he is precluded from using forgery as a basis for his claim for
recrediting of his account.
Same; Same; Same; Same.—As a rule, a drawee bank who has paid a check on
which an indorsement has been forged cannot charge the drawer's account for the
amount of said check. An exception to this rule is where the drawer is guilty of such
negligence which causes the bank to honor such a check or checks. If a check is stolen
from the payee, it is quite obvious that the drawer cannot possibly discover the
forged indorsement by mere examination of his cancelled check. This accounts for
the rule that although a depositor owes a duty to his drawee bank to examine his
cancelled checks for forgery of his own signature, he has no similar duty as to forged
indorsements. A different situation arises where the indorsement was forged by an
___________
*SECOND DIVISION.
683
VOL. 218, FEBRUARY 9, 1993 68
3 constitutes negligence on the part of the bank in carrying out its obligations to its
Gempesaw vs. Court of Appeals
employee or a ent of the drawer, or done with the active participation of the
latter. Most of the cases involving forgery by an agent or employee deal with the
payee's indorsement. The drawer and the payee oftentimes have business relations of
long standing. The continued occurrence of business transactions of the same nature
provides the opportunity for the agent/employee to commit the fraud after having
developed familiarity with the signatures of the parties. However, sooner or later,
some leak will show on the drawer's books. It will then be just a question of time until
the fraud is discovered. This is specially true when the agent perpetrates a series of
forgeries as in the case at bar. The negligence of a depositor which will prevent
recovery of an unauthorized payment is based on failure of the depositor to act as a
prudent businessman would under the circumstances.
Same; Same; No legal obligation on drawee not to honor crossed checks.—
Petitioner argues that respondent drawee Bank should not have honored the checks
because they were crossed checks. Issuing a crossed check imposes no legal
obligation on the drawee not to honor such a check. It is more of a warning to the
holder that the check cannot be presented to the drawee bank for payment in cash.
Instead, the check can only be deposited with the payee's bank which in turn must
present it for payment against the drawee bank in the course of normal banking
transactions between banks. The crossed check cannot be presented for payment but
it can only be deposited and the drawee bank may only pay to another bank in the
payee's or indorser's account.
Banks and Banking; Contractual relation between depositor as obligee and
drawee bank as obligor; Violation of rule on non-acceptance of second
indorsements without approval of branch manager.—There is no question that
there is a contractual relation between petitioner as depositor (obligee) and the
respondents drawee bank as the obligor. In the performance of its obligation, the
drawee bank is bound by its internal banking rules and regulations which form part
of any contract it enters into with any of its depositors. When it violated its internal
rules that second endorsements are not to be accepted without the approval of its
branch managers and it did accept the same upon the mere approval of Boon, a chief
accountant, it contravened the tenor of its obligation at the very least, if it were not
actually guilty of fraud or negligence. Furthermore, the fact that the respondent
drawee Bank did not discover the irregularity with respect to the acceptance of
checks with second indorsement for deposit even without the approval of the branch
manager despite
684
6 SUPREME COURT REPORTS ANNOTATED
84
Gempesaw vs. Court of Appeals
periodic inspection conducted by a team of auditors from the main office
depositors. Article 1173 provides—"The fault or negligence of the obligor consists in
the omission of that diligence which is required by the nature of the obligation and
correspondents with the circumstance of the persons, of the time and of the place. x x
x." We hold that banking business is so impressed with public interest where the
trust and confidence of the public in general is of paramount importance such that
the appropriate standard of diligence must be a high degree of diligence, if not the
utmost diligence. Surely, respondent drawee Bank cannot claim it exercised such a
degree of diligence that is required of it. There is no way We can allow it now to
escape liability for such negligence. Its liability as obligor is not merely vicarious but
primary wherein the defense of exercise of due diligence in the selection and
supervision of its employees is of no moment.
PETITION for review of the decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
L.B. Camins for petitioner.
Angara, Abello, Concepcion, Regala & Cruz for private respondent.
CAMPOS, JR., J.:
From the adverse decision** of the Court of Appeals (CA-G.R. CV No. 16447),
petitioner, Natividad Gempesaw, appealed to this Court in a Petition for Review, on
the issue of the right of the drawer to recover from the drawee bank who pays a check
with a forged indorsement of the payee, debiting the same against the drawer's
account.
The records show that on January 23, 1985, petitioner filed a Complaint against
the private respondent Philippine Bank of Communications (respondent drawee
Bank) for recovery of the money value of eighty-two (82) checks charged against the
petitioner's account with respondent drawee Bank on the ground
____________
** Penned by Associate' Justice Celso L. Magsino, Associate Justices Nathanael P.
De Pano, Jr. and Cezar D. Francisco, concurring.
685
VOL. 218, FEBRUARY 9, 1993 685
Gempesaw vs. Court of Appeals
that the payees' indorsements were forgeries. The Regional Trial Court, Branch
CXXVIII of Caloocan City, which tried the case, rendered a decision on November 17,
1987 dismissing the complaint as well as the respondent drawee Bank's
counterclaim. On appeal, the Court of Appeals in a decision rendered on February
22,1990, affirmed the decision of the RTC on two grounds, namely (1) that the
plaintiffs (petitioner herein) gross negligence in issuing the checks was the proximate
cause of the loss and (2) assuming that the bank was also negligent, the loss must
nevertheless be borne by the party whose negligence was the proximate cause of the
loss. On March 5, 1990, the petitioner filed this petition under Rule 45 of the Rules 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 RECREDIT THE CHECKING
ACCOUNT OF PETITIONER IN THE
___________
1 Rollo, p. 11.
686
686 SUPREME COURT REPORTS ANNOTATED
Gempesaw vs. Court of Appeals
CALOOCAN CITY BRANCH BY THE VALUE OF THE EIGHTY TWO (82) CHECKS
WHICH IS IN THE AMOUNT 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, both in Caloocan
City. Among these groceries are D.G. Shopper's Mart and D.G. Whole Sale Mart.
Petitioner maintains a checking account numbered 13-00038-1 with the Caloocan
City Branch 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 actually delivered to
their respective payees. Although the respondent drawee Bank notified her of all
checks presented to and paid by the bank, petitioner did not verify the correctness of
the returned checks, much less check if the payees actually received the checks in
payment for the supplies she received. In the course of her business operations
covering a period of two years, petitioner issued, following her usual practice stated
above, a total of eighty-two (82) checks in favor of several suppliers. These checks
were all presented by the indorsees as holders thereof to, and honored by, the
respondent drawee Bank. Respondent drawee Bank correspondingly debited the
amounts thereof against petitioner's checking account num-
687
VOL. 218, FEBRUARY 9, 1993 687
Gempesaw vs. Court of Appeals
bered 30-00038-1. Most of .the aforementioned checks were for amounts in excess of
her actual obligations to the various payees as shown in their corresponding invoices.
To mention a few:
"x x x (1) in Check No. 621127, dated June 27, 1984 in the amount of P11,895.23 in
favor of Kawsek Inc. (Exh. A-60), appellant's actual obligation to said payee was only
P895.33 (Exh. A-83); (2) in Check No. 652282 issued on September 18, 1984 in favor
of Senson Enterprises in the amount of P1 1,041.20 (Exh. A-67) appellant's actual
obligation to said payee was only P1,041.20 (Exh. 7); (3) in Check No. 589092 dated
April 7, 1984 for the amount of P11,672.47 in favor of Marchem, (Exh. A-61)
appellant's obligation was only P 1,672.47 (Exh. B); (4) in Check No. 620450 dated
May 10, 1984 in favor of Knotberry for P11,677.10 (Exh. A-31) her actual obligation
was only P677.10 (Exhs. C and C-1); (5) in Check No. 651862 dated August 9, 1984 in
favor of Malinta Exchange Mart for P11,107,16 (Exh. A-62), her obligation was only
P1,107.16 (Exh. D-2); (6) in Check No. 651863 dated August 11,1984 in favor of
Grocer's International Food Corp. in the amount of P1 1,335.60 (Exh. A-66), her
obligation was only P1,335.60 (Exh. E and E-1); (7) in Check No. 589019 dated
March 17, 1984 in favor of Sophy Products in the amount of P11,648.00 (Exh. A-78),
her obligation was only P648.00 (Exh. G); (8) in Check No. 589028 dated March 10,
1984 for the amount of P11,520.00 in favor of the Yakult Philippines (Exh. A-73), the
latter's invoice was only P520.00 (Exh. H-2); (9) in Check No. 62033 dated May 24,
1984 in the amount of P11,504.00 in favor of Monde Denmark Biscuit (Exh. A-34),
her obligation was only P504.00 (Exhs. 1-1 and I-2)."2
Practically, all the checks issued and honored by the respondent drawee Bank were
crossed checks.3 Aside from the daily
_____________
2 Rollo, pp. 20-21; CA Decision, pp. 2-3. See Notes 2-6 thereof.
3 A crossed check is defined as a check crossed with two (2) lines, between which
are either the name of a bank or the words "and company," in full or abbreviated. In
the former case, the banker on whom it is drawn must not pay the money for the
check to any other than the banker named; in the latter case, he must not pay it to
any other than a banker. Black's Law Dictionary 301 (4th Ed.), citing 2 Steph. Comm.
118, note C; 7 Exch. 389; [1903] A.C. 240; Farmers' Bank v. Johnson, King & Co., 134
Ga. 486, 68 S.E. 85, 30 L.R.A., N.S. 697.
688
688 SUPREME COURT REPORTS ANNOTATED
Gempesaw vs. Court of Appeals
notice given to the petitioner by the respondent drawee Bank, the latter also
furnished her with a monthly statement of her bank transactions, attaching thereto
all the cancelled checks she had issued and which were debited against her current
account. It was only after the lapse of more than two (2) years that petitioner found
out about the fraudulent manipulations of her bookkeeper.
All the eighty-two (82) checks with forged signatures 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
Elcano branch of the respondent drawee Bank.
About thirty (30) of the payees whose names were specifically written on the
checks testified that they did not receive nor even see the subject checks and that the
indorsements appearing at the back of the checks were not theirs.
The team of auditors from the main office of the respondent drawee Bank which
conducted periodical inspection of the branches' operations failed to discover, check
or stop the unauthorized acts of Ernest L. Boon. Under the rules of the respondent
drawee Bank, only a Branch Manager, and no other official of the respondent drawee
Bank, may accept a second indorsement on a check for deposit. In the case at bar, all
the deposit slips of the eighty-two (82) checks in question were initialed and/or
approved for deposit by Ernest L. Boon. The Branch Managers of the Ongpin and
Elcano branches accepted the deposits made in the Buendia branch and credited the
accounts of Alfredo Y. Romero and Benito Lam in their respective branches.
 On November 7, 1984, petitioner made a written demand on respondent drawee
Bank to credit her account with the money value of the eighty-two (82) checks
totalling P 1,208,606.89 for
689
VOL. 218, FEBRUARY 9, 1993 689
Gempesaw vs. Court of Appeals
having been wrongfully charged against her account. Respondent drawee Bank
refused to grant petitioner's demand. On January 23, 1985, petitioner filed the
complaint with the Regional Trial Court.
This is not a suit by the party whose signature was forged on a check drawn
against the drawee bank. The payees are not parties to the case. Rather, it is the
drawer, whose signature is genuine, who instituted this action to recover from the
drawee bank the money value of eighty-two (82) checks paid out by the drawee bank
to holders 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
Law4 (heretofore referred to as the NIL). Section 23 of the NIL provides:
"When a signature is forged or made without the authority of the person whose
signature it purports to be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to enforce payment thereof against any
party thereto, can be acquired through or under such signature, unless the party
against whom it is sought to enforce such right is precluded from setting up the
forgery or want of authority."
Under the aforecited provision, forgery is a real or absolute defense by the party
whose signature is forged. A party whose signature to an instrument was forged was
never a party and never gave his consent to the contract which gave rise to the
instrument. Since his signature does not appear in the instrument, he cannot be held
liable thereon by anyone, not even by a holder in due course. Thus, if a person's
signature is forged as a maker of a promissory note, he cannot be made to pay
because he never made the promise to pay. Or where a person's signature as a drawer
of a check is forged, the drawee bank cannot charge the amount thereof against the
drawer's account because he never gave the bank the order to pay. And said section
does not refer only to the forged signature of the maker of a
___________
4Act No. 2031, enacted on February 3, 1911.
690
690 SUPREME COURT REPORTS ANNOTATED
Gempesaw vs. Court of Appeals
promissory note and of the drawer of a check. It covers also a forged indorsement,
i.e., the forged signature of the payee or indorsee of a note or check. Since under said
provision a forged signature is "wholly inoperative", no one can gain title to the
instrument through such forged indorsement. Such an indorsement prevents any
subsequent party from acquiring any right as against any party whose name appears
prior to the forgery. Although rights may exist between and among parties
subsequent to the forged indorsement, not one of them can acquire rights against
parties prior to the forgery. Such forged indorsement cuts off the rights of all
subsequent parties as against parties prior to the forgery. However, the law makes an
exception to these rules where a party is precluded from setting up forgery as a
defense.
As a matter of practical significance, problems arising from forged indorsements
of checks may generally be broken into two types of cases: (1) where forgery was
accomplished by a person not associated with the drawer—for example a mail
robbery; and (2) where the indorsement was forged by an agent of the drawer. This
difference in situations would determine the effect of the drawer's negligence with
respect to forged indorsements. While there is no duty resting on the depositor to
look for forged indorsements on his cancelled checks in contrast to a duty imposed
upon him to look for forgeries of his own name, a depositor is under a duty to set up
an accounting system and a business procedure as are reasonably calculated to
prevent or render difficult the forgery of indorsements, particularly by the depositor's
own employees. And if the drawer (depositor) learns that a check drawn by him has
been paid under a forged indorsement, the drawer is under duty promptly to report
such fact to the drawer bank.5 For his negligence or failure either to discover or to
report promptly the fact of such forgery to the drawee, the drawer loses his right
against the drawee who has debited his account under the forged indorsement. 6 In
other words, he is precluded from
____________
5 Britton, Bills and Notes, Sec. 143, pp. 663-664.
6 City of New York vs. Bronx County Trust Co., 261 N.Y. 64,184 N.E. 495
(1933); Detroit Piston Ring Co. vs. Wayne County & Home
691
VOL. 218, FEBRUARY 9, 1993 691
Gempesaw vs. Court of Appeals
using forgery as a basis for his claim for recrediting of his account.
In the case at bar, petitioner admitted that the checks were filled up and
completed by her trusted employee, Alicia Galang, and were later given to her for her
signature. Her signing the checks made the negotiable instrument complete. Prior to
signing the checks, there was no valid contract yet.
 Every contract on a negotiable instrument is incomplete and revocable until
delivery of the instrument to the payee for the purpose of giving effect thereto. 7 The
first delivery of the instrument, complete in form, to the payee who takes it as a
holder, is called issuance of the instrument.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 Elcano branches of the same bank. The total amount of Savings
Bank, 252 Mich. 163, 233 N.W. 185 (1930); C.E. Erickson Co. vs. lowa Nat. Bank, 211
lowa 495, 230 N.W. 342 (1930).
___________
7 NIL, Sec, 16.
8 Ibid., Sec. 191, par. 10.
692
692 SUPREME COURT REPORTS ANNOTATED
Gempesaw vs. Court of Appeals
P1,208,606.89, represented by eighty-two (82) checks, were credited and paid out by
respondent drawee Bank to Alfredo Y. Romero and Benito Lam, and debited against
petitioner's checking account No. 13-00038-1, Caloocan branch.
As a rule, a drawee bank who has paid a check on which an indorsement has been
forged cannot charge the drawer's account for the amount of said check. An
exception to this rule is where the drawer is guilty of such negligence which causes
the bank to honor such a check or checks. If a check is stolen from the payee, it is
quite obvious that the drawer cannot possibly discover the forged indorsement by
mere examination of his cancelled check. This accounts for the rule that although a
depositor owes a duty to his drawee bank to examine his cancelled checks for forgery
of his own signature, he has no similar duty as to forged indorsements. A different
situation arises where the indorsement was forged by an employee or agent of the
drawer, or done with the active participation of the latter. Most of the cases involving
forgery by an agent or employee deal with the payee's indorsement. The drawer and
the payee oftentimes have business relations of long standing. The continued
occurrence of business transactions of the same nature provides the opportunity for
the agent/employee to commit the fraud after having developed familiarity with the
signatures of the parties. However, sooner or later, some leak will show on the
drawer's books. It will then be just a question of time until the fraud is discovered.
This is specially true when the agent perpetrates a series of forgeries as in the case at
bar.
The negligence of a depositor which will prevent recovery of an unauthorized
payment is based on failure 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 the
amounts of the checks she signed against the invoices attached thereto. Furthermore,
although she regularly received her bank statements, she apparently did not carefully
examine the same nor the check stubs and the returned checks, and did not compare
them with the sales invoices. Otherwise, she could have easily discovered the
discrepancies between the checks and the documents serving as bases for the checks.
With such discovery, the subsequent forgeries
693
VOL. 218, FEBRUARY 9, 1993 693
Gempesaw vs. Court of Appeals
would not have been accomplished. It was not until two years after the bookkeeper
commenced her fraudulent scheme that petitioner discovered that eighty-two (82)
checks were wrongfully charged to her account, at which time she notified the
respondent drawee bank.
It is highly improbable that in a period of two years, not one of petitioner's
suppliers complained of non-payment. Assuming that even one single complaint had
been made, petitioner would have been duty-bound, as far as the respondent drawee
Bank was concerned, to make an adequate investigation on the matter. Had this been
done, the discrepancies would have been discovered, sooner or later. Petitioner's
failure to make such adequate inquiry constituted negligence which resulted in the
bank's honoring of the subsequent checks with forged indorsements. On the other
hand, since the record mentions nothing about such a complaint, the possibility
exists that the checks in question covered inexistent sales. But even in such a case,
considering the length of a period of two (2) years, it is hard to believe that petitioner
did not know or realize that she was paying much more than she should for the
supplies she was actually getting. A depositor may not sit idly by, after knowledge has
come to her that her funds seem to be disappearing or that there may be a leak in her
business, and refrain from taking the steps that a careful and prudent businessman
would take in such circumstances and if taken, would result in stopping the
continuance of the fraudulent scheme. If she fails to take such steps, the facts may
establish her negligence and in that event, she would be estopped from recovering
from the bank.9
One thing is clear from the records—that the petitioner failed to examine her
records with reasonable diligence whether before she signed the checks or after
receiving her bank statements. Had the petitioner examined her records more
carefully, particularly the invoice receipts, cancelled checks, check book stubs, and
had she compared the sums written as amounts payable in the eighty-two (82)
checks with the perti-
____________
9 Detroit Piston Ring Co. vs. Wayne County & Home Savings Bank, supra, note 3.
694
694 SUPREME COURT REPORTS ANNOTATED
Gempesaw vs. Court of Appeals
nent sales invoices, she would have easily discovered that in some checks, the
amounts did not tally with those appearing in the sales invoices. Had she noticed
these discrepancies, she should not have signed those checks, and should have
conducted an inquiry as to the reason for the irregular entries. Likewise, had
petitioner been more vigilant in going over her current account by taking careful note
of the daily reports made by respondent drawee Bank on her issued checks, or at
least made random scrutiny of her cancelled checks returned by respondent drawee
Bank at the close of each month, she could have easily discovered the fraud being
perpetrated by Alicia Galang, and could have reported the matter to the respondent
drawee Bank. The respondent drawee Bank then could have taken immediate steps
to prevent further commission of such fraud. Thus, petitioner's negligence was the
proximate cause of her loss. And since it was her negligence which caused the
respondent drawee Bank to honor the forged checks or prevented it from recovering
the amount it had already paid on the checks, petitioner cannot now complain should
the bank refuse to recredit her account with the amount of such checks. 10 Under
Section 23 of the NIL, she is now precluded from using the forgery to prevent the
bank's debiting on her account.
The doctrine in the case of Great Eastern Life Insurance Co. us. Hongkong &
Shanghai Bank11 is not applicable to the case at bar because in said case, the check
was fraudulently taken and the signature of the payee was forged not by an agent or
employee of the drawer. The drawer was not found to be negligent in the handling of
its business affairs and the theft of the check by a total stranger was not attributable
to negligence of the drawer; neither was the forging of the payee's indorsement due
to the drawer's negligence. Since the drawer was not negligent, the drawee was duty-
bound to restore to the drawer's account the amount theretofore paid under the
check with
____________
10 Defiance Lumber Co. vs. Bank of California, N.A., 180 Wash. 533, 41 P. 2d 135
(1935); National Surety Co. vs. President and Directors of Manhattan Co., et al, 252
N.Y. 247, 169 N.E. 372 (1929); Erickson Co. vs. lowa National Bank, supra, note 3
11 43 Phil. 678 (1922).
695
VOL. 218, FEBRUARY 9, 1993 695
Gempesaw vs. Court of Appeals
a forged payee's indorsement because the drawee did not pay as ordered by the
drawer.
Petitioner argues that respondent drawee Bank should not have honored the
checks because they were crossed checks. Issuing a crossed check imposes no legal
obligation on the drawee not to honor such a check. It is more of a warning to the
holder that the check cannot be presented to the drawee bank for payment in cash.
Instead, the check can only be deposited with the payee's bank which in turn must
present it for payment against the drawee bank in the course of normal banking
transactions between banks. The crossed check cannot be presented for payment but
it can only be deposited and the drawee bank may only pay to another bank in the
payee's or indorser's account.
Petitioner likewise contends that banking rules prohibit the drawee bank from
having checks with more than one indorsement. The banking rule banning
acceptance 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 X X x."
In this kind of restrictive indorsement, the prohibition to transfer or negotiate must
be written in express words at the back of the instrument, so that any subsequent
party may be forewarned that it ceases to be negotiable. However, the restrictive
indorsee acquires the right to receive payment and bring any action thereon as any
indorser, but he can no longer transfer his rights as such indorsee where the form of
the
696
696 SUPREME COURT REPORTS ANNOTATED
Gempesaw vs. Court of Appeals
indorsement does not authorize him to do so.12
 Although the holder of a check cannot compel a drawee bank to honor it because
there is no privity between them, as far as the drawer-depositor is concerned, such
bank may not legally refuse to honor a negotiable bill of exchange or a check drawn
against it with more than one indorsement if there is nothing irregular with the bill
or check and the drawer has sufficient funds. The drawee cannot be compelled to
accept or pay the check by the drawer or any holder because as a drawee, he incurs
no liability on the check unless he accepts it. But the drawee will make itself liable to
a suit for damages at the instance of the drawer for wrongful dishonor of the bill or
check.
Thus, it is clear that under the NIL, petitioner is precluded from raising the
defense of forgery by reason 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 her negligence is the proximate cause thereof and
under Article 2179 of the Civil Code, she may not be awarded damages. However,
under Article 1170 of the same Code the respondent drawee Bank may be held liable
for damages. The article provides—
"Those who in the performance of their obligations are guilty 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
____________
12 NIL, Sec. 37.
697
VOL. 218, FEBRUARY 9, 1993 697
Gempesaw vs. Court of Appeals
approval of its branch managers and it did accept the same upon the mere approval
of Boon, a chief accountant, it contravened the tenor of its obligation at the very least,
if it were not actually guilty of fraud or negligence.
Furthermore, the fact that the respondent drawee Bank did not discover the
irregularity with respect to the acceptance of checks with second indorsement for
deposit even without the approval of the branch manager despite periodic inspection
conducted by a team of auditors from the main office constitutes negligence on the
part of the bank in carrying out its obligations to its depositors. Article 1173
provides—
"The fault or negligence of the obligor consists in the omission 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. x x x."
We hold that banking business is so impressed with public interest where the trust
and confidence of the public in general is of paramount importance such that the
appropriate standard of diligence must be a high degree of diligence, if not the
utmost diligence. Surely, respondent drawee Bank cannot claim it exercised such a
degree of diligence that is required of it. There is no way We can allow it now to
escape liability for such negligence. Its liability as obligor is not merely vicarious but
primary wherein the defense of exercise of due diligence in the selection and
supervision of its employees is of no moment.
Premises considered, respondent drawee Bank is adjudged liable to share the loss
with the petitioner on a fifty-fifty ratio in accordance with Article 1172 which
provides:
"Responsibility arising from negligence in the performance 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
698
698 SUPREME COURT REPORTS ANNOTATED
Gempesaw vs. Court of Appeals
the laws pertinent thereto. Thus, the fact that petitioner's negligence was found to be
the proximate cause of her loss does not preclude her from recovering damages. The
reason why the decision dealt on a discussion on proximate cause is due to the error
pointed out by petitioner as allegedly committed by the respondent court. And in
breaches 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., Chairman), Feliciano, Regalado and Nocon, JJ., concur.
 Case remanded to trial court for reception of evidence.
Note.—Respondent bank is not guilty of negligence for it had no way of
ascertaining the authenticity of the endorsements in the checks, and because it
caused the checks to pass through the clearing house, before allowing withdrawal of
the proceeds thereof (Manila Lighter Transportation, Inc. vs. Court of Appeals, 182
SCRA 251).

—o0o—
 G.R. No. 179952. December 4, 2009.*
METROPOLITAN BANK AND TRUST COMPANY (formerly ASIANBANK
CORPORATION), petitioner, vs.BA FINANCE CORPORATION and MALAYAN
INSURANCE CO., INC., respondents.
Negotiable Instruments Law; Checks; Where an instrument is payable to the
order of two or more payees or indorsees who are not partners, all must indorse
unless the one indorsing has authority to indorse for the others.—Section 41 of
the Negotiable Instruments Law provides: Where an instrument is payable to the
order of two or more payees or indorsees who are not partners, all must
indorse unless the one indorsing has authority to indorse for the others. Bitanga
alone endorsed the crossed check, and petitioner allowed the deposit and release of
the proceeds thereof, despite the absence of authority of Bitanga’s co-payee BA
Finance to endorse it on its behalf.
Same; Same; The payment of an instrument over a missing indorsement is the
equivalent of payment on a forged indorsement or an unauthorized indorsement in
itself in the case of joint payees.—Petitioner’s argument that since there was neither
forgery, nor unauthorized indorsement because Bitanga was a co-payee in the subject
check, the dictum in Associated Bank v. CA does not apply in the present case
fails. The payment of an instrument over a missing indorsement is the equivalent of
payment on a forged indorsement or an unauthorized indorsement in itself in the
case of joint payees. Clearly, petitioner, through its employee, was negligent when it
allowed the deposit of the crossed check, despite the lone endorsement of Bitanga,
ostensibly ignoring the fact that the check did not, it bears repeating, carry the
indorsement of BA Finance.
Same; Same; Banks and Banking; One who credits the proceeds of a check to
the account of the indorsing payee is liable in conversion to the non-indorsing
payee for the entire amount of the check.—The provisions of the Negotiable
Instruments Law and underlying jurisprudential teachings on the black-letter law
provide definitive justification for petitioner’s full liability on the value of the check.
To be sure, a collecting bank, Asianbank in this case, where a check is deposited and
which indorses the check upon presentment with the drawee bank, is an indorser.
This is because in indorsing a check to the drawee bank, a collecting bank stamps the
back of the check with the
_______________
* FIRST DIVISION.
621phrase “all prior endorsements and/or lack of endorsement guaranteed”
and, for all intents and purposes, treats the check as a negotiable instrument, hence,
assumes the warranty of an indorser. Without Asianbank’s warranty, the drawee
bank (China Bank in this case) would not have paid the value of the subject check.
Petitioner, as the collecting bank or last indorser, generally suffers the loss because it
has the duty to ascertain the genuineness of all prior indorsements considering that
the act of presenting the check for payment to the drawee is an assertion that the
party making the presentment has done its duty to ascertain the genuineness of prior
indorsements. Accordingly, one who credits the proceeds of a check to the account of
the indorsing payee is liable in conversion to the non-indorsing payee for
the entire amount of the check.
Same; Same; Same; When the maker dishonors the instrument, the holder
thereof can turn to those secondarily liable—the indorser—for recovery.—Granting
petitioner’s appeal for partial liability would run counter to the existing principles on
the liabilities of parties on negotiable instruments, particularly on Section 68 of
the Negotiable Instruments Law which instructs that joint payees who indorse are
deemed to indorse jointly and severally. Recall that when the maker dishonors the
instrument, the holder thereof can turn to those secondarily liable—the indorser—for
recovery. And since the law explicitly mandates a solidary liability on the part of the
joint payees who indorse the instrument, the holder thereof (assuming the check was
further negotiated) can turn to either Bitanga or BA Finance for full recompense.
Same; Quasi-Delicts; Damages; Words and Phrases; In quasi-delict,
exemplary damages may be granted if the defendant acted with gross negligence;
“Gross negligence” implies a want or absence of or failure to exercise even slight
care or diligence, or the entire absence of care, evincing a thoughtless disregard of
consequences without exerting any effort to avoid them.—Petitioner’s liability is
based not on contract or quasi-contract but on quasi-delict since there is no pre-
existing contractual relation between the parties. Article 2231 of the Civil Code,
which provides that in quasi-delict, exemplary damages may be granted if the
defendant acted with gross negligence, thus applies. For “gross negligence” implies a
want or absence of or failure to exercise even slight care or diligence, or the entire
absence of care, evincing a thoughtless disregard of consequences without exerting
any effort to avoid them. x x x The law allows the grant of exemplary damages to set
an example for the public good. The business of a bank is affected with public
interest; thus it makes a sworn profession of diligence and meticulousness in giving
irreproachable service. For this reason, the bank should guard against in
622injury attributable to negligence or bad faith on its part. The award
of exemplary damages is proper as a warning to [the petitioner] and all concerned
not to recklessly disregard their obligation to exercise the highest and strictest
diligence in serving their depositors.
Same; Banks and Banking; Agency; Interest Rates; The nature of the
relationship between the payee of a check and the collecting bank is one of agency—
the obligation of the bank does not arise out of a loan or forbearance of money,
goods or credit, thus the legal interest should be 6%, not 12%, per annum.—The
Court takes exception, however, to the appellate court’s affirmance of the trial court’s
grant of legal interest of 12% per annum on the value of the check. For the obligation
in this case did not arise out of a loan or forbearance of money, goods or credit. While
Article 1980 of the Civil Code provides that: Fixed savings, and current deposits of
money in banks and similar institutions shall be governed by the provisions
concerning simple loan, said provision does not find application in this case since the _______________
nature of the relationship between BA Finance and petitioner is one
of agency whereby petitioner, as collecting bank, is to collect for BA Finance the 2 Exhibit “B,” Id., at pp. 212-215.
corresponding proceeds from the check. Not being a loan or forbearance of money, 3 Id., at p. 213.
the interest should be 6% per annumcomputed from the date of extrajudicial 4 Exhibit “D,” Id., at p. 217.
demand on September 25, 1992 until finality of judgment; and 12% per annum from 5 Exhibit “D-1,” Ibid.
finality of judgment until payment, conformably with Eastern Shipping Lines, Inc. v. 6 Exhibit “F,” Id., at p. 219.
Court of Appeals, 234 SCRA 78 (1994). 624
PETITION for review on certiorari of a decision of the Court of Appeals. In the meantime, Bitanga’s loan became past due, but despite demands, he failed
The facts are stated in the opinion of the Court. to settle it.
Carlo Magno J. Verzo and Lemuel D. Lopez for petitioner. BA Finance eventually learned of the loss of the car and of Malayan Insurance’s
Domingo M. Navarro for BA Finance Corporation. issuance of a crossed check payable to it and Bitanga, and of Bitanga’s depositing it in
Francisco J. Farolan for Malayan Insurance Company, Inc. his account at Asianbank and withdrawing the entire proceeds thereof.
CARPIO-MORALES, J.: BA Finance thereupon demanded the payment of the value of the check from
Lamberto Bitanga (Bitanga) obtained from respondent BA Finance Corporation Asianbank7 but to no avail, prompting it to file a complaint before the Regional Trial
(BA Finance) a P329,2801 loan to secure which, he mort- Court (RTC) of Makati for sum of money and damages against Asianbank and
Bitanga,8 alleging that, inter alia, it is entitled to the entire proceeds of the check.
_______________ In its Answer with Counterclaim,9 Asianbank alleged that BA Finance “instituted
[the] complaint in bad faith to coerce [it] into paying the whole amount of the
1 Exhibit “A,” Records, pp. 210-211. CHECK knowing fully well that its rightful claim, if any, is against Malayan
623gaged his car to respondent BA Finance.2 The mortgage contained the following [Insurance].”10
stipulation: Asianbank thereafter filed a cross-claim against Bitanga,11 alleging that he
“The MORTGAGOR covenants and agrees that he/it will cause the property(ies) fraudulently induced its personnel to release to him the full amount of the check; and
hereinabove mortgaged to be insured against loss or damage by accident, theft and that on being later informed that the entire amount of the check did not belong to
fire for a period of one year from date hereof with an insurance company or Bitanga, it took steps to get in touch with him but he had changed residence without
companies acceptable to the MORTGAGEE in an amount not less than the leaving any forwarding address.12
outstanding balance of mortgage obligations and that he/it will make all loss, if any, And Asianbank filed a third-party complaint against Malayan
under such policy or policies, payable to the MORTGAGEE or its assigns as its Insurance,13 alleging that Malayan Insurance was grossly negligent in issuing the
interest may appear x x x.”3 (emphasis and underscoring supplied) check payable to both Bitanga and BA Finance and delivering it to Bitanga without
Bitanga thus had the mortgaged car insured by respondent Malayan Insurance the consent of BA Finance.14
Co., Inc. (Malayan Insurance)4 which issued a policy stipulating that, inter alia, Bitanga was declared in default in Asianbank’s cross-claim.15
“Loss, if any shall be payable to BA FINANCE CORP. as its interest may
appear. It is hereby expressly understood that this policy or any renewal thereof, _______________
shall not be cancelled without prior notification and conformity by BA FINANCE
CORPORATION.”5(emphasis and underscoring supplied) 7 Exhibits “H,” Id., at pp. 221-222.
The car was stolen. On Bitanga’s claim, Malayan Insurance issued a check payable 8 Id., at pp. 1-4.
to the order of “B.A. Finance Corporation and Lamberto Bitanga” for P224,500, 9 Id., at pp. 40-45.
drawn against China Banking Corporation (China Bank). The check was crossed with 10 Id., at p. 43.
the notation “For Deposit Payees’ Account Only.”6 11 Id., at pp. 53-63.
Without the indorsement or authority of his co-payee BA Finance, Bitanga 12 Id., at pp. 60-61.
deposited the check to his account with the Asianbank Corporation (Asianbank), now 13 Id., at pp. 69-72.
merged with herein petitioner Metropolitan Bank and Trust Company (Metrobank). 14 Id., at p. 82.
Bitanga subsequently withdrew the entire proceeds of the check. 15 Id., at pp. 142-143; Order of May 23, 1994.
 625Branch 137 of the Makati RTC, finding that Malayan Insurance was not privy
to the contract between BA Finance and Bitanga, and noting the claim of Malayan
Insurance that it is its policy to issue checks to both the insured and the financing
company, held that Malayan Insurance cannot be faulted for negligence for issuing
the check payable to both BA Finance and Bitanga.
The trial court, holding that Asianbank was negligent in allowing Bitanga to
deposit the check to his account and to withdraw the proceeds thereof, without his
co-payee BA Finance having either indorsed it or authorized him to indorse it in its
behalf,16 found Asianbank and Bitanga jointly and severally liable to BA
Finance following Section 41 of the Negotiable Instruments Law and Associated
Bank v. Court of Appeals.17
Thus the trial court disposed:
“WHEREFORE, premises considered, judgment is hereby rendered ordering
defendants Asian Bank Corporation and Lamberto Bitanga:
1) To pay plaintiff jointly and severally the sum of P224,500.00 with
interest thereon at the rate of 12% from September 25, 1992 until fully
paid;
2) To pay plaintiff the sum of P50,000.00 as exemplary damages;
P20,000.00 as actual damages; P30,000.00 as attorney’s fee; and
3) To pay the costs of suit.
Asianbank’s and Bitanga’s [sic] counterclaims are dismissed.
The third party complaint of defendant/third party plaintiff against third-party
defendant Malayan Insurance, Co., Inc. is hereby dismissed. Asianbank is ordered to
pay Malayan attorney’s fee of P50,000.00 and a per appearance fee of P500.00.
On the cross-claim of defendant Asianbank, co-defendant Lamberto
Bitanga is ordered to pay the former the amounts the latter is ordered to
pay the plaintiff in Nos. 1, 2 and 3 above-mentioned.
SO ORDERED.”18 (emphasis and underscoring supplied)
_______________
16 Id., at p. 306.
17 G.R. No. 89802, May 7, 1992, 208 SCRA 465.
18 Records, p. 307.
626Before the Court of Appeals, Asianbank, in its Appellant’s Brief, submitted the
following issues for consideration:
3.01.1.1 Whether BA Finance has a cause of action against Asianbank.
3.01.1.2 Assuming that BA Finance has a valid cause of action, may it claim from
Asianbank more than one-half of the value of the check considering that it is a mere
co-payee or joint payee of the check?
3.01.1.3 Whether BA Finance is liable to Asianbank for actual and exemplary
damages for wrongfully bringing the case to court.
3.01.1.4 Whether Malayan is liable to Asianbank for reimbursement of any sum
of money which this Honorable Court may award to BA Finance in this case.19
(underscoring supplied)
And it proffered the following arguments:
A. BA Finance has no cause of action against Asianbank as it has no legal right
and title to the check considering that the check was not delivered to BA Finance.
Hence, BA Finance is not a holder thereof under the Negotiable Instruments Law.
B. Asianbank, as collecting bank, is not liable to BA Finance as there was no
privity of contract between them.
C. Asianbank, as collecting bank, is not liable to BA Finance, considering that,
as the intermediary between the payee and the drawee Chinabank, it merely acted on
the instructions of drawee Chinabank to pay the amount of the check to Bitanga,
hence, the consequent damage to BA Finance was due to the negligence of
Chinabank.
D. Malayan’s act of issuing and delivering the check solely to Bitanga in violation
of the “loss payee” clause in the Policy, is the proximate cause of the alleged damage
to BA Finance.
E. Assuming Asianbank is liable, BA Finance can claim only his proportionate
interest on the check as it is a joint payee thereof.
F. Bitanga alone is liable for the amount to BA Finance on the ground of unjust
enrichment or solutio indebiti.
_______________
19 CA Rollo, pp. 39-40.
627
G. BA Finance is liable to pay Asianbank actual and exemplary
damages.20 (underscoring supplied)
The appellate court, “summarizing” the errors attributed to the trial court by
Asianbank to be “whether…BA Finance has a cause of action against [it] even if the
subject check had not been delivered to…BA Finance by the issuer itself,” held in the
affirmative and accordingly affirmed the trial court’s decision but deleted the award
of P20,000 as actual damages.21Hence, the present Petition for Review
on Certiorari22 filed by Metrobank (hereafter petitioner) to which Asianbank was, as
earlier stated, merged, faulting the appellate court
I. x x x in applying the case of Associated Bank v. Court of Appeals, in the absence
of factual similarity and of the legal relationships necessary for the application
of the desirable shortcut rule. x x x
II. x x x in not finding that x x x the general rule that the payee has no cause of
action against the collecting bank absent delivery to him must be applied.
III. x x x in finding that all the elements of a cause of action by BA Finance
Corporation against Asianbank Corporation are present.
IV. x x in finding that Article 1208 of the Civil Code is not applicable.
V. x x x in awarding of exemplary damages even in the absence of moral,
temperate, liquidated or compensatory damages and a finding of fact that
Asianbank acted in a wanton, fraudulent, reckless, oppressive or malevolent
manner.
xxxx
VII. x x x in dismissing Asianbank’s counterclaim and Third Party complaint
[against Malayan Insurance].23 (italics in the original; underscoring supplied)
_______________
20 Id., at pp. 40-41.
21 Decision of May 18, 2007, penned by Court of Appeals Associate Justice
Ramon M. Bato, Jr. with the concurrence of Associate Justices Andres B. Reyes, Jr.
and Jose C. Mendoza.
22 Rollo, pp. 10-57.
23 Id., at pp. 20-22.
628Petitioner proffers the following arguments against the application
of Associated Bank v. CA to the case:
“x x x [T]he rule established in the Associated Bank case has provided a speedier
remedy for the payee to recover from erring collecting banks despite the absence of
delivery of the negotiable instrument. However, the application of the rule demands
careful consideration of the factual settings and issues raised in the case x x x.
One of the relevant circumstances raised in Associated Bank is the existence of
forgery or unauthorized indorsement. x x x
xxxx
In the case at bar, Bitanga is authorized to indorse the check as the drawer names
him as one of the payees. Moreover, his signature is not a forgery nor has he or
anyone forged the signature of the representative of BA Finance Corporation. No
unauthorized indorsement appears on the check.
xxxx
Absent the indispensable fact of forgery or unauthorized indorsement, the
desirable shortcut rule cannot be applied,24(underscoring supplied)
The petition fails.
Section 41 of the Negotiable Instruments Law provides:
“Where an instrument is payable to the order of two or more payees or indorsees
who are not partners, all must indorseunless the one indorsing has authority to
indorse for the others.” (emphasis and underscoring supplied)
Bitanga alone endorsed the crossed check, and petitioner allowed the deposit and
release of the proceeds thereof, despite the absence of authority of Bitanga’s co-payee
BA Finance to endorse it on its behalf.25
_______________
24 Id., at pp. 23-25.
25 TSN, May 30, 1995, pp. 7-8; The testimony of John Agbayani, vice president of
BA Finance, reads as follows:
Q Thereafter what happened next, if you know?
A Upon further verification, we were informed by Malayan Insurance Company
that in deed a check, a cross check
629Denying any irregularity in accepting the check, petitioner maintains that it
followed normal banking procedure. The testimony of Imelda Cruz, Asianbank’s then
accounting head, shows otherwise, however, viz:
Q Now, could you be familiar with a particular policy of the bank with respect to
checks with joined (sic) payees?
A Yes, sir.
Q And what would be the particular policy of the bank regarding this transaction?
A The bank policy and procedure regarding the joint checks. Once it is
deposited to a single account, we are notaccepting joint checks for
single account, depositing to a single account (sic).
Q What happened to the bank employee who allowed this particular transaction to
occur?
A Once the branch personnel, the bank personnel (sic) accepted it, he is liable.
Q What do you mean by the branch personnel being held liable?
A Because since (sic) the bank policy, we are not supposed to accept
joint checks to a [single] account, so we mean that
_______________
was issued to BA Finance Corporation and Lamberto Bitanga and the check was
delivered to Lamberto Bitanga.
Q So, after the said check was delivered to Mr. Lamberto Bitanga, do you have any
knowledge Mr. witness, if you know, what happened to the check?
A Yes, sir, the check was deposited into the personal account of Mr. Lamberto
Bitanga only, with Asian Savings Bank without the knowledge and
endorsement of the joint payee of the said check, which is the plaintiff here, BA
Finance.
xxxx
We immediately send a formal letter communication to Asian Bank in order to
discuss the possibility of reimbursement of banking on the premise that our
check was irregular accepted for deposit into the personal account of Lamberto
Bitanga without our endorsement.
 630personnel would be held liable in the sense that (sic) once it is
withdrawn or encashed, it will not be allowed.
Q In your experience, have you encountered any bank employee who was
subjected to disciplinary action by not following bank policies?
A The one that happened in that case, since I really don’t know who that personnel
is, he is no longer connected with the bank.
Q What about in general, do you know of any disciplinary action,
Madam witness?
A Since there’s a negligence on the part of the bank personnel, it will be
a ground for his separation [from] the bank.26(emphasis, italics and
underscoring supplied)
Admittedly, petitioner dismissed the employee who allowed the deposit of the
check in Bitanga’s account.
Petitioner’s argument that since there was neither forgery, nor unauthorized
indorsement because Bitanga was a co-payee in the subject check, the dictum
in Associated Bank v. CA does not apply in the present case fails. The payment of an
instrument over a missing indorsement is the equivalent of payment on a forged
indorsement27 or an unauthorized indorsement in itself in the case of joint payees.28
Clearly, petitioner, through its employee, was negligent when it allowed the
deposit of the crossed check, despite the lone endorsement of Bitanga, ostensibly
ignoring the fact that the check did not, it bears repeating, carry the indorsement of
BA Finance.29
As has been repeatedly emphasized, the banking business is imbued with public
interest such that the highest degree of diligence
_______________
26 TSN, October 18, 1995, pp. 5-7.
27 Kelly v. Central Bank and Trust Co. (Colo App), 794 P2d 1037, 12 UCCRS2d
1089; Humberto Decorators, Inc. v. Plaza Nat’l Bank, 180 NJ Super 170, 434 A2d
618, 32 UCCRS 494; Vide: 11 Am Jur 2d, Bills and Notes, §224, at p. 557.
28 Beyer v. First Nat’l Bank, 188 Mont 208, 612 P2d 1285, 29 UCCRS 563; Vide:
11 Am Jur 2d, Bills and Notes, §224, at p. 557.
29 Gempesaw v. Court of Appeals, G.R. No. 92244, Feb. 9, 1993, 218 SCRA 682,
695.
631and highest standards of integrity and performance are expected of banks in
order to maintain the trust and confidence of the public in general in the banking
sector.30Undoubtedly, BA Finance has a cause of action against petitioner.
Is petitioner liable to BA Finance for the full value of the check?
Petitioner, at all events, argue that its liability to BA Finance should only be one-
half of the amount covered by the check as there is no indication in the check that
Bitanga and BA Finance are solidary creditors to thus make them presumptively joint
creditors under Articles 1207 and 1208 of the Civil Code which respectively provide:
“Art. 1207. The concurrence of two or more creditors or of two or more debtors
in one and the same obligation does not imply that each one of the former has a right
to demand, or that each one of the latter is bound to render, entire compliance with
the prestations. There is a solidary liability only when the obligation expressly so
states, or when the law or the nature of the obligation requires solidarity.
Art. 1208. If from the law, or the nature or wording of the obligations to which
the preceding article refers to the contrary does not appear, the credit or debt shall be
presumed to be divided into as many equal shares as there are creditors or debtors,
the debts or credits being considered distinct from one another, subject to the Rules
of Court governing the multiplicity of suits.”
Petitioner’s argument is flawed.
The provisions of the Negotiable Instruments Law and underlying jurisprudential
teachings on the black-letter law provide definitive justification for
petitioner’s full liability on the value of the check.
To be sure, a collecting bank, Asianbank in this case, where a check is deposited
and which indorses the check upon presentment with the drawee bank, is an
indorser.31This is because in indorsing a check to the drawee bank, a collecting bank
stamps the back of the
_______________
30 Philippine Commercial International Bank v. Court of Appeals, G.R. No.
121413, January 29, 2001, 350 SCRA 446.
31 Associated Bank v. Court of Appeals, 322 Phil. 677, 697; 252 SCRA 620, 630
(1996).
632check with the phrase “all prior endorsements and/or lack of endorsement
guaranteed”32 and, for all intents and purposes, treats the check as a negotiable
instrument, hence, assumes the warranty of an indorser.33 Without Asianbank’s
warranty, the drawee bank (China Bank in this case) would not have paid the value of
the subject check.Petitioner, as the collecting bank or last indorser, generally suffers
the loss because it has the duty to ascertain the genuineness of all prior indorsements
considering that the act of presenting the check for payment to the drawee is an
assertion that the party making the presentment has done its duty to ascertain the
genuineness of prior indorsements.34
_______________
32 Section 17 of the Philippine Clearing House Corporation Rules states that:
“BANK GUARANTEE. All checks cleared through the PCHC shall bear the guarantee
affixed thereto by the Presenting Bank/Branch which shall read as follows: ‘Cleared
thru the Philippine Clearing House Corporation. All prior endorsements and/or lack
of endorsement guaranteed.’ ”
 33 Banco de Oro v. Equitable Banking Corp., 241 Phil. 187, 196-197; 157 SCRA
188, 197 (1988).
34 Sections 65 and 66 of the Negotiable Instruments Law state that:
Sec. 65.—Every person negotiating an instrument by delivery or by a qualified
indorsement warrants:
(a) That the instrument is genuine and in all respects what it purports to be;
(b) That he has good title to it;
(c) That all prior parties had capacity to contract;
(d) That he has no knowledge of any fact which would impair the validity of the
instrument or render it valueless.
But when the negotiation is by delivery only, the warranty extends in favor of no
holder other than the immediate transferee.
The provisions of subdivision (c) of this section do not apply to a person
negotiating public or corporation securities other than bills and notes.
Sec. 66. Liability of general indorser.—Every indorser who indorses without
qualification, warrants to all subsequent holders in due course:
(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next
preceding section; and
633Accordingly, one who credits the proceeds of a check to the account of the
indorsing payee is liable in conversion to the non-indorsing payee for
the entire amount of the check.35
It bears noting that in petitioner’s cross-claim against Bitanga, the trial court
ordered Bitanga to return to petitioner the entire value of the check—P224,500.00—
with interest as well as damages and cost of suit. Petitioner never questioned this
aspect of the trial court’s disposition, yet it now prays for the modification of its
liability to BA Finance to only one-half of said amount. To pander to petitioner’s
supplication would certainly amount to unjust enrichment at BA Finance’s expense.
Petitioner’s remedy—which is the reimbursement for the full amount of the check
from the perpetrator of the irregularity—lies with Bitanga.
Articles 1207 and 1208 of the Civil Code cannot be applied to the present case as
these are completely irrelevant. The drawer, Malayan Insurance in this case, issued
the check to answer for an underlying contractual obligation (payment of insurance
proceeds). The obligation is merely reflected in the instrument and whether the
payees would jointly share in the proceeds or not is beside the point.
Moreover, granting petitioner’s appeal for partial liability would run counter to
the existing principles on the liabilities of parties on negotiable instruments,
particularly on Section 68 of the Negotiable Instruments Law which instructs that
joint payees who indorse are
_______________
(b) That the instrument is, at the time of his indorsement, valid and subsisting;
And in addition, he engages that, on due presentment, it shall be accepted or paid,
or both, as the case may be, according to its tenor, and that if it be dishonored and
the necessary proceedings on dishonor be duly taken, he will pay the amount thereof
to the holder, or to any subsequent indorser who may be compelled to pay it.
35 Vide Peoples Nat. Bank v. American Fidelity Fire Ins. Co., 39 Md. App. 614,
386 A.2d 1254, 24 U.C.C. Rep. Serv. 362 (1978); Middle States Leasing Corp. v.
Manufacturers Hanover Trust Co., 62 A.D.2d 273, 404 N.Y.S.2d 846, 23 U.C.C. Rep.
Serv. 1215 (1st Dep’t 1978); Vide 11 Am Jur 2d, Bills and Notes, §225, at p. 557.
634deemed to indorse jointly and severally.36 Recall that when the maker dishonors
the instrument, the holder thereof can turn to those secondarily liable—the
indorser—for recovery.37 And since the law explicitly mandates a solidary liability on
the part of the joint payees who indorse the instrument, the holder thereof (assuming
the check was further negotiated) can turn to either Bitanga or BA Finance for full
recompense.R
especting petitioner’s challenge to the award by the appellate court of exemplary
damages to BA Finance, the same fails. Contrary to petitioner’s claim that no moral,
temperate, liquidated or compensatory damages were awarded by the trial
court,38 the RTC did in fact award compensatory or actual damages of P224,500, the
value of the check, plus interest thereon.
Petitioner argues, however, that assuming arguendothat compensatory damages
had been awarded, the same contravened Article 2232 of the Civil Code which
provides that in contracts or quasi-contracts, the court may award exemplary
damages only if the defendant acted in a wanton, fraudulent, reckless, oppressive, or
malevolent manner. Since, so petitioner concludes, there was no finding that it acted
in a wanton, fraudulent, reckless, oppressive, or malevolent manner,39 it is not liable
for exemplary damages.
The argument fails. To reiterate, petitioner’s liability is based not on contract or
quasi-contract but on quasi-delictsince there is no pre-existing contractual relation
between the parties.40 Article 2231 of the
_______________
36 Sec. 68. Order in which indorsers are liable.—As respect one another,
indorsers are liable prima facie in the order in which they indorse; but evidence is
admissible to show that, as between or among themselves, they have agreed
otherwise. Joint payees or joint indorsees who indorse are deemed to indorse jointly
and severally.
37 Section 66 of the NIL, supra note 35.
38 Rollo, pp. 46-47.
39 Id., at p. 47.
40 Article 2176 of the Civil Code states: “Whoever by act or omission causes
damage to another, there being fault or negligence, is obliged to pay for the damage
done. Such fault or negligence, if there is no pre-existing
635Civil Code, which provides that in quasi-delict, exemplary damages may be
granted if the defendant acted with gross negligence, thus applies. For “gross
negligence” implies a want or absence of or failure to exercise even slight care or
diligence, or the entire absence of care,41 evincing a thoughtless disregard of
consequences without exerting any effort to avoid them.42
“x x x The law allows the grant of exemplary damages to set an example for the
public good. The business of a bank is affected with public interest; thus it makes a
sworn profession of diligence and meticulousness in giving irreproachable service.
For this reason, the bank should guard against in injury attributable to negligence or
bad faith on its part. The award of exemplary damages is proper as a warning to [the
petitioner] and all concerned not to recklessly disregard their obligation to exercise
the highest and strictest diligence in serving their depositors.”43(Italics and
underscoring supplied)
As for the dismissal by the appellate court of petitioner’s third-party complaint
against Malayan Insurance, the same is well-taken. Petitioner based its third-party
complaint on Malayan Insurance’s alleged gross negligence in issuing the check
payable to both BA Finance and Bitanga, despite the stipulation in the mortgage and
in the insurance policy that liability for loss shall be payable to BA
Finance.44 Malayan Insurance countered, however, that it
“x x x paid the amount of P224,500 to ‘BA Finance Corporation and Lamberto
Bitanga’ in compliance with the decision in the case of “Lamberto Bitanga versus
Malayan Insurance Co., Inc., Civil Case No. 88-2802, RTC-Makati Br. 132, and
affirmed on appeal by the Supreme Court [3rd Division], G.R. No. 101964, April 8,
1992 x x x.”45 (underscoring supplied)
_______________
contractual relation between the parties is called a quasi-delict and is governed by
the provisions of this Chapter.”
41 Acebedo Optical v. National Labor Relations Commission, G.R. No. 150171,
July 17, 2007, 527 SCRA 655, 675.
42 Ibid.
43 BPI Family Bank v. Buenaventura, G.R. No. 148196, Septenber 30, 2005, 471
SCRA 431, 445.
44 Vide records, p. 82; Rollo, p. 50.
45 Id., at pp. 100-101.
636It is noted that Malayan Insurance, which stated that it was a matter of
company policy to issue checks in the name of the insured and the financing
company, presented a witness to rebut its supposed negligence.46 Perforce, it thus
wrote a crossed check with joint payees so as to serve warning that the check was
issued for a definite purpose.47Petitioner never ever disputed these assertions.
The Court takes exception, however, to the appellate court’s affirmance of the trial
court’s grant of legal interest of 12% per annum on the value of the check. For the
obligation in this case did not arise out of a loan or forbearance of money, goods or
credit. While Article 1980 of the Civil Code provides that:
Fixed savings, and current deposits of money in banks and similar institutions
shall be governed by the provisions concerning simple loan,
said provision does not find application in this case since the nature of the
relationship between BA Finance and petitioner is one of agency whereby petitioner,
as collecting bank, is to collect for BA Finance the corresponding proceeds from the
check.48 Not being a loan or forbearance of money, the interest should be 6% per
annum computed from the date of extrajudicial demand on September 25, 1992 until
finality of judgment; and 12% per annum from finality of judgment until payment,
conformably with Eastern Shipping Lines, Inc. v. Court of Appeals.49
WHEREFORE, the Decision of the Court of Appeals dated May 18, 2007 is
AFFIRMED with MODIFICATION in that the rate of interest
_______________
46 Testimony of Michael Yap, Malayan Insurance’s first vice president.
47 Vide Bataan Cigar and Cigarette Factory v. Court of Appeals, G.R. No.
93048, March 3, 1994, 230 SCRA 643, 648-649, where the Court held that crossing
of checks should put the holder on inquiry and upon him or her 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 Section 52 (c) of the Negotiable Instruments Law.
(Underscoring supplied)
48 Jai Alai Corp. of the Phils. v. BPI, G.R. No. L-29432, August 6, 1975, 66 SCRA
29, 34.
49 G.R. No. 97412, July 12, 1994, 234 SCRA 78.
637on the judgment obligation of P224,500 should be 6% per annum, computed
from the time of extrajudicial demand on September 25, 1992 until its full payment
before finality of judgment; thereafter, if the amount adjudged remains unpaid, the
interest rate shall be 12% per annum computed from the time the judgment becomes
final and executory until fully satisfied.
Costs against petitioner.
SO ORDERED.
Puno (C.J.), Leonardo-De Castro, Bersamin and Villarama, Jr., JJ., concur.
Judgment affirmed with modification.
Notes.—If a bank refuses to pay a check (notwithstanding sufficiency of funds),
the payee-holder cannot sue the bank—the payee should instead sue the drawer who
might in turn sue the bank. (Villanueva vs. Nite, 496 SCRA 459 [2006])
 The term “promissory note” has a definite meaning under the negotiable
instruments law, which does not include “securities.” (Security Bank Corporation vs.
Commissioner of Internal Revenue, 499 SCRA 453 [2006])
——o0o——
 G.R. No. 136202. January 25, 2007.*
BANK OF THE PHILIPPINE ISLANDS, petitioner, vs. COURT OF APPEALS,
ANNABELLE A. SALAZAR, and JULIO R. TEMPLONUEVO, respondents.
Certiorari; Only questions of law may be raised in an appeal by certiorari
under Rule 45 of the Rules of Court; Factual findings of the Court of Appeals are
entitled to great weight and respect, especially when the CA affirms the factual
findings of the trial court; Exceptions.—Generally, only questions of law may be
raised in an appeal by certiorari under Rule 45 of the Rules of Court. Factual
findings of the CA are entitled to great weight and respect, especially when the CA
affirms the factual findings of the trial court. Such questions on whether certain
items of evidence should be accorded probative value or weight, or rejected as feeble
or spurious, or whether or not the proofs on one side or the other are clear and
convincing and adequate to establish a proposition in issue, are questions of fact. The
same holds true for questions on whether or not the body of proofs presented by a
party, weighed and analyzed in relation to contrary evidence submitted by the
adverse party may be said to be strong, clear and convincing, or whether or not
inconsistencies in the body of proofs of a party are of such gravity as to justify
refusing to give said proofs weight—all these are issues of fact which are not
reviewable by the Court. This rule, however, is not absolute and admits of certain
exceptions, namely: a) when the conclusion is a finding grounded entirely on
speculations, surmises, or conjectures; b) when the inference made is manifestly
mistaken, absurd, or impossible; c) when there is a grave abuse of discretion; d)
when the judgment is based on a misapprehension of facts; e) when the findings of
fact are conflicting; f) when the CA, in making its findings, went beyond the issues of
the case and the same are contrary to the admissions of both appellant and appellee;
g) when the findings of the CA are contrary to those of the trial court; h) when the
findings of fact are conclusions without citation of specific evidence on which they
are based; i) when the finding of fact of the CA is premised on the supposed absence
of evidence but is contradicted by the evidence on record; and j) when the CA
manifestly overlooked certain relevant
_______________
*FIRST DIVISION.
621
VOL. 512, JANUARY 25, 2007 62
1 the act of crossing the check serves as a warning to the holder that the check has been
Bank of the Philippine Islands vs. Court of Appeals
facts not disputed by the parties and which, if properly considered, would justify
a different conclusion.
Negotiable Instruments Law; Checks; The weight of authority is that the mere
possession of a negotiable instrument does not in itself conclusively establish either
the right of the possessor to receive payment, or of the right of one who has made
payment to be discharged from liability.—Section 49 of the Negotiable Instruments
Law contemplates a situation whereby the payee or indorsee delivers a negotiable
instrument for value without indorsing it, thus: Transfer without indorsement;
effect of.—Where the holder of an instrument payable to his order transfers it for
value without indorsing it, the transfer vests in the transferee such title as the
transferor had therein, and the transferee acquires in addition, the right to have the
indorsement of the transferor. But for the purpose of determining whether the
transferee is a holder in due course, the negotiation takes effect as of the time when
the indorsement is actually made. It bears stressing that the above transaction is an
equitable assignment and the transferee acquires the instrument subject to defenses
and equities available among prior parties. Thus, if the transferor had legal title, the
transferee acquires such title and, in addition, the right to have the indorsement of
the transferor and also the right, as holder of the legal title, to maintain legal action
against the maker or acceptor or other party liable to the transferor. The underlying
premise of this provision, however, is that a valid transfer of ownership of the
negotiable instrument in question has taken place. Transferees in this situation do
not enjoy the presumption of ownership in favor of holders since they are neither
payees nor indorsees of such instruments. The weight of authority is that the mere
possession of a negotiable instrument does not in itself conclusively establish either
the right of the possessor to receive payment, or of the right of one who has made
payment to be discharged from liability. Thus, something more than mere possession
by persons who are not payees or indorsers of the instrument is necessary to
authorize payment to them in the absence of any other facts from which the authority
to receive payment may be inferred.
Same; Same; Crossed Checks; If instruments payable to named payees or to
their order have not been indorsed in blank, only such payees or their indorsees can
be holders and entitled to receive payment in their own right.—In State Investment
House v. IAC, 175
622
6 SUPREME COURT REPORTS ANNOTATED
22
Bank of the Philippine Islands vs. Court of Appeals
SCRA 310 (1989), the Court enumerated the effects of crossing a check, thus: (1)
that the check may not be encashed but only deposited in the bank; (2) that the check
may be negotiated only once—to one who has an account with a bank; and (3) that
issued for a definite purpose so that such holder must inquire if the check has been
received pursuant to that purpose. Thus, even if the delay in the demand for
reimbursement is taken in conjunction with Salazar’s possession of the checks, it
cannot be said that the presumption of ownership in Templonuevo’s favor as the
designated payee therein was sufficiently overcome. This is consistent with the
principle that if instruments payable to named payees or to their order have not been
indorsed in blank, only such payees or their indorsees can be holders and entitled to
receive payment in their own right.
Same; Same; Presumptions; Words and Phrases; The presumption under
Section 131(s) of the Rules of Court stating that a negotiable instrument was given
for a sufficient consideration will not inure to the benefit of someone who was
merely the transferee of the physical possession of the instrument—the phrase
“given or indorsed” in the context of a negotiable instrument refers to the manner in
which such instrument may be negotiated.—The presumption under Section 131(s)
of the Rules of Court stating that a negotiable instrument was given for a sufficient
consideration will not inure to the benefit of Salazar because the term “given” does
not pertain merely to a transfer of physical possession of the instrument. The phrase
“given or indorsed” in the context of a negotiable instrument refers to the manner in
which such instrument may be negotiated. Negotiable instruments are negotiated by
“transfer to one person or another in such a manner as to constitute the transferee
the holderthereof. If payable to bearer it is negotiated by delivery. If payable to order
it is negotiated by the indorsement completed by delivery.” The present case involves
checks payable to order. Not being a payee or indorsee of the checks, private
respondent Salazar could not be a holder thereof.
Same; Same; It is an exception to the general rule for a payee of an order
instrument to transfer the instrument without indorsement.—It is an exception to
the general rule for a payee of an order instrument to transfer the instrument without
indorsement. Pre-
623
VOL. 512, JANUARY 25, 2007 62
3 their relationship.—It is conceded that petitioner had the right of set-off over the
Bank of the Philippine Islands vs. Court of Appeals
cisely because the situation is abnormal, it is but fair to the maker and to prior
holders to require possessors to prove without the aid of an initial presumption in
their favor, that they came into possession by virtue of a legitimate transaction with
the last holder. Salazar failed to discharge this burden, and the return of the check
proceeds to Templonuevo was therefore warranted under the circumstances despite
the fact that Templonuevo may not have clearly demonstrated that he never
authorized Salazar to deposit the checks or to encash the same. Noteworthy also is
the fact that petitioner stamped on the back of the checks the words: “All prior
endorsements and/or lack of endorsements guaranteed,” thereby making the
assurance that it had ascertained the genuineness of all prior endorsements. Having
assumed the liability of a general indorser, petitioner’s liability to the designated
payee cannot be denied.
Same; Banks and Banking; Checks; A bank generally has a right of set-off over
the deposits therein for the payment of any withdrawals on the part of a
depositor—the right of a collecting bank to debit a client’s account for the value of a
dishonored check that has previously been credited has fairly been established by
jurisprudence.—The right of set-off was explained in Associated Bank v. Tan, 446
SCRA 282 (2004): A bank generally has a right of set-off over the deposits therein for
the payment of any withdrawals on the part of a depositor. The right of a collecting
bank to debit a client’s account for the value of a dishonored check that has
previously been credited has fairly been established by jurisprudence. To begin with,
Article 1980 of the Civil Code provides that “[f]ixed, savings, and current deposits of
money in banks and similar institutions shall be governed by the provisions
concerning simple loan.” Hence, the relationship between banks and depositors has
been held to be that of creditor and debtor. Thus, legal compensation under Article
1278 of the Civil Code may take place “when all the requisites mentioned in Article
1279 are present,” as follows: (1) That each one of the obligors be bound principally,
and that he be at the same time a principal creditor of the other; (2) That both debts
consist in a sum of money, or if the things due are consumable, they be of the same
kind, and also of the same quality if the latter has been stated; (3) That the two debts
be due; (4) That they be liquidated and demandable; (5) That over neither of them
there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.
624
6 SUPREME COURT REPORTS ANNOTATED
24
Bank of the Philippine Islands vs. Court of Appeals
Same; Same; As businesses affected with public interest, and because of the
nature of their functions, banks are under obligation to treat the accounts of their
depositors with meticulous care, always having in mind the fiduciary nature of
amount it paid to Templonuevo against the deposit of Salazar, the issue of whether it
acted judiciously is an entirely different matter. As businesses affected with public
interest, and because of the nature of their functions, banks are under obligation to
treat the accounts of their depositors with meticulous care, always having in mind the
fiduciary nature of their relationship. In this regard, petitioner was clearly remiss in
its duty to private respondent Salazar as its depositor.
Same; Same; The taking and collection of a check without the proper
indorsement amount to a conversion of the check by the bank.—To begin with, the
irregularity appeared plainly on the face of the checks. Despite the obvious lack of
indorsement thereon, petitioner permitted the encashment of these checks three
times on three separate occasions. This negates petitioner’s claim that it merely made
a mistake in crediting the value of the checks to Salazar’s account and instead
bolsters the conclusion of the CA that petitioner recognized Salazar’s claim of
ownership of checks and acted deliberately in paying the same, contrary to ordinary
banking policy and practice. It must be emphasized that the law imposes a duty of
diligence on the collecting bank to scrutinize checks deposited with it, for the
purpose of determining their genuineness and regularity. The collecting bank, being
primarily engaged in banking, holds itself out to the public as the expert on this field,
and the law thus holds it to a high standard of conduct. The taking and collection of a
check without the proper indorsement amount to a conversion of the check by the
bank.
Same; Same; Damages; A depositor has the right to recover reasonable moral
damages even if the bank’s negligence may not have been attended with malice and
bad faith, if the former suffered mental anguish, serious anxiety, embarrassment
and humiliation.—This whole incident would have been avoided had petitioner
adhered to the standard of diligence expected of one engaged in the banking
business. A depositor has the right to recover reasonable moral damages even if the
bank’s negligence may not have been attended
625
VOL. 512, JANUARY 25, 2007 62
5 Templonuevo,
Bank of the Philippine Islands vs. Court of Appeals
with malice and bad faith, if the former suffered mental anguish, serious
anxiety, embarrassment and humiliation. Moral damages are not meant to enrich a
complainant at the expense of defendant. It is only intended to alleviate the moral
suffering she has undergone. The award of exemplary damages is justified, on the
other hand, when the acts of the bank are attended by malice, bad faith or gross
negligence. The award of reasonable attorney’s fees is proper where exemplary
damages are awarded. It is proper where depositors are compelled to litigate to
protect their interest.
PETITION for review on certiorari of the decision and resolution of the Court of
Appeals.
The facts are stated in the opinion of the Court.
Justino M. Marquez, III for petitioner.
Abesamis, Medialdea & Abesamis for respondent A. Salazar.
Arniel N. Bondoc for respondent Templonuevo.
AZCUNA, J.:
This is a petition for review under Rule 45 of the Rules of Court seeking the reversal
of the Decision1 dated April 3, 1998, and the Resolution2 dated November 9, 1998, of
the Court of Appeals in CA-G.R. CV No. 42241.
The facts3 are as follows:
A.A. Salazar Construction and Engineering Services filed an action for a sum of
money with damages against herein petitioner Bank of the Philippine Islands (BPI)
on December 5, 1991 before Branch 156 of the Regional Trial Court (RTC) of Pasig
City. The complaint was later amended by substitut-
_______________
1 CA Rollo, pp. 100-116.
2 Rollo, p. 57.
3 CA Rollo, pp. 100-105.
626
626 SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Court of Appeals
ing the name of Annabelle A. Salazar as the real party in interest in place of A.A.
Salazar Construction and Engineering Services. Private respondent Salazar prayed
for the recovery of the amount of Two Hundred Sixty-Seven Thousand, Seven
Hundred Seven Pesos and Seventy Centavos (P267,707.70) debited by petitioner BPI
from her account. She likewise prayed for damages and attorney’s fees.
Petitioner BPI, in its answer, alleged that on August 31, 1991, Julio R.
third-party defendant and herein also a private
respondent, demanded from the former payment of the amount of Two Hundred
Sixty-Seven Thousand, Six Hundred Ninety-Two Pesos and Fifty Centavos
(P267,692.50) representing the aggregate value of three (3) checks, which were
allegedly payable to him, but which were deposited with the petitioner bank to
private respondent Salazar’s account (Account No. 0203-1187-67) without his
knowledge and corresponding endorsement.
Accepting that Templonuevo’s claim was a valid one, petitioner BPI froze Account
No. 0201-0588-48 of A.A. Salazar and Construction and Engineering Services,
instead of Account No. 0203-1187-67 where the checks were deposited, since this
account was already closed by private respondent Salazar or had an insufficient
balance.
Private respondent Salazar was advised to settle the matter with Templonuevo but
they did not arrive at any settlement. As it appeared that private respondent Salazar
was not entitled to the funds represented by the checks which were deposited and
accepted for deposit, petitioner BPI decided to debit the amount of P267,707.70 from
her Account No. 02010588-48 and the sum of P267,692.50 was paid to
Templonuevo by means of a cashier’s check. The difference between the value of the
checks (P267,692.50) and the amount actually debited from her account
(P267,707.70) represented bank charges in connection with the issuance of a
cashier’s check to Templonuevo.
627
VOL. 512, JANUARY 25, 2007 627
Bank of the Philippine Islands vs. Court of Appeals
In the answer to the third-party complaint, private respondent Templonuevo
admitted the payment to him of P267,692.50 and argued that said payment was to
correct the malicious deposit made by private respondent Salazar to her private
account, and that petitioner bank’s negligence and tolerance regarding the matter
was violative of the primary and ordinary rules of banking. He likewise contended
that the debiting or taking of the reimbursed amount from the account of private
respondent Salazar by petitioner BPI was a matter exclusively between said parties
and may be pursuant to banking rules and regulations, but did not in any way affect
him. The debiting from another account of private respondent Salazar, considering
that her other account was effectively closed, was not his concern.
After trial, the RTC rendered a decision, the dispositive portion of which reads
thus:
“WHEREFORE, premises considered, judgment is hereby rendered in favor of the
plaintiff [private respondent Salazar] and against the defendant [petitioner BPI] and
ordering the latter to pay as follows:
1. 1.The amount of P267,707.70 with 12% interest thereon from September 16,
1991 until the said amount is fully paid;
2. 2.The amount of P30,000.00 as and for actual damages;
3. 3.The amount of P50,000.00 as and for moral damages;
4. 4.The amount of P50,000.00 as and for exemplary damages;
5. 5.The amount of P30,000.00 as and for attorney’s fees; and
6. 6.Costs of suit.
The counterclaim is hereby ordered DISMISSED for lack of factual basis.
The third-party complaint [filed by petitioner] is hereby likewise ordered
DISMISSED for lack of merit.
Third-party defendant’s [i.e., private respondent Templonuevo’s] counterclaim is
hereby likewise DISMISSED for lack of factual basis.
628
628 SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Court of Appeals
SO ORDERED.”4
On appeal, the Court of Appeals (CA) affirmed the decision of the RTC and held that
respondent Salazar was entitled to the proceeds of the three (3) checks
notwithstanding the lack of endorsement thereon by the payee. The CA concluded
that Salazar and Templonuevo had previously agreed that the checks payable to JRT
Construction and Trading5 actually belonged to Salazar and would be deposited to
her account, with petitioner acquiescing to the arrangement.6
Petitioner therefore filed this petition on these grounds:
I.
The Court of Appeals committed reversible error in misinterpreting Section 49 of the
Negotiable Instruments Law and Section 3 (r and s) of Rule 131 of the New Rules on
Evidence.
II.
The Court of Appeals committed reversible error in NOT applying the provisions
of Articles 22, 1278 and 1290 of the Civil Code in favor of BPI.
III.
The Court of Appeals committed a reversible error in holding, based on a
misapprehension of facts, that the account from which BPI debited the amount of
P267,707.70 belonged to a corporation with a separate and distinct personality.
IV.
The Court of Appeals committed a reversible error in holding, based entirely on
speculations, surmises or conjectures, that there was an agreement between
SALAZAR and TEMPLONUEVO that checks
_______________
4 Records, pp. 323-324.
5 Private respondent Templonuevo admitted that he was doing business under the
name and style, “JRT Construction and Trading.” See Records, p. 179.
6 Rollo, p. 106.
629
VOL. 512, JANUARY 25, 2007 629
Bank of the Philippine Islands vs. Court of Appeals
payable to TEMPLONUEVO may be deposited by SALAZAR to her personal account
and that BPI was privy to this agreement.
V.
The Court of Appeals committed reversible error in holding, based entirely on
speculation, surmises or conjectures, that SALAZAR suffered great damage and
prejudice and that her business standing was eroded.
VI.
The Court of Appeals erred in affirming instead of reversing the decision of the
lower court against BPI and dismissing SALAZAR’s complaint.
VII.
 The Honorable Court erred in affirming the decision of the lower court dismissing
the third-party complaint of BPI.7
The issues center on the propriety of the deductions made by petitioner from private
respondent Salazar’s account. Stated otherwise, does a collecting bank, over the
objections of its depositor, have the authority to withdraw unilaterally from such
depositor’s account the amount it had previously paid upon certain unendorsed
order instruments deposited by the depositor to another account that she later
closed?
Petitioner argues thus:
1. 1.There is no presumption in law that a check payable to order, when found in
the possession of a person who is neither a payee nor the indorsee thereof,
has been lawfully transferred for value. Hence, the CA should not have
presumed that Salazar was a transferee for value within the contemplation
of Section 49 of the Negotiable Instruments Law,8 as the latter applies only
to a holder defined under Section 191of the same.9
_______________
7 Id., at pp. 12-13.
8 Infra note 17.
9 Sec. 191. Definition and meaning of terms.—In this Act, unless the contract
otherwise requires:
630
630 SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Court of Appeals
1. 2.Salazar failed to adduce sufficient evidence to prove that her possession of
the three checks was lawful despite her allegations that these checks were
deposited pursuant to a prior internal arrangement with Templonuevo and
that petitioner was privy to the arrangement.
2. 3.The CA should have applied the Civil Code provisions on legal
compensation because in deducting the subject amount from Salazar’s
account, petitioner was merely rectifying the undue payment it made upon
the checks and exercising its prerogative to alter or modify an erroneous
credit entry in the regular course of its business.
3. 4.The debit of the amount from the account of A.A. Salazar Construction and
Engineering Services was proper even though the value of the checks had
been originally credited to the personal account of Salazar because A.A.
Salazar Construction and Engineering Services, an unincorporated single
proprietorship, had no separate and distinct personality from Salazar.
4. 5.Assuming the deduction from Salazar’s account was improper, the CA
should not have dismissed petitioner’s third-party complaint against
Templonuevo because the latter would have the legal duty to return to
petitioner the proceeds of the checks which he previously received from it.
5. 6.There was no factual basis for the award of damages to Salazar.
The petition is partly meritorious.
_______________
xxx
“Holder” means the payee or indorsee of a bill or note who is in possession of it,
or the bearer thereof;
xxx
631
VOL. 512, JANUARY 25, 2007 631
Bank of the Philippine Islands vs. Court of Appeals
First, the issue raised by petitioner requires an inquiry into the factual findings made
by the CA. The CA’s conclusion that the deductions from the bank account of A.A.
Salazar Construction and Engineering Services were improper stemmed from its
finding that there was no ineffective payment to Salazar which would call for the
exercise of petitioner’s right to set off against the former’s bank deposits. This
finding, in turn, was drawn from the pleadings of the parties, the evidence adduced
during trial and upon the admissions and stipulations of fact made during the pre-
trial, most significantly the following:
1. (a)That Salazar previously had in her possession the following checks:
1. (1)Solid Bank Check No. CB766556 dated January 30, 1990 in the amount of
P57,712.50;
2. (2)Solid Bank Check No. CB898978 dated July 31, 1990 in the amount of
P55,180.00; and,
3. (3)Equitable Banking Corporation Check No. 32380638 dated August 28,
1990 for the amount of P154,800.00;
1. (b)That these checks which had an aggregate amount of P267,692.50 were
payable to the order of JRT Construction and Trading, the name and style
under which Templonuevo does business;
2. (c)That despite the lack of endorsement of the designated payee upon such
checks, Salazar was able to deposit the checks in her personal savings
account with petitioner and encash the same;
 3. (d)That petitioner accepted and paid the checks on three (3) separate
occasions over a span of eight months in 1990; and
632
632 SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Court of Appeals
1. (e)That Templonuevo only protested the purportedly unauthorized
encashment of the checks after the lapse of one year from the date of the last
check.10
Petitioner concedes that when it credited the value of the checks to the account of
private respondent Salazar, it made a mistake because it failed to notice the lack of
endorsement thereon by the designated payee. The CA, however, did not lend
credence to this claim and concluded that petitioner’s actions were deliberate, in view
of its admission that the “mistake” was committed three times on three separate
occasions, indicating acquiescence to the internal arrangement between Salazar and
Templonuevo. The CA explained thus:
“It was quite apparent that the three checks which appellee Salazar deposited were
not indorsed. Three times she deposited them to her account and three times the
amounts borne by these checks were credited to the same. And in those separate
occasions, the bank did not return the checks to her so that she could have them
indorsed. Neither did the bank question her as to why she was depositing the checks
to her account considering that she was not the payee thereof, thus allowing us to
come to the conclusion that defendant-appellant BPI was fully aware that the
proceeds of the three checks belong to appellee.
For if the bank was not privy to the agreement between Salazar and Templonuevo,
it is most unlikely that appellant BPI (or any bank for that matter) would have
accepted the checks for deposit on three separate times nary any question. Banks are
most finicky over accepting checks for deposit without the corresponding
indorsement by their payee. In fact, they hesitate to accept indorsed checks for
deposit if the depositor is not one they know very well.”11
The CA likewise sustained Salazar’s position that she received the checks from
Templonuevo pursuant to an internal arrangement between them, ratiocinating as
follows:
_______________
10Records, pp. 178-179.
CA Rollo, pp. 106-107.
11
633
VOL. 512, JANUARY 25, 2007 633
Bank of the Philippine Islands vs. Court of Appeals
“If there was indeed no arrangement between Templonuevo and the plaintiff over the
three questioned checks, it baffles us why it was only on August 31, 1991 or more than
a year after the third and last check was deposited that he demanded for the refund
of the total amount of P267,692.50.
A prudent man knowing that payment is due him would have demanded payment
by his debtor from the moment the same became due and demandable. More so if the
sum involved runs in hundreds of thousand of pesos. By and large, every person, at
the very moment he learns that he was deprived of a thing which rightfully belongs to
him, would have created a big fuss. He would not have waited for a year within which
to do so. It is most inconceivable that Templonuevo did not do this.”12
Generally, only questions of law may be raised in an appeal by certiorari under Rule
45 of the Rules of Court.13 Factual findings of the CA are entitled to great weight and
respect, especially when the CA affirms the factual findings of the trial court. 14 Such
questions on whether certain items of evidence should be accorded probative value
or weight, or rejected as feeble or spurious, or whether or not the proofs on one side
or the other are clear and convincing and adequate to establish a proposition in issue,
are questions of fact. The same holds true for questions on whether or not the body of
proofs presented by a party, weighed and analyzed in relation to contrary evidence
submitted by the adverse party may be said to be strong, clear and convincing, or
whether or not inconsistencies in the body of proofs of a party are of such gravity as
to justify refusing to give said proofs weight—all
_______________
12 Id., at p. 107.
13 Madrigal v. Court of Appeals, G.R. No. 142944, April 15, 2005, 456 SCRA
247; Bernardo v. Court of Appeals, G.R. No. 101680, December 7, 1992, 216 SCRA
224; Remalante v. Tibe, G.R. No. L-59514, February 25, 1988, 158 SCRA 138.
14 Borromeo v. Sun, G.R. No. 75908, October 22, 1999, 317 SCRA 176.
634
634 SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Court of Appeals
these are issues of fact which are not reviewable by the Court.15
This rule, however, is not absolute and admits of certain exceptions, namely: a)
when the conclusion is a finding grounded entirely on speculations, surmises, or
conjectures; b) when the inference made is manifestly mistaken, absurd, or
impossible; c) when there is a grave abuse of discretion; d) when the judgment is
based on a misapprehension of facts; e) when the findings of fact are conflicting; f)
when the CA, in making its findings, went beyond the issues of the case and the same
are contrary to the admissions of both appellant and appellee; g) when the findings of
the CA are contrary to those of the trial court; h) when the findings of fact are
conclusions without citation of specific evidence on which they are based; i) when the
finding of fact of the CA is premised on the supposed absence of evidence but is
contradicted by the evidence on record; and j) when the CA manifestly overlooked
certain relevant facts not disputed by the parties and which, if properly considered,
would justify a different conclusion.16
In the present case, the records do not support the finding made by the CA and
the trial court that a prior arrangement existed between Salazar and Templonuevo
regarding the transfer of ownership of the checks. This fact is crucial as Salazar’s
entitlement to the value of the instruments is based on the assumption that she is a
transferee within the contemplation of Section 49 of the Negotiable Instruments
Law.
Section 49 of the Negotiable Instruments Law contemplates a situation whereby
the payee or indorsee delivers a negotiable instrument for value without indorsing it,
thus:
_______________
15 Paterno v. Paterno, G.R. No. 63680, March 23, 1990, 183 SCRA 630.
16 Arcaba v. Tabancura, 421 Phil. 1096; 370 SCRA 414 (2001); Martinez v. Court
of Appeals, G.R. No. 123547, May 21, 2001, 358 SCRA 38.
635
VOL. 512, JANUARY 25, 2007 635
Bank of the Philippine Islands vs. Court of Appeals
“Transfer without indorsement; effect of.—Where the holder of an instrument
payable to his order transfers it for value without indorsing it, the transfer vests in
the transferee such title as the transferor had therein, and the transferee acquires in
addition, the right to have the indorsement of the transferor. But for the purpose of
determining whether the transferee is a holder in due course, the negotiation takes
effect as of the time when the indorsement is actually made.”17
It bears stressing that the above transaction is an equitable assignment and the
transferee acquires the instrument subject to defenses and equities available among
prior parties. Thus, if the transferor had legal title, the transferee acquires such title
and, in addition, the right to have the indorsement of the transferor and also the
right, as holder of the legal title, to maintain legal action against the maker or
acceptor or other party liable to the transferor. The underlying premise of this
provision, however, is that a valid transfer of ownership of the negotiable instrument
in question has taken place.
Transferees in this situation do not enjoy the presumption of ownership in favor
of holders since they are neither payees nor indorsees of such instruments. The
weight of authority is that the mere possession of a negotiable instrument does not in
itself conclusively establish either the right of the possessor to receive payment, or of
the right of one who has made payment to be discharged from liability. Thus,
something more than mere possession by persons who are not payees or indorsers of
the instrument is necessary to authorize payment to them in the absence of any other
facts from which the authority to receive payment may be inferred.18
_______________
17 Act No. 2031 (1911).
18 11 Am. Jur. 2d, § 988, citing Doubleday v. Kress, 50 NY 410, Hoffmaster v.
Black, 84 NE 423, and First Nat. Bank v. Gorman, 21 P2d 549.
636
636 SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Court of Appeals
The CA and the trial court surmised that the subject checks belonged to private
respondent Salazar based on the pre-trial stipulation that Templonuevo incurred a
one-year delay in demanding reimbursement for the proceeds of the same. To the
Court’s mind, however, such period of delay is not of such unreasonable length as to
estop Templonuevo from asserting ownership over the checks especially considering
that it was readily apparent on the face of the instruments19 that these were crossed
checks.
In State Investment House v. IAC,20 the Court enumerated the effects of crossing
a check, thus: (1) that the check may not be encashed but only deposited in the bank;
(2) that the check may be negotiated only once—to one who has an account with a
bank; and (3) that the act of crossing the check serves as a warning to the holder that
the check has been issued for a definite purpose so that such holder must inquire if
the check has been received pursuant to that purpose.
Thus, even if the delay in the demand for reimbursement is taken in conjunction
with Salazar’s possession of the checks, it cannot be said that the presumption of
ownership in Templonuevo’s favor as the designated payee therein was sufficiently
overcome. This is consistent with the principle that if instruments payable to named
payees or to their order have not been indorsed in blank, only such payees or their
indorsees can be holders and entitled to receive payment in their own right.21
The presumption under Section 131(s) of the Rules of Court stating that a
negotiable instrument was given for a sufficient consideration will not inure to the
benefit of Salazar because the term “given” does not pertain merely to a transfer of
physical possession of the instrument. The phrase “given or indorsed” in the context
of a negotiable instrument refers to
_______________
19 Records, pp. 286-293.
20 G.R. No. 72764, July 13, 1989, 175 SCRA 310.
21 Supra note 18.
 637
VOL. 512, JANUARY 25, 2007 637
Bank of the Philippine Islands vs. Court of Appeals
the manner in which such instrument may be negotiated. Negotiable instruments are
negotiated by “transfer to one person or another in such a manner as to constitute
the transferee the holder thereof. If payable to bearer it is negotiated by delivery. If
payable to order it is negotiated by the indorsement completed by delivery.” 22 The
present case involves checks payable to order. Not being a payee or indorsee of the
checks, private respondent Salazar could not be a holder thereof.
It is an exception to the general rule for a payee of an order instrument to transfer
the instrument without indorsement. Precisely because the situation is abnormal, it
is but fair to the maker and to prior holders to require possessors to prove without
the aid of an initial presumption in their favor, that they came into possession by
virtue of a legitimate transaction with the last holder.23Salazar failed to discharge this
burden, and the return of the check proceeds to Templonuevo was therefore
warranted under the circumstances despite the fact that Templonuevo may not have
clearly demonstrated that he never authorized Salazar to deposit the checks or to
encash the same. Noteworthy also is the fact that petitioner stamped on the back of
the checks the words: “All prior endorsements and/or lack of endorsements
guaranteed,” thereby making the assurance that it had ascertained the genuineness
of all prior endorsements. Having assumed the liability of a general indorser,
petitioner’s liability to the designated payee cannot be denied.
Consequently, petitioner, as the collecting bank, had the right to debit Salazar’s
account for the value of the checks it previously credited in her favor. It is of no
moment that the account debited by petitioner was different from the original
account to which the proceeds of the check were credited be-
_______________
22 Negotiable Instruments Law, Section 30.
23 Campos, Jr. and Lopez Campos, “Notes and Selected Cases on Negotiable
Instruments Law,” p. 108 (1994).
638
638 SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Court of Appeals
cause both admittedly belonged to Salazar, the former being the account of the sole
proprietorship which had no separate and distinct personality from her, and the
latter being her personal account.
The right of set-off was explained in Associated Bank v. Tan:24
“A bank generally has a right of set-off over the deposits therein for the payment of
any withdrawals on the part of a depositor. The right of a collecting bank to debit a
client’s account for the value of a dishonored check that has previously been credited
has fairly been established by jurisprudence. To begin with, Article 1980 of the Civil
Code provides that “[f]ixed, savings, and current deposits of money in banks and
similar institutions shall be governed by the provisions concerning simple loan.”
Hence, the relationship between banks and depositors has been held to be that of
creditor and debtor. Thus, legal compensation under Article 1278 of the Civil Code
may take place “when all the requisites mentioned in Article 1279 are present,” as
follows:
1. (1)That each one of the obligors be bound principally, and that he be at the
same time a principal creditor of the other;
2. (2)That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;
3. (3)That the two debts be due;
4. (4)That they be liquidated and demandable;
5. (5)That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the debtor.”
While, however, it is conceded that petitioner had the right of set-off over the amount
it paid to Templonuevo against the deposit of Salazar, the issue of whether it acted
judiciously is an entirely different matter.25 As businesses affected with
_______________
24 G.R. No. 156940, December 14, 2004, 446 SCRA 282.
25 Id.
639
VOL. 512, JANUARY 25, 2007 639
Bank of the Philippine Islands vs. Court of Appeals
public interest, and because of the nature of their functions, banks are under
obligation to treat the accounts of their depositors with meticulous care, always
having in mind the fiduciary nature of their relationship.26 In this regard, petitioner
was clearly remiss in its duty to private respondent Salazar as its depositor.
To begin with, the irregularity appeared plainly on the face of the checks. Despite
the obvious lack of indorsement thereon, petitioner permitted the encashment of
these checks three times on three separate occasions. This negates petitioner’s claim
that it merely made a mistake in crediting the value of the checks to Salazar’s account
and instead bolsters the conclusion of the CA that petitioner recognized Salazar’s
claim of ownership of checks and acted deliberately in paying the same, contrary to
ordinary banking policy and practice. It must be emphasized that the law imposes a
duty of diligence on the collecting bank to scrutinize checks deposited with it, for the
purpose of determining their genuineness and regularity. The collecting bank, being
primarily engaged in banking, holds itself out to the public as the expert on this field,
and the law thus holds it to a high standard of conduct.27 The taking and collection of
a check without the proper indorsement amount to a conversion of the check by the
bank.28
More importantly, however, solely upon the prompting of Templonuevo, and with
full knowledge of the brewing dispute between Salazar and Templonuevo, petitioner
debited the
_______________
26 Prudential Bank v. Court of Appeals, G.R. No. 125536, March 16, 2000, 328
SCRA 264; Simex International [Manila], Inc. v. Court of Appeals, G.R. No. 88013,
March 19, 1990, 183 SCRA 360; Bank of the Phil. Iskands v. Intermediate Appellate
Court, G.R. No. 69162, February 21, 1992, 206 SCRA 408.
27 Banco de Oro Savings and Mortgage Bank v. Equitable Banking Corp., G.R.
No. L-74917, January 20, 1988, 157 SCRA 188.
28 Associated Bank v. Court of Appeals, G.R. No. 89802, May 7, 1992, 208 SCRA
465; City Trust Banking Corp. v. Intermediate Appellate Court, G.R. No. 84281,
May 27, 1994, 232 SCRA 559.
640
640 SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Court of Appeals
account held in the name of the sole proprietorship of Salazar without even serving
due notice upon her. This ran contrary to petitioner’s assurances to private
respondent Salazar that the account would remain untouched, pending the
resolution of the controversy between her and Templonuevo. 29 In this connection,
the CA cited the letter dated September 5, 1991 of Mr. Manuel Ablan, Senior Manager
of petitioner bank’s Pasig/Ortigas branch, to private respondent Salazar informing
her that her account had been frozen, thus:
“From the tenor of the letter of Manuel Ablan, it is safe to conclude that Account No.
0201-0588-48 will remain frozen or untouched until herein [Salazar] has settled
matters with Templonuevo. But, in an unexpected move, in less than two weeks
(eleven days to be precise) from the time that letter was written, [petitioner] bank
issued a cashier’s check in the name of Julio R. Templonuevo of the J.R.T.
Construction and Trading for the sum of P267,692.50 (Exhibit “8”) and debited said
amount from Ms. Arcilla’s account No. 0201-0588-48 which was supposed to be
frozen or controlled. Such a move by BPI is, to Our minds, a clear case of negligence,
if not a fraudulent, wanton and reckless disregard of the right of its depositor.”
The records further bear out the fact that respondent Salazar had issued several
checks drawn against the account of A.A. Salazar Construction and Engineering
Services prior to any notice of deduction being served. The CA sustained private
respondent Salazar’s claim of damages in this regard:
“The act of the bank in freezing and later debiting the amount of P267,692.50 from
the account of A.A. Salazar Construction and Engineering Services caused plaintiff-
appellee great damage and prejudice particularly when she had already issued checks
drawn against the said account. As can be expected, the said checks bounced. To
prove this, plaintiff-appellee presented as exhibits photocopies of checks dated
September 8, 1991, October 28, 1991, and November 14, 1991 (Exhibits “D,” “E” and
“F” respectively).”30
_______________
29 CA Rollo, p. 112; Transcript of Stenographic Notes dated November 9, 1992, pp.
8-9.
30 CA Rollo, pp. 111.
641
VOL. 512, JANUARY 25, 2007 641
Bank of the Philippine Islands vs. Court of Appeals
These checks, it must be emphasized, were subsequently dishonored, thereby causing
private respondent Salazar undue embarrassment and inflicting damage to her
standing in the business community. Under the circumstances, she was clearly not
given the opportunity to protect her interest when petitioner unilaterally withdrew
the above amount from her account without informing her that it had already done
so.
For the above reasons, the Court finds no reason to disturb the award of damages
granted by the CA against petitioner. This whole incident would have been avoided
had petitioner adhered to the standard of diligence expected of one engaged in the
banking business. A depositor has the right to recover reasonable moral damages
even if the bank’s negligence may not have been attended with malice and bad faith,
if the former suffered mental anguish, serious anxiety, embarrassment and
humiliation.31 Moral damages are not meant to enrich a complainant at the expense
of defendant. It is only intended to alleviate the moral suffering she has undergone.
The award of exemplary damages is justified, on the other hand, when the acts of the
bank are attended by malice, bad faith or gross negligence. The award of reasonable
attorney’s fees is proper where exemplary damages are awarded. It is proper where
depositors are compelled to litigate to protect their interest.32
WHEREFORE, the petition is partially GRANTED. The assailed Decision dated
April 3, 1998 and Resolution dated April 3, 1998 rendered by the Court of Appeals in
CA-G.R. CV No. 42241 are MODIFIED insofar as it ordered petitioner Bank of the
Philippine Islands to return the amount of Two Hundred Sixty-seven Thousand
Seven Hundred and Seven and 70/100 Pesos (P267,707.70) to respondent Annabelle
A. Salazar, which portion is REVERSED and SET ASIDE. In all other respects, the
same are AFFIRMED.
No costs.
_______________
31Civil Code, Article 2217.
32 Prudential Bank v. Court of Appeals, supra note 26.
642
642 SUPREME COURT REPORTS ANNOTATED
Manliclic vs. Calaunan
SO ORDERED.
Puno (C.J., Chairman), Sandoval-Gutierrez, Coronaand Garcia, JJ., concur.
Petition partially granted, assailed decision and resolution modified.
Notes.—The crossing of a check with the phrase “Payee’s Account Only,” is a
warning that the check should be deposited only in the account of the payee.
(Philippine Commercial International Bank vs. Court of Appeals, 350 SCRA
446 [2001])
A person to whom a crossed check was endorsed by the payee of said check could
not be considered a holder in due course. (Atrium Management Corporation vs.
Court of Appeals, 353 SCRA 23 [2001])

——o0o——
 G.R. No. 138074. August 15, 2003.*
CELY YANG, petitioner, vs. HON. COURT OF APPEALS, PHILIPPINE
COMMERCIAL INTERNATIONAL BANK, FAR EAST BANK & TRUST CO.,
EQUITABLE BANKING CORPORATION, PREM CHANDIRAMANI and
FERNANDO DAVID, respondents.
Negotiable Instrument Law; Every holder of a negotiable instrument is
deemed prima facie a holder in due course; Definition of a holder in due
course; Presumption rebuttable.—Every holder of a negotiable instrument is
deemed prima facie a holder in due course. However, this presumption arises only in
favor of a person who is a holder as defined in Section 191 of the Negotiable
Instruments Law, meaning a “payee or indorsee of a bill or note, who is in possession
of it, or the bearer thereof.” In the present case, it is not disputed that David was the
payee of the checks in question. The weight of authority sustains the view that a
payee may be a holder in due course. Hence, the presumption that he is a prima
facie holder in due course applies in his favor. However, said presumption may be
rebutted. Hence, what is vital to the resolution of this issue is whether David took
possession of the checks under the conditions provided for in Section 52 of the
Negotiable Instruments Law. All the requisites provided for in Section 52 must
concur in David’s case; otherwise he cannot be deemed a holder in due course.
Same; Section 24 of the Negotiable Instruments Law creates a presumption
that every party to an instrument acquired the same for a consideration or for
value; Petitioner must present convincing evidence to overthrow the
presumption.—With respect to consideration, Section 24 of the Negotiable
Instruments Law creates a presumption that every party to an instrument acquired
the same for a consideration or for value. Thus, the law itself creates a presumption
in David’s favor that he gave valuable
_______________
* SECOND DIVISION.
160
1 SUPREME COURT REPORTS ANNOTATED
60
Yang vs. Court of Appeals
consideration for the checks in question. In alleging otherwise, the petitioner
has the onus to prove that David got hold of the checks absent said consideration. In
other words, the petitioner must present convincing evidence to overthrow the
presumption. Our scrutiny of the records, however, shows that the petitioner failed to
discharge her burden of proof. The petitioner’s averment that David did not give
valuable consideration when he took possession of the checks is unsupported, devoid
of any concrete proof to sustain it.
Same; Court has taken judicial cognizance of the practice that a check with
two parallel lines in the upper left hand corner means that it could only be
deposited and not converted into cash.—The Negotiable Instruments Law is silent
with respect to crossed checks, although the Code of Commerce makes reference to
such instruments. Nonetheless, this Court has taken judicial cognizance of the
practice that a check with two parallel lines in the upper left hand corner means that
it could only be deposited and not converted into cash. The effects of crossing a
check, thus, relates to the mode of payment, meaning that the drawer had intended
the check for deposit only by the rightful person, i.e., the payee named therein.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Don P. Porciuncula for petitioner.
Victor N. Alimurong and Siguion Reyna, Monticillo &
Ongsiako and Curato, Divina & Associates for FEBTC Bank.
Recto Law Offices for private respondent Chandiramani.
Fortun, Narvasa & Salazar for respondent David.
Pacis, Ramirez & Bacorro Law Offices for respondent PCI Bank.
QUISUMBING, J.:
For review on certiorari is the decision1 of the Court of Appeals, dated March 25,
1999, in CA-G.R. CV No. 52398, which affirmed with modification the joint decision
of the Regional Trial Court (RTC) of Pasay City, Branch 117, dated July 4, 1995, in
Civil Cases
_______________
1Penned by Associate Justice Bernardo P. Abesamis with Associate Justices Jainal
D. Rasul and Conchita Carpio Morales (now a member of this Court) concurring. See
Rollo, pp. 95-108.
161
VOL. 409, AUGUST 15, 2003 161
Yang vs. Court of Appeals
Nos. 54792 and 5492.3 The trial court dismissed the complaint against herein
respondents Far East Bank & Trust Company (FEBTC), Equitable Banking
Corporation (Equitable), and Philippine Commercial International Bank (PCIB) and
ruled in favor of respondent Fernando David as to the proceeds of the two cashier’s
checks, including the earnings thereof pendente lite. Petitioner Cely Yang was
ordered to pay David moral damages of P100,000.00 and attorney’s fees also in the
amount of P100,000.00.
The facts of this case are not disputed, to wit:
 On or before December 22, 1987, petitioner Cely Yang and private respondent
Prem Chandiramani entered into an agreement whereby the latter was to give Yang a
PCIB manager’s check in the amount of P4.2 million in exchange for two (2) of
Yang’s manager’s checks, each in the amount of P2.087 million, both payable to the
order of private respondent Fernando David. Yang and Chandiramani agreed that
the difference of P26,000.00 in the exchange would be their profit to be divided
equally between them.
Yang and Chandiramani also further agreed that the former would secure from
FEBTC a dollar draft in the amount of US$200,000.00, payable to PCIB FCDU
Account No. 4195-01165-2, which Chandiramani would exchange for another dollar
draft in the same amount to be issued by Hang Seng Bank Ltd. of Hong Kong.
Accordingly, on December 22, 1987, Yang procured the following:
1. a)Equitable Cashier’s Check No. CCPS 14-009467 in the sum of
P2,087,000.00, dated December 22, 1987, payable to the order of Fernando
David;
2. b)FEBTC Cashier’s Check No. 287078, in the amount of P2,087,000.00,
dated December 22, 1987, likewise payable to the order of Fernando David;
and
3. c)FEBTC Dollar Draft No. 4771, drawn on Chemical Bank, New York, in the
amount of US$200,000.00, dated December 22, 1987, payable to PCIB
FCDU Account No. 4195-01165-2.
_______________
2 The case is entitled “Cely Yang v. Equitable Banking Corporation, Prem
Chandiramani and Fernando David.” See Rollo, pp. 38-41.
3 Entitled “Cely Yang v. Far East Bank & Trust Company, Philippine Commercial
and International Bank, Prem Chandiramani and Fernando David.” See Rollo, pp.
42-46.
162
162 SUPREME COURT REPORTS ANNOTATED
Yang vs. Court of Appeals
At about one o’clock in the afternoon of the same day, Yang gave the aforementioned
cashier’s checks and dollar drafts to her business associate, Albert Liong, to be
delivered to Chandiramani by Liong’s messenger, Danilo Ranigo. Ranigo was to meet
Chandiramani at Philippine Trust Bank, Ayala Avenue, Makati City, Metro Manila
where he would turn over Yang’s cashier’s checks and dollar draft to Chandiramani
who, in turn, would deliver to Ranigo a PCIB manager’s check in the sum of P4.2
million and a Hang Seng Bank dollar draft for US$200,000.00 in exchange.
Chandiramani did not appear at the rendezvous and Ranigo allegedly lost the two
cashier’s checks and the dollar draft bought by petitioner. Ranigo reported the
alleged loss of the checks and the dollar draft to Liong at half past four in the
afternoon of December 22, 1987. Liong, in turn, informed Yang, and the loss was
then reported to the police.
It transpired, however, that the checks and the dollar draft were not lost, for
Chandiramani was able to get hold of said instruments, without delivering the
exchange consideration consisting of the PCIB manager’s check and the Hang Seng
Bank dollar draft.
At three o’clock in the afternoon or some two (2) hours after Chandiramani and
Ranigo were to meet in Makati City, Chandiramani delivered to respondent
Fernando David at China Banking Corporation branch in San Fernando City,
Pampanga, the following: (a) FEBTC Cashier’s Check No. 287078, dated December
22, 1987, in the sum of P2.087 million; and (b) Equitable Cashier’s Check No. CCPS
14-009467, dated December 22, 1987, also in the amount of P2.087 million. In
exchange, Chandiramani got US$360,000.00 from David, which Chandiramani
deposited in the savings account of his wife, Pushpa Chandiramani; and his mother,
Rani Reynandas, who held FCDU Account No. 124 with the United Coconut Planters
Bank branch in Greenhills, San Juan, Metro Manila. Chandiramani also deposited
FEBTC Dollar Draft No. 4771, dated December 22, 1987, drawn upon the Chemical
Bank, New York for US$200,000.00 in PCIB FCDU Account No. 4195-01165-2 on
the same date.
Meanwhile, Yang requested FEBTC and Equitable to stop payment on the
instruments she believed to be lost. Both banks complied with her request, but upon
the representation of PCIB, FEBTC subsequently lifted the stop payment order on
FEBTC
163
VOL. 409, AUGUST 15, 2003 163
Yang vs. Court of Appeals
Dollar Draft No. 4771, thus enabling the holder of PCIB FCDU Account No. 4195-
01165-2 to receive the amount of US$200,000.00.
On December 28, 1987, herein petitioner Yang lodged a Complaint4 for injunction
and damages against Equitable, Chandiramani, and David, with prayer for a
temporary restraining order, with the Regional Trial Court of Pasay City. The
Complaint was docketed as Civil Case No. 5479. The Complaint was subsequently
amended to include a prayer for Equitable to return to Yang the amount of P2.087
million, with interest thereon until fully paid.5
On January 12, 1988, Yang filed a separate case for injunction and damages, with
prayer for a writ of preliminary injunction against FEBTC, PC1B, Chandiramani and
David, with the RTC of Pasay City, docketed as Civil Case No. 5492. This complaint
was later amended to include a prayer that defendants therein return to Yang the
amount of P2.087 million, the value of FEBTC Dollar Draft No. 4771, with interest at
18% annually until fully paid.6
 On February 9, 1988, upon the filing of a bond by Yang, the trial court issued a
writ of preliminary injunction in Civil Case No. 5479. A writ of preliminary injunction
was subsequently issued in Civil Case No. 5492 also.
Meanwhile, herein respondent David moved for dismissal of the cases against him
and for reconsideration of the Orders granting the writ of preliminary injunction, but
these motions were denied. David then elevated the matter to the Court of Appeals in
a special civil action for certiorari docketed as CA-G.R. SP No. 14843, which was
dismissed by the appellate court.
As Civil Cases Nos. 5479 and 5492 arose from the same set of facts, the two cases
were consolidated. The trial court then conducted pre-trial and trial of the two cases,
but the proceedings had to be suspended after a fire gutted the Pasay City Hall and
destroyed the records of the courts.
After the records were reconstituted, the proceedings resumed and the parties
agreed that the money in dispute be invested in Treasury Bills to be awarded in favor
of the prevailing side. It was
_______________
4 Records, Vol. I, pp. 1-4.
5 Id., at p. 8.
6 Id., at p. 141.
164
164 SUPREME COURT REPORTS ANNOTATED
Yang vs. Court of Appeals
also agreed by the parties to limit the issues at the trial to the following:
1. 1.Who, between David and Yang, is legally entitled to the proceeds of
Equitable Banking Corporation (EBC) Cashier’s Check No. CCPS 14-009467
in the sum of P2,087,000.00 dated December 22, 1987, and Far East Bank
and Trust Company (FEBTC) Cashier’s Check No. 287078 in the sum of
P2,087,000.00 dated December 22, 1987, together with the earnings
derived therefrom pendente lite?
2. 2.Are the defendants FEBTC and PCIB solidarily liable to Yang for having
allowed the encashment of FEBTC Dollar Draft No. 4771, in the sum of
US$200,000.00 plus interest thereon despite the stop payment order of
Cely Yang?7
On July 4, 1995, the trial court handed down its decision in Civil Cases Nos. 5479 and
5492, to wit:
“WHEREFORE, the Court renders judgment in favor of defendant Fernando David
against the plaintiff Cely Yang and declaring the former entitled to the proceeds of
the two (2) cashier’s checks, together with the earnings derived therefrom pendente
lite; ordering the plaintiff to pay the defendant Fernando David moral damages in
the amount of P100,000.00; attorney’s fees in the amount of P100,000.00 and to
pay the costs. The complaint against Far East Bank and Trust Company (FEBTC),
Philippine Commercial International Bank (PCIB) and Equitable Banking
Corporation (EBC) is dismissed. The decision is without prejudice to whatever action
plaintiff Cely Yang will file against defendant Prem Chandiramani for reimbursement
of the amounts received by him from defendant Fernando David.
SO ORDERED.”8
In finding for David, the trial court ratiocinated:
The evidence shows that defendant David was a holder in due course for the reason
that the cashier’s checks were complete on their face when they were negotiated to
him. They were not yet overdue when he became the holder thereof and he had no
notice that said checks were previously dishonored; he took the cashier’s checks in
good faith and for value. He parted some $200,000.00 for the two (2) cashier’s
checks which were given to defendant Chandiramani; he had also no notice of any
infirmity in the cashier’s checks or defect in the title of the drawer. As a matter of
fact, he
_______________
7 Rollo, p. 84.
8 CA Rollo, p. 131.
165
VOL. 409, AUGUST 15, 2003 165
Yang vs. Court of Appeals
asked the manager of the China Banking Corporation to inquire as to the
genuineness of the cashier’s checks (tsn, February 5, 1988, p. 21, September 20, 1991,
pp. 13-14). Another proof that defendant David is a holder in due course is the fact
that the stop payment order on [the] FEBTC cashier’s check was lifted upon his
inquiry at the head office (tsn, September 20, 1991, pp. 24-25). The apparent reason
for lifting the stop payment order was because of the fact that FEBTC realized that
the checks were not actually lost but indeed reached the payee defendant David.9
Yang then moved for reconsideration of the RTC judgment, but the trial court denied
her motion in its Order of September 20, 1995.
In the belief that the trial court misunderstood the concept of a holder in due
course and misapprehended the factual milieu, Yang seasonably filed an appeal with
the Court of Appeals, docketed as CA-G.R. CV No. 52398.
On March 25, 1999, the appellate court decided CA-G.R. CV No. 52398 in this
wise:
“WHEREFORE, this court AFFIRMS the judgment of the lower court with
modification and hereby orders the plaintiff-appellant to pay defendant-appellant
PCIB the amount of Twenty-Five Thousand Pesos (P25,000.00).
 SO ORDERED.”10
In affirming the trial court’s judgment with respect to herein respondent David, the
appellate court found that:
In this case, defendant-appellee had taken the necessary precautions to verify,
through his bank, China Banking Corporation, the genuineness of whether (sic) the
cashier’s checks he received from Chandiramani. As no stop payment order was
made yet (at) the time of the inquiry, defendant-appellee had no notice of what had
transpired earlier between the plaintiff-appellant and Chandiramani. All he knew
was that the checks were issued to Chandiramani with whom he was he had (sic) a
transaction. Further on, David received the checks in question in due course because
Chandiramani, who at the time the checks were delivered to David, was acting as
Yang’s agent.
David had no notice, real or constructive, cogent for him to make further inquiry
as to any infirmity in the instrument(s) and defect of title of
_______________
9 Id., at pp. 195-196.
10 Id., at p. 462.
166
166 SUPREME COURT REPORTS ANNOTATED
Yang vs. Court of Appeals
the holder. To mandate that each holder inquire about every aspect on how the
instrument came about will unduly impede commercial transactions,
Although negotiable instruments do not constitute legal tender, they often take the
place of money as a means of payment.
The mere fact that David and Chandiramani knew one another for a long time is
not sufficient to establish that they connived with each other to defraud Yang. There
was no concrete proof presented by Yang to support her theory.11
The appellate court awarded P25,000.00 in attorney’s fees to PCIB as it found the
action filed by Yang against said bank to be “clearly unfounded and baseless.” Since
PCIB was compelled to litigate to protect itself, then it was entitled under Article
220812 of the Civil Code to attorney’s fees and litigation expenses.
_______________
11 Id., at p. 456.
12 ART. 2208. In the absence of stipulation, attorney’s fees and expenses of
litigation, other than judicial costs, cannot be recovered, except:
1. (1)When exemplary damages are awarded;
2. (2)When the defendant’s act or omission has compelled the plaintiff to litigate
with third persons or to incur expenses to protect his interest;
3. (3)In criminal cases of malicious prosecution against the plaintiff;
4. (4)In case of a clearly unfounded civil action or proceeding against the
plaintiff;
5. (5)Where the defendant acted in gross and evident bad faith in refusing the
plaintiffs plainly valid, just, and demandable claim;
6. (6)In actions for legal support;
7. (7)In actions for the recovery of wages of household helpers, laborers, and
skilled workers;
8. (8)In actions for indemnity under workmen’s compensation and employer’s
liability laws;
9. (9)In a separate civil action to recover civil liability arising from a crime;
10. (10)When at least double judicial costs are awarded;
11. (11)In any other case where the court deems it just and equitable that
attorney’s fees and expenses of litigation should be recovered.
In all cases, the attorney’s fees and expenses of litigation must be reasonable.
167
VOL. 409, AUGUST 15, 2003 167
Yang vs. Court of Appeals
Hence, the instant recourse wherein petitioner submits the following issues for
resolution:
1. a.WHETHER THE CHECKS WERE ISSUED TO PREM CHANDIRAMANI
BY PETITIONER;
2. b.WHETHER THE ALLEGED TRANSACTION BETWEEN PREM
CHANDIRAMANI AND FERNANDO DAVID IS LEGITIMATE OR A
SCHEME BY BOTH PRIVATE RESPONDENTS TO SWINDLE
PETITIONER;
3. c.WHETHER FERNANDO DAVID GAVE PREM CHANDIRAMANI
US$360,000.00 OR JUST A FRACTION OF THE AMOUNT
REPRESENTING HIS SHARE OF THE LOOT;
4. d.WHETHER PRIVATE RESPONDENTS FERNANDO DAVID AND PCIB
ARE ENTITLED TO DAMAGES AND ATTORNEY’S FEES.13
At the outset, we must stress that this is a petition for review under Rule 45 of the
1997 Rules of Civil Procedure. It is basic that in petitions for review under Rule 45,
the jurisdiction of this Court is limited to reviewing questions of law, questions of fact
are not entertained absent a showing that the factual findings complained of are
totally devoid of support in the record or are glaringly erroneous. 14Given the facts in
the instant case, despite petitioner’s formulation, we find that the following are the
pertinent issues to be resolved:
1. a)Whether the Court of Appeals erred in holding herein respondent Fernando
David to be a holder in due course; and
2. b)Whether the appellate court committed a reversible error in awarding
damages and attorney’s fees to David and PCIB.
On the first issue, petitioner Yang contends that private respondent Fernando David
is not a holder in due course of the checks in question. While it is true that he was
named the payee thereof, David failed to inquire from Chandiramani about how the
latter acquired possession of said checks. Given his failure to do so, it cannot be said
that David was unaware of any defect or infirmity in the title of Chandiramani to the
checks at the time of their nego-
_______________
13 Rollo, p. 230.
14 Producers Bank of the Phil. v. Court of Appeals, 417 Phil. 646, 656; 365 SCRA
326 (2001).
168
168 SUPREME COURT REPORTS ANNOTATED
Yang vs. Court of Appeals
tiation. Moreover, inasmuch as the checks were crossed, then David should have,
pursuant to our ruling in Bataan Cigar & Cigarette Factory, Inc. v. Court of
Appeals, G.R. No. 93048, March 3, 1994, 230 SCRA 643, been put on guard that the
checks were issued for a definite purpose and accordingly, made inquiries to
determine if he received the checks pursuant to that purpose. His failure to do so
negates the finding in the proceedings below that he was a holder in due course.
Finally, the petitioner argues that there is no showing whatsoever that David gave
Chandiramani any consideration of value in exchange for the aforementioned checks.
Private respondent Fernando David counters that the evidence on record shows
that when he received the checks, he verified their genuineness with his bank, and
only after said verification did he deposit them. David stresses that he had no notice
of previous dishonor or any infirmity that would have aroused his suspicions, the
instruments being complete and regular upon their face. David stresses that the
checks in question were cashier’s checks. From the very nature of cashier’s checks, it
is highly unlikely that he would have suspected that something was amiss. David also
stresses negotiable instruments are presumed to have been issued for valuable
consideration, and he who alleges otherwise must controvert the presumption with
sufficient evidence. The petitioner failed to discharge this burden, according to
David. He points out that the checks were delivered to him as the payee, and he took
them as holder and payee thereof. Clearly, he concludes, he should be deemed to be
their holder in due course.
We shall now resolve the first issue.
Every holder of a negotiable instrument is deemed prima facie a holder in due
course. However, this presumption arises only in favor of a person who is a holder as
defined in Section 191 of the Negotiable Instruments Law,15 meaning a “payee or
indorsee of a bill or note, who is in possession of it, or the bearer thereof.”
In the present case, it is not disputed that David was the payee of the checks in
question. The weight of authority sustains the view that a payee may be a holder in
due course.16 Hence, the presump-
_______________
15 Fossum v. Fernandez Hermanos, 44 Phil. 713, 716 (1923).
16 Merchants’ National Bank v. Smith, 59 Mont. 280, 196 p. 523, 15 ALR
430; Boston Steel & Iron Co. v. Steur, 183 Mass. 140, 66 NE 646.
169
VOL. 409, AUGUST 15, 2003 169
Yang vs. Court of Appeals
tion that he is a prima facie holder in due course applies in his favor. However, said
presumption may be rebutted. Hence, what is vital to the resolution of this issue is
whether David took possession of the checks under the conditions provided for in
Section 5217 of the Negotiable Instruments Law. All the requisites provided for in
Section 52 must concur in David’s case; otherwise he cannot be deemed a holder in
due course.
We find that the petitioner’s challenge to David’s status as a holder in due course
hinges on two arguments: (1) the lack of proof to show that David tendered any
valuable consideration for the disputed checks; and (2) David’s failure to inquire
from Chandiramani as to how the latter acquired possession of the checks, thus
resulting in David’s intentional ignorance tantamount to bad faith. In sum, petitioner
posits that the last two requisites of Section 52 are missing, thereby preventing David
from being considered a holder in due course. Unfortunately for the petitioner, her
arguments on this score are less than meritorious and far from persuasive.
First, with respect to consideration, Section 2418 of the Negotiable Instruments
Law creates a presumption that every party to an instrument acquired the same for a
consideration19 or for
_______________
17SEC. 52. What constitutes a holder in due course.—A holder in due course is a
holder who has taken the instrument under the following conditions:
 1. (a)That it is complete and regular upon its face;
2. (b)That he became the holder of it before it was overdue, and without notice
that it has been previously dishonored, if such was the fact;
3. (c)That he took it in good faith and for value;
4. (d)That at the time it was negotiated to him, he had no notice of any infirmity
in the instrument or defect of the title of the person negotiating it.
18 SEC. 24. Presumption of consideration.—Every negotiable instrument is
deemed prima facie to have been issued for valuable consideration; and every person
whose signature appears thereon to have become a party thereto, for value.
19 SEC. 25. Value; What constitutes.—Value is any consideration sufficient to
support a simple contract. An antecedent or pre-existing debt constitutes value, and
is deemed such whether the instrument is payable on demand or at a future date.
170
170 SUPREME COURT REPORTS ANNOTATED
Yang vs. Court of Appeals
value. Thus, the law itself creates a presumption in David’s favor that he gave
20
valuable consideration for the checks in question. In alleging otherwise, the
petitioner has the onus to prove that David got hold of the checks absent said
consideration. In other words, the petitioner must present convincing evidence to
overthrow the presumption. Our scrutiny of the records, however, shows that the
petitioner failed to discharge her burden of proof. The petitioner’s averment that
David did not give valuable consideration when he took possession of the checks is
unsupported, devoid of any concrete proof to sustain it. Note that both the trial court
and the appellate court found that David did not receive the checks gratis, but
instead gave Chandiramani US$360,000.00 as consideration for the said
instruments. Factual findings of the Court of Appeals are conclusive on the parties
and not reviewable by this Court; they carry great weight when the factual findings of
the trial court are affirmed by the appellate court.21
Second, petitioner fails to point any circumstance which should have put David on
inquiry as to the why and wherefore of the possession of the checks by
Chandiramani. David was not privy to the transaction between petitioner and
Chandiramani. Instead, Chandiramani and David had a separate dealing in which it
was precisely Chandiramani’s duty to deliver the checks to David as payee. The
evidence shows that Chandiramani performed said task to the letter. Petitioner
admits that David took the step of asking the manager of his bank to verify from
FEBTC and Equitable as to the genuineness of the checks and only accepted the same
after being assured that there was nothing wrong with said checks. At that time,
David was not aware of any “stop payment” order. Under these circumstances, David
thus had no obligation to ascertain from Chandiramani what the nature of the latter’s
title to the checks was, if any, or the nature of his possession. Thus, we cannot hold
him guilty of gross neglect amounting to legal absence of good faith, absent any
showing that there was something amiss about Chandiramani’s acquisition or
possession of the checks. David did
_______________
20 SEC. 191. Definitions and meaning of terms.—In this Act, unless the context
otherwise requires:
xxx
“Value” means valuable consideration.
21 See Fernandez v. Fernandez, 416 Phil. 322, 337; 363 SCRA 811(2001).
171
VOL. 409, AUGUST 15, 2003 171
Yang vs. Court of Appeals
not close his eyes deliberately to the nature or the particulars of a fraud allegedly
committed by Chandiramani upon the petitioner, absent any knowledge on his part
that the action in taking the instruments amounted to bad faith.22
Belatedly, and we say belatedly since petitioner did not raise this matter in the
proceedings below, petitioner now claims that David should have been put on alert as
the instruments in question were crossed checks. Pursuant to Bataan Cigar &
Cigarette Factory, Inc. v. Court of Appeals, David should at least have inquired as to
whether he was acquiring said checks for the purpose for which they were issued,
according to petitioner’s submission.
Petitioner’s reliance on the Bataan Cigar case, however, is misplaced. The facts in
the present case are not on all fours with Bataan Cigar. In the latter case, the crossed
checks were negotiated and sold at a discount by the payee, while in the instant case,
the payee did not negotiate further the checks in question but promptly deposited
them in his bank account.
The Negotiable Instruments Law is silent with respect to crossed checks, although
the Code of Commerce23 makes reference to such instruments. Nonetheless, this
Court has taken judicial cognizance of the practice that a check with two parallel lines
in the upper left hand corner means that it could only be deposited and not converted
into cash.24 The effects of crossing a check, thus, relates to the mode of payment,
meaning that the drawer had intended the check for deposit only by the rightful
person, i.e.,the payee named therein. In Bataan Cigar, the rediscounting of the check
by the payee knowingly violated the avowed intention of crossing the check. Thus, in
accepting the cross checks and paying cash for them, despite the warning of the
crossing, the subsequent holder could not be considered in good faith and thus, not a
holder
_______________
 22 See Ozark Motor Co. v. Horton, 196 SW 395. See also Davis v. First National
Bank, 26 Ariz. 621, 229 p. 391.
23 ART. 541. The maker or any legal holder of a check shall be entitled to indicate
therein that it be paid to a certain banker or institution, which he shall do by writing
across the face the name of said banker or institution, or only the words “and
company.”
24 State Investment House v. Intermediate Appellate Court, G.R. No. 72764, 13
July 1989, 175 SCRA 310, 315.
172
172 SUPREME COURT REPORTS ANNOTATED
Yang vs. Court of Appeals
in due course. Our ruling in Bataan Cigar reiterates that in De Ocampo & Co. v.
Gatchalian.25
The factual circumstances in De Ocampo and in Bataan Cigar are not present in
this case. For here, there is no dispute that the crossed checks were delivered and
duly deposited by David, the payee named therein, in his bank account. In other
words, the purpose behind the crossing of the checks was satisfied by the payee.
Proceeding to the issue of damages, petitioner merely argues that respondents
David and PCIB are not entitled to damages, attorney’s fees, and costs of suit as both
acted in bad faith towards her, as shown by her version of the facts which gave rise to
the instant case.
Respondent David counters that he was maliciously and unceremoniously
dragged into this suit for reasons which have nothing to do with him at all, but which
arose from petitioner’s failure to receive her share of the profit promised her by
Chandiramani. Moreover, in filing this suit which has lasted for over a decade now,
the petitioner deprived David of the rightful enjoyment of the two checks, to which
he is entitled, under the law, compelled him to hire the services of counsel to
vindicate his rights, and subjected him to social humiliation and besmirched
reputation, thus harming his standing as a person of good repute in the business
community of Pampanga. David thus contends that it is but proper that moral
damages, attorney’s fees, and costs of suit be awarded him.
For its part, respondent PCIB stresses that it was established by both the trial
court and the appellate court that it was needlessly dragged into this case. Hence, no
error was committed by the appellate court in declaring PCIB entitled to attorney’s
fees as it was compelled to litigate to protect itself.
_______________
25113 Phil. 574 (1961). We held that under the following circumstances: (1) the
drawer had no account with the payee; (2) the check was crossed; (3) the crossed
check was used to pay an obligation which did not correspond to the amount of the
check; and (4) the holder did not show or tell the payee why he had the check in his
possession and why he was using to pay his personal account, then the payee had the
duty to ascertain from the holder what the nature of the latter’s title to the check was
or the nature of his possession.
173
VOL. 409, AUGUST 15, 2003 173
Yang vs. Court of Appeals
We have thoroughly perused the records of this case and find no reason to disagree
with the finding of the trial court, as affirmed by the appellate court, that:
[D]efendant David is entitled to [the] award of moral damages as he has been
needlessly and unceremoniously dragged into this case which should have been
brought only between the plaintiff and defendant Chandiramani.26
A careful reading of the findings of facts made by both the trial court and appellate
court clearly shows that the petitioner, in including David as a party in these
proceedings, is barking up the wrong tree. It is apparent from the factual findings
that David had no dealings with the petitioner and was not privy to the agreement of
the latter with Chandiramani. Moreover, any loss which the petitioner incurred was
apparently due to the acts or omissions of Chandiramani, and hence, her recourse
should have been against him and not against David. By needlessly dragging David
into this case all because he and Chandiramani knew each other, the petitioner not
only unduly delayed David from obtaining the value of the checks, but also caused
him anxiety and injured his business reputation while waiting for its outcome. Recall
that under Article 221727 of the Civil Code, moral damages include mental anguish,
serious anxiety, besmirched reputation, wounded feelings, social humiliation, and
similar injury. Hence, we find the award of moral damages to be in order.
The appellate court likewise found that like David, PCIB was dragged into this
case on unfounded and baseless grounds. Both were thus compelled to litigate to
protect their interests, which makes an award of attorney’s fees justified under
Article 2208 (2)28 of the Civil Code. Hence, we rule that the award of attorney’s fees
to David and PCIB was proper.
_______________
26 CA Rollo, p. 130.
27 ART. 2217. Moral damages include physical suffering, mental anguish, fright,
serious anxiety, besmirched reputation, wounded feelings, moral shock, social
humiliation and similar injury. Though incapable of pecuniary computation, moral
damages may be recovered if they are the proximate result of the defendant’s
wrongful act or omission.
28 See note 12.
174
174 SUPREME COURT REPORTS ANNOTATED
Camacho vs. Gloria
WHEREFORE, the instant petition is DENIED. The assailed decision of the Court of
Appeals, dated March 25, 1999, in CA-G.R. CV No. 52398 is AFFIRMED. Costs
against the petitioner.
SO ORDERED.
Bellosillo (Chairman), Austria-Martinez and Tinga, JJ., concur.
Callejo, Sr., J., On leave.
Petition denied, assailed judgment affirmed.
Note.—Where a signature is so placed upon the instrument that it is not clear in
what capacity the person making the same intended to sign, he is deemed an indorser
(Sapiera vs. Court of Appeals, 314 SCRA 370[1999])

——o0o——
 G.R. No. 158262. July 21, 2008.*
SPS. PEDRO AND FLORENCIA VIOLAGO, petitioners, vs. BA FINANCE
CORPORATION and AVELINO VIOLAGO, respondents.
Negotiable Instruments Law; Promissory Notes; The promissory note is
clearly negotiable.—The promissory note is clearly negotiable. The appellate court
was correct in finding all the requisites of a negotiable instrument present. The NIL
provides: Section 1. Form of Negotiable Instruments.—An instrument to be
negotiable must conform to the following requirements: (a) It must be in writing and
_______________
* SECOND DIVISION.
70
7 SUPREME COURT REPORTS ANNOTATED
0 Arcilla v. Court of Appeals (215 SCRA 120 [1992]), an appellate proceeding
Violago vs. BA Finance Corporation
signed by the maker or drawer; (b) Must contain an unconditional promise or
order to pay a sum certain in money; (c) Must be payable on demand, or at a fixed or
determinable future time; (d) Must be payable to order or to bearer; and (e) Where
the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.
Same; Same; The law presumes that a holder of a negotiable instrument is a
holder thereof in due course.—The law presumes that a holder of a negotiable
instrument is a holder thereof in due course. In this case, the CA is correct in finding
that BA Finance meets all the foregoing requisites: In the present recourse, on its
face, (a) the “Promissory Note,” Exhibit “A,” is complete and regular; (b)
the “Promissory Note” was endorsed by the VMSC in favor of the Appellee; (c) the
Appellee, when it accepted the Note, acted in good faith and for value; (d) the
Appellee was never informed, before and at the time the “Promissory Note” was
endorsed to the Appellee, that the vehicle sold to the Defendants-Appellants was not
delivered to the latter and that VMSC had already previously sold the vehicle to
Esmeraldo Violago. Although Jose Olvido mortgaged the vehicle to Generoso Lopez,
who assigned his rights to the BA Finance Corporation (Cebu Branch), the same
occurred only on May 8, 1987, much later than August 4, 1983, when VMSC assigned
its rights over the “Chattel Mortgage” by the Defendants-Appellants to the
Appellee. Hence, Appellee was a holder in due course.
Same; Same; The Negotiable Instruments Law considers every negotiable
instrument prima facie to have been issued for a valuable consideration.—In the
hands of one other than a holder in due course, a negotiable instrument is subject to
the same defenses as if it were non-negotiable. A holder in due course, however,
holds the instrument free from any defect of title of prior parties and from defenses
available to prior parties among themselves, and may enforce payment of the
instrument for the full amount thereof. Since BA Finance is a holder in due course,
petitioners cannot raise the defense of non-delivery of the object and nullity of the
sale against the corporation. The NIL considers every negotiable instrument prima
facie to have been issued for a valuable consideration. In Salas, 181 SCRA 296
(1990), we held that a party holding an instrument may enforce payment of the
instrument for the full amount thereof. As such, the maker cannot set up the defense
of nullity of
71
VOL. 559, JULY 21, 2008 7
1
Violago vs. BA Finance Corporation
the contract of sale. Thus, petitioners are liable to respondent corporation for
the payment of the amount stated in the instrument.
Corporation Law; Piercing-of-the-Corporate-Veil; We suggested as much in
involving petitioner Arcilla’s bid to avoid the adverse CA decision on argument that
he is not personally liable for the amount adjudged since the same constitutes a
corporate liability which nevertheless cannot be enforced against the corporation
which has not been impleaded as a party below.—The fact that VMSC was not
included as defendant in petitioners’ third party complaint does not preclude
recovery by petitioners from Avelino; neither would such non-inclusion constitute a
bar to the application of the piercing-of-the-corporate-veil doctrine. We suggested as
much in Arcilla v. Court of Appeals, 215 SCRA 120 (1992), an appellate proceeding
involving petitioner Arcilla’s bid to avoid the adverse CA decision on the argument
that he is not personally liable for the amount adjudged since the same constitutes a
corporate liability which nevertheless cannot even be enforced against the
corporation which has not been impleaded as a party below. In that case, the Court
found as well-taken the CA’s act of disregarding the separate juridical personality of
the corporation and holding its president, Arcilla, liable for the obligations incurred
in the name of the corporation although it was not a party to the collection suit before
the trial court.
PETITION for review on certiorari of the decision and resolution of the Court of
Appeals.
The facts are stated in the opinion of the Court.
Cabrera, Makalintal & Baliad Law Offices for petitioners.
Reyes, Cruz & Associates for respondent Avelino Violago.
Brillantes, Navarro, Jumamil, Arcilla, Escolin, Martinez & Vivero Law
Offices for respondent BA Finance Corporation.
72
72 SUPREME COURT REPORTS ANNOTATED
Violago vs. BA Finance Corporation
VELASCO, JR., J.:
This is a Petition for Review on Certiorari of the August 20, 2002 Decision1 and
May 15, 2003 Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No. 48489
entitled BA Finance Corporation, Plaintiff-Appellee v. Sps. Pedro and Florencia
Violago, Defendants and Third Party Plaintiffs-Appellants v. Avelino Violago, Third
Party Defendant-Appellant. Petitioners-spouses Pedro and Florencia Violago pray
for the reversal of the appellate court’s ruling which held them liable to respondent
BA Finance Corporation (BA Finance) under a promissory note and a chattel
mortgage. Petitioners likewise pray that respondent Avelino Violago be adjudged
directly liable to BA Finance.
The Facts
Sometime in 1983, Avelino Violago, President of Violago Motor Sales Corporation
(VMSC), offered to sell a car to his cousin, Pedro F. Violago, and the latter’s wife,
Florencia. Avelino explained that he needed to sell a vehicle to increase the sales
quota of VMSC, and that the spouses would just have to pay a down payment of PhP
60,500 while the balance would be financed by respondent BA Finance. The spouses
would pay the monthly installments to BA Finance while Avelino would take care of
the documentation and approval of financing of the car. Under these terms, the
spouses then agreed to purchase a Toyota Cressida Model 1983 from VMSC.3
_______________
1 Rollo, pp. 14-28. Penned by Associate Justice Romeo J. Callejo, Sr. (former
member of this Court) and concurred in by Associate Justices Remedios Salazar-
Fernando and Danilo B. Pine (now retired).
2 Id., at pp. 30-31.
3 Id., at p. 15.
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VOL. 559, JULY 21, 2008 73
Violago vs. BA Finance Corporation
On August 4, 1983, the spouses and Avelino signed a promissory note under
which they bound themselves to pay jointly and severally to the order of VMSC the
amount of PhP 209,601 in 36 monthly installments of PhP 5,822.25 a month, the
first installment to be due and payable on September 16, 1983. Avelino prepared a
Disclosure Statement of Loan/Credit Transportation which showed the net purchase
price of the vehicle, down payment, balance, and finance charges. VMSC then issued
a sales invoice in favor of the spouses with a detailed description of the Toyota
Cressida car. In turn, the spouses executed a chattel mortgage over the car in favor of
VMSC as security for the amount of PhP 209,601. VMSC, through Avelino, endorsed
the promissory note to BA Finance without recourse. After receiving the amount
of PhP 209,601, VMSC executed a Deed of Assignment of its rights and interests
under the promissory note and chattel mortgage in favor of BA Finance. Meanwhile,
the spouses remitted the amount of PhP 60,500 to VMSC through Avelino.4
The sales invoice was filed with the Land Transportation Office (LTO)-Baliwag
Branch, which issued Certificate of Registration No. 0137032 in the name of Pedro
on August 8, 1983. The spouses were unaware that the same car had already been
sold in 1982 to Esmeraldo Violago, another cousin of Avelino, and registered in
Esmeraldo’s name by the LTO-San Rafael Branch. Despite the spouses’ demand for
the car and Avelino’s repeated assurances, there was no delivery of the vehicle. Since
VMSC failed to deliver the car, Pedro did not pay any monthly amortization to BA
Finance. 5
On March 1, 1984, BA Finance filed with the Regional Trial Court (RTC), Branch
116 in Pasay City a complaint for Replevin with Damages against the spouses. The
complaint, docketed as Civil Case No. 1628-P, prayed for the delivery of the vehicle in
favor of BA Finance or, if delivery cannot be
_______________
4 Id., at pp. 15-16.
5 Id.
74
74 SUPREME COURT REPORTS ANNOTATED
Violago vs. BA Finance Corporation
effected, for the payment of PhP 199,049.41 plus penalty at the rate of 3% per month
from February 15, 1984 until fully paid. BA Finance also asked for the payment of
attorney’s fees, liquidated damages, replevin bond premium, expenses in the seizure
of the vehicle, and costs of suit. The RTC issued an Order of Replevin on March 28,
1984. The Violago spouses, as defendants a quo, were declared in default for failing
to file an answer. Eventually, the RTC rendered on December 3, 1984 a decision in
favor of BA Finance. A writ of execution was thereafter issued on January 11, 1985,
followed by an alias writ of execution.6
In the meantime, Esmeraldo conveyed the vehicle to Jose V. Olvido who was then
issued Certificate of Registration No. 0014830-4 by the LTO-Cebu City Branch on
April 29, 1985. On May 8, 1987, Jose executed a Chattel Mortgage over the vehicle in
favor of Generoso Lopez as security for a loan covered by a promissory note in the
amount of PhP 260,664. This promissory note was later endorsed to BA Finance,
Cebu City branch.7
On August 21, 1989, the spouses Violago filed a Motion for Reconsideration and
Motion to Quash Writ of Execution on the basis of lack of a valid service of summons
on them, among other reasons. The RTC denied the motions; hence, the spouses filed
a petition for certiorari under Rule 65 before the CA, docketed as CA G.R. No. 2002-
SP. On May 31, 1991, the CA nullified the RTC’s order. This CA decision became final
and executory.
 On January 28, 1992, the spouses filed their Answer before the RTC, alleging the
following: they never received the vehicle from VMSC; the vehicle was previously
sold to Esmeraldo; BA Finance was not a holder in due course under Section 59 of
the Negotiable Instruments Law (NIL); and the recourse of BA Finance should be
against VMSC. On February 25, 1995,
_______________
6 Id., at pp. 16-17.
7 Id., at p. 18.
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VOL. 559, JULY 21, 2008 75
Violago vs. BA Finance Corporation
the Violago spouses, with prior leave of court, filed a Third Party Complaint against
Avelino praying that he be held liable to them in the event that they be held liable to
BA Finance, as well as for damages. VMSC was not impleaded as third party
defendant. In his Motion to Dismiss and Answer, Avelino contended that he was not
a party to the transaction personally, but VMSC. Avelino’s motion was denied and the
third party complaint against him was entertained by the trial court. Subsequently,
the spouses belabored to prove that they affixed their signatures on the promissory
note and chattel mortgage in favor of VMSC in blank.8
The RTC rendered a Decision on March 5, 1994, finding for BA Finance but
against the Violago spouses. The RTC, however, declared that they are entitled to be
indemnified by Avelino. The dispositive portion of the RTC’s decision reads:
“WHEREFORE, defendant-[third]-party plaintiffs spouses Pedro F. Violago and
Florencia R. Violago are ordered to deliver to plaintiff BA Finance Corporation, at its
principal office the BAFC Building, Gamboa St., Legaspi Village, Makati, Metro
Manila the Toyota Cressida car, model 1983, bearing Engine No. 21R-02854117, and
with Serial No. RX60-804614, covered by the deed of chattel mortgage dated August
4, 1983; or if such delivery cannot be made, to pay, jointly and severally, to the
plaintiff the sum of P198,003.06 together with the penalty [thereon] at three percent
(3%) a month, from March 1, 1984, until the amount is fully paid.
In either case, the defendant-third-party plaintiffs are required to pay, jointly and
severally, to the plaintiff a sum equivalent to twenty-five percent (25%) of
P198,003.06 as attorney’s fees, and another amount also equivalent to twenty five
percent (25%) of the said unpaid balance, as liquidated damages. The defendant-
third party-plaintiffs are also required to shoulder the litigation expenses and costs.
As indemnification, third-party defendant Avelino Violago is ordered to deliver to
defendants-third-party plaintiffs spouses Pedro F. Violago and Florencia R. Violago
the aforedescribed motor vehicle;
_______________
8 Id., at pp. 18-19.
76
76 SUPREME COURT REPORTS ANNOTATED
Violago vs. BA Finance Corporation
or if such delivery is not possible, to pay to the said spouses the sum of P198,003.06,
together with the penalty thereon at three (3%) a month from March 1, 1984, until
the amount is entirely paid.
In either case, the third-party defendant should pay to the defendant-third-party
plaintiffs spouses a sum equivalent to twenty-five percent (25%) of P198,003.06 as
attorney’s fees, and another sum equivalent also to twenty-five percent (25%) of the
said unpaid balance, as liquidated damages.
Third-party defendant Avelino Violago is further ordered to return to the third-
party plaintiffs the sum of P60,500.00 they paid to him as down payment for the car;
and to pay them P15,000.00 as moral damages; P10,000.00 as exemplary damages;
and reimburse them for all the expenses and costs of the suit.
The counterclaims of the defendants and third-party defendant, for lack of merit,
are dismissed.”9
The Ruling of the CA
Petitioners-spouses and Avelino appealed to the CA. The spouses argued that the
promissory note is a negotiable instrument; hence, the trial court should have
applied the NIL and not the Civil Code. The spouses also asserted that since VMSC
was not the owner of the vehicle at the time of sale, the sale was null and void for the
failure in the “cause or consideration” of the promissory note, which in this case was
the sale and delivery of the vehicle. The spouses also alleged that BA Finance was not
a holder in due course of the note since it knew, through its Cebu City branch, that
the car was never delivered to the spouses.10 On the other hand, Avelino prayed for
the dismissal of the complaint against him because he was not a party to the
transaction, and for an order to the spouses to pay him moral damages and costs of
suit.
The appellate court ruled that the promissory note was a negotiable instrument
and that BA Finance was a holder in
_______________
9 Id.
10 Id., at pp. 20-26.
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VOL. 559, JULY 21, 2008 77
Violago vs. BA Finance Corporation
due course, applying Secs. 8, 24, and 52 of the NIL. The CA faulted petitioners for
failing to implead VMSC, the seller of the vehicle and creditor in the promissory note,
as a party in their Third Party Complaint. Citing Salas v. Court of Appeals,11 the
appellate court reasoned that since VMSC is an indispensable party, any judgment
will not bind it or be enforced against it. The absence of VMSC rendered the
proceedings in the RTC and the judgment in the Third Party Complaint “null and
void, not only as to the absent party but also to the present parties, namely the
Defendants-Appellants (petitioners herein) and the Third-Party-Defendant-
Appellant (Avelino Violago).” The CA set aside the trial court’s order holding Avelino
liable for damages to the spouses without prejudice to the action of the spouses
against VMSC and Avelino in a separate action.12
The dispositive portion of the August 20, 2002 CA Decision reads:
“IN THE LIGHT OF ALL THE FOREGOING, the appeal of the Plaintiffs-
Appellants is DISMISSED. The appeal of the Third-Party-Defendant-Appellant
is GRANTED. The Decision of the Court a quo is AFFIRMED, with the
modification that the Third-Party Complaint against the Third-Party-Defendant-
appellant is DISMISSED, without prejudice. The counterclaims of the Third-Party
Defendant Appellant against the Defendants-Appellants are DISMISSED, also
without prejudice.”13
The spouses Violago sought but were denied reconsideration by the CA per its
Resolution of May 15, 2003.
The Issues
Petitioners raise the following issues:
_______________
11 G.R. No. 76788, January 22, 1990, 181 SCRA 296.
12 Rollo, p. 19.
13 Supra note 1, at p. 27.
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78 SUPREME COURT REPORTS ANNOTATED
Violago vs. BA Finance Corporation
WHETHER OR NOT THE HOLDER OF AN INVALID NEGOTIABLE PROMISSORY
NOTE MAY BE CONSIDERED A HOLDER IN DUE COURSE
WHETHER OR NOT A CHATTEL MORTGAGE SHOULD BE CONSIDERED VALID
DESPITE VITIATION OF CONSENT OF, AND THE FRAUD COMMITTED ON, THE
MORTGAGORS BY AVELINO, AND THE CLEAR ABSENCE OF OBJECT CERTAIN
WHETHER OR NOT THE VEIL OF CORPORATE ENTITY MAY BE INVOKED AND
SUSTAINED DESPITE THE FRAUD AND DECEPTION OF AVELINO
The Court’s Ruling
The ruling of the appellate court is set aside insofar as it dismissed, without
prejudice, the third party complaint of petitioners against Avelino thereby effectively
absolving Avelino from any liability under the third party complaint.
In addressing the threshold issue of whether BA Finance is a holder in due course
of the promissory note, we must determine whether the note is a negotiable
instrument and, hence, covered by the NIL. In their appeal to the CA, petitioners
argued that the promissory note is a negotiable instrument and that the provisions of
the NIL, not the Civil Code, should be applied. In the present petition, however,
petitioners claim that Article 1318 of the Civil Code14 should be applied since their
consent was vitiated by fraud, and, thus, the promissory note does not carry any legal
effect despite its negotiation. Either way, the petitioners’ arguments deserve no
merit.
The promissory note is clearly negotiable. The appellate court was correct in
finding all the requisites of a negotiable instrument present. The NIL provides:
_______________
14 Art. 1318. There is no contract unless the following requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established.
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VOL. 559, JULY 21, 2008 79
Violago vs. BA Finance Corporation
“Section 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.”
The promissory note signed by petitioners reads:
Makati, Metro Manila, Philippines, August 4, 1983
209,601.00
For value received, I/we, jointly and severally, promise to pay to the order of
VIOLAGO MOTOR SALES CORPORATION, its office, the principal sum of TWO
HUNDRED NINE THOUSAND SIX HUNDRED ONE ONLY Pesos (P209,601.00),
Philippines Currency, with interest at the rate stipulated herein below, in
installments as follows:
 Thirty Six (36) successive monthly installments of P5,822.25, the first installment (d) That at the time it was negotiated to him he had no notice of any infirmity in
to be paid on 9-16-83, and the succeeding monthly installments on the 16th day of the instrument or defect in the title of the person negotiating it.
each and every succeeding month thereafter until the account is fully paid, provided
that the penalty charge of three (3%) per cent per month or a fraction thereof shall be _______________
added on each unpaid installment from maturity thereof until fully paid.
xxxx 15 Rollo, p. 21.
Notice of demand, presentment, dishonor and protest are hereby waived. 81
(Sgd.) (Sgd.)
PEDRO F. VIOLAGO FLORENCIA R. VOL. 559, JULY 21, 2008 81
763 Constancia St., Sampaloc, VIOLAGO Violago vs. BA Finance Corporation
Manila same The law presumes that a holder of a negotiable instrument is a holder thereof in
(Address) (Address) due course.16 In this case, the CA is correct in finding that BA Finance meets all the
foregoing requisites:
80 “In the present recourse, on its face, (a) the “Promissory Note,” Exhibit “A,” is
80 SUPREME COURT REPORTS ANNOTATED complete and regular; (b) the “Promissory Note” was endorsed by the VMSC in
Violago vs. BA Finance Corporation favor of the Appellee; (c) the Appellee, when it accepted the Note, acted in good faith
(Sgd.) (Sgd.) and for value; (d) the Appellee was never informed, before and at the time the
Marivic Avaria Jesus Tuazon “Promissory Note” was endorsed to the Appellee, that the vehicle sold to the
(WITNESS) (WITNESS) Defendants-Appellants was not delivered to the latter and that VMSC had already
previously sold the vehicle to Esmeraldo Violago. Although Jose Olvido mortgaged
PAY TO THE ORDER OF BA FINANCE CORPORATION the vehicle to Generoso Lopez, who assigned his rights to the BA Finance
WITHOUT RECOURSE Corporation (Cebu Branch), the same occurred only on May 8, 1987, much later than
VIOLAGO MOTOR SALES CORPORATION August 4, 1983, when VMSC assigned its rights over the “Chattel Mortgage” by
By: (Sgd.) the Defendants-Appellants to the Appellee. Hence, Appellee was a holder in due
AVELINO A. VIOLAGO, Pres.15 course.”17
The promissory note clearly satisfies the requirements of a negotiable instrument In the hands of one other than a holder in due course, a negotiable instrument is
under the NIL. It is in writing; signed by the Violago spouses; has an unconditional subject to the same defenses as if it were non-negotiable.18 A holder in due course,
promise to pay a certain amount, i.e., PhP 209,601, on specific dates in the future however, holds the instrument free from any defect of title of prior parties and from
which could be determined from the terms of the note; made payable to the order of defenses available to prior parties among themselves, and may enforce payment
VMSC; and names the drawees with certainty. The indorsement by VMSC to BA
_______________
Finance appears likewise to be valid and regular.
The more important issue now is whether or not BA Finance is a holder in due
16 NIL, Sec. 59.
course. The resolution of this issue will determine whether petitioners’ defense of
17 Rollo, p. 25.
fraud and nullity of the sale could validly be raised against respondent corporation.
18 NIL, Sec. 58.
Sec. 52 of the NIL provides:
19 Id., Sec. 57.
“Section 52. What constitutes a holder in due course.––A holder in due course
20 Id., Sec. 24.
is a holder who has taken the instrument under the following conditions:
82
(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 82 SUPREME COURT REPORTS ANNOTATED
that it had been previously dishonored, if such was the fact; Violago vs. BA Finance Corporation
(c) That he took it in good faith and for value; of the instrument for the full amount thereof.19 Since BA Finance is a holder in due
course, petitioners cannot raise the defense of non-delivery of the object and nullity
of the sale against the corporation. The NIL considers every negotiable instrument
prima facie to have been issued for a valuable consideration. 20 In Salas, we held that
a party holding an instrument may enforce payment of the instrument for the full
amount thereof. As such, the maker cannot set up the defense of nullity of the
contract of sale.21Thus, petitioners are liable to respondent corporation for the
payment of the amount stated in the instrument.
From the third party complaint to the present petition, however, petitioners pray
that the veil of corporate fiction be set aside and Avelino be adjudged directly liable
to BA Finance. Petitioners likewise pray for damages for the fraud committed upon
them.
In Concept Builders, Inc. v. NLRC, we held:
“It is a fundamental principle of corporation law that a corporation is an entity
separate and distinct from its stockholders and from other corporations to which it
may be connected. But, this separate and distinct personality of a corporation is
merely a fiction created by law for convenience and to promote justice. So, when the
notion of separate juridical personality is used to defeat public convenience, justify
wrong, protect fraud or defend crime, or is used as a device to defeat the labor laws,
this separate personality of the corporation may be disregarded or the veil of
corporate fiction pierced. This is true likewise when the corporation is merely an
adjunct, a business conduit or an alter ego of another corporation.
xxxx
The test in determining the applicability of the doctrine of piercing the veil
of corporate fiction is as follows:
1. Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in respect
to the transaction attacked so that the corporate entity as to this transaction
had at the time no separate mind, will or existence of its own;
2. Such control must have been used by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal duty, or
dishonest and unjust acts in contravention of plaintiffs legal rights; and
_______________
21 Supra note 11, at pp. 302-303.
83
VOL. 559, JULY 21, 2008 83
Violago vs. BA Finance Corporation
3. The aforesaid control and breach of duty must proximately cause the
injury or unjust loss complained of.”22
This case meets the foregoing test. VMSC is a family-owned corporation of which
Avelino was president. Avelino committed fraud in selling the vehicle to petitioners, a
vehicle that was previously sold to Avelino’s other cousin, Esmeraldo. Nowhere in the
pleadings did Avelino refute the fact that the vehicle in this case was already
previously sold to Esmeraldo; he merely insisted that he cannot be held liable
because he was not a party to the transaction. The fact that Avelino and Pedro are
cousins, and that Avelino claimed to have a need to increase the sales quota, was
likely among the factors which motivated the spouses to buy the car. Avelino,
knowing fully well that the vehicle was already sold, and with abuse of his
relationship with the spouses, still proceeded with the sale and collected the down
payment from petitioners. The trial court found that the vehicle was not delivered to
the spouses. Avelino clearly defrauded petitioners. His actions were the proximate
cause of petitioners’ loss. He cannot now hide behind the separate corporate
personality of VMSC to escape from liability for the amount adjudged by the trial
court in favor of petitioners.
The fact that VMSC was not included as defendant in petitioners’ third party
complaint does not preclude recovery by petitioners from Avelino; neither would
such non-inclusion constitute a bar to the application of the piercing-of-the-
corporate-veil doctrine. We suggested as much in Arcilla v. Court of Appeals, an
appellate proceeding involving petitioner Arcilla’s bid to avoid the adverse CA
decision on the argument that he is not personally liable for the amount adjudged
since the same constitutes a corporate liability which nevertheless cannot even be
enforced against the corporation which has not been impleaded as a party below. In
that case, the Court found as well-taken the CA’s act of disregarding the separate
_______________
22 G.R. No. 108734, May 29, 1996, 257 SCRA 149, 157-159.
84
84 SUPREME COURT REPORTS ANNOTATED
Violago vs. BA Finance Corporation
juridical personality of the corporation and holding its president, Arcilla, liable for
the obligations incurred in the name of the corporation although it was not a party to
the collection suit before the trial court. An excerpt from Arcilla:
“x x x In short, even if We are to assume arguendo that the obligation was
incurred in the name of the corporation, the petitioner [Arcilla] would still be
personally liable therefor because for all legal intents and purposes, he and the
corporation are one and the same. Csar Marine Resources, Inc. is nothing more than
his business conduit and alter ego. The fiction of separate juridical personality
conferred upon such corporation by law should be disregarded. Significantly,
petitioner does not seriously challenge the [CA’s] application of the doctrine which
permits the piercing of the corporate veil and the disregarding of the fiction of a
separate juridical personality; this is because he knows only too well that from the
beginning, he merely used the corporation for his personal purposes.”23
 WHEREFORE, the CA’s August 20, 2002 Decision and May 15, 2003 Resolution
in CA-G.R. CV No. 48489 are SET ASIDE insofar as they dismissed without prejudice
the third party complaint of petitioners-spouses Pedro and Florencia Violago against
respondent Avelino Violago. The March 5, 1994 Decision of the RTC is REINSTATED
and AFFIRMED. Costs against Avelino Violago.
SO ORDERED.
Quisumbing (Chairperson), Ynares-Santiago,** Carpio-Morales and Tinga, JJ.,
concur.
Judgment and resolution set aside. That of Regional Trial Court dated March 5,
1994 reinstated and affirmed.

_______________

23 G.R. No. 89804, October 23, 1992, 215 SCRA 120, 129.
** Additional member as per Special Order No. 509 dated July 1, 2008.
© Copyright 2018 Central Book Supply, Inc. All rights reserved.
 No. L-72593. April 30, 1987.*
CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and RODOLFO T.
VERGARA, petitioners, vs. IFC LEASING AND ACCEPTANCE CORPORATION,
respondent.
Negotiable Instruments Law; Promissory Note must he payable to order or
bearer to be negotiable.—"The instrument in order to be considered negotiable must
contain the so called 'words of negotiability'-ie., must be payable to 'order' or 'bearer.'
These words serve as an expression of consent that the instrument may be
transferred. This consent is indispensable since a maker assumes greater risks under
a negotiable instrument than under a non-negotiable one.
Same; Same; When instrument is payable to order.—The instrument is payable
to order where it is drawn payable to the order of a specified person or to him or his
order . . . "These are the only two ways by which an instrument may be made payable
to order. There must be always be a specified person named in the instrument. It
means that the bill or note is to be paid to the person designated in the instrument or
to any person to whom he has indorsed and delivered the same. Without the
words 'or order' or 'to the order of,' the instrument is payable only to the person
designated therein and is therefore non-negotiable. Any subsequent purchaser
thereof will not enjoy the advantages of being a holder of a negotiable instrument,
but will merely 'step into the shoes' of the person designated in the instrument and
will thus be open to all defenses available against the latter."
Same; Same; Effect if promissory note is non-negotiable.—There
________________
*SECOND DIVISION.
449
VOL. 149, APRIL 30, 1987 449
Consolidated Plywood Industries, Inc, vs. IFC Leasing and
Acceptance Corporation
fore, considering that the subject promissory note is not a negotiable
instrument, it follows that the respondent can never be a holder in due course but
remains a mere assignee of the note in question. Thus, the petitioner may raise
against the respondent all defenses available to it as against the seller-assignor,
Industrial Products Marketing.
PETITION for certiorari to review the decision of the Intermediate Appellate Court.
The facts are stated in the opinion of the Court.
Carpio, Villaraza & Cruz Law Offices for petitioners.
Europa, Dacanay & Tolentino for respondent.
GUTIERREZ, JR., J.:
This is a petition for certiorari under Rule 45 of the Rules of Court which assails on
questions of law a decision of the Intermediate Appellate Court in AC-G.R. CV No.
68609dated July 17, 1985, as well as its resolution dated October 17, 1985, denying
the motion f or reconsideration.
The antecedent facts culled from the petition are as follows:
The petitioner is a corporation engaged in the logging business. It had for its
program of logging activities for the year 1978 the opening of additional roads, and
simultaneous logging operations along the route of said roads, in its logging
concession area at Baganga, Manay, and Caraga, Davao Oriental For this purpose, it
needed two (2) additional units of tractors.
Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf & Pacific
Company of Manila, through its sister company and marketing arm, Industrial
Products Marketing (the "seller-assignor"), a corporation dealing in tractors and
other heavy equipment business, offered to sell to petitionercorporation two (2)
"Used" Allis Crawler Tractors, one (1) an HD-21-B and the other an HD-16-B.
In order to ascertain the extent of work to which the tractors were to be exposed,
(t.s.n., May 28, 1980, p. 44) and to determine the capability of the "Used" tractors
being offered,
450
450 SUPREME COURT REPORTS ANNOTATED
Consolidated Plywood Industries, Inc. vs. IFC Leasing and
Acceptance Corporation
petitioner-corporation requested the seller-assignor to inspect the jobsite. After
conducting said inspection, the sellerassignor assured petitioner-corporation that the
"Used" Allis Crawler Tractors which were being offered were fit for the job, and gave
the corresponding warranty of ninety (90) days performance of the machines and
availability of parts. (t.s.n., May 28,1980, pp. 59-66).
With said assurance and warranty, and relying on the sellerassignor's skill and
judgment, petitioner-corporation through petitioners Wee and Vergara, president
and vice-president, respectively, agreed to purchase on installment said two (2) units
of "Used" Allis Crawler Tractors. It also paid the down payment of Two Hundred Ten
Thousand Pesos (P210,000.00).
On April 5, 1978, the seller-assignor issued the sales invoice for the two (2) units
of tractors (Exh. "3-A"). At the same time, the deed of sale with chattel mortgage with
promissory note was executed (Exh. "2").
Simultaneously with the execution of the deed of sale with chattel mortgage with
promissory note, the seller-assignor, by means of a deed of assignment (Exh. "1"),
assigned its rights and interest in the chattel mortgage in favor of the respondent.
 Immediately thereafter, the seller-assignor delivered said two (2) units of "Used"
tractors to the petitioner-corporation's jobsite and as agreed, the seller-assignor
stationed its own mechanics to supervise the operations of the machines.
Barely fourteen (14) days had elapsed after their delivery when one of the tractors
broke down and af ter another nine (9) days, the other tractor likewise broke down
(t.s.n., May 28, 1980, pp. 68-69),
On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the seller-
assignor of the fact that the tractors broke down and requested for the seller-
assignor's usual prompt attention under the warranty (Exh, "5").
In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit "5," the
seller-assignor sent to the jobsite its mechanics to conduct the necessary repairs
(Exhs. "6," "6-A," "6-B," 6-C," "6-C-1," "6-D," and "6-E"), but the tractors did
451
VOL. 149, APRIL 30, 1987 451
Consolidated Plywood Industries, Inc. vs. IFC Leasing and
Acceptance Corporation
not come out to be what they should be after the repairs were undertaken because the
units were no longer serviceable (t.s.n., May 28, 1980, p.78).
Because of the breaking down of the tractors, the road building and simultaneous
logging operations of petitionercorporation were delayed and petitioner Vergara
advised the seller-assignor that the payments of the installments as listed in the
promissory note would likewise be delayed until the seller-assignor completely
fulfills its obligation under its warranty (t.s.n, May 28,1980, p. 79).
Since the tractors were no longer serviceable, on April 7, 1979, petitioner Wee
asked the seller-assignor to pull out the units and have them reconditioned, and
thereafter to offer them for sale. The proceeds were to be given to the respondent and
the excess, if any, to be divided between the seller-assignor and petitioner-
corporation which offered to bear one-half (1/2) of the reconditioning cost (Exh. "7").
No response to this letter, Exhibit "7," was received by the petitioner-corporation
and despite several follow-up calls, the seller-assignor did nothing with regard to the
request, until the complaint in this case was filed by the respondent against the
petitioners, the corporation, Wee, and Vergara.
The complaint was filed by the respondent against the petitioners for the recovery
of the principal sum of One Million Ninety Three Thousand Seven Hundred Eighty
Nine Pesos & 71/100 (P1,093,789.71), accrued interest of One Hundred Fifty One
Thousand Six Hundred Eighteen Pesos & 86/100 (P151,618.86) as of August 15, 1979,
accruing interest thereafter at the rate of twelve (12%) percent per annum, attorney's
fees of Two Hundred Forty Nine Thousand Eighty One Pesos & 71/100 (P249,081.71)
and costs of suit
The petitioners filed their amended answer praying for the dismissal of the
complaint and asking the trial court to order the respondent to pay the petitioners
damages in an amount at the sound discretion of the court, Twenty Thousand Pesos
(P20,000.00) as and for attorney's fees, and Five Thousand Pesos (P5,000.00) for
expenses of litigation. The petitioners
452
452 SUPREME COURT REPORTS ANNOTATED
Consolidated Plywood Industries, Inc. vs. IFC Leasing and
Acceptance Corporation
likewise prayed for such other and further relief as would be just under the premises.
In a decision dated April 20, 1981, the trial court rendered the f ollowing
judgment:
"WHEREFORE, judgment is hereby rendered:
1. 1.ordering defendants to pay jointly and severally in their official and
personal capacities the principal sum of ONE MILLION NINETY THREE
THOUSAND SEVEN HUNDRED NINETY EIGHT PESOS & 71/100
(P1,093,798.71) with accrued interest of ONE HUNDRED FIFTY ONE
THOUSAND SIX HUNDRED EIGHTEEN PESOS & 86/100 (P151,618.,86)
as of August 15, 1979 and accruing interest thereafter at the rate of 12% per
annum;
2. "2)ordering defendants to pay jointly and severally attorney's fees equivalent
to ten percent (10%) of the principal and to pay the costs of the suit.
"Defendants' counterclaim is disallowed." (pp. 45-46, Rollo)
On June 8, 1981, the trial court issued an order denying the motion f or
reconsideration f iled by the petitioners,
Thus, the petitioners appealed to the Intermediate Appellate Court and assigned
therein the following errors:
I
THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER ATLANTIC
GULF AND PACIFIC COMPANY OF MANILA DID NOT APPROVE DEFENDANTS-
APPELLANTS CLAIM OF WARRANTY.
II
THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF-
APPELLEE IS A HOLDER IN DUE COURSE OF THE PROMISSORY NOTE AND
SUED UNDER SAID NOTE AS HOLDER THEREOF IN DUE COURSE.
On July 17, 1985, the Intermediate Appellate Court issued the challenged decision
affirming in toto the decision of the
453
VOL. 149, APRIL 30, 1987 453
 Consolidated Plywood Industries, Inc. vs. IFC Leasing and
Acceptance Corporation
trial court. The pertinent portions of the decision are as follows:
xxx xxx xxx
"From the evidence presented by the parties on the issue of warranty, We are of
the considered opinion that aside from the fact that no provision of warranty appears
or is provided in the Deed of Sale of the tractors and even admitting that in a contract
of sale unless a contrary intention appears, there is an implied warranty, the defense
of breach of warranty, if there is any, as in this case, does not lie in favor of the
appellants and against the plaintiff-appellee who is the assignee of the promissory
note and a holder of the same in due course. Warranty lies in this case only between
Industrial Products Marketing and Consolidated Plywood Industries, Inc. The
plaintiffappellant herein upon application by appellant corporation granted financing
for the purchase of the questioned units of Fiat-Allis Crawler Tractors.
xxx xxx xxx
"Holding that breach of warranty if any, is not a defense available to appellants
either to withdraw from the contract and/or demand a proportionate reduction of
the price with damages in either case (Art. 1567, New Civil Code). We now come to
the issue as to whether the plaintiff-appellee is a holder in due course of the
promissory note.
'To begin with, it is beyond arguments that the plaintiffappellee is a financing
corporation engaged in financing and receivable discounting extending credit
facilities to consumers and industrial, commercial or agricultural enterprises by
discounting or factoring commercial papers or accounts receivable duly authorized
pursuant to R.A. 5980 otherwise known as the Financing Act.
"A study of the questioned promissory note reveals that it is a negotiable
instrument which was discounted or sold to the IFC Leasing and Acceptance
Corporation for P800,000.00 (Exh. "A") considering the following: it is in writing
and signed by the maker; it contains an unconditional promise to pay a certain sum
of money payable at a fixed or determinable future time; it is payable to order (Sec. 1,
NIL); the promissory note was negotiated when it was transferred and delivered by
IPM to the appellee and duly endorsed to the latter (Sec. 30, NIL); it was taken in the
conditions that the note was complete and regular upon its face before the same was
overdue and without
454
454 SUPREME COURT REPORTS ANNOTATED
Consolidated Plywood Industries, Inc. vs. IFC Leasing and
Acceptance Corporation
notice, that it had been previously dishonored and that the note is in good faith and
for value without notice of any infirmity or defect in the title of IPM (Sec. 52, NIL);
that IFC Leasing and Acceptance Corporation held the instrument free from any
defect of title of prior parties and free from defenses available to prior parties among
themselves and may enforce payment of the instrument for the full amount thereof
against all parties liable thereon (Sec. 57, NIL); the appellants engaged that they
would pay the note according to its tenor, and admit the existence of the payee IPM
and its capacity to endorse (Sec. 60, NIL).
"In view of the essential elements found in the questioned promissory note, We
opine that the same is legally and conclusively enforceable against the defendants-
appellants.
"WHEREFORE, finding the decision appealed from according to law and
evidence, We find the appeal without merit and thus affirm the decision in toto. With
costs against the appellants." (pp. 5055, Rollo)
The petitioners' motion for reconsideration of the decision of July 17, 1985 was
denied by the Intermediate Appellate Court in its resolution dated October 17, 1985,
a copy of which was received by the petitioners on October 21, 1985.
Hence, this petition was filed on the following grounds:
I.
ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A NEGOTIABLE
INSTRUMENT AS DEFINED UNDER THE LAW SINCE IT IS NEITHER PAYABLE
TO ORDER NOR TO BEARER.
II.
THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT IS A
MERE ASSIGNEE OF THE SUBJECT PROMISSORY NOTE.
III.
SINCE THE INSTANT CASE INVOLVES A NONNEGOTIABLE INSTRUMENT
AND THE TRANSFER OF
455
VOL. 149, APRIL 30, 1987 455
Consolidated Plywood Industries, Inc. vs. IFC Leasing and
Acceptance Corporation
RIGHTS WAS THROUGH A MERE ASSIGNMENT, THE PETITIONERS MAY
RAISE AGAINST THE RESPONDENT ALL DEFENSES THAT ARE AVAILABLE TO
IT AS AGAINST THE SELLER-ASSIGNOR, INDUSTRIAL PRODUCTS
MARKETING.
IV.
 THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE
PROMISSORY NOTE BECAUSE:
A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF WARRANTY UNDER
THE LAW;
B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE SELLER-
ASSIGNOR OF THE PROMISSORY NOTE.
V.
THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLER-
ASSIGNOR IN FAVOR OF THE RESPONDENT DOES NOT CHANGE THE
NATURE OF THE TRANSACTION FROM BEING A SALE ON INSTALLMENTS TO
A PURE LOAN.
VI.
THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN EVIDENCE
IN ANY COURT BECAUSE THE REQUISITE DOCUMENTARY STAMPS HAVE
NOT BEEN AFFIXED THEREON OR CANCELLED.
The petitioners prayed that judgment be rendered setting aside the decision dated
July 17, 1985, as well as the resolution dated October 17, 1985 and dismissing the
complaint but granting petitioners' counterclaims before the court of origin.
On the other hand, the respondent corporation in its comment to the petition
filed on February 20,1986, contended that the petition was filed out of time; that the
promissory note is a negotiable instrument and respondent a holder in due course;
that respondent is not liable for any breach of warranty; and finally, that the
promissory note is admissible in evidence.
456
456 SUPREME COURT REPORTS ANNOTATED
Consolidated Plywood Industries, Inc. vs. IFC Leasing and
Acceptance Corparation
The core issue herein is whether or not the promissory note in question is a
negotiable instrument so as to bar completely all the available defenses of the
petitioner against the respondent-assignee.
Preliminarily, it must be established at the outset that we consider the instant
petition to have been filed on time because the petitioners' motion for
reconsideration actually raised new issues. It cannot, therefore, be considered pro-
forma.
The petition is impressed with merit.
First, there is no question that the seller-assignor breached its express 90-day
warranty because the findings of the trial court, adopted by the respondent appellate
court, that "14 days after delivery, the first tractor broke down and 9 days, thereafter,
the second tractor became inoperable" are sustained by the records. The petitioner
was clearly a victim of a warranty not honored by the maker.
The Civil Code provides that:
"ART. 1561. The vendor shall be responsible for warranty against the hidden defects
which the thing sold may have, should they render it unfit for the use for which it is
intended, or should they diminish its fitness for such use to such an extent that , had
the vendee been aware thereof, he would not have acquired it or would have given a
lower price for it; but said vendor shall not be answerable for patent defects or those
which may be visible, or for those which are not visible if the vendee is an expert who,
by reason of his trade or profession, should have known them.
"ART. 1562. In a sale of goods, there is an implied warranty or condition as to
the quality or fitness of the goods, as follows:
"(1) Where the buyer, expressly or by implication, makes known to the seller the
particular purpose for which the goods areacquired, and it appears that the buyer
relies on the seller's skill or judg-ment (whether he be the grower or manufacturer
or not), there is an implied warranty that the goods shall be reasonably fit for such
purpose;
xxx xxx xxx
"ART. 1564. An implied warranty or condition as to the quality or fitness for a
particular purpose may be annexed by the
457
VOL. 149, APRIL 30, 1987 457
Consolidated Plywood Industries, Inc. vs. IFC Leasing and
Acceptance Corporation
usage of trade.
xxx xxx xxx
"ART. 1566. The vendor is responsible to the vendee for any hidden faults or
defects in the thing sold, even though he was not aware thereof.
"This provision shall not apply if the contrary has been stipulated, and the vendor
was not aware of the hidden faults or defects in the thing sold." (Italics supplied).
It is patent then, that the seller-assignor is liable for its breach of warranty against
the petitioner. This liability as a general rule, extends to the corporation to whom it
assigned its rights and interests unless the assignee is a holder in due course of the
promissory note in question, assuming the note is negotiable, in which case the
latter's rights are based on the negotiable instrument and assuming further that the
petitioner's defenses may not prevail against it.
Secondly, it likewise cannot be denied that as soon as the tractors broke down, the
petitioner-corporation notified the seller-assignor's sister company, AG & P, about
the breakdown based on the seller-assignor's express 90-day warranty, with which
the latter complied by sending its mechanics. However, due to the seller-assignor's
delay and its failure to comply with its warranty, the tractors became totally
unserviceable and useless for the purpose f or which they were purchased
 Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its contract
with the seller-assignor.
Articles 1191 and 1567 of the Civil Code provide that:
"ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon him.
"The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.
xxx xxx xxx
458
458 SUPREME COURT REPORTS ANNOTATED
Consolidated Plywood Industries, Inc. vs. IFC Leasing and
Acceptance Corporation
"ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and 1566, the vendee may
elect between withdrawing from the contract and demanding a proportionate
reduction of the price, with damages in either case." (Italics supplied)
Petitioner, having unilaterally and extrajudicially rescinded its contract with the
seller-assignor, necessarily can no longer sue the seller-assignor except by way of
counterclaim if the seller-assignor sues it because of the rescission.
In the case of the University of the Philippines v De los Angeles (35 SCRA 102) we
held:
"In other words, the party who deems the contract violated may consider it resolved
or rescinded, and act accordingly, without previous court action, but it proceeds at
its own risk. For it is only the final judgment of the corresponding court that will
conclusively and finally settle whether the action taken was or was not correct in law.
But the law definitely does not require that the contracting party who believes itself
injured must first file suit and wait for a judgment before taking extrajudicial steps
to protect its interest. Otherwise, the party injured by the other's breach will have to
passively sit and watch its damages accumulate during the pendency of the suit
until the final judgment of rescission is rendered when the law itself requires that he
should exercise due diligence to minimize its own damages (Civil Code, Article
2203)." (Italics supplied)
Going back to the core issue, we rule that the promissory note in question is not a
negotiable instrument
The pertinent portion of the note is as f ollows:
"FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the
INDUSTRIAL PRODUCTS MARKETING, the sum of ONE MILLION NINETY
THREE THOUSAND SEVEN HUNDRED EIGHTY NINE PESOS & 71/100 only
(P1,093,789.71), Philippine Currency, the said principal sum, to be payable in 24
monthly installments starting July 15, 1978 and every 15th of the month thereafter
until fully paid. x x x."
Considering that paragraph (d), Section 1 of the Negotiable Instruments Law
requires that a promissory note "must be
459
VOL. 149, APRIL 30, 1987 459
Consolidated Plywood Industries, Inc. vs. IFC Leasing and
Acceptance Corporation
payable to order or bearer," it cannot be denied that the promissory note in question
is not a negotiable instrument.
"The instrument in order to be considered negotiable must contain the so-called
'words of negotiability'—i.e., must be payable to 'order' or 'bearer'. These words serve
as an expression of consent that the instrument may be transferred. This consent is
indispensable since a maker assumes greater risk under a negotiable instrument than
under a non-negotiable one. x x x.
xxx xxx xxx
"When instrument is payable to order.—
"SEC. 8. WHEN PAYABLE TO ORDER.—The instrument is payable to order
where it is drawn payable to the order of a specified person or to him or his order. . . .
xxx xxx xxx
"These are the only two ways by which an instrument may be made payable to
order. There must always be a specified person named in the instrument. It means
that the bill or note is to be paid to the person designated in the instrument or to any
person to whom he has indorsed and delivered the same. Without the words 'or
order' or 'to the order of,' the instrument is payable only to the person designated
therein and is therefore non-negotiable. Any subsequent purchaser thereof will not
enjoy the advantages of being a holder of a negotiable instrument, but will
merely 'step into the shoes' of the person designated in the instrument and will thus
be open to all defenses available against the latter." (Campos and Campos, Notes and
Selected Cases on Negotiable Instruments Law, Third Edition, page 38). (Italics
supplied)
Therefore, considering that the subject promissory note is not a negotiable
instrument, it follows that the respondent can never be a holder in due course but
remains a mere assignee of the note in question. Thus, the petitioner may raise
against the respondent all defenses available to it as against the sellerassignor,
Industrial Products Marketing.
This being so, there was no need for the petitioner to implead the seller-assignor
when it was sued by the respondentassignee because the petitioner's defenses apply
to both or either of them.
460
460 SUPREME COURT REPORTS ANNOTATED
Consolidated Plywood Industries, Inc. vs. IFC Leasing and
Acceptance Corporation
Actually, the records show that even the respondent itself admitted to being a mere
assignee of the promissory note in question, to wit:
"ATTY. PALACA:
"Did we get it right from the counsel that what is being assigned is the Deed of Sale
with Chattel Mortgage with the promissory note which is as testified to by the witness
was indorsed? (Counsel for Plaintiff nodding his head.) Then we have no further
questions on cross.
"COURT:
"You confirm his manifestation? You are nodding your head? Do you confirm
that?
"ATTY. ILAGAN:
"The Deed of Sale cannot be assigned. A deed of sale is a transaction between two
persons; what is assigned are rights, the rights of the mortgagee were assigned to the
IFC Leasing & Acceptance Corporation.
"COURT:
"He puts it in a simple way,—as one—deed of sale and chattel mortgage were
assigned;. . . you want to make a distinction, one is an assignment of mortgage right
and the other one is indorsement of the promissory note. What counsel for
defendants wants is that you stipulate that it is contained in one single transaction?
"ATTY. ILAGAN:
"We stipulate it is one single transaction." (pp. 27-29, TSN., February 13, 1980).
Secondly, even conceding for purposes of discussion that the promissory note in
question is a negotiable instrument, the respondent cannot be a holder in due course
for a more significant reason.
The evidence presented in the instant case shows that prior to the sale on
installment of the tractors, there was an arrangement between the seller-assignor,
Industrial Products Market-
461
VOL. 149, APRIL 30, 1987 461
Consolidated Plywood lndustries, Inc. vs. IFC Leasing and
Acceptance Corporation
ing, and the respondent whereby the latter would pay the seller-assignor the entire
purchase price and the sellerassignor, in turn, would assign its rights to the
respondent which acquired the right to collect the price from the buyer, herein
petitioner Consolidated Plywood Industries, Inc.
A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory Note,
the Deed of Assignment and the Disclosure of Loan/Credit Transaction shows that
said documents evidencing the sale on installment of the tractors were all executed
on the same day by and among the buyer, which is herein petitioner Consolidated
Plywood Industries, Inc.; the sellerassignor which is the Industrial Products
Marketing; and the assignee-financing company, which is the respondent. Therefore,
the respondent had actual knowledge of the fact that the seller-assignor's right to
collect the purchase price was not unconditional and that it was subject to the
condition that the tractors sold were not defective. The respondent knew that when
the tractors turned out to be defective, it would be subject to the defense of failure of
consideration and cannot recover the purchase price from the petitioners. Even
assuming for the sake of argument that the promissory note is negotiable, the
respondent, which took the same with actual knowledge of the foregoing facts so that
its action in taking the instrument amounted to bad faith, is not a holder in due
course. As such, the respondent is subject to all defenses which the petitioners may
raise against the seller-assignor. Any other interpretation would be most inequitous
to the unfortunate buyer who is not only saddled with two useless tractors but must
also face a lawsuit from the assignee for the entire purchase price and all its incidents
without being able to raise valid defenses available as against the assignor.
Lastly, the respondent failed to present any evidence to prove that it had no
knowledge of any fact, which would justify its act of taking the promissory note as not
amounting to bad faith.
Sections 52 and 56 of the Negotiable Instruments Law provide that:
462
462 SUPREME COURT REPORTS ANNOTATED
Consolidated Plywood lndustries, Inc. vs. IFC Leasing and
Acceptance Corporation
"SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE.—A holder in due
course is a holder who has taken the instrument under the following conditions:
xxx xxx xxx
xxx xxx xxx
"(c) That he took it in good faith and for value;
"(d) That at the time it was negotiated to him he had no notice of any infirmity in
the instrument or defect in the title of the person negotiating it
xxx xxx xxx
"SEC. 56. WHAT CONSTITUTES NOTICE OF DEFECT.—To constitute notice of
an infirmity in the instrument or defect in the title of the person negotiating the
same, the person to whom it is negotiated must have had actual knowledge of the
infirmity or defect, or knowledge of such facts that his action in taking the
instrument amounts to bad faith." (Italics supplied)
We subscribe to the view of Campos and Campos that a financing company is not a holder in due course, a negotiable instrument is subject to the same defenses as if it
holder in good faith as to the buyer, to wit: were non-negotiable. x x x."
"In installment sales, the buyer usually issues a note payable to the seller to cover the Prescinding from the foregoing and setting aside other peripheral issues, we find
purchase price. Many times, in pursuance of a previous arrangement with the seller, that both the trial and respondent appellate court erred in holding the promissory
a finance company pays the full price and the note is indorsed to it, subrogating it to note in question to be negotiable, Such a ruling does not only violate the law and
the right to collect the price from the buyer, with interest. With the increasing applicable jurisprudence, but would result in unjust enrichment on the part of both
frequency of installment buying in this country, it is most probable that the tendency the seller-assignor and respondent assignee at the expense of the petitioner-
of the courts in the United States to protect the buyer against the finance company corporation
will find judicial approval here. Where the goods sold turn out to be defective, the 464
finance company will be subject to the defense of failure of consideration and cannot 464 SUPREME COURT REPORTS ANNOTATED
recover the purchase price from the buyer. As against the argument that such a rule People vs. Rosas
would seriously affect 'a certain mode of transacting business adopted throughout which rightfully rescinded an inequitable contract. We note, however, that since the
the State,' a court in one case stated: seller-assignor has not been impleaded herein, there is no obstacle for the
" 'lt may be that our holding here will require some changes in business methods and respondent to file a civil suit and litigate its claims against the seller-assignor in the
will impose a greater burden on the finance companies. We think the buyer—Mr. & rather unlikely possibility that it so desires.
Mrs. General Public—should have some protection somewhere along the line. We WHEREFORE, in view of the foregoing, the decision of the respondent appellate
believe the finance company is better able to bear court dated July 17, 1985, as well as its resolution dated October 17, 1986, are hereby
463 ANNULLED and SET ASIDE. The complaint against the petitioner before the trial
VOL. 149, APRIL 30, 1987 463 court is DISMISSED.
Consolidated Plywood lndustries, Inc. vs. IFC Leasing and SO ORDERED.
Acceptance Corporation Fernan, Paras, Padilla, Bidin and Cortes, JJ.,concur.
the risk of the dealer's insolvency than the buyer and in a far better position to Decision annulled and set aside.
protect his interests against unscrupulous and insolvent dealers. . . .
" 'lf this opinion imposes great burdens on finance companies it is a potent ——o0o——
argument in favor of a rule which will afford public protection to the general buying
public against unscrupulous dealers in personal property. . . .' (Mutual Finance Co. v.
Martin, 63 So. 2d 649, 44 ALR 2d 1 [1953])" (Campos and Campos, Notes and
Selected Cases on Negotiable Instruments Law, Third Edition, p. 128).' "
In the case of Commercial Credit Corporation v. Orange Country Machine
Works (34 Cal. 2d 766) involving similar facts, it was held that in a very real sense,
the finance company was a moving force in the transaction from its very inception
and acted as a party to it. When a finance company actively participates in a
transaction of this type from its inception, it cannot be regarded as a holder in due
course of the note given in the transaction.
In like manner, therefore, even assuming that the subject promissory note is
negotiable, the respondent, a financing company which actively participated in the
sale on installment of the subject two Allis Crawler tractors, cannot be regarded as a
holder in due course of said note. It follows that the respondent's rights under the
promissory note involved in this case are subject to all defenses that the petitioners
have against the seller-assignor, Industrial Products Marketing. For Section 58 of the
Negotiable Instruments Law provides that "in the hands of any holder other than a
 G.R. No. 109491. February 28, 2001.*
ATRIUM MANAGEMENT CORPORATION, petitioner, vs.COURT OF APPEALS,
E.T. HENRY AND CO., LOURDES VICTORIA M. DE LEON, RAFAEL DE LEON,
JR., AND HI-CEMENT CORPORATION, respondents.
G.R. No. 121794. February 28, 2001.*
LOURDES M. DE LEON, petitioner, vs. COURT OF APPEALS, ATRIUM
MANAGEMENT CORPORATION, AND HI-CEMENT CORPORATION, respondents.
Corporation Law; Ultra Vires Acts; Checks; The act of issuing checks for the
purpose of securing a loan to finance the activities of the corporation is well within
the ambit of a valid corporate act, hence, not an ultra vires act.—Hi-Cement,
however, maintains that the checks were not issued for consideration and that
Lourdes and E.T. Henry engaged in a “kiting operation” to raise funds for E.T. Henry,
who admittedly was in need of financial assistance. The Court finds that there was no
sufficient evidence to show that such is the case. Lourdes M. de Leon is the treasurer
of the corporation and is authorized to sign checks for the corporation. At the time of
the issuance of the checks, there were sufficient funds in the bank to cover payment
of the amount of P2 million pesos. It is, however, our view that there is basis to rule
that the act of issuing the checks was well within the ambit of a valid corporate act,
for it was for securing a loan to finance the activities of the corporation, hence, not
an ultra vires act.
_______________
*FIRST DIVISION.
24
2 SUPREME COURT REPORTS ANNOTATED
4 holder in due course, thus: “A holder in due course is a holder who has taken the
Atrium Management Corporation vs. Court of Appeals
Same; Same; Words and Phrases; “Ultra Vires Acts,” Explained.—“An ultra
vires act is one committed outside the object for which a corporation is created as
defined by the law of its organization and therefore beyond the power conferred upon
it by law.” The term “ultra vires” is “distinguished from an illegal act for the former is
merely voidable which may be enforced by performance, ratification, or estoppel,
while the latter is void and cannot be validated.”
Same; Same; Instances when personal liability of corporate directors, trustees
or officers may validly attach.—The next question to determine is whether Lourdes
M. de Leon and Antonio de las Alas were personally liable for the checks issued as
corporate officers and authorized signatories of the check. “Personal liability of a
corporate director, trustee or officer along (although not necessarily) with the
corporation may so validly attach, as a rule, only when: “1. He assents (a) to a
patently unlawful act of the corporation, or (b) for bad faith or gross negligence in
directing its affairs, or (c) for conflict of interest, resulting in damages to the
corporation, its stockholders or other persons; “2. He consents to the issuance of
watered down stocks or who, having knowledge thereof, does not forthwith file with
the corporate secretary his written objection thereto; “3. He agrees to hold himself
personally and solidarily liable with the corporation; or “4. He is made, by a specific
provision of law, to personally answer for his corporate action.”
Same; Same; Checks; A treasurer of a corporation whose negligence in signing
a confirmation letter for rediscounting of crossed checks, knowing fully well that
the checks were strictly endorsed for deposit only to the payee’s account and not to
be further negotiated, resulting in damage to the corporation may be personally
liable therefor.—In the case at bar, Lourdes M. de Leon and Antonio de las Alas as
treasurer and Chairman of HiCement were authorized to issue the checks. However,
Ms. de Leon was negligent when she signed the confirmation letter requested by Mr.
Yap of Atrium and Mr. Henry of E.T. Henry for the rediscounting of the crossed
checks issued in favor of E.T. Henry. She was aware that the checks were strictly
endorsed for deposit only to the payee’s account and not to be further negotiated.
What is more, the confirmation letter contained a clause that was not true, that is,
“that the checks issued to E.T. Henry were in payment of Hydro oil bought by Hi-
Cement from E.T. Henry.” Her negligence resulted in damage to the corporation.
Hence, Ms. de Leon may be held personally liable therefor.
25
VOL. 353, FEBRUARY 28, 2001 2
5
Atrium Management Corporation vs. Court of Appeals
Negotiable Instrument Law; Checks; Words and Phrases; “Holder in Due
Course,” Explained.—The next issue is whether or not petitioner Atrium was a holder
of the checks in due course. The Negotiable Instruments Law, Section 52 defines a
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.”
Same; Same; A person to whom a crossed check was endorsed by the payee of
said check could not be considered a holder in due course.—In the instant case, the
checks were crossed checks and specifically indorsed for deposit to payee’s account
only. From the beginning, Atrium was aware of the fact that the checks were all for
deposit only to payee’s account, meaning E.T. Henry. Clearly, then, Atrium could not
be considered a holder in due course.
Same; Same; A holder not in due course may still recover on the instrument.—
It does not follow as a legal proposition that simply because petitioner Atrium was
not a holder in due course for having taken the instruments in question with notice
that the same was for deposit only to the account of payee E.T. Henry that it was
altogether precluded from recovering on the instrument. The Negotiable Instruments
Law does not provide that a holder not in due course can not recover on the
instrument.
Same; Same; The disadvantage of a holder not in due course is that the
negotiable instrument is subject to defenses as if it were non-negotiable, such as
absence or failure of consideration.—The disadvantage of Atrium in not being a
holder in due course is that the negotiable instrument is subject to defenses as if it
were non-negotiable. One such defense is absence or failure of consideration.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Meer, Meer & Meer for Lourdes M. de Leon.
Castillo, Laman, Tan, Pantaleon & San Jose for Atrium Mgt. Corp.
26
26 SUPREME COURT REPORTS ANNOTATED
Atrium Management Corporation vs. Court of Appeals
Quisumbing, Torres for Hi-Cement Corp.
PARDO, J.:
What is before the Court are separate appeals from the decision of the Court of
Appeals,1 ruling that Hi-Cement Corporation is not liable for four checks amounting
to P2 million issued to E.T. Henry and Co. and discounted to Atrium Management
Corporation.
On January 3, 1983, Atrium Management Corporation filed with the Regional
Trial Court, Manila an action for collection of the proceeds of four postdated checks
in the total amount of P2 million. Hi-Cement Corporation through its corporate
signatories, petitioner Lourdes M. de Leon,2treasurer, and the late Antonio de las
Alas, Chairman, issued checks in favor of E.T. Henry and Co. Inc., as payee. E.T.
Henry and Co., Inc., in turn, endorsed the four checks to petitioner Atrium
Management Corporation for valuable consideration. Upon presentment for
payment, the drawee bank dishonored all four checks for the common reason
“payment stopped.” Atrium, thus, instituted this action after its demand for payment
of the value of the checks was denied.3
After due proceedings, on July 20, 1989, the trial court rendered a decision
ordering Lourdes M. de Leon, her husband Rafael de Leon, E.T. Henry and Co., Inc.
and Hi-Cement Corporation to pay petitioner Atrium, jointly and severally, the
amount of P2 million corresponding to the value of the four checks, plus interest and
attorney’s fees.4
On appeal to the Court of Appeals, on March 17, 1993, the Court of Appeals
promulgated its decision modifying the decision of the trial court, absolving Hi-
Cement Corporation from liability and dismissing the complaint as against it. The
appellate court ruled
_______________
1 In CA-G.R. CV No. 26686, promulgated on March 17, 1973, Francisco,
C., J., ponente, Ramirez and Gutierrez, JJ., concurring.
2 In G.R. No. 121794.
3 Consolidated Memorandum, G.R. No. 121794, Rollo, pp. 191-226, at pp. 192-193.
4 Original Record, Decision, Judge Edilberto O. Sandoval, presiding pp. 356-362.
27
VOL. 353, FEBRUARY 28, 2001 27
Atrium Management Corporation vs. Court of Appeals
that: (1) Lourdes M. de Leon was not authorized to issue the subject checks in favor
of E.T. Henry, Inc.; (2) The issuance of the subject checks by Lourdes M. de Leon and
the late Antonio de las Alas constituted ultra vires acts; and (3) The subject checks
were not issued for valuable consideration.5
At the trial, Atrium presented as its witness Carlos C. Syquia who testified that in
February 1981, Enrique Tan of E.T. Henry approached Atrium for financial
assistance, offering to discount four RCBC checks in the total amount of P2 million,
issued by Hi-Cement in favor of E.T. Henry. Atrium agreed to discount the checks,
provided it be allowed to confirm with Hi-Cement the fact that the checks
represented payment for petroleum products which E.T. Henry delivered to Hi-
Cement. Carlos C. Syquia identified two letters, dated February 6, 1981 and February
9, 1981 issued by Hi-Cement through Lourdes M. de Leon, as treasurer, confirming
the issuance of the four checks in favor of E.T. Henry in payment for petroleum
products.6
Respondent Hi-Clement presented as witness Ms. Erlinda Yap who testified that
she was once a secretary to the treasurer of Hi-Cement, Lourdes M. de Leon, and as
such she was familiar with the four RCBC checks as the postdated checks issued by
Hi-Cement to E.T. Henry upon instructions of Ms. de Leon. She testified that E.T.
Henry offered to give Hi-Cement a loan which the subject checks would secure as
collateral.7
On July 20, 1989, the Regional Trial Court, Manila, Branch 09 rendered a
decision, the dispositive portion of which reads:
“WHEREFORE, in view of the foregoing considerations, and plaintiff having proved
its cause of action by preponderance of evidence, judgment is hereby rendered
ordering all the defendants except defendant Antonio de las Alas to pay plaintiff
jointly and severally the amount of TWO MILLION (P2,000,000.00) PESOS with
the legal rate of interest from the
_______________
 5 Petition, Annex “C,” in G.R. No. 109491, Rollo, pp. 319-339 and Petition, Annex
“A,” in G.R. No. 121794, Rollo, pp. 30-49.
6 TSN, September 30, 1985, pp. 6-19.
7 TSN, January 29, 1988, pp. 15-16.
28
28 SUPREME COURT REPORTS ANNOTATED
Atrium Management Corporation vs. Court of Appeals
filling of the complaint until fully paid, plus the sum of TWENTY THOUSAND
(P20,000.00) PESOS as and for attorney’s fees and the cost of suit.”
All other claims are, for lack of merit dismissed.
SO ORDERED.”8
In due time, both Lourdes M. de Leon and Hi-Cement appealed to the Court of
Appeals.9
Lourdes M. de Leon submitted that the trial court erred in ruling that she was
solidarity liable with Hi-Cement for the amount of the check. Also, that the trial court
erred in ruling that Atrium was an ordinary holder, not a holder in due course of the
rediscounted checks.10
Hi-Cement on its part submitted that the trial court erred in ruling that even if
Hi-Cement did not authorize the issuance of the checks, it could still be held liable
for the checks. And assuming that the checks were issued with its authorization, the
same was without any consideration, which is a defense against a holder in due
course and that the liability shall be borne alone by E.T Henry.11
On March 17, 1993, the Court of Appeals promulgated its decision modifying the
ruling of the trial court, the dispositive portion of which reads:
“Judgement is hereby rendered:
1. (1)dismissing the plaintiffs complaint as against defendants Hi-Cement
Corporation and Antonio De las Alas;
2. (2)ordering the defendants E.T. Henry and Co., Inc. and Lourdes M. de Leon,
jointly and severally to pay the plaintiff the sum of TWO MILLION PESOS
(P2,000,000.00) with interest at the legal rate from the filling of the
complaint until fully paid, plus P20,000.00 for attorney’s fees.
_______________
8 Original Record, Decision, Judge Edilberto G. Sandoval, presiding, pp. 356-362.
9 Ibid., Notice of appeal, Lourdes, p. 366, and Notice of Appeal Hi-Cement, p. 365.
10 CA Rollo, Defendant-Appellant Lourdes M. De Leon’s Brief, pp. 10-10N.
11 Ibid., Defendant Appellant’s Brief, pp. 23C-23II.
29
VOL. 353, FEBRUARY 28, 2001 29
Atrium Management Corporation vs. Court of Appeals
1. (3)ordering the plaintiff and defendants E.T. Henry and Co., Inc. and Lourdes
M. de Leon, jointly and severally to pay defendant Hi-Cement Corporation,
the sum of P20,000.00 as and for attorney’s fees.
With cost in this instance against the appellee Atrium Management Corporation
and appellant Lourdes Victoria M. de Leon.
So ordered.”12
Hence, the recourse to this Court.13
The issues raised are the following:
In G.R. No. 109491 (Atrium, petitioner):
1. 1.Whether the issuance of the questioned checks was an ultra vires act;
2. 2.Whether Atrium was not a holder in due course and for value; and
3. 3.Whether the Court of Appeals erred in dismissing the case against Hi-
Cement and ordering it to pay P20,000.00 as attorney’s fees.14
In G.R. No. 121794 (de Leon, petitioner):
1. 1.Whether the Court of Appeals erred in holding petitioner personally liable
for the Hi-Cement checks issued to E.T. Henry;
2. 2.Whether the Court of Appeals erred in ruling that Atrium is a holder in due
course;
3. 3.Whether the Court of Appeals erred in ruling that petitioner Lourdes M. de
Leon as signatory of the checks was personally liable for the value of the
checks, which were declared to be issued without consideration;
_______________
12 CA Rollo, Decision, pp. 78-99, Francisco, C., J., ponente, Ramirez and
Gutierrez, JJ. concurring.
13 G.R. No. 109491, Petition filed on April 13, 1993, Rollo, pp. 3-18; G.R. No.
121794, Petition filed on October 20, 1995, Rollo, pp. 10-28. On January 31, 2000, we
gave due course to the petition. G.R. No. 109491, Rollo, pp. 244-245; G.R. No.
121794, Rollo, pp. 152-153.
14 Petition, G.R. No. 109491, Rollo, pp. 10-16.
30
30 SUPREME COURT REPORTS ANNOTATED
Atrium Management Corporation vs. Court of Appeals
1. 4.Whether the Court of Appeals erred in ordering petitioner to pay Hi-
Cement attorney’s fees and costs.15
We affirm the decision of the Court of Appeals.
We first resolve the issue of whether the issuance of the checks was an ultra
vires act. The record reveals that Hi-Cement Corporation issued the four (4) checks
to extend financial assistance to E.T. Henry, not as payment of the balance of the P30
million pesos cost of hydro oil delivered by E.T. Henry to Hi-Cement. Why else would
petitioner de Leon ask for counterpart checks from E.T. Henry if the checks were in
payment for hydro oil delivered by E.T. Henry to Hi-Cement?
Hi-Cement, however, maintains that the checks were not issued for consideration
and that Lourdes and E.T. Henry engaged in a “kiting operation” to raise funds for
E.T. Henry, who admittedly was in need of financial assistance. The Court finds that
there was no sufficient evidence to show that such is the case. Lourdes M. de Leon is
the treasurer of the corporation and is authorized to sign checks for the corporation.
At the time of the issuance of the checks, there were sufficient funds in the bank to
cover payment of the amount of P2 million pesos.
It is, however, our view that there is basis to rule that the act of issuing the checks
was well within the ambit of a valid corporate act, for it was for securing a loan to
finance the activities of the corporation, hence, not an ultra viresact.
“An ultra vires act is one committed outside the object for which a corporation is
created as defined by the law of its organization and therefore beyond the power
conferred upon it by law.”16 The term “ultra vires” is “distinguished from an illegal
act for the former is merely voidable which may be enforced by performance,
ratification, or estoppel, while the latter is void and cannot be validated.”17
_______________
15 Petition, G.R. No. 121794, Rollo, p. 16.
16 Republic v. Acoje Mining Co., Inc., 117 Phil. 379, 383; 7 SCRA 361(1963);
Corporation Code, Sec. 45.
17 Republic v. Acoje Mining Co., Inc., supra, Note 16, at pp. 383-384.
31
VOL. 353, FEBRUARY 28, 2001 31
Atrium Management Corporation vs. Court of Appeals
The next question to determine is whether Lourdes M. de Leon and Antonio de las
Alas were personally liable for the checks issued as corporate officers and authorized
signatories of the check.
“Personal liability of a corporate director, trustee or officer along (although not
necessarily) with the corporation may so validly attach, as a rule, only when:
1. “1.He assents (a) to a patently unlawful act of the corporation, or (b) for bad
faith or gross negligence in directing its affairs, or (c) for conflict of interest,
resulting in damages to the corporation, its stockholders or other persons;
2. “2.He consents to the issuance of watered down stocks or who, having
knowledge thereof, does not forthwith file with the corporate secretary his
written objection thereto;
3. “3.He agrees to hold himself personally and solidarity liable with the
corporation; or
4. “4.He is made, by a specific provision of law, to personally answer for his
corporate action.”18
In the case at bar, Lourdes M. de Leon and Antonio de las Alas as treasurer and
Chairman of Hi-Cement were authorized to issue the checks. However, Ms. de Leon
was negligent when she signed the confirmation letter requested by Mr. Yap of
Atrium and Mr. Henry of E.T. Henry for the rediscounting of the crossed checks
issued in favor of E.T. Henry. She was aware that the checks were strictly endorsed
for deposit only to the payee’s account and not to be further negotiated. What is
more, the confirmation letter contained a clause that was not true, that is, “that the
checks issued to E.T. Henry were in payment of Hydro oil bought by Hi-Cement from
E.T. Henry.” Her negligence resulted in damage to the corporation. Hence, Ms. de
Leon may be held personally liable therefor.
_______________
18 FCY Construction Group, Inc. v. Court of Appeals, G.R. No. 123358, February 1,
2000, 324 SCRA 270, citing Tramat Mercantile, Inc. v. Court of Appeals, 238 SCRA
14, 18-19 (1994); Equitable Banking Corporation v. NLRC, 339 Phil. 541, 566; 273
SCRA 352 (1997).
32
32 SUPREME COURT REPORTS ANNOTATED
Atrium Management Corporation vs. Court of Appeals
The next issue is whether or not petitioner Atrium was a holder of the checks in due
course. The Negotiable Instruments Law, Section 52 defines a holder in due course,
thus:
“A holder in due course is a holder who has taken the instrument under the following
conditions:
1. (a)That it is complete and regular upon its face;
2. (b)That he became the holder of it before it was overdue, and without notice
that it had been previously dishonored, if such was the fact;
3. (c)That he took it in good faith and for value;
4. (d)That at the time it was negotiated to him he had no notice of any infirmity
in the instrument or defect in the title of the person negotiating it.”
In the instant case, the checks were crossed checks and specifically indorsed for ——o0o——
deposit to payee’s account only. From the beginning, Atrium was aware of the fact
that the checks were all for deposit only to payee’s account, meaning E.T. Henry.
Clearly, then, Atrium could not be considered a holder in due course.
However, it does not follow as a legal proposition that simply because petitioner
Atrium was not a holder in due course for having taken the instruments in question
with notice that the same was for deposit only to the account of payee E.T. Henry that
it was altogether precluded from recovering on the instrument. The Negotiable
Instruments Law does not provide that a holder not in due course can not recover on
the instrument.19
The disadvantage of Atrium in not being a holder in due course is that the
negotiable instrument is subject to defenses as if it were non-negotiable.20 One such
defense is absence or failure of consideration.21
We need not rule on the other issues raised, as they merely follow as a
consequence of the foregoing resolutions.

_______________
19 Chan Wan v. Tan Kim and Chen So, 109 Phil. 706 (1960).
20 State Investment House v. Intermediate Appellate Court, 175 SCRA 310,
317(1989).
21 Negotiable Instrument Law, Sec. 28.

33
VOL. 353, FEBRUARY 28, 2001 33
Sevalle vs. Court of Appeals
WHEREFORE, the petitions are hereby DENIED. The decision and resolution of the
Court of Appeals in CA-G.R. CV No. 26686, are hereby AFFIRMED in toto.
No costs.
SO ORDERED.
Davide, Jr. (C.J., Chairman), Puno, Kapunan and Ynares-Santiago,
JJ., concur.
Petition denied, judgment and resolution affirmed in toto.
Note.—Issuing a crossed check imposes no legal obligation on the drawee not to
honor such a check. (Gempesaw vs. Court of Appeals, 218 SCRA 682 [1993])
In legal parlance, “ultra vires” act refers to one which is not within the corporate
powers conferred by the Corporation Code or articles of incorporation or not
necessary or incidental in the exercise of the powers so conferred. (Lopez Realty, Inc.
vs. Fontecha, 247 SCRA 183[1995])
The crossing of a check with the phrase “Payee’s Account Only,” is a warning that
the check should be deposited only in the account of the payee. (Philippine
Commercial International Bank vs. Court of Appeals, 350 SCRA 446[2001])
 G.R. No. 170912. April 19, 2010.*
ROBERT DINO, petitioner, vs. MARIA LUISA JUDAL-LOOT, joined by her husband
VICENTE LOOT, respondents.
Mercantile Law; Negotiable Instruments Law; Checks; Crossed Checks; The
act of crossing a check serves as a warning to the holder that the check has been
issued for a definite purpose so that the holder thereof must inquire if he has
received the check pursuant to that purpose, otherwise, he is not a holder in due
course.—The act of crossing a check serves as a warning to the holder that the check
has been issued for a definite purpose so that the holder thereof must inquire if he
has received the check pursuant to that purpose; otherwise, he is not a holder in due
course. Contrary to respondents’ view, petitioner never changed his theory, that
respondents are not holders in due course of the subject check, as would violate
fundamental rules of justice, fair play, and due process. Besides, the subject check
was presented and admitted as evidence during the trial and respondents did not and
in fact cannot deny that it is a crossed check.
Civil Procedure; Courts; Jurisdiction; The Court is clothed with ample
authority to entertain issues or matters not raised in the lower courts in the interest
of substantial justice.—In any event, the Court is clothed with ample authority to
entertain issues or matters not raised in the lower courts in the interest of substantial
justice. In Casa Filipina Realty v. Office of the President, 241 SCRA 165 (1995), the
Court held: “[T]he trend in modern-day procedure is to accord the courts broad
discretionary power such that the appellate court may consider matters bearing on
the issues submitted for resolution which the parties failed to raise or which the
lower court ignored. Since rules of procedure are mere tools designed to facilitate the
attainment of justice, their strict and rigid application which would result in
technicalities that tend to frustrate rather than promote substantial justice, must
always be avoided. Technicality should not be allowed to stand in the way of
equitably and completely resolving the rights and obligations of the parties.”
_______________
* SECOND DIVISION.
394
3 SUPREME COURT REPORTS ANNOTATED
94
Dino vs. Judal-Loot
Mercantile Law; Negotiable Instruments Law; “Holder in Due Course,”
Defined.—Section 52 of the Negotiable Instruments Law defines a holder in due
course, thus: “A holder in due course is a holder who has taken the instrument under
the following conditions: (a) That it is complete and regular upon its face; (b) That
he became the holder of it before it was overdue, and without notice that it has been
previously dishonored, if such was the fact; (c) That he took it in good faith and for
value; (d) That at the time it was negotiated to him, he had no notice of any infirmity
in the instrument or defect in the title of the person negotiating it.”
Same; Same; Checks; Crossed Checks; Principles that must be considered in
the treatment of crossed checks.—In the case of a crossed check, as in this case, the
following principles must additionally be considered: A crossed check (a) may not be
encashed but only deposited in the bank; (b) may be negotiated only once—to one
who has an account with a bank; and (c) warns the holder that it has been issued for
a definite purpose so that the holder thereof must inquire if he has received the check
pursuant to that purpose; otherwise, he is not a holder in due course.
Same; Same; Same; Same; “Special Crossed Check,” and General Crossed
Check,” Defined; Crossing a check is done by placing two parallel lines diagonally
on the left top portion of the check.—Under usual practice, crossing a check is done
by placing two parallel lines diagonally on the left top portion of the check. The
crossing may be special wherein between the two parallel lines is written the name of
a bank or a business institution, in which case the drawee should pay only with the
intervention of that bank or company, or crossing may be general wherein between
two parallel diagonal lines are written the words “and Co.” or none at all as in the
case at bar, in which case the drawee should not encash the same but merely accept
the same for deposit. The effect therefore of crossing a check relates to the mode of
its presentment for payment. Under Section 72 of the Negotiable Instruments Law,
presentment for payment to be sufficient must be made (a) by the holder, or by some
person authorized to receive payment on his behalf x x x As to who the holder or
authorized person will be depends on the instructions stated on the face of the
check.395
VOL. 618, APRIL 19, 2010 395
Dino vs. Judal-Loot
Same; Same; Same; Holder in Due Course; The Negotiable Instruments Law
does not provide that a holder who is not a holder in due course may not in any case
recover on the instrument; The only disadvantage of a holder who is not in due
course is that the negotiable instrument is subject to defenses as if it were non-
negotiable.—The fact that respondents are not holders in due course does not
automatically mean that they cannot recover on the check. The Negotiable
Instruments Law does not provide that a holder who is not a holder in due course
may not in any case recover on the instrument. The only disadvantage of a holder
who is not in due course is that the negotiable instrument is subject to defenses as if
it were non-negotiable. Among such defenses is the absence or failure of
consideration, which petitioner sufficiently established in this case. Petitioner issued
the subject check supposedly for a loan in favor of Consing’s group, who turned out
to be a syndicate defrauding gullible individuals. Since there is in fact no valid loan to
speak of, there is no consideration for the issuance of the check. Consequently,
petitioner cannot be obliged to pay the face value of the check.
PETITION for review on certiorari of the decision and resolution of the Court of
Appeals.
The facts are stated in the opinion of the Court.
The Law Firm of Hermosisima & Inso for petitioner.
Maderazo & Associates for respondents.
CARPIO, J.:
The Case
This is a petition for review1 of the 16 August 2005 Decision2 and 30 November
2005 Resolution3 of the Court of Appeals in CA-G.R. CV No. 57994. The Court of
Appeals affirmed
_______________
1 Under Rule 45 of the Rules of Court.
2 Rollo, pp. 24-32. Penned by Associate Justice Enrico A. Lanzanas with
Associate Justices Arsenio J. Magpale and Sesinando E. Villon, concurring.
3 Id., at pp. 34-36.
396
396 SUPREME COURT REPORTS ANNOTATED
Dino vs. Judal-Loot
the decision of the Regional Trial Court, 7th Judicial Region, Branch 56, Mandaue
City (trial court), with the deletion of the award of interest, moral damages,
attorney’s fees and litigation expenses. The trial court ruled that respondents Maria
Luisa Judal-Loot and Vicente Loot are holders in due course of Metrobank Check No.
C-MA 142119406 CA and ordered petitioner Robert Dino as drawer, together with co-
defendant Fe Lobitana as indorser, to solidarily pay respondents the face value of the
check, among others.
The Facts
Sometime in December 1992, a syndicate, one of whose members posed as an
owner of several parcels of land situated in Canjulao, Lapu-lapu City, approached
petitioner and induced him to lend the group P3,000,000.00 to be secured by a real
estate mortgage on the properties. A member of the group, particularly a woman
pretending to be a certain Vivencia Ompok Consing, even offered to execute a Deed
of Absolute Sale covering the properties, instead of the usual mortgage
contract.4 Enticed and convinced by the syndicate’s offer, petitioner issued three
Metrobank checks totaling P3,000,000.00, one of which is Check No. C-MA-
142119406-CA postdated 13 February 1993 in the amount of P1,000,000.00 payable
to Vivencia Ompok Consing and/or Fe Lobitana.5
Upon scrutinizing the documents involving the properties, petitioner discovered
that the documents covered rights over government properties. Realizing he had
been deceived, petitioner advised Metrobank to stop payment of his checks.
However, only the payment of Check No. C-MA- 142119406-CA was ordered stopped.
The other two checks were already encashed by the payees.
_______________
4 Records, p. 22.
5 Id.
397
VOL. 618, APRIL 19, 2010 397
Dino vs. Judal-Loot
Meanwhile, Lobitana negotiated and indorsed Check No. C-MA- 142119406-CA to
respondents in exchange for cash in the sum of P948,000.00, which respondents
borrowed from Metrobank and charged against their credit line. Before respondents
accepted the check, they first inquired from the drawee bank, Metrobank, Cebu-
Mabolo Branch which is also their depositary bank, if the subject check was
sufficiently funded, to which Metrobank answered in the positive. However, when
respondents deposited the check with Metrobank, Cebu-Mabolo Branch, the same
was dishonored by the drawee bank for reason “PAYMENT STOPPED.”
Respondents filed a collection suit6 against petitioner and Lobitana before the
trial court. In their Complaint, respondents alleged, among other things, that they
are holders in due course and for value of Metrobank Check No. C-MA-142119406-
CA and that they had no prior information concerning the transaction between
defendants.
In his Answer, petitioner denied respondents’ allegations that “on the face of the
subject check, no condition or limitation was imposed” and that respondents are
holders in due course and for value of the check. For her part, Lobitana denied the
allegations in the complaint and basically claimed that the transaction leading to the
issuance of the subject check is a sale of a parcel of land by Vivencia Ompok Consing
to petitioner and that she was made a payee of the check only to facilitate its
discounting.
The trial court ruled in favor of respondents and declared them due course
holders of the subject check, since there was no privity between respondents and
defendants. The dispositive portion of the 14 March 1996 Decision of the trial court
reads:
“In summation, this Court rules for the Plaintiff and against the Defendants and
hereby orders:
_______________
 6 Docketed as Civil Case No. MAN-1843. In its 16 August 2005 Decision, the Court of Appeals affirmed the trial court’s
398 decision with modifications, thus:
398 SUPREME COURT REPORTS ANNOTATED “WHEREFORE, premises considered, finding no reversible error in the decision
Dino vs. Judal-Loot of the lower court, WE hereby DISMISS the appeal and AFFIRM the decision of the
1.) defendants to pay to Plaintiff, and severally, the amount of P1,000,000.00 court a quo with modifications that the award of interest, moral damages, attorney’s
representing the face value of subject Metrobank check; fees and litigation expenses be deleted.
2.) to pay to Plaintiff herein, jointly and severally, the sum of P101,748.00 for No pronouncement as to costs.
accrued and paid interest; SO ORDERED.”8
3.) to pay to Plaintiff, jointly and severally, moral damages in the amount of In its 30 November 2005 Resolution, the Court of Appeals denied petitioner’s
P100,000.00; motion for reconsideration.
4.) to pay to Plaintiff, jointly and severally, the sum of P200,000.00 for In denying the petitioner’s motion for reconsideration, the Court of Appeals noted
attorney’s fees; and that petitioner raised the defense that the check is a crossed check for the first time
5.) to pay to Plaintiff, jointly and severally, litigation expenses in the sum of on appeal (particularly in the motion for reconsideration). The Court of Appeals
P10,000.00 and costs of the suit. rejected such defense considering that to entertain the same would be offensive to
SO ORDERED.”7 the basic rules of fair play, justice, and due process.
Only petitioner filed an appeal. Lobitana did not appeal the trial court’s judgment. Hence, this petition.

The Ruling of the Court of Appeals The Issues

The Court of Appeals affirmed the trial court’s finding that respondents are Petitioner raises the following issues:
holders in due course of Metrobank Check No. C-MA-142119406-CA. The Court of I. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RESPONDENTS
Appeals pointed out that petitioner’s own admission that respondents were never WERE HOLDERS IN DUE COURSE. THE FACT THAT METROBANK CHECK
parties to the transaction among petitioner, Lobitana, Concordio Toring, Cecilia NO. 142119406 IS A CROSSED CHECK CONSTITUTES SUFFICIENT WARNING
Villacarlos, and Consing, proved respondents’ lack of knowledge of any infirmity in TO THE RESPONDENTS TO
the instrument or defect in the title of the person negotiating it. Moreover,
_______________
respondents verified from Metrobank whether the check was sufficiently funded
before they accepted it. Therefore, respondents must be excluded from the ambit of
8 Id., at p. 31.
petitioner’s stop payment order.
400
The Court of Appeals modified the trial court’s decision by deleting the award of
interest, moral damages, attorney’s fees and litigation expenses. The Court of 400 SUPREME COURT REPORTS ANNOTATED
Appeals opined that petitioner “was only exercising (although incorrectly), what he Dino vs. Judal-Loot
perceived to be his right to stop the payment of the check EXERCISE EXTRAORDINARY DILIGENCE TO DETERMINE THE TITLE OF THE
INDORSER.
_______________
II. THE COURT OF APPEALS ERRED IN DENYING PETITIONER’S MOTION
7 Rollo, p. 77. FOR RECONSIDERATION UPON THE GROUND THAT THE ARGUMENTS
399 RELIED UPON HAVE ONLY BEEN RAISED FOR THE FIRST TIME. EQUITY
VOL. 618, APRIL 19, 2010 399 DEMANDS THAT THE COURT OF APPEALS SHOULD HAVE MADE AN
EXCEPTION TO PREVENT THE COMMISSION OF MANIFEST WRONG AND
Dino vs. Judal-Loot INJUSTICE UPON THE PETITIONER.9
which he rediscounted.” The Court of Appeals ruled that petitioner acted in good
faith in ordering the stoppage of payment of the subject check and thus, he must not The Ruling of this Court
be made liable for those amounts.
 The petition is meritorious.
Respondents point out that petitioner raised the defense that Metrobank Check
No. C-MA-142119406-CA is a crossed check for the first time in his motion for
reconsideration before the Court of Appeals. Respondents insist that issues not
raised during the trial cannot be raised for the first time on appeal as it would be
offensive to the elementary rules of fair play, justice and due process. Respondents
further assert that a change of theory on appeal is improper.
In his Answer, petitioner specifically denied, among others, (1) Paragraph 4 of the
Complaint, concerning the allegation that on the face of the subject check, no
condition or limitation was imposed, and (2) Paragraph 8 of the Complaint,
regarding the allegation that respondents were holders in due course and for value of
the subject check. In his “Special Affirmative Defenses,” petitioner claimed that “for
want or lack of the prestation,” he could validly stop the payment of his check, and
that by rediscounting petitioner’s check, respondents “took the risk of what might
happen on the check.” Essentially, petitioner maintained that respondents are not
holders in due course of the subject check, and as such, respondents could not
recover any liability on the check from petitioner.
_______________
9 Id., at pp. 14-15.
401
VOL. 618, APRIL 19, 2010 401
Dino vs. Judal-Loot
Indeed, petitioner did not expressly state in his Answer or raise during the trial
that Metrobank Check No. C-MA-142119406-CA is a crossed check. It must be
stressed, however, that petitioner consistently argues that respondents are not
holders in due course of the subject check, which is one of the possible effects of
crossing a check. The act of crossing a check serves as a warning to the holder that
the check has been issued for a definite purpose so that the holder thereof must
inquire if he has received the check pursuant to that purpose; otherwise, he is not a
holder in due course.10 Contrary to respondents’ view, petitioner never changed his
theory, that respondents are not holders in due course of the subject check, as would
violate fundamental rules of justice, fair play, and due process. Besides, the subject
check was presented and admitted as evidence during the trial and respondents did
not and in fact cannot deny that it is a crossed check.
In any event, the Court is clothed with ample authority to entertain issues or
matters not raised in the lower courts in the interest of substantial justice.11 In Casa
Filipina Realty v. Office of the President,12 the Court held:
“[T]he trend in modern-day procedure is to accord the courts broad discretionary
power such that the appellate court may consider matters bearing on the issues
submitted for resolution which the parties failed to raise or which the lower court
ignored. Since rules of procedure are mere tools designed to facilitate the attainment
of justice, their strict and rigid application which would result in technicalities that
tend to frustrate rather than promote substantial justice, must always be avoided.
Technicality should not be allowed
_______________
10 State Investment House v. Intermediate Appellate Court, G.R. No. 72764, 13
July 1989, 175 SCRA 310, 315.
11 Phil. Commercial & Industrial Bank v. Court of Appeals, 242 Phil. 497, 503-
504; 159 SCRA 24, 30 (1988). See also Ortigas, Jr. v. Lufthansa German Airlines,
159-A Phil. 863, 889; 64 SCRA 610; 683 (1975).
12 311 Phil. 170, 181; 241 SCRA 165, 174-175 (1995).
402
402 SUPREME COURT REPORTS ANNOTATED
Dino vs. Judal-Loot
to stand in the way of equitably and completely resolving the rights and obligations of
the parties.”13
Having disposed of the procedural issue, the Court shall now proceed to the
merits of the case. The main issue is whether respondents are holders in due course
of Metrobank Check No. C-MA 142119406 CA as to entitle them to collect the face
value of the check from its drawer or petitioner herein.
Section 52 of the Negotiable Instruments Law defines a holder in due course,
thus:
“A holder in due course is a holder who has taken the instrument under the
following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice that
it has been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no notice of any infirmity in
the instrument or defect in the title of the person negotiating it.”
In the case of a crossed check, as in this case, the following principles must
additionally be considered: A crossed check (a) may not be encashed but only
deposited in the bank; (b) may be negotiated only once—to one who has an account
with a bank; and (c) warns the holder that it has been issued for a definite purpose so
that the holder thereof must inquire if he has received the check pursuant to that
purpose; otherwise, he is not a holder in due course.14
_______________
13 Id.
 14 State Investment House v. Intermediate Appellate Court, supra note
10; Bataan Cigar and Cigarette Factory, Inc. v. Court of Appeals, G.R. No. 93048, 3
March 1994, 230 SCRA 643, 648.
403
VOL. 618, APRIL 19, 2010 403
Dino vs. Judal-Loot
Based on the foregoing, respondents had the duty to ascertain the indorser’s, in
this case Lobitana’s, title to the check or the nature of her possession. This
respondents failed to do. Respondents’ verification from Metrobank on the funding
of the check does not amount to determination of Lobitana’s title to the check.
Failing in this respect, respondents are guilty of gross negligence amounting to legal
absence of good faith,15 contrary to Section 52(c) of the Negotiable Instruments Law.
Hence, respondents are not deemed holders in due course of the subject check.16
State Investment House v. Intermediate Appellate Court17 squarely applies to this
case. There, New Sikatuna Wood Industries, Inc. sold at a discount to State
Investment House three post-dated crossed checks, issued by Anita Peña Chua
naming as payee New Sikatuna Wood Industries, Inc. The Court found State
Investment House not a holder in due course of the checks. The Court also
expounded on the effect of crossing a check, thus:
“Under usual practice, crossing a check is done by placing two parallel lines
diagonally on the left top portion of the check. The crossing may be special wherein
between the two parallel lines is written the name of a bank or a business institution,
in which case the drawee should pay only with the intervention of that bank or
company, or crossing may be general wherein between two parallel diagonal lines are
written the words “and Co.” or none at all as in the case at bar, in which case the
drawee should not encash the same but merely accept the same for deposit.
The effect therefore of crossing a check relates to the mode of its presentment for
payment. Under Section 72 of the Negotiable Instruments Law, presentment for
payment to be sufficient must be made (a) by the holder, or by some person
authorized to receive
_______________
15 Vicente R. de Ocampo & Co. v. Gatchalian, No. L-15126, 30 November 1961, 3
SCRA 596, 603.
16 State Investment House v. Intermediate Appellate Court, supra note 10.
17 Id., at pp. 316-317.
404
404 SUPREME COURT REPORTS ANNOTATED
Dino vs. Judal-Loot
payment on his behalf x x x As to who the holder or authorized person will be
depends on the instructions stated on the face of the check.
The three subject checks in the case at bar had been crossed generally and issued
payable to New Sikatuna Wood Industries, Inc. which could only mean that the
drawer had intended the same for deposit only by the rightful person, i.e., the payee
named therein. Apparently, it was not the payee who presented the same for payment
and therefore, there was no proper presentment, and the liability did not attach to
the drawer.
Thus, in the absence of due presentment, the drawer did not become liable.
Consequently, no right of recourse is available to petitioner against the drawer of the
subject checks, private respondent wife, considering that petitioner is not the proper
party authorized to make presentment of the checks in question.”
In this case, there is no question that the payees of the check, Lobitana or
Consing, were not the ones who presented the check for payment. Lobitana
negotiated and indorsed the check to respondents in exchange for P948,000.00. It
was respondents who presented the subject check for payment; however, the check
was dishonored for reason “PAYMENT STOPPED.” In other words, it was not the
payee who presented the check for payment; and thus, there was no proper
presentment. As a result, liability did not attach to the drawer. Accordingly, no right
of recourse is available to respondents against the drawer of the check, petitioner
herein, since respondents are not the proper party authorized to make presentment
of the subject check.
However, the fact that respondents are not holders in due course does not
automatically mean that they cannot recover on the check.18 The Negotiable
Instruments Law does not provide that a holder who is not a holder in due course
may not in any case recover on the instrument. The only disadvantage of a holder
who is not in due course is that the negotiable
_______________
18 Bataan Cigar and Cigarette Factory, Inc. v. Court of Appeals, supranote 14 at
649.
405
VOL. 618, APRIL 19, 2010 405
Dino vs. Judal-Loot
instrument is subject to defenses as if it were non-negotiable.19 Among such defenses
is the absence or failure of consideration,20 which petitioner sufficiently established
in this case. Petitioner issued the subject check supposedly for a loan in favor of
Consing’s group, who turned out to be a syndicate defrauding gullible individuals.
Since there is in fact no valid loan to speak of, there is no consideration for the
issuance of the check. Consequently, petitioner cannot be obliged to pay the face
value of the check.
Respondents can collect from the immediate indorser,21in this case Lobitana.
Significantly, Lobitana did not appeal the trial court’s decision, finding her solidarily
liable to pay, among others, the face value of the subject check. Therefore, the trial
court’s judgment has long become final and executory as to Lobitana.
WHEREFORE, we GRANT the petition. We SET ASIDE the 16 August 2005
Decision and 30 November 2005 Resolution of the Court of Appeals in CA-G.R. CV
No. 57994.
SO ORDERED.
Brion, Del Castillo, Abad and Perez, JJ., concur.
Petition granted, judgment and resolution set aside.
Notes.—If instruments payable to named payees or to their order have not been
indorsed in blank, only such payees or their indorsees can be holders and entitled to
receive payment in their own right. (Bank of the Philippine Islands vs. Court of
Appeals, 534 SCRA 620 [2007])

_______________

19 Id., citing Chan Wan v. Tan Kim and Chen So, 109 Phil. 706 (1960).
20 Section 28, Negotiable Instruments Law.
21 Bataan Cigar and Cigarette Factory, Inc. v.
 No. L-34539. July 14, 1986.*
EULALIO PRUDENCIO and ELISA T. PRUDENCIO, petitioners, vs. THE
HONORABLE COURT OF APPEALS, THE PHILIPPINE NATIONAL BANK,
RAMON C. CONCEPCION and MANUEL M, TAMAYO, partners of the defunct
partnership Concepcion & Tamayo Construction Company, JOSE TORIBIO, Atty.-in-
Fact of Concepcion & Tamayo Construction Company, and THE DISTRICT
ENGINEER, Puerto Princesa, Palawan, respondents.
Negotiable Instruments Law; Contracts; Mortgages; An accommodation
party in a loan agreement is primarily and unconditionally liable thereon and
cannot excuse itself as such by the fact that the creditor extended the time for
payment without its knowledge or consent.—There is, therefore, no question that as
accommodation makers, petitioners would be primarily and unconditionally liable on
________________
* SECOND DIVISION.
8 received from the Bureau of Public Works on account of contract for the construction
8 SUPREME COURT REPORTS ANNOTATED
Prudencio vs. Court of Appeals
the promissory note to a holder for value, regardless of whether they stand as
sureties or solidary co-debtors since such distinction would be entirely immaterial
and inconsequential as far as a holder for value is concerned. Consequently, the
petitioners cannot claim to have been released from their obligation simply because
the time of payment of such obligation was temporarily deferred by PNB without
their knowledge and consent. There has to be another basis for their claim of having
been freed from their obligation. The question which should be resolved in this
instant petition, therefore, is whether or not PNB can be considered a holder for
value under Section 29 of the Negotiable Instruments Law such that the petitioners
must be necessarily barred from setting up the defense of want of consideration or
some other personal defenses which may be set up against a party who is not a holder
in due course.
Same; “Holder for Value” defined.—A holder for value under Section 20 of the
Negotiable Instruments Law is one who must meet all the requirements of a holder
in due course under Section 52 of the same law except notice of want of
consideration, (Agbayani, Commercial Laws of the Philippines, 1964, p. 208). If he
does not qualify as a holder in due course then he holds the instrument subject to the
same defenses as if it were non-negotiable (Section 58, Negotiable Instruments Law).
Same; A bank that dealt directly with an accommodation party and knows
fully well that the latter signed the promissory note and deed of assignment only
because the said deed contains a provision that the principal debtor assigns and
conveys to the bank all payments to be received from the person who will pay the
project to be undertaken by the principal debtor as public works contractor, cannot
be considered a holder in due course.—Although as a general rule, a payee may be
considered a holder in due course we think that such a rule cannot apply with respect
to the respondent PNB. Not only was PNB an immediate party or in privy to the
promissory note, that is, it had dealt directly with the petitioners knowing fully well
that the latter only signed as accommodation makers but more important, it was the
Deed of Assignment executed by the Construction Company in favor of PNB which
principally moved the petitioners to sign the promissory note also in favor of PNB.
Petitioners were made to believe and on that belief entered into the agreement that
no other conditions would alter the terms thereof and yet, PNB altered the same. The
Deed of Assignment specifically provided that Jose F. Toribio, on behalf of the
Company, “have assigned,
9
VOL. 143, JULY 14, 1986 9
Prudencio vs. Court of Appeals
transferred and conveyed and by these presents, do assign, transfer and convey
unto the said Philippine National Bank, its successors and assigns all payments to be
of the Puerto Princesa Municipal Building in Palawan, involving the total amount of
P36,000.00” and that “This assignment shall be irrevocable and subject to the terms
and conditions of the promissory note and or any other kind of documents which the
Philippine National Bank have required or may require the assignor to execute to
evidence the above-mentioned obligation.”
Same; The approval by PNB of the direct release of payments owed by the
Bureau of Public Works to the project contractor which PNB should have retained
and applied to the contractor’s loan constitutes a waiver of said payments for which
it cannot charge the accommodation party which had no knowledge of nor
approved of such procedure.—This, notwithstanding, PNB approved the Bureau’s
release of three payments directly to the Company instead of paying the same to the
Bank. This approval was in violation of the Deed of Assignment and without any
notice to the petitioners who stood to lose their property once the promissory note
falls due without the same having been paid because the PNB, in effect, waived
payments of the first three releases. From the foregoing circumstances, PNB can not
be regarded as having acted in good faith which is also one of the requisites of a
holder in due course under Section 52 of the Negotiable Instruments Law. The PNB
knew that the promissory note which it took from the accommodation makers was
signed by the latter because of full reliance on the Deed of Assignment, which, PNB
had no intention to comply with strictly. Worse, the third payment to the Company in
the amount of P4,293.60 was approved by PNB although the promissory note was
almost a month overdue, an act which is clearly detrimental to the petitioners.
Same; Same; Mortgages; An accommodation party can set up the defense of
personal release from a real estate mortgage where creditor authorized release of
payments received from a third party pay or of the debtor for a project, after the
accommodated note has matured.—We, therefore, hold that respondent PNB is not a
holder in due course. Thus, the petitioners can validly set up their personal defense
of release from the real estate mortgage against PNB. The latter, in authorizing the
third payment to the Company after the promissory note became due, in effect,
extended the term of the payment of the note without the consent of the
accommodation makers
10
1 SUPREME COURT REPORTS ANNOTATED
0 GUTIERREZ, JR., J .:
Prudencio vs. Court of Appeals
who stand as sureties to the accommodated party and to all other parties who
are not holders in due course or who do not derive their right from the same,
including PNB.
Same; Same; Same; Where a Bank is the payee of a note and assignee of a
deed of assignment, its extension of the period of payment of the note to the debtor
would release the accommodation party who did not consent thereto, from its
obligation thereon, including the mortgage made by the accommodation party.—
True, if the Bank had not been the assignee, then the petitioners would be obliged to
pay the Bank as their creditor on the promissory note, irrespective of whether or not
the deed of assignment had been violated. However, the assignee and the creditor in
this case are one and the same—the Bank itself. When the Bank violated the deed of
assignment, it prejudiced itself because its very violation was the reason why it was
not paid on time in its capacity as creditor in the promissory note. It would be unfair
to make the petitioners now answer for the debt or to foreclose on their property.
Same; Same; Same; Same.—Neither can PNB justify its acts on the ground that
the Bureau of Public Works approved the deed of assignment with the condition that
the wages of laborers and materials needed in the construction work must take
precedence over the payment of the promissory note. In the first place, PNB did not
need the approval of the Bureau. But even if it did, it should have informed the
petitioners about the amendment of the deed of assignment. Secondly, the wages and
materials have already been paid, That issue is academic. What is in dispute is who
should bear the loss in this case. As between the petitioners and the Bank, the law
and the equities of the case favor the petitioners. And thirdly, the wages and
materials constitute a lien only on the constructed building but do not enjoy
preference over the loan unless there is a liquidation proceeding such as in
insolvency or settlement of estate. (See Philippine Savings Bank v. Lantin, 124 SCRA
476). There were remedies available at the time if the laborers and the creditors had
not been paid. The fact is, they have been paid. Hence, when the PNB accepted the
condition imposed by the Bureau without the knowledge or consent of the
petitioners, it amended the deed of assignment which, as stated earlier, was the
principal reason why the petitioners consented to become accommodation makers.
PETITION for review the decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
11
VOL. 143, JULY 14, 1986 11
Prudencio vs. Court of Appeals
Fernando R. Mangubat, Jr. for respondent PNB.
This is a petition for review seeking to annul and set aside the decision of the Court of
Appeals, now the Intermediate Appellate Court, affirming the order of the trial court
which dismissed the petitioners’ complaint for cancellation of their real estate
mortgage and held them jointly and severally liable with the principal debtors on a
promissory note which they signed as accommodation makers.
The factual background of this case is stated in the decision of the appellate court:
“Appellants are the registered owners of a parcel of land located in Sampaloc, Manila,
and covered by T.C.T. 35161 of the Register of Deeds of Manila, On October 7, 1954,
this property was mortgaged by the appellants to the Philippine National Bank,
hereinafter called PNB, to guarantee a loan of P1,000.00 extended to one Domingo
Prudeneio.
“Sometime in 1955, the Concepcion & Tamayo Construction Company,
hereinafter called Company, had a pending contract with the Bureau of Public
Works, hereinafter called the Bureau, for the construction of the municipal building
in Puerto Princesa, Palawan, in the amount of P36,800.00 and, as said Company
needed funds for said construction, Jose Toribio, appellants’ relative, and attorney-
in-fact of the Company, approached the appellants asking them to mortgage their
property to secure the loan of P10,000.00 which the Company was negotiating with
the PNB.
“After some persuasion appellants signed on December 23, 1955 the ‘Amendment
of Real Estate Mortgage’, mortgaging their said property to the PNB to guaranty the
loan of P10,000.00 extended to the Company. The terms and conditions of the
original mortgage for P1,000.00 were made integral part of the new mortgage for
P10,000.00 and both documents were registered with the Register of Deeds of
Manila. The promissory note covering the loan of P10,000.00 dated December 29,
1955, maturing on April 27, 1956, was signed by Jose Toribio, as attorney-in-fact of
the Company, and by the appellants.Appellants also signed the portion of the
promissory note indicating that they are requesting the PNB to issue the Check
covering the loan to the Company. On the same date
12
12 SUPREME COURT REPORTS ANNOTATED
Prudencio vs. Court of Appeals
(December 23, 1955) that the ‘Amendment of Real Estate’ was executed, Jose
Toribio, in the same capacity as attorney-in-fact of the Company, executed also the
‘Deed of Assignment’ assigning all payments to be made by the Bureau to the
Company on account of the contract for the construction of the Puerto Princesa
building in favor of the PNB.
“This assignment of credit to the contrary notwithstanding, the Bureau; with
approval, of the PNB, conditioned, however that they should be for labor and
materials, made three payments to the Company on account of the contract price
totalling P11,234.40. The Bureau’s last request for P5,000.00 on June 20, 1956,
however, was denied by the PNB for the reason that since the loan was already
overdue as of April 28, 1958, the remaining balance of the contract price should be
applied to the loan.
“The Company abandoned the work, as a consequence of which on June 30, 1956,
the Bureau rescinded the construction contract and assumed the work of completing
the building, On November 14, 1958, appellants wrote the PNB contending that since
the PNB authorized payments to the Company instead of on account of the loan
guaranteed by the mortgage there was a change in the conditions of the contract
without the knowledge of appellants, which entitled the latter to a cancellation of
their mortgage contract.
“Failing in their bid to have the real estate mortgage cancelled, appellants filed on
June 27, 1959 this action against the PNB, the Company, the latter’s attorney-in-fact
Jose Toribio, and the District Engineer of Puerto Princesa, Palawan, seeking the
cancellation of their real estate mortgage. The complaint was amended to exclude the
Company as defendant, it having been shown that its life as a partnership had
already expired and, in lieu thereof, Ramon Concepcion and Manuel M. Tamayo,
partners of the defunct Company, were impleaded in their private capacity as
defendants.”
After hearing, the trial court rendered judgment, denying the prayer in the complaint
that the petitioners be absolved from their obligation under the mortgage contract
and that the said mortgage be released or cancelled. The petitioners were ordered to
pay jointly and severally with their co-makers Ramon C. Concepcion and Manuel M.
Tamayo the sum of P1l,800.19 with interest at the rate of 6% per annum from the
date of the filing of the complaint on June 27, 1959 until fully paid and Pl,000.00
attorney’s fees.
13
VOL. 143, JULY 14, 1986 13
Prudencio vs. Court of Appeals
The decision also provided that if the judgment was not satisfied within 90 days from
its receipt, the mortgaged properties together with all the improvements thereon
belonging to the petitioners would be sold at public auction and applied to the
judgment debt.
The Court of Appeals affirmed the trial court’s decision in toto stating that, as
accommodation makers, the petitioners’ liability is that of solidary co-makers and
that since “the amounts released to the construction company were used therein and,
therefore, were spent for the successful accomplishment of the work constructed for,
the authorization made by the Philippine National Bank of partial payments to the
construction company which was also one of the solidary debtors cannot constitute a
valid defense on the part of the other solidary debtors. Moreover, those who rendered
services and furnished materials in the construction are preferred creditors and have
a lien on the price of the contract.” The appellate court further held that PNB had no
obligation whatsoever to notify the petitioners of its authorizing the three payments
in the total amount of P11,234.00 in favor of the Company because aside from the
fact that the petitioners were not parties to the deed of assignment, there was no
stipulation in said deed making it obligatory on the part of the PNB to notify the
petitioners everytime it authorizes payment to the Company. It ruled that the
petitioners cannot ask to be released from the real estate mortgage.
In this petition, the petitioners raise the following issues which they present in the
form of errors:
1. I.First Assignment of Error.THE HONORABLE COURT OF APPEALS
ERRED IN HOLDING THAT HEREIN PETITIONERS WERE SOLIDARY
CO-DEBTORS INSTEAD OF SURETIES:
2. II.Second Assignment of Error.THE HONORABLE COURT OF APPEALS
ERRED IN HOLDING THAT PETITIONERS WERE NOT RELEASED
FROM THEIR OBLIGATION TO THE RESPONDENT PNB, WHEN THE
PNB, WITHOUT THE KNOWLEDGE AND CONSENT OF PETITIONERS,
CHANGED THE TENOR AND CON-
14
14 SUPREME COURT REPORTS ANNOTATED
Prudencio vs. Court of Appeals
1. DITION OF THE ASSIGNMENT OF PAYMENTS MADE BY THE
PRINCIPAL DEBTOR; CONCEPCION & TAMAYO CONSTRUCTION
COMPANY; AND RELEASED TO SUCH PRINCIPAL DEBTOR PAYMENTS
FROM THE BUREAU OF PUBLIC WORKS WHICH WERE MORE THAN
ENOUGH TO WIPE OUT THE INDEBTEDNESS TO THE PNB.
The petitioners contend that as accommodation makers, the mature of their liability
is only that of mere sureties instead of solidary co-debtors such that “a material
alteration in the principal contract, effected by the creditor without the knowledge
and consent of the sureties, completely discharges the sureties from all liability on
the contract of suretyship.” They state that when respondent PNB did not apply the
initial and subsequent payments to the petitioners’ debt as provided for in the deed
of assignment, they were released from their obligation as sureties and, therefore, the
real estate mortgage executed by them should have been cancelled.
Section 29 of the Negotiable Instrument Law provides:
“Liability of accommodation party.—An accommodation party is one who has signed
the instrument as maker, drawer, acceptor, or indorser, without receiving value
therefor, and for the purpose of lending his name to some other person. Such a
person is liable on the instrument to a holder for value, notwithstanding such holder
at the time of taking the instrument knew him to be only an accommodation party.”
In the case of Philippine Bank of Commerce v. Aruego (102 SCRA 530, 539), we held
that “x x x in lending his name to the accommodated party, the accommodation party
is in effect a surety, x x x.” However, unlike in a contract of suretyship, the liability of
the accommodation party remains not only primary but also unconditional to a
holder for value such that even if the accommodated party receives an extension of
the period for payment without the consent of the accommodation party, the latter is
still liable for the whole obligation and such extension does not release him because
as far as a holder for value is concerned, he is a solidary co-debtor.
Expounding on the nature of the liability of an accommoda-
15
VOL, 143, JULY 14, 1966 15
Prudencio vs. Court of Appeals
tion party under the aforequoted section, we ruled in Ang Tiong v. Ting (22 SCRA
713, 716):
“3. That the appellant, again assuming him to be an accommodation indorser, may
obtain security from the maker to protect himself against the danger of insolvency of
the latter, cannot in any manner affect his liability to the appellee, as the said remedy
is a matter of concern exclusively between accommodation indorser and
accommodated party. So that the appellant stands only as a surety in relation to the
maker, granting this to be true for the sake of argument, is immaterial to the claim of
the appellee, and does not a whit diminish nor defeat the rights of the latter who is a
holder for value. The liability of the appellant remains primary and unconditional. To
sanction the appellant’s theory is to give unwarranted legal recognition to the patent
absurdity of a situation where an indorser, when sued on an instrument by a holder
in due course and for value, can escape liability on his indorsement by the convenient
expedient of interposing the defense that he is a mere accommodation indorser.”
There is, therefore, no question that as accommodation makers, petitioners would be
primarily and unconditionally liable on the promissory note to a holder for value,
regardless of whether they stand as sureties or solidary co-debtors since such
distinction would be entirely immaterial and inconsequential as far as a holder for
value is concerned. Consequently, the petitioners cannot claim to have been released
from their obligation simply because the time of payment of such obligation was
temporarily deferred by PNB without their knowledge and consent. There has to be
another basis for their claim of having been freed from their obligation. The question
which should be resolved in this instant petition, therefore, is whether or not PNB
can be considered a holder for value under Section 29 of the Negotiable Instruments
Law such that the petitioners must be necessarily barred from setting up the defense
of want of consideration or some other personal defenses which may be set up
against a party who is not a holder in due course.
A holder for value under Section 29 of the Negotiable Instruments Law is one who
must meet all the requirements of a holder in due course under Section 52 of the
same law except notice of want of consideration, (Agbayani, Commercial Laws
16
16 SUPREME COURT REPORTS ANNOTATED
Prudencio vs. Court of Appeals
of the Philippines, 1964, p. 208). If he does not qualify as a holder in due course then
he holds the instrument subject to the same defenses as if it were non-negotiable
(Section 58, Negotiable Instruments Law).
In the case at bar, can PNB, the payee of the promissory note be considered a
holder in due course?
Petitioners contend that the payee PNB is an immediate party and, therefore, is
not a holder in due course and stands on no better footing than a mere assignee.
In those cases where a payee was considered a holder in due course, such payee
either acquired the note from another holder or has not directly dealt with the maker
thereof. As was held in the case of Bank of Commerce and Savings v. Randell (186
Northwestern Reporter 71):
“We conclude, therefore, that a payee who receives a negotiable promissory note, in
good faith, for value, before maturity, and without any notice of any infirmity, from a
holder, not the maker, to whom it was negotiated as a completed instrument, is a
holder in due course within the purview of a Negotiable Instruments law, so as to
preclude the defense of fraud and failure of consideration between the maker and the
holder to whom the instrument, was delivered.”
Similarly, in the case of Stone v. Goldberg & Lewis (60 Southern Reporter 748) on
rehearing and quoting Daniel on Negotiable Instruments, it was held:
“It is a general principle of the law merchant that, as between the immediate parties
to a negotiable instrument—the parties between whom there is a privity—the
consideration may be inquired into; and as to them the only superiority of a bill or
note over other unsealed evidence of debt is that it prima facie imports a
consideration.”
Although as a general rule, a payee may be considered a holder in due course we
think that such a rule cannot apply with respect to the respondent PNB. Not only was
PNB an immediate party or in privy to the promissory note, that is, it had dealt
directly with the petitioners knowing fully well that the latter only signed as
accommodation makers but more im-
17
 VOL. 143, JULY 14, 1986 17
Prudencio vs. Court of Appeals
portant, it was the Deed of Assignment executed by the Construction Company in
favor of PNB which principally moved the petitioners to sign the promissory note
also in favor of PNB. Petitioners were made to believe and on that belief entered into
the agreement that no other conditions would alter the terms thereof and yet, PNB
altered the same. The Deed of Assignment specifically provided that Jose F. Toribio,
on behalf of the Company, “have assigned, transferred and conveyed and by these
presents, do assign, transfer and convey unto the said Philippine National Bank, its
successors and assigns all payments to be received from the Bureau of Public Works
on account of contract for the construction of the Puerto Princesa Municipal Building
in Palawan, involving the total amount of P36,000.00” and that “This assignment
shall be irrevocable and subject to the terms and conditions of the promissory note
and or any other kind of documents which the Philippine National Bank have
required or may require the assignor to execute to evidence the above-mentioned
obligation.”
Under the terms of the above Deed, it is clear that there are no further conditions
which could possibly alter the agreement without the consent of the petitioners such
as the grant of greater priority to obligations other than the payment of the loan due
to the PNB and part of which loan was guaranteed by the petitioners in the amount of
P10,000.00.
This, notwithstanding, PNB approved the Bureau’s release of three payments
directly to the Company instead of paying the same to the Bank. This approval was in
violation of the Deed of Assignment and without any notice to the petitioners who
stood to lose their property once the promissory note falls due without the same
having been paid because the PNB, in effect, waived payments of the first three
releases. From the foregoing circumstances, PNB can not be regarded as having acted
in good faith which is also one of the requisites of a holder in due course under
Section 52 of the Negotiable Instruments Law. The PNB knew that the promissory
note which it took from the accommodation makers was signed by the latter because
of full reliance on the Deed of Assignment, which, PNB had no intention to comply
with strictly. Worse,
18
18 SUPREME COURT REPORTS ANNOTATED
Prudencio vs. Court of Appeals
the third payment to the Company in the amount of P4,293.60 was approved by PNB
although the promissory note was almost a month overdue, an act which is clearly
detrimental to the petitioners.
We, therefore, hold that respondent PNB is not a holder in due course. Thus, the
petitioners can validly set up their personal defense of release from the real estate
mortgage against PNB. The latter, in authorizing the third payment to the Company
after the promissory note became due, in effect, extended the term of the payment of
the note without the consent of the accommodation makers who stand as sureties to
the accommodated party and to all other parties who are not holders in due course or
who do not derive their right from the same, including PNB.
It may be argued that the Prudencios could have mortgaged their property even
without the promissory note. The records show, however, that they would not have
mortgaged the lot were it not for the sake of the Company whose attorney-in-fact was
their relative. The spouses did not need the money for themselves.
The attorney-in-fact tried twice to convince the Prudencios to mortgage their
property in order to secure a loan in favor of the Company but the Prudencios
refused. It was only when th e deed of assignment was shown to the spouses that they
consented to the mortgage and signed the promissory note in the Bank’s favor.
Article 2085 of the Civil Code enumerates the requisites of a valid mortgage
contract. Petitioners do not dispute the validity of the mortgage. They only want to
have it cancelled because the Bank violated the deed of assignment and extended the
period of time of payment of the promissory note without the petitioners’ consent
and to the latter’s detriment.
The mortgage cannot be separated from the promissory note for it is the latter
which is the basis of determining whether the mortgage should be foreclosed or
cancelled.Without the promissory note which determines the amount of
indebtedness there would have been no basis for the mortgage.
True, if the Bank had not been the assignee, then the peti-
19
VOL. 143, JULY 14, 1986 19
Prudencio vs. Court of Appeals
tioners would be obliged to pay the Bank as their creditor on the promissory note,
irrespective of whether or not the deed of assignment had been violated. However,
the assignee and the creditor in this case are one and the same—the Bank itself.
When the Bank violated the deed of assignment, it prejudiced itself because its very
violation was the reason why it was not paid on time in its capacity as creditor in the
promissory note. It would be unfair to make the petitioners now answer for the debt
or to foreclose on their property.
Neither can PNB justify its acts on the ground that the Bureau of Public Works
approved the deed of assignment with the condition that the wages of laborers and
materials needed in the construction work must take precedence over the payment of
the promissory note. In the first place, PNB did not need the approval of the Bureau.
But even if it did, it should have informed the petitioners about the amendment of
the deed of assignment. Secondly, the wages and materials have already been paid.
That issue is academic. What is in dispute is who should bear the loss in this case. As
between the petitioners and the Bank, the law and the equities of the case favor the
petitioners. And thirdly, the wages and materials constitute a lien only on the
constructed building but do not enjoy preference over the loan unless there is a
liquidation proceeding such as in insolvency or settlement of estate. (See Philippine
Savings Bank v. Lantin, 124 SCRA 476) There were remedies available at the time if
the laborers and the creditors had not been paid. The fact is, they have been paid.
Hence, when the PNB accepted the condition imposed by the Bureau without the
knowledge or consent of the petitioners, it amended the deed of assignment which, as
stated earlier, was the principal reason why the petitioners consented to become
accommodation makers.
WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals
affirming the decision of the trial court is hereby REVERSED and SET ASIDE and a
new one entered absolving the petitioners from liability on the promissory note and
under the mortgage contract. The Philippine National Bank is ordered to release the
real estate mortgage constituted on the property of the petitioners and to pay the
amount of
20
20 SUPREME COURT REPORTS ANNOTATED
Metropolitan Waterworks and Sewerage System vs. Court of
Appeals
THREE THOUSAND PESOS (P3,000.00) as attorney’s fees.
SO ORDERED.
Feria (Chairman), Fernan, Alampay and Paras, JJ.,concur.
Petition granted. Decision reversed and set aside.
Notes.—The payee of a promissory note executed jointly and severally has the
right of recourse against any one of the signatories. (PNB vs. Concepcion Mining
Co., 5 SCRA 745.)
It is not a valid defense that the accommodation party did not receive any
valuable consideration when he executed the instrument. An accommodation party is
liable on the instrument to a holder for value if the latter knew him to be only an
accommodation party. (Ang Tiong vs. Ting, 22 SCRA 713.)

——o0o——
 G.R. No. 154469. December 6, 2006.*
METROPOLITAN BANK AND TRUST COMPANY, petitioner, vs. RENATO D.
CABILZO, respondent.
Equitable Estoppel; The doctrine of equitable estoppel states that when one of
the two innocent persons, each guiltless of any intentional or moral wrong, must
suffer a loss, it must be borne by the one whose erroneous conduct, either by
omission or commission, was the cause of injury.—Metrobank cannot lightly impute
that Cabilzo was negligent and is therefore prevented from asserting his rights under
the doctrine of equitable estoppel when the facts on record are bare of evidence to
support such conclusion. The doctrine of equitable estoppel states that when one of
the two innocent persons, each guiltless of any intentional or moral wrong, must
suffer a loss, it must be borne by the one whose erroneous conduct, either by
omission or commission, was the cause of injury. Metrobank’s reliance on
this dictum, is misplaced. For one, Metrobank’s representation that it is an innocent
party is flimsy and evidently, misleading. At the same time, Metrobank cannot
asseverate that Cabilzo was negligent and this negligence was the proximate cause of
the loss in the absence of even a scintilla proof to buttress such claim. Negligence is
not presumed but must be proven by the one who alleges it.
Banks and Banking; The point is that as a business affected with public
interest and because of the nature of its functions, the bank is under obligation to
treat the accounts of its depositors with meticulous care, always having in mind the
fiduciary nature of their relationship.—The point is that as a business affected with
public interest and because of the nature of its functions, the bank is under obligation
to treat the accounts of its depositors with meticulous care, always having in mind
the fiduciary nature of their relationship. The appropriate degree of diligence
required of a bank must be a high degree of diligence, if not the utmost diligence.
Negotiable Instruments; Checks; Payment made under materially altered
instrument is not payment done in accordance with the instruction of the drawer.—
The bank on which the check is drawn,
_______________
*FIRST DIVISION.
260
2 SUPREME COURT REPORTS ANNOTATED
60
Metropolitan Bank and Trust Company vs. Cabilzo
known as the drawee bank, is under strict liability to pay to the order of the
payee in accordance with the drawer’s instructions as reflected on the face and by the
terms of the check. Payment made under materially altered instrument is not
payment done in accordance with the instruction of the drawer. When the drawee
bank pays a materially altered check, it violates the terms of the check, as well as its
duty to charge its client’s account only for bona fide disbursements he had made.
Since the drawee bank, in the instant case, did not pay according to the original tenor
of the instrument, as directed by the drawer, then it has no right to claim
reimbursement from the drawer, much less, the right to deduct the erroneous
payment it made from the drawer’s account which it was expected to treat with
utmost fidelity.
Same; It owes the highest degree fidelity to its client and should not therefore
lightly rely on the judgment of other banks on occasions where its clients money
were involve, no matter how small or substantial the amount at stake.—The
reliance made by Metrobank on Westmont Bank’s indorsement is clearly
inconsistent, if not totally offensive to the dictum that being impressed with public
interest, banks should exercise the highest degree of diligence, if not utmost diligence
in dealing with the accounts of its own clients. It owes the highest degree fidelity to
its clients and should not therefore lightly rely on the judgment of other banks on
occasions where its clients money were involve, no matter how small or substantial
the amount at stake.
PETITION for review on certiorari of the decision and resolution of the Court of
Appeals.
The facts are stated in the opinion of the Court.
Sedigo, Sison & Associates for petitioner.
Jose A. Suing for respondent.
CHICO-NAZARIO, J.:
Before this Court is a Petition for Review on Certiorari, filed by petitioner
Metropolitan Bank and Trust Company
261
VOL. 510, DECEMBER 6, 2006 261
Metropolitan Bank and Trust Company vs. Cabilzo
(Metrobank) seeking to reverse and set aside the Decision1of the Court of Appeals
dated 8 March 2002 and its Resolution dated 26 July 2002 affirming the Decision of
the Regional Trial Court (RTC) of Manila, Branch 13 dated 4 September 1998. The
dispositive portion of the Court of Appeals Decision reads:
“WHEREFORE, the assailed decision dated September 4, 1998 is AFFIRMED with
modifications (sic) that the awards for exemplary damages and attorney’s fees are
hereby deleted.”
Petitioner Metrobank is a banking institution duly organized and existing as such
under Philippine laws.2
Respondent Renato D. Cabilzo (Cabilzo) was one of Metrobank’s clients who
maintained a current account with Metrobank Pasong Tamo Branch.3
 On 12 November 1994, Cabilzo issued a Metrobank Check No. 985988, payable to
“CASH” and postdated on 24 November 1994 in the amount of One Thousand
Pesos (P1,000.00). The check was drawn against Cabilzo’s Account with
Metrobank Pasong Tamo Branch under Current Account No. 618044873-3 and was
paid by Cabilzo to a certain Mr. Marquez, as his sales commission.4
Subsequently, the check was presented to Westmont Bank for payment.
Westmont Bank, in turn, indorsed the check to Metrobank for appropriate clearing.
After the entries thereon were examined, including the availability of funds and the
authenticity of the signature of the drawer, Metrobank cleared the check for
encashment in accordance with the Philippine Clearing House Corporation (PCHC)
Rules.
_______________
1 Penned by Associate Justice Delilah Vidallon-Magtolis with Associate Justices
Candido V. Rivera and Juan Q. Enriquez, Jr., concurring, CA-G.R. CV No.
66384. Rollo, pp. 18-25.
2 Records, p. 1.
3 Id.
4 Id., at p. 2.
262
262 SUPREME COURT REPORTS ANNOTATED
Metropolitan Bank and Trust Company vs. Cabilzo
On 16 November 1994, Cabilzo’s representative was at Metrobank Pasong Tamo
Branch to make some transaction when he was asked by a bank personnel if Cabilzo
had issued a check in the amount of P91,000.00 to which the former replied in the
negative. On the afternoon of the same date, Cabilzo himself called Metrobank to
reiterate that he did not issue a check in the amount of P91,000.00 and requested
that the questioned check be returned to him for verification, to which Metrobank
complied.5
Upon receipt of the check, Cabilzo discovered that Metrobank Check No. 985988
which he issued on 12 November 1994 in the amount of P1,000.00 was altered
to P91,000.00 and the date 24 November 1994 was changed to 14 November
1994.6
Hence, Cabilzo demanded that Metrobank re-credit the amount of P91,000.00 to
his account. Metrobank, however, refused reasoning that it has to refer the matter
first to its Legal Division for appropriate action. Repeated verbal demands followed
but Metrobank still failed to re-credit the amount of P91,000.00 to Cabilzo’s
account.7
On 30 June 1995, Cabilzo, thru counsel, finally sent a letter-demand8 to
Metrobank for the payment of P90,000.00, after deducting the original value of the
check in the amount of P1,000.00. Such written demand notwithstanding,
Metrobank still failed or refused to comply with its obligation.
Consequently, Cabilzo instituted a civil action for damages against Metrobank
before the RTC of Manila, Branch 13. In his Complaint docketed as Civil Case No. 95-
75651, Renato D. Cabilzo v. Metropolitan Bank and Trust Company, Cabilzo prayed
that in addition to his claim for reimbursement, actual
_______________
5 Id.
6 Id., at pp. 2-3.
7 Id., at p. 3.
8 Id., at p. 11.
263
VOL. 510, DECEMBER 6, 2006 263
Metropolitan Bank and Trust Company vs. Cabilzo
and moral damages plus costs of the suit be awarded in his favor.9
For its part, Metrobank countered that upon the receipt of the said check through
the PCHC on 14 November 1994, it examined the genuineness and the authenticity of
the drawer’s signature appearing thereon and the technical entries on the check
including the amount in figures and in words to determine if there were alterations,
erasures, superimpositions or intercalations thereon, but none was noted. After
verifying the authenticity and propriety of the aforesaid entries, including the
indorsement of the collecting bank located at the dorsal side of the check which
stated that, “all prior indorsements and lack of indorsement guaranteed,” Metrobank
cleared the check.10
Anent thereto, Metrobank claimed that as a collecting bank and the last indorser,
Westmont Bank should be held liable for the value of the check. Westmont Bank
indorsed the check as the an unqualified indorser, by virtue of which it assumed the
liability of a general indorser, and thus, among others, warranted that the instrument
is genuine and in all respect what it purports to be.
In addition, Metrobank, in turn, claimed that Cabilzo was partly responsible in
leaving spaces on the check, which, made the fraudulent insertion of the amount and
figures thereon, possible. On account of his negligence in the preparation and
issuance of the check, which according to Metrobank, was the proximate cause of the
loss, Cabilzo cannot thereafter claim indemnity by virtue of the doctrine of equitable
estoppel.
Thus, Metrobank demanded from Cabilzo, for payment in the amount of
P100,000.00 which represents the cost of litiga-
_______________
 9 Id., at pp. 1-6.
10 Id., at pp. 19-20.
264
264 SUPREME COURT REPORTS ANNOTATED
Metropolitan Bank and Trust Company vs. Cabilzo
tion and attorney’s fees, for allegedly bringing a frivolous and baseless suit.11
On 19 April 1996, Metrobank filed a Third-Party Complaint12 against Westmont
Bank on account of its unqualified indorsement stamped at the dorsal side of the
check which the former relied upon in clearing what turned out to be a materially
altered check.
Subsequently, a Motion to Dismiss13 the Third-Party Complaint was then filed by
Westmont bank because another case involving the same cause of action was pending
before a different court. The said case arose from an action for reimbursement filed
by Metrobank before the Arbitration Committee of the PCHC against Westmont
Bank, and now the subject of a Petition for Review before the RTC of Manila, Branch
19.
In an Order14 dated 4 February 1997, the trial court granted the Motion to Dismiss
the Third-Party Complaint on the ground of litis pendentia.
On 4 September 1998, the RTC rendered a Decision15 in favor of Cabilzo and
thereby ordered Metrobank to pay the sum of P90,000.00, the amount of the check.
In stressing the fiduciary nature of the relationship between the bank and its clients
and the negligence of the drawee bank in failing to detect an apparent alteration on
the check, the trial court ordered for the payment of exemplary damages, attorney’s
fees and cost of litigation. The dispositive portion of the Decision reads:
“WHEREFORE, judgment is rendered ordering defendant Metropolitan Bank and
Trust Company to pay plaintiff Renato Cabilzo the sum of P90,000 with legal interest
of 6 percent per annum from
_______________
11 Id., at pp. 18-22.
12 Id., at pp. 38-43.
13 Id., at pp. 70-76.
14 Id., at pp. 94-95.
15 Id., at pp. 193-196.
265
VOL. 510, DECEMBER 6, 2006 265
Metropolitan Bank and Trust Company vs. Cabilzo
November 16, 1994 until payment is made plus P20,000 attorney’s fees, exemplary
damages of P50,000, and costs of the suit.”16
Aggrieved, Metrobank appealed the adverse decision to the Court of Appeals
reiterating its previous argument that as the last indorser, Westmont Bank shall bear
the loss occasioned by the fraudulent alteration of the check. Elaborating, Metrobank
maintained that by reason of its unqualified indorsement, Westmont Bank warranted
that the check in question is genuine, valid and subsisting and that upon
presentment the check shall be accepted according to its tenor.
Even more, Metrobank argued that in clearing the check, it was not remiss in the
performance of its duty as the drawee bank, but rather, it exercised the highest
degree of diligence in accordance with the generally accepted banking practice. It
further insisted that the entries in the check were regular and authentic and
alteration could not be determined even upon close examination.
In a Decision17 dated 8 March 2002, the Court of Appeals affirmed with
modification the Decision of the court a quo,similarly finding Metrobank liable for
the amount of the check, without prejudice, however, to the outcome of the case
between Metrobank and Westmont Bank which was pending before another tribunal.
The decretal portion of the Decision reads:
“WHEREFORE, the assailed decision dated September 4, 1998 is AFFIRMED with
the modifications (sic) that the awards for exemplary damages and attorney’s fees are
hereby deleted.”18
Similarly ill-fated was Metrobank’s Motion for Reconsideration which was also
denied by the appellate court in its Resolution19 issued on 26 July 2002, for lack of
merit.
_______________
16 Id., at p. 196.
17 CA Rollo, pp. 45-52.
18 Id., at p. 52.
19 Id., at p. 95.
266
266 SUPREME COURT REPORTS ANNOTATED
Metropolitan Bank and Trust Company vs. Cabilzo
Metrobank now poses before this Court this sole issue:
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN HOLDING
METROBANK, AS DRAWEE BANK, LIABLE FOR THE ALTERATIONS ON THE
SUBJECT CHECK BEARING THE AUTHENTIC SIGNATURE OF THE DRAWER
THEREOF.
We resolve to deny the petition.
An alteration is said to be material if it changes the effect of the instrument. It
means that an unauthorized change in an instrument that purports to modify in any
respect the obligation of a party or an unauthorized addition of words or numbers or
other change to an incomplete instrument relating to the obligation of a party.20 In
other words, a material alteration is one which changes the items which are required
to be stated under Section 1 of the Negotiable Instruments Law.
 Section 1 of the Negotiable Instruments Law provides:
“Section 1. Form of negotiable instruments.—An instrument to be negotiable must
conform to the following requirements:
1. (a)It must be in writing and signed by the maker or drawer;
2. (b)Must contain an unconditional promise or order to pay a sum certain in
money;
3. (c)Must be payable on demand or at a fixed determinable future time;
4. (d)Must be payable to order or to bearer; and
5. (e)Where the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty.”
Also pertinent is the following provision in the Negotiable Instrument Law which
states:
_______________
20 Philippine National Bank v. Court of Appeals, 326 Phil. 504, 511; 256 SCRA
491, 497 (1996).
267
VOL. 510, DECEMBER 6, 2006 267
Metropolitan Bank and Trust Company vs. Cabilzo
“Section 125. What constitutes material alteration.—Any alteration which changes:
1. (a)The date;
2. (b)The sum payable, either for principal or interest;
3. (c)The time or place of payment;
4. (d)The number or the relation of the parties;
5. (e)The medium or currency in which payment is to be made;
Or which adds a place of payment where no place of payment is specified, or any
other change or addition which alters the effect of the instrument in any respect is a
material alteration.”
In the case at bar, the check was altered so that the amount was increased
from P1,000.00 to P91,000.00 and the date was changed from 24 November
1994 to 14 November 1994. Apparently, since the entries altered were among
those enumerated under Section 1 and 125, namely, the sum of money payable and
the date of the check, the instant controversy therefore squarely falls within the
purview of material alteration.
Now, having laid the premise that the present petition is a case of material
alteration, it is now necessary for us to determine the effect of a materially altered
instrument, as well as the rights and obligations of the parties thereunder. The
following provision of the Negotiable Instrument Law will shed us some light in
threshing out this issue:
“Section 124. Alteration of instrument; effect of.—Where a negotiable instrument is
materially altered without the assent of all parties liable thereon, it is avoided,
except as against a party who has himself made, authorized, and assented to
the alteration and subsequent indorsers.
But when the instrument has been materially altered and is in the hands of a
holder in due course not a party to the alteration, he may enforce the payment
thereof according to its original tenor.” (Emphasis ours.)
268
268 SUPREME COURT REPORTS ANNOTATED
Metropolitan Bank and Trust Company vs. Cabilzo
Indubitably, Cabilzo was not the one who made nor authorized the alteration.
Neither did he assent to the alteration by his express or implied acts. There is no
showing that he failed to exercise such reasonable degree of diligence required of a
prudent man which could have otherwise prevented the loss. As correctly ruled by
the appellate court, Cabilzo was never remiss in the preparation and issuance of the
check, and there were no indicia of evidence that would prove otherwise. Indeed,
Cabilzo placed asterisks before and after the amount in words and figures in order to
forewarn the subsequent holders that nothing follows before and after the amount
indicated other than the one specified between the asterisks.
The degree of diligence required of a reasonable man in the exercise of his tasks
and the performance of his duties has been faithfully complied with by Cabilzo. In
fact, he was wary enough that he filled with asterisks the spaces between and after
the amounts, not only those stated in words, but also those in numerical figures, in
order to prevent any fraudulent insertion, but unfortunately, the check was still
successfully altered, indorsed by the collecting bank, and cleared by the drawee bank,
and encashed by the perpetrator of the fraud, to the damage and prejudice of Cabilzo.
Verily, Metrobank cannot lightly impute that Cabilzo was negligent and is
therefore prevented from asserting his rights under the doctrine of equitable estoppel
when the facts on record are bare of evidence to support such conclusion. The
doctrine of equitable estoppel states that when one of the two innocent persons, each
guiltless of any intentional or moral wrong, must suffer a loss, it must be borne by
the one whose erroneous conduct, either by omission or commission, was the cause
of injury.21Metrobank’s reliance on this dictum, is misplaced. For one, Metrobank’s
representation that it is an innocent party is flimsy and evidently, misleading. At the
same
_______________
Metropolitan Waterworks and Sewerage System v. Court of Appeals, G.R. No.
21
L-62943, 14 July 1986, 143 SCRA 20.
 269
VOL. 510, DECEMBER 6, 2006 269
Metropolitan Bank and Trust Company vs. Cabilzo
time, Metrobank cannot asseverate that Cabilzo was negligent and this negligence
was the proximate cause22 of the loss in the absence of even a scintilla proof to
buttress such claim. Negligence is not presumed but must be proven by the one who
alleges it.23
Undoubtedly, Cabilzo was an innocent party in this instant controversy. He was
just an ordinary businessman who, in order to facilitate his business transactions,
entrusted his money with a bank, not knowing that the latter would yield a
substantial amount of his deposit to fraud, for which Cabilzo can never be faulted.
We never fail to stress the remarkable significance of a banking institution to
commercial transactions, in particular, and to the country’s economy in general. The
banking system is an indispensable institution in the modern world and plays a vital
role in the economic life of every civilized nation. Whether as mere passive entities
for the safekeeping and saving of money or as active instruments of business and
commerce, banks have become an ubiquitous presence among the people, who have
come to regard them with respect and even gratitude and, most of all, confidence.24
Thus, even the humble wage-earner does not hesitate to entrust his life’s savings
to the bank of his choice, knowing that they will be safe in its custody and will even
earn some interest for him. The ordinary person, with equal faith, usually maintains
a modest checking account for security and convenience in the settling of his monthly
bills and the pay-
_______________
22 Proximate cause is that cause, which, in natural and continuous sequence,
unbroken by any efficient and intervening cause, produces the injury, and without
which the result would not have occurred. Vda de Bataclan v. Medina, 102 Phil. 181,
186 (1957).
23 Samsung Construction Company Philippines, Inc. v. Far East Bank and Trust
Company, G.R. No. 129015, 13 August 2004, 436 SCRA 402, 417.
24 Simex v. Court of Appeals, G.R. No. 88013, 19 March 1990, 183 SCRA 360, 361,
366-367.
270
270 SUPREME COURT REPORTS ANNOTATED
Metropolitan Bank and Trust Company vs. Cabilzo
ment of ordinary expenses. As for a businessman like the respondent, the bank is a
trusted and active associate that can help in the running of his affairs, not only in the
form of loans when needed but more often in the conduct of their dayto-day
transactions like the issuance or encashment of checks.25
In every case, the depositor expects the bank to treat his account with the utmost
fidelity, whether such account consists only of a few hundred pesos or of millions.
The bank must record every single transaction accurately, down to the last centavo,
and as promptly as possible. This has to be done if the account is to reflect at any
given time the amount of money the depositor can dispose of as he sees fit, confident
that the bank will deliver it as and to whomever he directs.26
The point is that as a business affected with public interest and because of the
nature of its functions, the bank is under obligation to treat the accounts of its
depositors with meticulous care, always having in mind the fiduciary nature of their
relationship. The appropriate degree of diligence required of a bank must be a high
degree of diligence, if not the utmost diligence.27
In the present case, it is obvious that Metrobank was remiss in that duty and
violated that relationship. As observed by the Court of Appeals, there are material
alterations on the check that are visible to the naked eye. Thus:
“x x x The number “1” in the date is clearly imposed on a white figure in the shape of
the number “2.” The appellant’s employees who examined the said check should have
likewise been put on guard as to why at the end of the amount in words, i.e., after the
word “ONLY”, there are 4 asterisks, while at the beginning of the line or before said
phrase, there is none, even as 4 asterisks have been placed before and after the word
“CASH” in the space for payee. In addition, the 4 asterisks before the words “ONE
THOUSAND PE
_______________
25 Id.
26 Id.
27 Id.
271
VOL. 510, DECEMBER 6, 2006 271
Metropolitan Bank and Trust Company vs. Cabilzo
SOS ONLY” have noticeably been erased with typing correction paper, leaving white
marks, over which the word “NINETY” was superimposed. The same can be said of
the numeral “9” in the amount “91,000,” which is superimposed over a whitish mark,
obviously an erasure, in lieu of the asterisk which was deleted to insert the said
figure. The appellant’s employees should have again noticed why only 2 asterisks
were placed before the amount in figures, while 3 asterisks were placed after such
amount. The word “NINETY” is also typed differently and with a lighter ink, when
compared with the words “ONE THOUSAND PESOS ONLY.” The letters of the word
“NINETY” are likewise a little bigger when compared with the letters of the words
“ONE THOUSAND PESOS ONLY.”28
Surprisingly, however, Metrobank failed to detect the above alterations which could
not escape the attention of even an ordinary person. This negligence was exacerbated
by the fact that, as found by the trial court, the check in question was examined by
the cash custodian whose functions do not include the examinations of checks
indorsed for payment against drawer’s accounts.29Obviously, the employee allowed
by Metrobank to examine the check was not versed and competent to handle such
duty. These factual findings of the trial court are conclusive upon this court especially
when such findings were affirmed the appellate court.30
Apropos thereto, we need to reiterate that by the very nature of their work the
degree of responsibility, care and trustworthiness expected of their employees and
officials is far better than those of ordinary clerks and employees. Banks are expected
to exercise the highest degree of diligence in the selection and supervision of their
employees.31
_______________
28 Rollo, p. 22.
29 Records, p. 195.
30 Samahan ng Magsasaka sa San Josep v. Valisno, G.R. No. 158314, 3 June
2004, 430 SCRA 629, 635.
31 Philippine Commercial and Industrial Bank v. Court of Appeals, G.R. No.
121413, 29 January 2001, 350 SCRA 446, 472.
272
272 SUPREME COURT REPORTS ANNOTATED
Metropolitan Bank and Trust Company vs. Cabilzo
In addition, the bank on which the check is drawn, known as the drawee bank, is
under strict liability to pay to the order of the payee in accordance with the drawer’s
instructions as reflected on the face and by the terms of the check. Payment made
under materially altered instrument is not payment done in accordance with the
instruction of the drawer.
When the drawee bank pays a materially altered check, it violates the terms of the
check, as well as its duty to charge its client’s account only for bona
fide disbursements he had made. Since the drawee bank, in the instant case, did not
pay according to the original tenor of the instrument, as directed by the drawer, then
it has no right to claim reimbursement from the drawer, much less, the right to
deduct the erroneous payment it made from the drawer’s account which it was
expected to treat with utmost fidelity.
Metrobank vigorously asserts that the entries in the check were carefully
examined: The date of the instrument, the amount in words and figures, as well as
the drawer’s signature, which after verification, were found to be proper and
authentic and was thus cleared. We are not persuaded. Metrobank’s negligence
consisted in the omission of that degree of diligence required of a bank owing to the
fiduciary nature of its relationship with its client. Article 1173 of the Civil Code
provides:
“The fault or negligence of the obligor consists in the omission of that diligence which
is required by the nature of the obligation and corresponds with the circumstances of
the persons, of the time and of the place. x x x.”
Beyond question, Metrobank failed to comply with the degree required by the nature
of its business as provided by law and jurisprudence. If indeed it was not remiss in its
obligation, then it would be inconceivable for it not to detect an evident alteration
considering its vast knowledge and technical expertise in the intricacies of the
banking business. This Court is not completely unaware of banks’ practices of em-
273
VOL. 510, DECEMBER 6, 2006 273
Metropolitan Bank and Trust Company vs. Cabilzo
ploying devices and techniques in order to detect forgeries, insertions, intercalations,
superimpositions and alterations in checks and other negotiable instruments so as to
safeguard their authenticity and negotiability. Metrobank cannot now feign
ignorance nor claim diligence; neither can it point its finger at the collecting bank, in
order to evade liability.
Metrobank argues that Westmont Bank, as the collecting bank and the last
indorser, shall bear the loss. Without ruling on the matter between the drawee bank
and the collecting bank, which is already under the jurisdiction of another tribunal,
we find that Metrobank cannot rely on such indorsement, in clearing the questioned
check. The corollary liability of such indorsement, if any, is separate and independent
from the liability of Metrobank to Cabilzo.
The reliance made by Metrobank on Westmont Bank’s indorsement is clearly
inconsistent, if not totally offensive to the dictum that being impressed with public
interest, banks should exercise the highest degree of diligence, if not utmost diligence
in dealing with the accounts of its own clients. It owes the highest degree fidelity to
its clients and should not therefore lightly rely on the judgment of other banks on
occasions where its clients money were involve, no matter how small or substantial
the amount at stake.
Metrobank’s contention that it relied on the strength of collecting bank’s
indorsement may be merely a lame excuse to evade liability, or may be indeed an
actual banking practice. In either case, such act constitutes a deplorable banking
practice and could not be allowed by this Court bearing in mind that the confidence
of public in general is of paramount importance in banking business.
What is even more deplorable is that, having been informed of the alteration,
Metrobank did not immediately recredit the amount that was erroneously debited
from Cabilzo’s account but permitted a full blown litigation to push through, to the
prejudice of its client. Anyway, Metrobank is not left with no recourse for it can still
run after the one who made
274
274 SUPREME COURT REPORTS ANNOTATED
Metropolitan Bank and Trust Company vs. Cabilzo
the alteration or with the collecting bank, which it had already done. It bears
repeating that the records are bare of evidence to prove that Cabilzo was negligent.
We find no justifiable reason therefore why Metrobank did not immediately
reimburse his account. Such ineptness comes within the concept of wanton manner
contemplated under the Civil Code which warrants the imposition of exemplary
damages, “by way of example or correction for the public good,” in the words of the
law. It is expected that this ruling will serve as a stern warning in order to deter the
repetition of similar acts of negligence, lest the confidence of the public in the
banking system be further eroded.32
WHEREFORE, premises considered, the instant Petition is DENIED. The
Decision dated 8 March 2002 and the Resolution dated 26 July 2002 of the Court of
Appeals are AFFIRMED with modification that exemplary damages in the amount of
P50,000.00 be awarded. Costs against the petitioner.
SO ORDERED.
Panganiban (C.J., Chairperson), Ynares-Santiago, Austria-
Martinez and Callejo, Sr., JJ., concur.
Petition denied, judgment and resolution affirmed with modification.
Notes.—When a bank pays a forged check it must be considered as paying out of
its funds and cannot charge the amount so paid to the account of the depositor.
(Traders Royal Bank vs. Radio Philippines Network, Inc., 390 SCRA 608 [2002])
As a business affected with public interest and because of the nature of its
functions, a bank is under obligation to treat the accounts of its depositors with
meticulous care, always

_______________
32Id.
275
VOL. 510, DECEMBER 6, 2006 275
Villanueva vs. Philippine National Bank
having in mind the fiduciary nature of their relationship. (Philippine Commercial
International Bank vs. Court of Appeals, 350 SCRA 446 [2001])

——o0o——
 [No. 19461. March 28, 1923]
CHARLES A. FOSSUM, plaintiff and appellant, vs.FERNANDEZ HERMANOS, a
general partnership, and JOSE F. FERNANDEZ Y CASTRO and RAMON
FERNANDEZ Y CASTRO, members of the said partnership of FERNANDEZ
HERMANOS, defendants and appellees.
1. 1.BlLLS AND NOTES; FAILURE OF CONSIDERATION J TlTLE DERIVED
FROM HOLDER IN DUE COURSE.—A person who is not himself a holder
in due course of a negotiable instrument may yet recover against the person
primarily liable thereon, even though the consideration for the instrument
has failed, where it appears that such holder derives his title through a
holder in due course. But in order that the holder may recover on the
instrument under such circumstances, it is incumbent upon him to show
that the person through whom he derives his indefeasible title was a holder
in due course; and this must be proved as an independent matter of fact.
1. 2.ID:; PRESUMPTION IN FAVOR OF HOLDER HAVING PRESENT
POSSESSION.—The presumption expressed in section 59 of the Negotiable
Instruments Law, to the effect that every holder is deemed prima facie to be
a holder in due course, arises only in favor of a person who is a holder in the
sense defined in section 191 of the same Law, that is, a payee or indorsee
who is in possession of the draft, or the bearer thereof. There is no
presumption that a person through whose hands an instrument has passed
was a holder in due course.
1. 3.ID.; FAILURE OF CONSIDERATION ; HOLDER IN DUE
COURSE; RETRANSFER TO ORIGINAL PAYEE OR HlS AGENT.—If the
Original payee of a note unenforceable for lack of consideration repurchases
the instrument after transferring it to a holder in due course, the paper again
becomes subject in the payee's hands to the same defenses to which it would
have been subject if the paper had never passed through the hands of a
holder in due course. The same is true where the instrument is retransferred
to an agent of the payee.
APPEAL from a judgment of the Court of First Instance of Manila. Imperial, J.
The facts are stated in the opinion of the court.
Chas. E. Tenney for appellant.
Ernesto Zaragoza and Jose Varela Calderon for appellees.
714
714 PHILIPPINE REPORTS ANNOTATED
Fossum vs. Fernandez Hermanos
STREET, J.:
Prior to the date of the making of the contract which gave rise to this litigation the
plaintiff, Charles A. Fossum, was the resident agent in Manila of the American Iron
Products Company, Inc., a concern engaged in business in New York City; and on
February 10, 1920, the said Fossum, acting as agent of that company, procured an
order from Fernandez Hermanos, a general commercial partnership engaged in
business in the Philippine Islands, to deliver to said firm a tail shaft, to be installed
on the ship Romulus, then operated by Fernandez Hermanos, as managers of La
Compañía Marítima. It was stipulated that said tail shaft would be in accordance
with the specifications contained in a blueprint which had been placed in the hands
of Fossum on or about December 18, 1919; and it was further understood that the
shaft should be shipped from New York upon some steamer sailing in March or April
of the year 1920.
Considerable delay seems to have been encountered in the matter of the
manufacture and shipment of the shaft; but in the autumn of 1920 it was dispatched
to Manila, having arrived in January, 1921. Meanwhile the American Iron Products
Company, Inc., had drawn a time draft, at sixty days, upon Fernandez Hermanos, for
the purchase price of the shaft, the same being in the amount of $2,250, and payable
to the Philippine National Bank. In due course the draft was presented to Fernandez
Hermanos for acceptance, and was accepted by said firm on December 15, 1920,
according to its tenor.
Upon inspection after arrival in Manila the shaft was found not to be in
conformity with the specifications and was incapable of use for the purpose for which
it had been intended. Upon discovering this, Fernandez Hermanos refused to pay the
draft, and it remained for a time dishonored in the hands of the Philippine National
Bank in Manila. Later the bank indorsed the draft in blank, without consideration,
and delivered it to the plaintiff, Charles
715
VOL. 44, MARCH 28, 1923 715
Fossum vs. Fernandez Hermanos
A. Fossum, who thereupon institued the present action on the instrument against the
acceptor, Fernandez Hermanos, and the two individuals named as defendants in the
complaint, in the character of members of said partnership.
On the foregoing statement it is evident that the consideration for the draft in
question and for the acceptance placed thereon by Fernandez Hermanos, has
completely failed; and no action whatever can be maintained on the instrument by
the American Iron Products Company, Inc., or by any other person against whom the
defense of failure of consideration is available. In recognition of this fact, and
considering that the plaintiff Fossum, in whose name the action is brought, was the
individual who had acted for the American Iron Products Company, Inc., in the
making of the contract, the trial court held that the action could not be maintained
and absolved the defendants from the complaint. From this judgment the plaintiff
appealed.
We are of the opinion that the trial judge has committed no error. To begin with,
the plaintiff himself is far from being a holder of this draft in due course. In the first
place, he was himself a party to the contract which supplied the consideration for the
draft, albeit he there acted in a representative capacity. In the second place, he
procured the instrument to be indorsed by the bank and delivered to himself without
the payment of value, after it was overdue, and with full notice that, as between the
original parties, the consideration had completely failed. Under these circumstances
recovery on this draft by the plaintiff by virtue of any merit in his own position is out
of the question. His attorney, however, calls attention to the familiar rule that a
person who is not himself a holder in due course may yet recover against the person
primarily liable where it appears that such holder derives his title through a holder in
due course.
The difficulty of the plaintiff's position from this point of view is that there is not a
line of proof in the record tending to show as a fact that the bank itself was ever 715
716
716 PHILIPPINE REPORTS ANNOTATED
Fossum vs. Fernandez Hermanos
a holder of this draft in due course. In this connection it was incumbent on the
plaintiff to show, as an independent matter of fact, that the person under whom the
plaintiff claims, i. e., the bank, was a holder in due course; and upon this point the
plaintiff can have no assistance f rom the presumption, expressed in section 59 of the
Negotiable Instruments Law, to the effect that every holder is deemedprima facie to
be a holder in due course. The presumption expressed in that section arises only in
favor of a person who is a holder in the sense defined in section 191 of the same Law,
that is, a payee or indorsee who is in possession of the draft, or the bearer thereof.
Under this definition, in order to be a holder, one must be in possession of the note
or the bearer thereof. (Night & Day Bank vs. Rosenbaum, 191 Mo. App., 559, 574.) If
this action had been instituted by the bank itself, the presumption that the bank was
a holder in due course would have arisen from the tenor of the draft and the fact that
it was in the bank's possession; but when the instrument passed out of the possession
of the bank and into the possession of the present plaintiff, no presumption arises as
to the character in which the bank held the paper. The bank's relation to the
instrument became past history when it delivered the document to the plaintiff; and
it was incumbent upon the plaintiff in this action to show that the bank had in f act
acquired the instrument for value and under such conditions as would constitute it a
holder in due course. In the entire absence of proof on this point, the action must fail.
There is another circumstance which exerted a decisive influence on the mind of
the trial judge in deciding the case for the defendants. This is found in the fact that
the plaintiff personally made the contract which constituted the consideration for
this draft. He was therefore a party in fact, if not in law, to the transaction giving
origin to the instrument; and it is difficult to see how the plaintiff could strip himself
of the character of agent with respect
717
VOL. 44, MARCH 28, 1923 717
Fossum vs. Fernandez Hermanos
to the origin of the contract and maintain this action in his own name where his
principal could not. Certainly an agent who actually makes a contract, and who has
notice of all equities emanating therefrom, can stand on no better footing than his
principal with respect to commercial paper growing out of the transaction. To place
him on any higher plane would be incompatible with the fundamental conception
underlying the relation of principal and agent. We note that in the present case there
is no proof that the plaintiff Fossum has ceased to be the agent of the American Iron
Products Company, Inc.; and in the absence of proof the presumption must be that
he still occupies the relation of agent to that company.
It is a well-known rule of law that if the original payee of a note unenforceable for
lack of consideration repurchases the instrument after transferring it to a holder in
due course, the paper again becomes subject in the payee's hands to the same
defenses to which it would have been subject if the paper had never passed through
the hands of a holder in due course. (Kost vs. Bender, 25 Mich., 515; Shade vs. Hayes,
L. R. A. [1915D], 271; 8 C. J., 470.) The same is true where the instrument is
retransferred to an agent of the payee (Battersbee vs. Calkins, 128 Mich., 569).
In Dollarhide vs. Hopkins (72 111. App., 509), the plaintiff, as agent of a
corporation engaged in manufacturing agricultural implements, sold to the
defendant a separator for threshing small grain, with a general warranty that the
machine, properly handled, would thresh and clean grain as well as any other
separator of like size. The notes in suit were executed by the defendant in payment of
the separator, and were assigned to the plaintiff before maturity. They were then
indorsed by the plaintiff to a bank which became holder in due course; but
afterwards, and before the commencement of the action, the notes were retransferred
by the bank to the plaintiff. In an action
718
718 PHILIPPINE REPORTS ANNOTATED
Fossum vs. Fernandez Hermanos
upon the notes the defendant alleged and proved breach of warranty and showed that
the plaintiff knew of the defect in the separator at the time he purchased the notes. It
was held that the plaintiff could not recover, notwithstanding the fact that the notes
had passed through a bank, in whose hands they would not have been subject to the
defense which had been interposed (54 L, R, A,, 678).
We find nothing in the Negotiable Instruments Law that would interfere with the
application of the doctrine applied in the cases above cited, for the rule that identifies
the agent with the principal, so f ar as the legal consequences of certain acts are
concerned, is a rule of general jurisprudence that must operate in conjunction with
that Law. We consider the situation to be the same in practical effect as if the action The absence or failure of consideration is not a defense against a holder in due
had been brought in the name of the American Iron Products Company, Inc., itself; course, although it is a defense against a holder not in due course, as clearly appears
and the use of the name of Fossum strikes us as a mere attempt at an evasion of the from the Negotiable Instruments Law. (Act No. 2031, secs. 28, 51, 52, 57, 58, 59.)
rule of law that would have been fatal to the success of an action instituted by that 720
company. 720 PHILIPPINE REPORTS ANNOTATED
It appears from statements of Mr. Fossum on the witness stand that the draft in People vs. Avila
question was indorsed and delivered to him by the bank in order that suit might be The plain provisions of the Negotiable Instruments Law should not be ignored and
brought thereon in his name for the use and benefit of the bank, which is said to be they should be construed and applied in accordance with the language of the Act and
the real party in interest. In addition to this it appears that during the pendency of in accordance with precedents construing and applying the Uniform Negotiable
the cause in this court on appeal a formal transfer, or assignment, to the bank was Instruments Law. Accordingly, I must dissent.
made by Fossum of all his interest in the draft and in the cause of action. Judgment affirmed.
Assuming that the suggestion thus made is true, and that the bank is the real
party in interest, the result of the lawsuit in this court is not thereby affected, since it ______________
has not been affirmatively shown that the bank is an innocent purchaser for value. It
is therefore unnecessary to discuss the bearing of this circumstance on the second
feature of the case discussed in this opinion.
719
VOL. 44, MARCH 28, 1923 719
Fossum vs. Fernandez Hermanos
For the reasons stated the judgment appealed from must be affirmed, and it is so
ordered, with costs against the appellant.
Araullo, C. J., Avanceña, Villamor, Johns, and Romualdez, JJ., concur.
Ostrand, J., concurs in the result.

MALCOLM, J., dissenting:

The bill of exchange mentioned in the majority opinion, and here in question, was
drawn by the American Iron Products Company, Inc., in New York, payable sixty
days after sight to the order of the Philippine National Bank, and addressed to
Fernandez Hermanos of Manila as drawee. The said bill of exchange was accepted by
Fernandez Hermanos, as appears from the following: "Accepted, 15th Dec., 1920,
Due, 13 February, 1920, A/C Varadero de Manila. (Sgd.) Fernandez Hermanos." The
Philippine National Bank later indorsed the bill of exchange to Charles A. Fossum, as
appears from the following: "Philippine National Bank, Manila, P. I., (Sgd.) E. O.
Kaufman." Such are the facts.
Section 58 of the Negotiable Instruments Law provides: " * * * A holder who
derives his title through a holder in due course, and who is not himself a party to any
f raud or illegality affecting the instrument, has all the rights of such former holder in
respect of all parties prior to the latter." Under the provisions of this section, Fossum
is in exactly the same situation as the Philippine National Bank would be. Fossum is
entitled to all the rights that pertain to the Philippine National Bank as holder in due
course. Such is the law.
 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.
Commercial Law; Negotiable Instruments Law; Holder in Due Course; What
constitutes a holder in due course.—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.”
Same; Same; Same; Every holder is deemed prima facie a holder in due
course.—Section 59 of the NIL further states that every holder is
________________
*SECOND DIVISION.
644
6 SUPREME COURT REPORTS ANNOTATED
44
Bataan Cigar and Cigarette Factory, Inc. vs. Court of
Appeals
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.
Same; Same; Same; Same; 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.—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.
Hence, respondent can collect from the immediate indorser, in this case, George
King.
Same; Same; Checks; A check is defined by law as a bill of exchange drawn on
a bank payable on demand.—As a preliminary, a check is defined by law as a bill of
exchange drawn on a bank payable on demand. 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.
Same; Same; Same; A check may be crossed specially or generally.—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 presentment can be made only by a bank.
Same; Same; Same; Effects of crossing a check.—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 as warning to the holder that the
check has been issued for a definite purpose so that he must inquire if he has
received the check pursuant to that purpose, otherwise, he is not a holder in due
course.
Same; Same; Same; Same; Crossing of checks puts 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.—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
645
VOL. 230, MARCH 3, 1994 645
Bataan Cigar and Cigarette Factory, Inc. vs. Court of
Appeals
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, and as such the consensus of authority is to the
effect that the holder of the check is not a holder in due course.
PETITION for review of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
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 Court2 in a complaint filed by 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 and
Cigarette Factory, Inc. (BCCFI), a corporation involved in the manufacturing of
cigarettes, engaged one of its suppliers, King Tim Pua George (hereinafter referred to “Sec. 52—A holder in due course is a holder who has taken the instrument under the
as George King), to deliver 2,000 bales of tobacco leaf starting October 1978. In following conditions:
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 1. (a)That it is complete and regular upon its face;
Relying on the supplier’s representation that he would complete “delivery within
three months from December 5, 1978, _________________
__________________ 4 Exhibit “4”, Folder of Exhibits, p. 14.
5 Annex “A”, Folder of Exhibits, p. 3.
1 CA-G.R. CV No. 03032, Justice Jorge R. Coquia, ponente, Justices Josue N. 6 Annexes “B” and “C”, Folder of Exhibits, pp. 4-5.
Bellosillo and Venancio D. Aldecoa, Jr., concurring, November 13, 1987. 647
2 Judge Agusto E. Villarin, presiding, Branch XL, National Capital Region, Manila.
3 Exhibit “1”, Folder of Exhibits, p. 11.
VOL. 230, MARCH 3, 1994 647
646 Bataan Cigar and Cigarette Factory, Inc. vs. Court of Appeals
646 SUPREME COURT REPORTS ANNOTATED
1. (b)That he became the holder of it before it was overdue, and without notice
Bataan Cigar and Cigarette Factory, Inc. vs. Court of Appeals
that it had been previously dishonored, if such was the fact;
petitioner agreed to purchase additional 2,500 bales of tobacco leaves, despite the 2. (c)That he took it in good faith and for value;
supplier’s failure to deliver in accordance with their earlier agreement. Again 3. (d)That at the time it was negotiated to him he had no notice of any infirmity
petitioner issued postdated crossed checks in the total amount of P1,100,000.00, in the instrument or defect in the title of the person negotiating it.”
payable sometime in September 1979.4
During these times, George King was simultaneously dealing with private
Section 59 of the NIL further states that every holder is deemed prima facie a holder
respondent SIHI. On July 19, 1978, he sold at a discount check TCBT
in due course. However, when it is shown that the title of any person who has
5518265 bearing an amount of P164,000.00, post dated March 31, 1979, drawn by
negotiated the instrument was defective, the burden is on the holder to prove that he
petitioner, naming George King as payee to SIHI. On December 19 and 26, 1978, he
or some person under whom he claims, acquired the title as holder in due course.
again sold to respondent checks TCBT Nos. 608967 & 608968,6 both in the amount
The facts in this present case are on all fours to the case of State Investment
of P100,000.00, post dated September 15 & 30, 1979 respectively, drawn by
House, Inc. (the very respondent in this case) v. Intermediate Appellate
petitioner in favor of George King.
Court7 wherein we made a discourse on the effects of crossing of checks.
In as much as George King failed to deliver the bales of tobacco leaf as agreed
As a preliminary, a check is defined by law as a bill of exchange drawn on a bank
despite petitioner’s demand, BCCFI issued on March 30, 1979, a stop payment order
payable on demand.8 There are a variety of checks, the more popular of which are the
on all checks payable to George King, including check TCBT 551826. Subsequently,
memorandum check, cashier’s check, traveler’s check and crossed check. Crossed
stop payment was also ordered on checks TCBT Nos. 608967 & 608968 on
check is one where two parallel lines are drawn across its face or across a corner
September 14 & 28, 1979, respectively, due to George King’s failure to deliver the
thereof. It may be crossed generally or specially.
tobacco leaves.
A check is crossed specially when the name of a particular banker or a company is
Efforts of SIHI to collect from BCCFI having failed, it instituted the present case,
written between the parallel lines drawn. It is crossed generally when only the words
naming only BCCFI as party defendant. The trial court pronounced SIHI as having a
“and company” are written or nothing is written at all between the parallel lines. It
valid claim being a holder in due course. It further said that the non-inclusion of King
may be issued so that presentment can be made only by a bank. Veritably the
Tim Pua George as party defendant is immaterial in this case, since he, as payee, is
Negotiable Instruments Law (NIL) does not mention “crossed checks,” although
not an indispensable party.
Article 5419 of the Code of Commerce refers to such instruments.
The main issue then is whether SIHI, a second indorser, and 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: 7 G.R. No. 72764, 175 SCRA 310.
 8 Sec. 185, Negotiable Instruments Law.
9 Article 541—The maker or any legal holder of a check shall be entitled to indicate
therein that it be paid to a certain banker or institution, which he shall do by writing
across the face the name of said banker or institution, or only the words “and
company.”
648
648 SUPREME COURT REPORTS ANNOTATED
Bataan Cigar and Cigarette Factory, Inc. vs. Court of Appeals
According to commentators, the negotiability of a check is not affected by its being
crossed, whether specially or generally. It may legally be negotiated from one person
to another as long as the one who encashes the check with the drawee bank is
another bank, or if it is specially crossed, by the bank mentioned between the parallel
lines.10 This is specially true in England where the Negotiable Instrument Law
originated.
In the Philippine business setting, however, we used to be beset with bouncing
checks, forging of checks, and so forth that banks have become quite guarded in
encashing checks, particularly those which name a specific payee. Unless one is a
valued client, a bank will not even accept second indorsements on checks.
In order to preserve the credit worthiness of checks, jurisprudence has
pronounced that crossing of a check should have the following effects: (a) the check
may not be encashed but only deposited in the bank; (b) the check may be
negotiated only once—to one who has an account with a bank; (c) and the act of
crossing the check serves as warning to the holder that the check has been issued for
a definite purpose so that he must inquire if he has received the check pursuant to
that purpose, otherwise, he is not a holder in due course.11
The foregoing was adopted in the case of SIHI v. IAC, supra. In that case, New
Sikatuna Wood Industries, Inc. also sold at a discount to SIHI three postdated
crossed checks, issued by Anita Pena 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
_________________
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.
649
VOL. 230, MARCH 3, 1994 649
Bataan Cigar and Cigarette Factory, Inc. vs. Court of Appeals
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
“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, BCCFIs 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
________________
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.
650
650 SUPREME COURT REPORTS ANNOTATED
People vs. Revillame
application of law, the instant petition is hereby GRANTED. The decision of the
Regional Trial Court as affirmed fey the Court of Appeals is hereby REVERSED. Cost
against private respondent.
SO ORDERED.
Narvasa (C.J., Chairman), Regalado and Puno, JJ.,concur.
Padilla, J., No part, former counsel of State Investment.
Petition granted; Reviewed decision reversed.
Note.—A check whether a manager’s check or ordinary check is not a legal tender
and an offer of a check in payment of a debt is not a valid tender of payment and may
be refused receipt by the obligee or creditor (Roman Catholic Bishop of Malolos Inc.
vs. Intermediate Appellate Court, 191 SCRA 411).

——o0o——
 G.R. No. 121413. January 29, 2001.*
PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly INSULAR BANK
OF ASIA AND AMERICA), petitioner, vs. COURT OF APPEALS and FORD
PHILIPPINES, INC. and CITIBANK, N.A., respondents.
G.R. No. 121479. January 29, 2001.*
FORD PHILIPPINES, INC., petitioner, vs. COURT OF APPEALS and CITIBANK,
N.A. and PHILIPPINE COMMERCIAL INTERNATIONAL BANK, respondents.
G.R. No. 128604. January 29, 2001.*
FORD PHILIPPINES, INC., petitioner, vs. CITIBANK, N.A., PHILIPPINE
COMMERCIAL INTERNATIONAL BANK and THE COURT OF APPEALS,
respondents.
Negligence; Torts; Quasi-Delicts; The general rule is that if the master is
injured by the negligence of a third person and by the concurring contributory
negligence of his own servant or agent, the latter’s negligence is imputed to his
superior and will defeat the superior’s action against the third person, assuming, of
course that the contributory negligence was the proximate cause of the injury of
which complaint is made.—On this point, jurisprudence regarding the imputed
negligence of employer in a master-servant relationship is instructive. Since a master
may be held for his servant’s wrongful act, the law imputes to the master the act of
the servant, and if that act is negligent or wrongful and proximately results in injury
to a third person, the negligence or wrongful conduct is the negligence or wrongful
conduct of the master, for which he is liable. The general rule is that if the master is
injured by the negligence of a third person and by the concurring contributory
negligence of his own servant or agent, the latter’s negligence is imputed to his
superior and will defeat the superior’s action against the third person, assuming, of
course that the contributory negligence was the proximate cause of the injury of
which complaint is made.
Same; Same; Same; Words and Phrases; Proximate cause is that which, in the
natural and continuous sequence, unbroken by any efficient, intervening cause,
produces the injury, and without which the result would
________________
*SECOND DIVISION.
447
VOL. 350, JANUARY 29, 2001 44
7 48
Philippine Commercial and International Bank vs. Court of
Appeals
not have occurred.—Accordingly, we need to determine whether or not the
action of Godofredo Rivera, Ford’s General Ledger Accountant, and/or Alexis
Marindo, his assistant, was the proximate cause of the loss or damage. As defined,
proximate cause is that which, in the natural and continuous sequence, unbroken by
any efficient, intervening cause produces the injury, and without which the result
would not have occurred.
Banks and Banking; Negotiable Instruments; Checks; The mere fact that the
forgery was committed by a drawer-payor’s confidential employee or agent, who
by virtue of his position had unusual facilities for perpetrating the fraud and
imposing the forged paper upon the bank, does not entitle the bank to shift the loss
to the drawer-payor, in the absence of some circumstances raising estoppel against
the drawer.—It appears that although the employees of Ford initiated the
transactions attributable to an organized syndicate, in our view, their actions were
not the proximate cause of encashing the checks payable to the CIR. The degree of
Ford’s negligence, if any, could not be characterized as the proximate cause of the
injury to the parties. The Board of Directors of Ford, we note, did not confirm the
request of Godofredo Rivera to recall Citibank Check No. SN-04867. Rivera’s
instruction to replace the said check with PCIBank’s Manager’s Check was not in the
ordinary course of business which could have prompted PCIBank to validate the
same. As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it was
established that these checks were made payable to the CIR. Both were crossed
checks. These checks were apparently turned around by Ford’s employees, who were
acting on their own personal capacity. Given these circumstances, the mere fact that
the forgery was committed by a drawer-payor’s confidential employee or agent, who
by virtue of his position had unusual facilities for perpetrating the fraud and
imposing the forged paper upon the bank, does not entitle the bank to shift the loss
to the drawer-payor, in the absence of some circumstance raising estoppel against
the drawer. This rule likewise applies to the checks fraudulently negotiated or
diverted by the confidential employees who hold them in their possession.
Same; Checks; Collecting Banks; Taxation; A bank authorized to collect the
payment of taxpayers in behalf of the Bureau of Internal Revenue is duty bound to
consult its principal regarding the unwarranted instructions given by the pay or of
its agent.—Citibank Check No. SN-04867 was deposited at PCIBank through its
Ermita Branch. It was coursed through the ordinary banking transaction, sent to
Central Clearing with the indorsement at the back “all prior indorsements and/or
lack of indorsements guaranteed,” and was presented to Citibank for payment.
Thereafter PCIBank, instead of remitting the proceeds to the CIR, prepared two of its
448
4 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial and International Bank vs. Court of
Appeals
Manager's checks and enabled the syndicate to encash the same. On record,
PCIBank failed to verify the authority of Mr. Rivera to negotiate the checks. The
neglect of PCIBank employees to verify whether his letter requesting for the
replacement of the Citibank Check No. SN-04867 was duly authorized, showed lack
of care and prudence required in the circumstances. Furthermore, it was admitted
that PCIBank is authorized to collect the payment of taxpayers in behalf of the BIR.
As an agent of BIR, PCIBank is duty bound to consult its principal regarding the
unwarranted instructions given by the payor or its agent.
Same; Same; Same; Negotiable Instruments; It is a well-settled rule that the
relationship between the payee or holder of commercial paper and the bank to
which it is sent for collection is, in the absence of an agreement to the contrary, that
of principal and agent.—It is a well-settled rule that the relationship between the
payee or holder of commercial paper and the bank to which it is sent for collection is,
in the absence of an agreement to the contrary, that of principal and agent. A bank
which receives such paper for collection is the agent of the payee or holder.
Same; Same; Same; Even considering arguendo, that the diversion of the
amount of a check payable to the collecting bank in behalf of the designated payee
may be allowed, still such diversion must be properly authorized by the payor.—
Even considering arguendo, that the diversion of the amount of a check payable to
the collecting bank in behalf of the designated payee may be allowed, still such
diversion must be properly authorized by the payor. Otherwise stated, the diversion
can be justified only by proof of authority from the drawer, or that the drawer has
clothed his agent with apparent authority to receive the proceeds of such check.
Same; Same; Same; Crossed Checks; Words and Phrases; The crossing of the
check with the phrase “Payee’s Account Only,” is a warning that the check should be
deposited only in the account of the payee; It is the collecting bank which is bound
to scrutinize the check and to know its depositors before it could make the clearing
indorsement “all prior indorsements and lor lack ofindorsement guaranteed.”—
Indeed, the crossing of the check with the phrase “Payee’s Account Only,” is a
warning that the check should be deposited only in the account of the CIR. Thus, it is
the duty of the collecting bank PCIBank to ascertain that the check be deposited in
payee’s account only. Therefore, it is the collecting bank (PCIBank) which is bound to
scrutinize the check and to know its depositors before it could make the clearing
indorsement “all prior indorsements and/or lack of indorsement guaranteed.”
449
VOL. 350, JANUARY 29, 2001 44
9 Philippine Commercial International Bank vs. Court of
Philippine Commercial International Bank vs. Court of
Appeals
Same; Same; Same; A bank which cashes a check drawn upon another bank,
without requiring proof as to the identity of persons presenting it, or making
inquiries with regard to them, cannot hold the proceeds against the drawee when
the proceeds of the checks were afterwards diverted to the hands of a third party.—
Banking business requires that the one who first cashes and negotiates the check
must take some precautions to learn whether or not it is genuine. And if the one
cashing the check through indifference or other circumstance assists the forger in
committing the fraud, he should not be permitted to retain the proceeds of the check
from the drawee whose sole fault was that it did not discover the forgery or the defect
in the title of the person negotiating the instrument before paying the check. For this
reason, a bank which cashes a check drawn upon another bank, without requiring
proof as to the identity of persons presenting it, or making inquiries with regard to
them, cannot hold the proceeds against the drawee when the proceeds of the checks
were afterwards diverted to the hands of a third party. In such cases the drawee bank
has a right to believe that the cashing bank (or the collecting bank) had, by the usual
proper investigation, satisfied itself of the authenticity of the negotiation of the
checks. Thus, one who encashed a check which had been forged or diverted and in
turn received payment thereon from the drawee, is guilty of negligence which
proximately contributed to the success of the fraud practiced on the drawee bank.
The latter may recover from the holder the money paid on the check.
Same; Same; Torts; As a general rule, a banking corporation is liable for the
wrongful or tortuous acts and declarations of its officers or agents within the
course and scope of their employment—it may be liable for the tortuous acts of its
officers even as regards that species of tort of which malice is an essential
element.—In this case, there was no evidence presented confirming the conscious
participation of PCIBank in the embezzlement. As a general rule, however, a banking
corporation is liable for the wrongful or tortuous acts and declarations of its officers
or agents within the course and scope of their employment. A bank will be held liable
for the negligence of its officers or agents when acting within the course and scope of
their employment. It may be liable for the tortuous acts of its officers even as regards
that species of tort of which malice is an essential element. In this case, we find a
situation where the PCIBank appears also to be the victim of the scheme hatched by a
syndicate in which its own management employees had participated.
Same; Same; Same; The general rule is that a bank is liable for the fraudulent
acts or representations of an officer or agent acting within the course and apparent
scope of his employment or authority.—A bank hold-
450
4 SUPREME COURT REPORTS ANNOTATED
50
Appeals
ing out its officers and agents as worthy of confidence will not be permit- ted to
profit by the frauds these officers or agents were enabled to perpetrate in the
apparent course of their employment; nor will it be permitted to shirk its
responsibility for such frauds, even though no benefit may accrue to the bank
therefrom. For the general rule is that a bank is liable for the fraudulent acts or
representations of an officer or agent acting within the course and apparent scope of
his employment or authority. And if an officer or employee of a bank, in his official
capacity, receives money to satisfy an evidence of indebtedness lodged with his bank
for collection, the bank is liable for his misappropriation of such sum.
Same; Same; Same; Negligence; As a business affected with public interest
and because of the nature of its functions, a bank is under obligation to treat the
accounts of its depositors with meticulous care, always having in mind the
fiduciary nature of their relationship.—Citibank should have scrutinized Citibank
Check Numbers SN-10597 and 16508 before paying the amount of the proceeds
thereof to the collecting bank of the BIR. One thing is clear from the record: the
clearing stamps at the back of Citibank Check Nos. SN-10597 and 16508 do not bear
any initials. Citibank failed to notice and verify the absence of the clearing stamps.
Had this been duly examined, the switching of the worthless checks to Citibank
Check Nos. 10597 and 16508 would have been discovered in time. For this reason,
Citibank had indeed failed to perform what was incumbent upon it, which is to
ensure that the amount of the checks should be paid only to its designated payee. The
fact that the drawee bank did not discover the irregularity seasonably, in our view,
constitutes negligence in carrying out the bank’s duty to its depositors. The point is
that as a business affected with public interest and because of the nature of its
functions, the bank is under obligation to treat the accounts of its depositors with
meticulous care, always having in mind the fiduciary nature of their relationship.
Same; Same; Same; Same; Doctrine of Comparative Negligence; Where both
the collecting and drawee banks failed in their respective obligations and both were
negligent in the selection and supervision of their employees, both are equally liable
for the loss of the proceeds of checks fraudulently encashed.—Thus, invoking the
doctrine of comparative negligence, we are of the view that both PCIBank and
Citibank failed in their respective obligations and both were negligent in the selection
and supervision of their employees resulting in the encashment of Citibank Check
Nos. SN-10597 and 16508. Thus, we are constrained to hold them equally liable for
the loss of the proceeds of said checks issued by Ford in favor of the CIR.
451
VOL. 350, JANUARY 29, 2001 45
1 Appeals
Philippine Commercial International Bank vs. Court of
Appeals
Same; Same; Same; Same; The banking business is so impressed with public
interest where the trust and confidence of the public in general is of paramount
importance such that the appropriate standard of diligence must be very high, if
not the highest, degree of diligence.—Time and again, we have stressed that banking
business is so impressed with public interest where the trust and confidence of the
public in general is of paramount importance such that the appropriate standard of
diligence must be very high, if not the highest, degree of diligence. A bank’s liability
as obligor is not merely vicarious but primary, wherein the defense of exercise of due
diligence in the selection and supervision of its employees is of no moment.
Same; Same; Same; Same; Banks are expected to exercise the highest degree
of diligence in the selection and supervision of their employees.—Banks handle daily
transactions involving millions of pesos. By the very nature of their work the degree
of responsibility, care and trustworthiness expected of their employees and officials
is far greater than those of ordinary clerks and employees. Banks are expected to
exercise the highest degree of diligence in the selection and supervision of their
employees.
Same; Same; Same; Prescription; The statute of limitations begins to run
when the bank gives the depositor notice of the payment, and an action upon a
check is ordinarily governed by the statutory period applicable to instruments in
writing; An action upon a written contract must be brought within ten years from
the time the right of action accrues.—The statute of limitations begins to run when
the bank gives the depositor notice of the payment, which is ordinarily when the
check is returned to the alleged drawer as a voucher with a statement of his account,
and an action upon a check is ordinarily governed by the statutory period applicable
to instruments in writing. Our laws on the matter provide that the action upon a
written contract must be brought within ten years from the time the right of action
accrues. Hence, the reckoning time for the prescriptive period begins when the
instrument was issued and the corresponding check was returned by the bank to its
depositor (normally a month thereafter). Applying the same rule, the cause of action
for the recovery of the proceeds of Citibank Check No. SN-04867 would normally be
a month after December 19, 1977, when Citibank paid the face value of the check in
the amount of P4,746,114.41. Since the original complaint for the cause of action was
filed on January 20, 1983, barely six years had lapsed. Thus, we conclude that Ford’s
cause of action to recover the amount of Citibank Check No. SN-04867 was
seasonably filed within the period provided by law.
452
4 SUPREME COURT REPORTS ANNOTATED
52
Philippine Commercial International Bank vs. Court of
Same; Same; Same; Negligence; Failure on the part of the depositor to
examine its passbook, statements of account, and cancelled checks and to give
notice within a reasonable time (or as required by statute) of any discrepancy
which it may in the exercise of due care and diligence find therein, serves to
mitigate the banks’ liability by reducing the award of interest from twelve percent
(12%) to six percent (6%) per annum.—We also find that Ford is not completely
blameless in its failure to detect the fraud. Failure on the part of the depositor to
examine its passbook, statements of account, and cancelled checks and to give notice
within a reasonable time (or as required by statute) of any discrepancy which it may
in the exercise of due care and diligence find therein, serves to mitigate the banks’
liability by reducing the award of interest from twelve percent (12%) to six percent
(6%) per annum. As provided in Article 1172 of the Civil Code of the Philippines,
responsibility arising from negligence in the performance of every kind of obligation
is also demandable, but such liability may be regulated by the courts, according to
the circumstances. In quasi-delicts, the contributory negligence of the plaintiff shall
reduce the damages that he may recover.
PETITIONS for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Romulo, Mabanta, Buenaventura, Sayoc & Delos Angeles for Ford
Philippines, Inc.
Agabin, Verzola, Hermoso, Layaoen and De Castro for private respondent
PCIB.
Angara, Abello, Concepcion, Regala and Cruz for respondent Citibank.
QUISUMBING, J.:
These consolidated petitions involve several fraudulently negotiated checks.
The original actions a quo were instituted by Ford Philippines to recover from the
drawee bank, CITIBANK, N.A. (Citibank) and collecting bank, Philippine
Commercial International Bank (PCI-Bank) [formerly Insular Bank of Asia and
America], the value of several checks payable to the Commissioner of Internal
Revenue, which were embezzled allegedly by an organized syndicate.
453
VOL. 350, JANUARY 29, 2001 453
Philippine Commercial International Bank vs. Court of Appeals
G.R. Nos. 121413 and 121479 are twin petitions for review of the March 27, 1995
Decision1 of the Court of Appeals in CA-G.R. CV No. 25017, entitled “Ford
Philippines, Inc. vs. Citibank, N.A. and Insular Bank of Asia and America (now
Philippine Commercial International Bank), and the August 8, 1995
Resolution,2 ordering the collecting bank, Philippine Commercial International Bank,
to pay the amount of Citibank Check No. SN-04867.
In G.R. No. 128604, petitioner Ford Philippines assails the October 15, 1996
Decision3 of the Court of Appeals and its March 5, 1997 Resolution4 in CA-G.R. No.
28430entitled “Ford Philippines, Inc. vs. Citibank, N.A. and Philippine Commercial
International Bank,” affirming in toto the judgment of the trial court holding the
defendant drawee bank, Citibank, N.A., solely liable to pay the amount of
P12,163,298.10 as damages for the misapplied proceeds of the plaintiff’s Citibank
Check Numbers SN-10597 and 16508.
I. G.R. Nos. 121413 and 121479
The stipulated facts submitted by the parties as accepted by the Court of Appeals are
as follows:
“On October 19, 1977, the plaintiff Ford drew and issued its Citibank Check No. SN-
04867 in the amount of P4,746,114.41, in favor of the Commissioner of Internal
Revenue as payment of plaintiff’s percentage or manufacturer’s sales taxes for the
third quarter of 1977.
The aforesaid check was deposited with the defendant IBAA (now PCIBank) and
was subsequently cleared at the Central Bank. Upon presentment with the defendant
Citibank, the proceeds of the check was paid to IBAA as collecting or depository
bank.
__________________
1 Penned by Justice B. A. Adefuin-dela Cruz and concurred in by Justices Jesus M.
Elbinias and Lourdes K. Tayao-Jaguros, rollo, G.R. No. 121413, pp. 27-42.
2 Rollo, G.R. No. 121413, pp. 44-45.
3 Penned by Justice Jose C. de la Rama and concurred in by Justices Emeterio C.
Cui and Eduardo G. Montenegro, rollo, G.R. No. 128604, pp. 45-60.
4 Rollo, G.R. No. 128604, pp. 42-43.
454
454 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
The proceeds of the same Citibank check of the plaintiff was never paid to or received
by the payee thereof, the Commissioner of Internal Revenue.
As a consequence, upon demand of the Bureau and/or Commissioner of Internal
Revenue, the plaintiff was compelled to make a second payment to the Bureau of
Internal Revenue of its percentage/manufacturers’ sales taxes for the third quarter of
1977 and that said second payment of plaintiff in the amount of P4,746,114.41 was
duly received by the Bureau of Internal Revenue.
It is further admitted by defendant Citibank that during the time of the
transactions in question, plaintiff had been maintaining a checking account with
defendant Citibank; that Citibank Check No. SN-04867 which was drawn and issued
by the plaintiff in favor of the Commissioner of Internal Revenue was a crossed check
in that, on its face were two parallel lines and written in between said lines was the
phrase “Payee’s Account Only”; and that defendant Citibank paid the full face value
of the check in the amount of P4,746,114.41 to the defendant IBAA.
It has been duly established that for the payment of plaintiff’s percentage tax for
the last quarter of 1977, the Bureau of Internal Revenue issued Revenue Tax Receipt
No. 18747002, dated October 20, 1977, designating therein in Muntinlupa, Metro
Manila, as the authorized agent bank of Metrobank, Alabang Branch to receive the
tax payment of the plaintiff.
On December 19, 1977, plaintiff’s Citibank Check No. SN-04867, together with the
Revenue Tax Receipt No. 18747002, was deposited with defendant IBAA, through its
Ermita Branch. The latter accepted the check and sent it to the Central Clearing
House for clearing on the same day, with the indorsement at the back “all prior
indorsements and/or lack of indorsements guaranteed.” Thereafter, defendant IBAA
presented the check for payment to defendant Citibank on same date, December 19,
1977, and the latter paid the face value of the check in the amount of P4,746,114.41.
Consequently, the amount of P4,746,114.41 was debited in plaintiff’s account with the
defendant Citibank and the check was returned to the plaintiff.
Upon verification, plaintiff discovered that its Citibank Check No. SN-04867 in
the amount of P4,746,114.41 was not paid to the Commissioner of Internal Revenue.
Hence, in separate letters dated October 26, 1979, addressed to the defendants, the
plaintiff notified the latter that in case it will be re-assessed by the BIR for the
payment of the taxes covered by the said checks, then plaintiff shall hold the
defendants liable for reim-
455
VOL. 350, JANUARY 29, 2001 455
Philippine Commercial International Bank vs. Court of Appeals
bursement of the face value of the same. Both defendants denied liability and refused
to pay.
In a letter dated February 28, 1980 by the Acting Commissioner of Internal
Revenue addressed to the plaintiff—supposed to be Exhibit “D,” the latter was
officially informed, among others, that its check in the amount of P4,746,114.41 was
not paid to the government or its authorized agent and instead encashed by
unauthorized persons, hence, plaintiff has to pay the said amount within fifteen days
from receipt of the letter. Upon advice of the plaintiff’s lawyers, plaintiff on March 11,
1982, paid to the Bureau of Internal Revenue, the amount of P4,746,114.41,
representing payment of plaintiff’s percentage tax for the third quarter of 1977.
As a consequence of defendant’s refusal to reimburse plaintiff of the payment it
had made for the second time to the BIR of its percentage taxes, plaintiff filed on
January 20, 1983 its original complaint before this Court.
On December 24, 1985, defendant IBAA was merged with the Philippine
Commercial International Bank (PCIBank) with the latter as the surviving entity.
Defendant Citibank maintains that; the payment it made of plaintiffs Citibank
Check No. SN-04867 in the amount of P4,746,114.41 “was in due course”; it merely
relied on the clearing stamp of the depository/collecting bank, the defendant IBAA
that “all prior indorsements and/or lack of indorsements guaranteed”; and the
proximate cause of plaintiff’s injury is the gross negligence of defendant IBAA in
indorsing the plaintiff’s Citibank check in question.
It is admitted that on December 19, 1977 when the proceeds of plaintiff’s Citibank
Check No. SN-04867 was paid to defendant IBAA as collecting bank, plaintiff was
maintaining a checking account with defendant Citibank.”5
Although it was not among the stipulated facts, an investigation by the National
Bureau of Investigation (NBI) revealed that Citibank Check No. SN-04867 was
recalled by Godofredo Rivera, the General Ledger Accountant of Ford. He
purportedly needed to hold back the check because there was an error in the
computation of the tax due to the Bureau of Internal Revenue (BIR). With Rivera’s
instruction, PCIBank replaced the check with two of its own Man-
__________________
5 Supra, see note 1, pp. 32-34 (All citations omitted).
456
456 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
ager’s Checks (MCs). Alleged members of a syndicate later deposited the two MCs
with the Pacific Banking Corporation.
Ford, with leave of court, filed a third-party complaint before the trial court
impleading Pacific Banking Corporation (PBC) and Godofredo Rivera, as third party
defendants. But the court dismissed the complaint against PBC for lack of cause of
action. The court likewise dismissed the third-party complaint against Godofredo
Rivera because he could not be served with summons as the NBI declared him as a
“fugitive from justice.”
On June 15, 1989, the trial court rendered its decision, as follows:
“Premises considered, judgment is hereby rendered as follows:
1. 1.Ordering the defendants Citibank and IBAA (now PCI Bank), jointly and
severally, to pay the plaintiff the amount of P4,746,114.41 representing the
face value of plaintiff’s Citibank Check No. SN-04867, with interest thereon
at the legal rate starting January 20, 1983, the date when the original
complaint was filed until the amount is fully paid, plus costs;
2. 2.On defendant Citibank’s cross-claim: ordering the cross-defendant IBAA
(now PCI BANK) to reimburse defendant Citibank for whatever amount the
latter has paid or may pay to the plaintiff in accordance with the next
preceding paragraph;
3. 3.The counterclaims asserted by the defendants against the plaintiff, as well
as that asserted by the cross-defendant against the cross-claimant are
dismissed, for lack of merits; and
4. 4.With costs against the defendants.
SO ORDERED.”6
Not satisfied with the said decision, both defendants, Citibank and PCIBank, elevated
their respective petitions for review on certiorari to the Court of Appeals. On March
27, 1995, the appellate court issued its judgment as follows:
“WHEREFORE, in view of the foregoing, the court AFFIRMS the appealed decision
with modifications.
The court hereby renders judgment:
_________________
6Rollo, G.R. No. 121413, pp. 131-132.
457
VOL. 350, JANUARY 29, 2001 457
Philippine Commercial International Bank vs. Court of Appeals
1. 1.Dismissing the complaint in Civil Case No. 49287 insofar as defendant
Citibank N.A. is concerned;
2. 2.Ordering the defendant IBAA now PCI Bank to pay the plaintiff the amount
of P4,746,114.41 representing the face value of plaintiff’s Citibank Check No.
SN-04867, with interest thereon at the legal rate starting January 20, 1983,
the date when the original complaint was filed until the amount is fully paid;
3. 3.Dismissing the counterclaims asserted by the defendants against the
plaintiff as well as that asserted by the cross-defendant against the cross-
claimant, for lack of merits.
Costs against the defendant IBAA (now PCI Bank).
IT IS SO ORDERED.”7
PCIBank moved to reconsider the above-quoted decision of the Court of Appeals,
while Ford filed a “Motion for Partial Reconsideration.” Both motions were denied
for lack of merit.
Separately, PCIBank and Ford filed before this Court, petitions for review by
certiorari under Rule 45.
In G.R. No. 121413, PCIBank seeks the reversal of the decision and resolution of
the Twelfth Division of the Court of Appeals contending that it merely acted on the
instruction of Ford and such cause of action had already prescribed.
PCIBank sets forth the following issues for consideration:
1. I.Did the respondent court err when, after finding that the petitioner acted on
the check drawn by respondent Ford on the said respondent’s instructions, it
nevertheless found the petitioner liable to the said respondent for the full
amount of the said check.
2. II.Did the respondent court err when it did not find prescription in favor of
the petitioner.8
In a counter move, Ford filed its petition docketed as G.R. No. 121479, questioning
the same decision and resolution of the Court of Appeals, and praying for the
reinstatement in toto of the decision
_________________
7 1d. at 41-42.
8 Id. at 18.
458
458 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
of the trial court which found both PCIBank and Citibank jointly and severally liable
for the loss.
In G.R. No. 121479, appellant Ford presents the following propositions for
consideration:
1. I.Respondent Citibank is liable to petitioner Ford considering that:
1. 1.As drawee bank, respondent Citibank owes to petitioner Ford, as the drawer
of the subject check and a depositor of respondent Citibank, an absolute and
contractual duty to pay the proceeds of the subject check only to the payee
thereof, the Commissioner of Internal Revenue.
2. 2.Respondent Citibank failed to observe its duty as banker with respect to the
subject check, which was crossed and payable to “Payee’s Account Only.”
3. 3.Respondent Citibank raises an issue for the first time on appeal; thus the
same should not be considered by the Honorable Court.
4. 4.As correctly held by the trial court, there is no evidence of gross negligence
on the part of petitioner Ford.9
1. II.PCIBank is liable to petitioner Ford considering that:
1. 1.There were no instructions from petitioner Ford to deliver the proceeds of
the subject check to a person other than the payee named therein, the
Commissioner of the Bureau of Internal Revenue; thus, PCIBank’s only
obligation is to deliver the proceeds to the Commissioner of the Bureau of
Internal Revenue.10
2. 2.PCIBank which affixed its indorsement on the subject check (“All prior
indorsement and/or lack of indorsement guaranteed”), is liable as collecting
bank.11
3. 3.PCIBank is barred from raising issues of fact in the instant proceedings.12
4. 4.Petitioner Ford’s cause of action had not prescribed.13
___________________
9 Rollo, G.R. No. 121479, pp. 162-163.
10 Id. at 181.
11 Id. at 186.
12 Id at 188.
 13 Id. at 192.
459
VOL. 350, JANUARY 29, 2001 459
Philippine Commercial International Bank vs. Court of Appeals
II. G.R. No. 128604
The same syndicate apparently embezzled the proceeds of checks intended, this time,
to settle Ford’s percentage taxes appertaining to the second quarter of 1978 and the
first quarter of 1979.
The facts as narrated by the Court of Appeals are as follows:
Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the amount of
P5,851,706.37 representing the percentage tax due for the second quarter of 1978
payable to the Commissioner of Internal Revenue. A BIR Revenue Tax Receipt No.
28645385 was issued for the said purpose.
On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in the
amount of P6,311,591.73, representing the payment of percentage tax for the first
quarter of 1979 arid payable to the Commissioner of Internal Revenue. Again a BIR
Revenue Tax Receipt No. A-1697160 was issued for the said purpose.
Both checks were “crossed checks” and contain two diagonal lines on its upper left
corner between which were written the words “payable to the payee’s account only.”
The checks never reached the payee, CIR. Thus, in a letter dated February 28,
1980, the BIR, Region 4-B, demanded for the said tax payments the corresponding
periods above-mentioned.
As far as the BIR is concerned, the said two BIR Revenue Tax Receipts were
considered “fake and spurious.” This anomaly was confirmed by the NBI upon the
initiative of the BIR. The findings forced Ford to pay the BIR anew, while an action
was filed against Citibank and PCIBank for the recovery of the amount of Citibank
Check Numbers SN-10597 and 16508.
The Regional Trial Court of Makati, Branch 57, which tried the case, made its
findings on the modus operandi of the syndicate, as follows:
“A certain Mr. Godofredo Rivera was employed by the plaintiff FORD as its General
Ledger Accountant. As such, he prepared the plaintiffs check marked Exh. ‘A’
[Citibank Check No. SN-10597] for payment to the BIR. Instead, however, of
delivering the same to the payee, he passed
460
460 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
on the check to a co-conspirator named Remberto Castro who was a promanager of
the San Andres Branch of PCIB.** In connivance with one Winston Dulay, Castro
himself subsequently opened a Checking Account in the name of a fictitious person
denominated as ‘Reynaldo Reyes’ in the Meralco Branch of PCIBank where Dulay
works as Assistant Manager.
After an initial deposit of P100.00 to validate the account, Castro deposited a
worthless Bank of America Check in exactly the same amount as the first FORD
check (Exh. “A,” P5,851,706.37) while this worthless check was coursed through
PCIB’s main office enroute to the Central Bank for clearing, replaced this worthless
check with FORD’s Exhibit ‘A’ and accordingly tampered the accompanying
documents to cover the replacement. As a result, Exhibit ‘A’ was cleared by defendant
CITIBANK, and the fictitious deposit account of ‘Reynaldo Reyes’ was credited at the
PCIB Meralco Branch with the total amount of the FORD check Exhibit ‘A.’ The same
method was again utilized by the syndicate in profiting from Exh. ‘B’ [Citibank Check
No. SN-16508] which was subsequently pilfered by Alexis Marindo, Rivera’s
Assistant at FORD.
From this ‘Reynaldo Reyes’ account, Castro drew various checks distributing the
shares of the other participating conspirators namely (1) CRISANTO BERNABE, the
mastermind who formulated the method for the embezzlement; (2) RODOLFO R. DE
LEON a customs broker who negotiated the initial contact between Bernabe, FORD’s
Godofredo Rivera and PCIB’s Remberto Castro; (3) JUAN CASTILLO who assisted
de Leon in the initial arrangements; (4) GODOFREDO RIVERA, FORD’s accountant
who passed on the first check (Exhibit “A”) to Castro; (5) REMBERTO CASTRO,
PCIB’s pro-manager at San Andres who performed the switching of checks in the
clearing process and opened the fictitious Reynaldo Reyes account at the PCIB
Meralco Branch; (6) WINSTON DULAY, PCIB’s Assistant Manager at its Meralco
Branch, who assisted Castro in switching the checks in the clearing process and
facilitated the opening of the fictitious Reynaldo Reyes’ bank account; (7) ALEXIS
MARINDO, Rivera’s Assistant at FORD, who gave the second check (Exh. “B”) to
Castro; (8) ELEUTERIO JIMENEZ, BIR Collection Agent who provided the fake and
spurious revenue tax receipts to make it appear that the BIR had received FORD’s tax
payments.
Several other persons and entities were utilized by the syndicate as conduits in the
disbursements of the proceeds of the two checks, but like the aforementioned
participants in the conspiracy, have not been im-
___________________
**Initials stand for Philippine Commercial International Bank, or PCIBank.
461
VOL. 350, JANUARY 29, 2001 461
Philippine Commercial International Bank vs. Court of Appeals
pleaded in the present case. The manner by which the said funds were distributed
among them are traceable from the record of checks drawn against the original
“Reynaldo Reyes” account and indubitably identify the parties who illegally benefited
therefrom and readily indicate in what amounts they did so.”14
On December 9, 1988, Regional Trial Court of Makati, Branch 57, held drawee-bank,
Citibank, liable for the value of the two checks while absolving PCIBank from any
liability, disposing as follows:
“WHEREFORE, judgment is hereby rendered sentencing defendant CITIBANK to
reimburse plaintiff FORD the total amount of P12,163,298.10 prayed for in its
complaint, with 6% interest thereon from date of first written demand until full
payment, plus P300,000.00 attorney’s fees and expenses of litigation, and to pay the
defendant, PCIB (on its counterclaim to crossclaim) the sum of P300,000.00 as
attorney’s fees and costs of litigation, and pay the costs.
SO ORDERED.”15
Both Ford and Citibank appealed to the Court of Appeals which affirmed, in toto, the
decision of the trial court. Hence, this petition.
Petitioner Ford prays that judgment be rendered setting aside the portion of the
Court of Appeals decision and its resolution dated March 5, 1997, with respect to the
dismissal of the complaint against PCIBank and holding Citibank solely responsible
for the proceeds of Citibank Check Numbers SN-10597 and 16508 fot P5,851,706.73
and P6,311,591.73 respectively.
Ford avers that the Court of Appeals erred in dismissing the complaint against
defendant PCIBank considering that:
1. I.Defendant PCIBank was clearly negligent when it failed to exercise the
diligence required to be exercised by it as a banking institution.
2. II.Defendant PCIBank clearly failed to observe the diligence re- quired in the
selection and supervision of its officers and employees.
_________________
14Supra, see note 3, pp. 47-49.
15Id. at 46.
462
462 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
1. III.Defendant PCIBank was, due to its negligence, clearly liable for the loss or
damage resulting to the plaintiff Ford as a consequence of the substitution of
the check consistent with Section 5 of Central Bank Circular No. 580 series
of 1977.
2. IV.Assuming arguendo that defendant PCIBank did not accept, endorse or
negotiate in due course the subject checks, it is liable, under Article 2154 of
the Civil Code, to return the money which it admits having received, and
which was credited to it in its Central Bank account.16
The main issue presented for our consideration by these petitions could be simplified
as follows: Has petitioner Ford the right to recover from the collecting bank
(PCIBank) and the drawee bank (Citibank) the value of the checks intended as
payment to the Commissioner of Internal Revenue? Or has Ford’s cause of action
already prescribed?
Note that in these cases, the checks were drawn against the drawee bank, but the
title of the person negotiating the same was allegedly defective because the
instrument was obtained by fraud and unlawful means, and the proceeds of the
checks were not remitted to the payee. It was established that instead of paying the
checks to the CIR, for the settlement of the appropriate quarterly percentage taxes of
Ford, the checks were diverted and encashed for the eventual distribution among the
members of the syndicate. As to the unlawful negotiation of the check the applicable
law is Section 55 of the Negotiable Instruments Law (NIL), which provides:
“When title defective—The title of a person who negotiates an instrument is defective
within the meaning of this Act when he obtained the instrument, or any signature
thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal
consideration, or when he negotiates it in breach of faith or under such
circumstances as amount to a fraud.”
Pursuant to this provision, it is vital to show that the negotiation is made by the
perpetrator in breach of faith amounting to fraud. The person negotiating the checks
must have gone beyond
__________________
16 Id. at 24-25.
463
VOL. 350, JANUARY 29, 2001 463
Philippine Commercial International Bank vs. Court of Appeals
the authority given by his principal. If the principal could prove that there was no
negligence in the performance of his duties, he may set up the personal defense to
escape liability and recover from other parties who, through their own negligence,
allowed the commission of the crime.
In this case, we note that the direct perpetrators of the offense, namely the
embezzlers belonging to a syndicate, are now fugitives from justice. They have, even
if temporarily, escaped liability for the embezzlement of millions of pesos. We are
thus left only with the task of determining who of the present parties before us must
bear the burden of loss of these millions. It all boils down to the question of liability
based on the degree of negligence among the parties concerned.
Foremost, we must resolve whether the injured party, Ford, is guilty of the
“imputed contributory negligence” that would defeat its claim for reimbursement,
bearing in mind that its employees, Godofredo Rivera and Alexis Marindo, were
among the members of the syndicate.
 Citibank points out that Ford allowed its very own employee, Godofredo Rivera,
to negotiate the checks to his co-conspirators, instead of delivering them to the
designated authorized collecting bank (Metrobank-Alabang) of the payee, CIR.
Citibank bewails the fact that Ford was remiss in the supervision and control of its
own employees, inasmuch as it only discovered the syndicate’s activities through the
information given by the payee of the checks after an unreasonable period of time.
PCIBank also blames Ford of negligence when it allegedly authorized Godofredo
Rivera to divert the proceeds of Citibank Check No. SN-04867, instead of using it to
pay the BIR. As to the subsequent run-around of funds of Citibank Check Nos. SN-
10597 and 16508, PCIBank claims that the proximate cause of the damage to Ford
lies in its own officers and employees who carried out the fraudulent schemes and the
transactions. These circumstances were not checked by other officers of the
company, including its comptroller or internal auditor. PCIBank contends that the
inaction of Ford despite the enormity of the amount involved was a sheer negligence
and stated that, as between two innocent persons, one of whom must suffer the
consequences of a breach of trust, the
464
464 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
one who made it possible, by his act of negligence, must bear the loss.
For its part, Ford denies any negligence in the performance of its duties. It avers
that there was no evidence presented before the trial court showing lack of diligence
on the part of Ford. And, citing the case of Gempesaw vs. Court of Appeals,17 Ford
argues that even if there was a finding therein that the drawer was negligent, the
drawee bank was still ordered to pay damages.
Furthermore, Ford contends that Godofredo Rivera was not authorized to make
any representation in its behalf, specifically, to divert the proceeds of the checks. It
adds that Citibank raised the issue of imputed negligence against Ford for the first
time on appeal. Thus, it should not be considered by this Court.
On this point, jurisprudence regarding the imputed negligence of employer in a
master-servant relationship is instructive. Since a master may be held for his
servant’s wrongful act, the law imputes to the master the act of the servant, and if
that act is negligent or wrongful and proximately results in injury to a third person,
the negligence or wrongful conduct is the negligence or wrongful conduct of the
master, for which he is liable.18 The general rule is that if the master is injured by the
negligence of a third person and by the concurring contributory negligence of his
own servant or agent, the latter’s negligence is imputed to his superior and will defeat
the superior’s action against the third person, assuming, of course that the
contributory negligence was the proximate cause of the injury of which complaint is
made.19
Accordingly, we need to determine whether or not the action of Godofredo Rivera,
Ford’s General Ledger Accountant, and/or Alexis Marindo, his assistant, was the
proximate cause of the loss or damage. As defined, proximate cause is that which, in
the natural and continuous sequence, unbroken by any efficient, intervening cause
produces the injury, and without which the result would not have occurred.20
___________________
17 218 SCRA 682 (1993).
18 Am Jur 2d, Volume 58, Negligence, Section 458.
19 Am Jur 2d, Volume 58, Negligence, Section 464.
20 Vda. de Bataclan, et al vs. Medina, 102 Phil. 181,186 (1957).
465
VOL. 350, JANUARY 29, 2001 465
Philippine Commercial International Bank vs. Court of Appeals
It appears that although the employees of Ford initiated the transactions attributable
to an organized syndicate, in our view, their actions were not the proximate cause of
encashing the checks payable to the CIR. The degree of Ford’s negligence, if any,
could not be characterized as the proximate cause of the injury to the parties.
The Board of Directors of Ford, we note, did not confirm the request of Godofredo
Rivera to recall Citibank Check No. SN-04867. Rivera’s instruction to replace the
said check with PCIBank’s Manager’s Check was not in the ordinary course of
business which could have prompted PCIBank to validate the same.
As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it was
established that these checks were made payable to the CIR. Both were crossed
checks. These checks were apparently turned around by Ford’s employees, who were
acting on their own personal capacity.
Given these circumstances, the mere fact that the forgery was committed by a
drawer-payor’s confidential employee or agent, who by virtue of his position had
unusual facilities for perpetrating the fraud and imposing the forged paper Upon the
bank, does not entitle the bank to shift the loss to the drawer-payor, in the absence of
some circumstance raising estoppel against the drawer.21 This rule likewise applies to
the checks fraudulently negotiated or diverted by the confidential employees who
hold them in their possession.
With respect to the negligence of PCIBank in the payment of the three checks
involved, separately, the trial courts found variations between the negotiation of
Citibank Check No. SN-04867 and the misapplication of total proceeds of Checks SN-
10597 and 16508. Therefore, we have to scrutinize, separately, PCIBank’s share of
negligence when the syndicate achieved its ultimate agenda of stealing the proceeds
of these checks.
G.R. Nos. 121413 and 121479
Citibank Check No. SN-04867 was deposited at PCIBank through its Ermita Branch.
It was coursed through the ordinary
___________________
21 Am Jur 2d, Volume 10, Banks, Section 604 (1963 Edition).
466
466 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
banking transaction, sent to Central Clearing with the indorsement at the back “all
prior indorsements and/or lack of indorsements guaranteed,” and was presented to
Citibank for payment. Thereafter PCIBank, instead of remitting the proceeds to the
CIR, prepared two of its Manager’s checks and enabled the syndicate to encash the
same.
On record, PCIBank failed to verify the authority of Mr. Rivera to negotiate the
checks. The neglect of PCIBank employees to verify whether his letter requesting for
the replacement of the Citibank Check No. SN-04867 was duly authorized, showed
lack of care and prudence required in the circumstances.
Furthermore, it was admitted that PCIBank is authorized to collect the payment
of taxpayers in behalf of the BIR. As an agent of BIR, PCIBank is duty bound to
consult its principal regarding the unwarranted instructions given by the payor or its
agent. As aptly stated by the trial court, to wit:
“x x x. Since the questioned crossed check was deposited with IBAA [now PCIBank],
which claimed to be a depository/collecting bank of the BIR, it has the responsibility
to make sure that the check in question is deposited in Payee’s account only.
xxx xxx xxx
As agent of the BIR (the payee of the check), defendant IBAA should receive
instructions only from its principal BIR and not from any other person especially so
when that person is not known to the defendant. It is very imprudent on the part of
the defendant IBAA to just rely on the alleged telephone call of one Godofredo Rivera
and in his signature to the authenticity of such signature considering that the
plaintiff is not a client of the defendant IBAA.”
It is a well-settled rule that the relationship between the payee or holder of
commercial paper and the bank to which it is sent for collection is, in the absence of
an agreement to the contrary, that of principal and agent.22 A bank which receives
such paper for collection is the agent of the payee or holder.23
__________________
22Id. at Section 697.
23Ibid.
467
VOL. 350, JANUARY 29, 2001 467
Philippine Commercial International Bank vs. Court of Appeals
Even considering arguendo, that the diversion of the amount of a check payable to
the collecting bank in behalf of the designated payee may be allowed, still such
diversion must be properly authorized by the payor. Otherwise stated, the diversion
can be justified only by proof of authority from the drawer, or that the drawer has
clothed his agent with apparent authority to receive the proceeds of such check.
Citibank further argues that PCI Bank’s clearing stamp appearing at the back of
the questioned checks stating that ALL PRIOR INDORSEMENTS AND/OR LACK OF
INDORSEMENTS GUARANTEED should render PCIBank liable because it made it
pass through the clearing house and therefore Citibank had no other option but to
pay it. Thus, Citibank asserts that the proximate cause of Ford’s injury is the gross
negligence of PCIBank. Since the questioned crossed check was deposited with
PCIBank, which claimed to be a depository/collecting bank of the BIR, it had the
responsibility to make sure that the check in question is deposited in Payee’s account
only.
Indeed, the crossing of the check with the phrase “Payee’s Account Only,” is a
warning that the check should be deposited only in the account of the CIR. Thus, it is
the duty of the collecting bank PCIBank to ascertain that the check be deposited in
payee’s account only. Therefore, it is the collecting bank (PCIBank) which is bound to
scrutinize the check and to know its depositors before it could make the clearing
indorsement “all prior indorsements and/or lack of indorsement guaranteed.”
In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking
Corporation,24 we ruled:
“Anent petitioner’s liability on said instruments, this court is in full accord with the
ruling of the PCHC’s Board of Directors that:
‘In presenting the checks for clearing and for payment, the defendant made an
express guarantee on the validity of “all prior endorsements.” Thus, stamped at the
back of the checks are the defendant’s clear warranty: ALL PRIOR
ENDORSEMENTS AND/OR LACK OF EN-
_________________
24157 SCRA 188 (1988).
468
468 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
DORSEMENTS GUARANTEED. Without such warranty, plaintiff would not have
paid on the checks.’
No amount of legal jargon can reverse the clear meaning of defendant’s warranty.
As the warranty has proven to be false and inaccurate, the defendant is liable for any
damage arising out of the falsity of its representation.”25
Lastly, banking business requires that the one who first cashes and negotiates the
check must take some precautions to learn whether or not it is genuine. And if the
one cashing the check through indifference or other circumstance assists the forger
in committing the fraud, he should not be permitted to retain the proceeds of the
check from the drawee whose sole fault was that it did not discover the forgery or the
defect in the title of the person negotiating the instrument before paying the check.
For this reason, a bank which cashes a check drawn upon another bank, without
requiring proof as to the identity of persons presenting it, or making inquiries with
regard to them, cannot hold the proceeds against the drawee when the proceeds of
the checks were afterwards diverted to the hands of a third party. In such cases the
drawee bank has a right to believe that the cashing bank (or the collecting bank) had,
by the usual proper investigation, satisfied itself of the authenticity of the negotiation
of the checks. Thus, one who encashed a check which had been forged or diverted
and in turn received payment thereon from the drawee, is guilty of negligence which
proximately contributed to the success of the fraud practiced on the drawee bank.
The latter may recover from the holder the money paid on the check.26
Having established that the collecting bank’s negligence is the proximate cause of
the loss, we conclude that PCIBank is liable in the amount corresponding to the
proceeds of Citibank Check No SN-04867.
__________________
25 Id. at 194.
26 Supra note 20 at Section 611.
469
VOL. 350, JANUARY 29, 2001 469
Philippine Commercial International Bank vs. Court of Appeals
G.R. No. 128604
The trial court and the Court of Appeals found that PCIBank had no official act in the
ordinary course of business that would attribute to it the case of the embezzlement of
Citibank Check Numbers SN-10597 and 16508, because PCIBank did not actually
receive nor hold the two Ford checks at all. The trial court held, thus:
“Neither is there any proof that defendant PCIBank contributed any official or
conscious participation in the process of the embezzlement. This Court is convinced
that the switching operation (involving the checks while in transit for “clearing”)
were the clandestine or hidden actuations performed by the members of the
syndicate in their own personal, covert and private capacity and done without the
knowledge of the defendant PCIBank. . . .”27
In this case, there was no evidence presented confirming the conscious participation
of PCIBank in the embezzlement. As a general rule, however, a banking corporation
is liable for the wrongful or tortuous acts and declarations of its officers or agents
within the course and scope of their employment.28 A bank will be held liable for the
negligence of its officers or agents when acting within the course and scope of their
employment. It may be liable for the tortuous acts of its officers even as regards that
species of tort of which malice is an essential element. In this case, we find a situation
where the PCIBank appears also to be the victim of the scheme hatched by a
syndicate in which its own management employees had participated.
The pro-manager of San Andres Branch of PCIBank, Remberto Castro, received
Citibank Check Numbers SN-10597 and 16508. He passed the checks to a co-
conspirator, an Assistant Manager of PCIBank’s Meralco Branch, who helped Castro
open a Checking account of a fictitious person named “Reynaldo Reyes.” Castro
deposited a worthless Bank of America Check in exactly the same amount of Ford
checks. The syndicate tampered with the checks
__________________
27 Rollo, G.R. No. 128604, pp. 56-57.
28 Supra note 20 at Section 110.
470
470 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
and succeeded in replacing the worthless checks and the eventual encashment of
Citibank Check Nos, SN-10597 and 16508. The PCIBank Pro-manager, Castro, and
his co-conspirator Assistant Manager apparently performed their activities using
facilities in their official capacity or authority but for their personal and private gain
or benefit.
A bank holding out its officers and agents as worthy of confidence will not be
permitted to profit by the frauds these officers or agents were enabled to perpetrate
in the apparent course of their employment; nor will it be permitted to shirk its
responsibility for such frauds, even though no benefit may accrue to the bank
therefrom. For the general rule is that a bank is liable for the fraudulent acts or
representations of an officer or agent acting within the course and apparent scope of
his employment or authority.29 And if an officer or employee of a bank, in his official
capacity, receives money to satisfy an evidence of indebtedness lodged with his bank
for collection, the bank is liable for his misappropriation of such sum.30
Moreover, as correctly pointed out by Ford, Section 5 31 of Central Bank Circular
No. 580, Series of 1977 provides that any theft affecting items in transit for clearing,
shall be for the account of sending bank, which in this case is PCIBank.
But in this case, responsibility for negligence does not lie on PCIBank’s shoulders
alone.
The evidence on record shows that Citibank as drawee bank was likewise
negligent in the performance of its duties. Citibank failed to establish that its
payment of Ford’s checks were made in due course and legally in order. In its
defense, Citibank claims the genuineness and due execution of said checks,
considering that Citibank (1) has no knowledge of any infirmity in the issuance of the
checks in question (2) coupled by the fact that said checks were sufficiently funded
and (3) the endorsement of the Payee or lack
___________________
29 Id. at Sec. 111.
30 Id. Sec. 113.
31 Sec. 5. Loss of Clearing Items.—Any loss or damage arising from theft,
pilferage, or other causes affecting items in transit shall be for the account of the
sending bank/branch, institution or entity concerned.
471
VOL. 350, JANUARY 29, 2001 471
Philippine Commercial and International Bank vs. Court of
Appeals
thereof was guaranteed by PCI Bank (formerly IBAA), thus, it has the obligation to
honor and pay the same.
For its part, Ford contends that Citibank as the drawee bank owes to Ford an
absolute and contractual duty to pay the proceeds of the subject check only to the
payee thereof, the CIR. Citing Section 6232 of the Negotiable Instruments Law, Ford
argues that by accepting the instrument, the acceptor which is Citibank engages that
it will pay according to the tenor of its acceptance, and that it will pay only to the
payee, (the CIR), considering the fact that here the check was crossed with
annotation “Payees Account Only.”
As ruled by the Court of Appeals, Citibank must likewise answer for the damages
incurred by Ford on Citibank Checks Numbers SN-10597 and 16508, because of the
contractual relationship existing between the two. Citibank, as the drawee bank
breached its contractual obligation with Ford and such degree of culpability
contributed to the damage caused to the latter. On this score, we agree with the
respondent court’s ruling.
Citibank should have scrutinized Citibank Check Numbers SN-10597 and 16508
before paying the amount of the proceeds thereof to the collecting bank of the BIR.
One thing is clear from the record: the clearing stamps at the back of Citibank Check
Nos. SN-10597 and 16508 do not bear any initials. Citibank failed to notice and verify
the absence of the clearing stamps. Had this been duly examined, the switching of the
worthless checks to Citibank Check Nos. SN-10597 and 16508 would have been
discovered in time. For this reason, Citibank had indeed failed to perform what was
incumbent upon it, which is to ensure that the amount of the checks should be paid
only to its designated payee. The fact that the drawee bank did not discover the
irregularity seasonably, in our view, constitutes negligence in carrying out the bank’s
duty to its depositors. The point is that as a business affected with public interest and
because of the nature of its functions, the bank is under obligation to treat the
accounts of its depositors with me-
___________________
32 Sec. 62, Negotiable Instruments Law.
472
472 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
ticulous care, always having in mind the fiduciary nature of their relationship.33
Thus, invoking the doctrine of comparative negligence, we are of the view that
both PCIBank and Citibank failed in their respective obligations and both were
negligent in the selection and supervision of their employees resulting in the
encashment of Citibank Check Nos. SN-10597 and 16508. Thus, we are constrained
to hold them equally liable for the loss of the proceeds of said checks issued by Ford
in favor of the CIR.
Time and again, we have stressed that banking business is so impressed with
public interest where the trust and confidence of the public in general is of
paramount importance such that the appropriate standard of diligence must be very
high, if not the highest, degree of diligence.34A bank’s liability as obligor is not merely
vicarious but primary, wherein the defense of exercise of due diligence in the
selection and supervision of its employees is of no moment.35
Banks handle daily transactions involving millions of pesos.36 By the very nature
of their work the degree of responsibility, care and tnistworthiness expected of their
employees and officials is far greater than those of ordinary clerks and
employees.37 Banks are expected to exercise the highest degree of diligence in the
selection and supervision of their employees.38
On the issue of prescription, PCIBank claims that the action of Ford had
prescribed because of its inability to seek judicial relief seasonably, considering that
the alleged negligent act took place prior to December 19, 1977 but the relief was
sought only in 1983, or seven years thereafter.
The statute of limitations begins to run when the bank gives the depositor notice
of the payment, which is ordinarily when the check
______________________
33 Simex International (Manila), Inc. vs. Court of Appeals, 183 SCRA 360, 367
(1990).
34 Supra, see note 17, at p. 697.
35 Ibid.
36 BPI vs. Court of Appeals, 216 SCRA 51, 71 (1992).
37 Ibid.
38 Ibid.
473
VOL. 350, JANUARY 29, 2001 473
 Philippine Commercial International Bank vs. Court of Appeals
is returned to the alleged drawer as a voucher with a statement of his account, 39 and
an action upon a check is ordinarily governed by the statutory period applicable to
instruments in writing.40
Our laws on the matter provide that the action upon a written contract must be
brought within ten years from the time the right of action accrues.41 Hence, the
reckoning time for the prescriptive period begins when the instrument was issued
and the corresponding check was returned by the bank to its depositor (normally a
month thereafter). Applying the same rule, the cause of action for the recovery of the
proceeds of Citibank Check No. SN-04867 would normally be a month after
December 19, 1977, when Citibank paid the face value of the check in the amount of
P4,746,114.41. Since the original complaint for the cause of action was filed on
January 20, 1983, barely six years had lapsed. Thus, we conclude that Ford’s cause of
action to recover the amount of Citibank Check No. SN-04867 was seasonably filed
within the period provided by law.
Finally, we also find that Ford is not completely blameless in its failure to detect
the fraud. Failure on the part of the depositor to examine its passbook, statements of
account, and cancelled checks and to give notice within a reasonable time (or as
required by statute) of any discrepancy which it may in the exercise of due care and
diligence find therein, serves to mitigate the banks’ liability by reducing the award of
interest from twelve percent (12%) to six percent (6%) per annum. As provided in
Article 1172 of the Civil Code of the Philippines, responsibility arising from
negligence in the performance of every kind of obligation is also demandable, but
such liability may be regulated by the courts, according to the circumstances. In,
quasi-delicts, the. contributory negligence of the plaintiff shall reduce the damages
that he may recover.42
WHEREFORE, the assailed Decision and Resolution of the Court of Appeals in
CA-G.R. CV No. 25017, are AFFIRMED. PCIBank, known formerly as Insular Bank of
Asia and America, is declared solely responsible for the loss of the proceeds of
Citibank
Check No. SN-04867 in the amount of P4,746,114.41, which shall be paid together
with six percent (6%) interest thereon to Ford Philippines, Inc. from the date when
the original complaint was filed until said amount is fully paid.
However, the Decision and Resolution of the Court of Appeals in CA-G.R. No.
28430 are MODIFIED as follows: PCIBank and Citibank are adjudged liable for and
must share the loss, (concerning the proceeds of Citibank Check Numbers SN-10597
and 16508 totalling P12,163,298.10) on a fifty-fifty ratio, and each bank is ORDERED
to pay Ford Philippines, Inc. P6,081,649.05, with six percent (6%) interest thereon,
from the date the complaint was filed until full payment of said amount.
Costs against Philippine Commercial International Bank and Citibank, N.A.
SO ORDERED.
Bellosillo (Chairman), Mendoza, Buena and De Leon, Jr., JJ., concur.
Judgment in CA-G.R. CV No. 25017 affirmed, while in CA-G.R. No. 28430
modified.
Notes.—Issuing a crossed check imposes no legal obligation on the drawee not to
honor such a check. (Gempesaw vs. Court of Appeals, 218 SCRA 682 [19931)
There is no contractual relation created between a drawee bank and the payee as a
result of the payment by the former of the amount of the check. (Security Bank and
Trust Company vs. Court of Appeals, 291 SCRA 33 [1998])
——o0o——

___________________
39 Supra note 20 at Section 605.
40 Ibid.
41 CIVIL CODE, Art. 1144.
42 CIVIL CODE, Art. 2214.

474
474 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
 [No. L-15380. September 30, 1960]
CHAN WAN, plaintiff and appellant, vs. TAN KIM and CHEN SO, defendants and
appellees.
1. 1.NEGOTIABLE INSTRUMENTS; CROSSED CHECKS; ABSENCE OF DUE
PRESENTMENT; LIABILITY OF DRAWER.—The drawer in drawing the
check engaged that on due presentment, the check would be paid, and that if
it be dishonored, he will pay the amount thereof to the holder. Wherefore, in
the absence of due presentment, the drawer did not become liable.
1. 2.ID.; ID.; CHECK CROSSED SPECIALLY IN FAVOR OF A CERTAIN BANK,
HOW COLLECTED; LIABILITY OF DRAWEE FOR WRONG
707
VOL. 109, SEPTEMBER 30, 1960 7 In view of such circumstances, the court declined to order payment for two principal
07
Chan Wan vs. Tan Kim and Chen So
1. PAYMENT.—Where a check is crossed specially in favor of a certain bank, the
check is generally deposited with the bank mentioned in the crossing, so that
the latter may take charge of the collection. If it is not presented by said
bank for payment, the drawee is liable to the true owner, in case of payment
to persons not entitled thereto.
1. 3.ID.; ID.; HOLDER WHO IS NOT A HOLDER IN DUE COURSE CAN STILL
RECOVER ON THE CHECK.—The Negotiable Instruments Law does not
provide that a holder who is not a holder in due course, may not in any case,
recover on the instrument. The only disadvantage of a holder who is not a
holder in due course is that the negotiable instrument is subject to defenses
sa if it were non-negotiable.
APPEAL from a judgment of the Court of First Instance of Manila. Alvendia, J.
The facts are stated in the opinion of the Court.
Manuel Domingo for appellant.
C. M. de los Reyes for appellees.
BENGZON, J.:
This suit to collect eleven checks totalling P4,290.00 is here for decision because it
involves no issue of fact.
Such checks payable to "cash or bearer" and drawn by defendant Tan Kim (the
other defendant is her husband) upon the Equitable Banking Corporation, were all
presented for payment by Chan Wan to the drawee bank, but they "were all
dishonored and returned to him unpaid due to insufficient funds and/or causes
attributable to the drawer."
At the hearing of the case, in the Manila court of first instance, the plaintiff did
not take the witness stand. His attorney, however, testified only to identify the
checks—which are Exhibits A to K—plus the letters of demand upon defendants.
On the other hand, Tan Kim declared without contradiction that the checks had
been issued to two persons named Pinong and Muy for some shoes the former had
promised to make and "were intended as mere receipts".
708
708 PHILIPPINE REPORTS ANNOTATED
Chan Wan vs. Tan Kim and Chen So
reasons: (a) plaintiff failed to prove he was a holder in due course, and (b) the checks
being crossed checks should not have been presented to the drawee for "payment,"
but should have been deposited instead with the bank mentioned in the crossing.
It may be stated in this connection, that defendants asserted a counterclaim, the
court dismissed it for failure of proof, and from such dismissal they did not appeal.
The only issue is, therefore, the plaintiff's right to collect on the eleven
commercial documents.
The Negotiable Instruments Law regulating the issuance of negotiable checks, the
rights and the liabilities arising therefrom, does not mention "crossed checks". Art.
541 of the Code of Commerce refers to such instruments. 1The bills of Exchange Act
of England of 1882, contains several provisions about them, some of which are
quoted in the margin. 2 In Philippine National Bank vs. Zulueta, 101 Phil., 1071; 55
Off. Gaz., 222, we applied some provisions of said Bills of Exchange Act because the
Negotiable Instruments Law, originating from England
_______________
1 SEC. 541.—The maker or any legal holder of a check shall be entitled to indicate
therein that it be paid to a certain banker or institution, which he shall do by writing
across the face the name of said banker or institution, or only the words "and
company."
The payment made to a person other than the banker or institution shall not exempt
the person on whom it is drawn, if the payment was not correctly made.
2 76. [General and Special Crossings Defined.]—(1) Where a check bears across its
face an addition of—
 1. (a)The words "and company" or any abbreviation thereof between two
parallel transverse lines, either with or without the words "not negotiable;"
or
2. (b)Two parallel transverse lines simply, either with or without the words "not
negotiable;" that addition constitutes a crossing, and the cheque is crossed
generally.
1. (2)Where a cheque bears across its face an addition of the name of a banker,
either with or without the words "not negotiable,"
709
VOL. 109, SEPTEMBER 30, 1960 709
Chan Wan vs. Tan Kim and Chen So
and codified in the United States, permits resort thereto in matters not covered by it
and local legislation.3
Eight of the checks here in question bear across their face two parallel transverse
lines between which these words are written: non-negotiable—China Banking
Corporation. These checks have, therefore, been crossed specially to the China
Banking Corporation, and should have been presented for payment by China
Banking, and not by Chan Wan. 4 Inasmuch as Chan Wan did present them for
payment himself—the Manila court said—there was no proper presentment, and the
liability did not attach to the drawer.
We agree to the legal premises and conclusion. It must be remembered, at this
point, that the drawer in drawing the check engaged that "on due presentment, the
check would be paid, and that if it be dishonored * * * he will pay the amount thereof
to the holder". 5 Wherefore, in the absence of due presentment, the drawer did not
become liable.
Nevertheless we find, on the backs of the checks, endorsements which apparently
show they had been deposited
_______________
that addition constitutes a crossing, and the cheque is crossed specially and to
that banker. 79. * * * (2) Where the banker on whom a cheque is drawn which is so
crossed nevertheless pays the same, or pays a cheque crossed generally otherwise
than to a banker, or if crossed specially otherwise than to the banker to whom it is
crossed, or his agent for collection being a banker, he is liable to the true owner of the
cheque for any loss he may sustain owing to the cheque having been so paid. (Taken
from Brannan's Negotiable Instruments Law, 6th Ed. 1250–1251.)
3 Sec. 196, Negotiable Instruments Law.
4 If it is not presented by said Bank for payment, the drawee runs the risk, in case
of payment to persons not entitled thereto. So the practice is for the drawee to refuse
when presented by individuals. The check is generally deposited with the bank
mentioned in the crossing, so that the latter may take charge of the collection.
5 Sec. 61. Negotiable Instruments Law.
710
710 PHILIPPINE REPORTS ANNOTATED
Chan Wan vs. Tan Kim and Chen So
with the China Banking Corporation and were, by the latter, presented to the drawee
bank for collection. For instance, on the back of the check Exhibit A (same as in Exh.
B), this endorsement appears:
"For deposit to the account of White House Shoe Supply with the China Banking
Corporation." and then this:
"Cleared through the clearing office Central Bank of the Philippines. All prior
endorsements and/or lack of endorsements guaranteed. China Banking
Corporation."
And on the back of Exh. G:
"For deposit to the credit of our account. Viuda e Hijos de Chua Chiong Pio. People's
Shoe Company",
followed by the endorsement of China Banking Corporation as in Exhibits A and B.
All the crossed checks have the "clearance" endorsement of China Banking
Corporation.
These circumstances would seem to show deposit of the checks with China
Banking Corporation and subsequent presentation by the latter through the clearing
office; but as drawee had no funds, they were unpaid and returned, some of them
stamped "account closed". How they reached his hands, plaintiff did not indicate.
Most probably, as the trial court surmised,—this is not a finding of fact—he got
them after they had been thus returned, because he presented them in court with
such "account closed" stamps, without bothering to explain. Naturally and rightly,
the lower court held him not to be a holder in due course under the circumstances,
since he knew, upon taking them up, that the checks had already been dishonored. 6
Yet it does not follow as a legal proposition, that simply because he was not a
holder in due course, Chan Wan could not recover on the checks. The Negotiable
Instru-
_______________
6Sec. 52 (b), Negotiable Instruments Law.
711
VOL. 109, SEPTEMBER 30, 1960 711
Chan Wan vs. Tan Kim and Chen So
ments Law does not provide that a holder 7 who is not a holder in due course, may
not in any case, recover on the instrument. If B purchases an overdue negotiable
promissory note signed by A, he is not a holder in due course; but he may recover
from A,8 if the latter has no valid excuse for refusing payment. The only disadvantage
of a holder who is not a holder in due course is that the negotiable instrument is
subject to defenses as if it were non-negotiable. 9
Now what defenses did the defendant Tan Kim prove? The lower court's decision
does not mention any; evidently His Honor had in mind the defense pleaded in
defendant's answer, but thought it unnecessary to specify, because the "crossing" and
presentation incidents sufficed to bar recovery, in his opinion.
Tan Kim admitted on cross-examination either that the checks had been issued as
evidence of debts to Pinong and Muy, and/or that they had been issued in payment of
shoes which Pinong had promised to make for her.
Seeming to imply that Pinong had failed to make the shoes, she asserted Pinong
had "promised to pay the checks for me". Yet she did not complete the idea, perhaps
because she was just answering cross-questions, her main testimony having referred
merely to their counterclaim.
Needless to say, if it were true that the checks had been issued in payment for
shoes that were never made and delivered, Tan Kim would have a good defense as
against a holder who is not a holder in due course. 10
Considering the deficiency of important details on which a fair adjudication of the
parties' rights depends, we think the record should be and is hereby returned, in

_______________
7 He was a holder all right, because he had possession of the checks that were
payable to bearer.
8 Sec. 51. Negotiable Instruments Law.
9 SEC. 58. Negotiable Instruments Law.
10 Lack of consideration is a defense. (Sec. 28, Negotiable Instruments Law.)

712
712 PHILIPPINE REPORTS ANNOTATED
Rex Taxicab Co., Inc. vs. Bautista and Court of Appeals
the interest of justice, to the court below for additional evidence, and such further
proceedings as are not inconsistent with this opinion. With the understanding that,
as defendants did not appeal, their counterclaim must be and is hereby definitely
dismissed. So ordered.
Parás, C. J., Padilla, Bautista Angelo, Labrador,Concepción, Reyes, J. B.
L., Barrera, Gutierrez David, Paredes, and Dizon, JJ., concur.
Case returned for further proceedings.

_______________
 G.R. No. 121413. January 29, 2001.*
PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly INSULAR BANK
OF ASIA AND AMERICA), petitioner, vs. COURT OF APPEALS and FORD
PHILIPPINES, INC. and CITIBANK, N.A., respondents.
G.R. No. 121479. January 29, 2001.*
FORD PHILIPPINES, INC., petitioner, vs. COURT OF APPEALS and CITIBANK,
N.A. and PHILIPPINE COMMERCIAL INTERNATIONAL BANK, respondents.
G.R. No. 128604. January 29, 2001.*
FORD PHILIPPINES, INC., petitioner, vs. CITIBANK, N.A., PHILIPPINE
COMMERCIAL INTERNATIONAL BANK and THE COURT OF APPEALS,
respondents.
Negligence; Torts; Quasi-Delicts; The general rule is that if the master is
injured by the negligence of a third person and by the concurring contributory
negligence of his own servant or agent, the latter’s negligence is imputed to his
superior and will defeat the superior’s action against the third person, assuming, of
course that the contributory negligence was the proximate cause of the injury of
which complaint is made.—On this point, jurisprudence regarding the imputed
negligence of employer in a master-servant relationship is instructive. Since a master
may be held for his servant’s wrongful act, the law imputes to the master the act of
the servant, and if that act is negligent or wrongful and proximately results in injury
to a third person, the negligence or wrongful conduct is the negligence or wrongful
conduct of the master, for which he is liable. The general rule is that if the master is
injured by the negligence of a third person and by the concurring contributory
negligence of his own servant or agent, the latter’s negligence is imputed to his
superior and will defeat the superior’s action against the third person, assuming, of
course that the contributory negligence was the proximate cause of the injury of
which complaint is made.
Same; Same; Same; Words and Phrases; Proximate cause is that which, in the
natural and continuous sequence, unbroken by any efficient, intervening cause,
produces the injury, and without which the result would
________________
*SECOND DIVISION.
447
VOL. 350, JANUARY 29, 2001 44
7 48
Philippine Commercial and International Bank vs. Court of
Appeals
not have occurred.—Accordingly, we need to determine whether or not the
action of Godofredo Rivera, Ford’s General Ledger Accountant, and/or Alexis
Marindo, his assistant, was the proximate cause of the loss or damage. As defined,
proximate cause is that which, in the natural and continuous sequence, unbroken by
any efficient, intervening cause produces the injury, and without which the result
would not have occurred.
Banks and Banking; Negotiable Instruments; Checks; The mere fact that the
forgery was committed by a drawer-payor’s confidential employee or agent, who
by virtue of his position had unusual facilities for perpetrating the fraud and
imposing the forged paper upon the bank, does not entitle the bank to shift the loss
to the drawer-payor, in the absence of some circumstances raising estoppel against
the drawer.—It appears that although the employees of Ford initiated the
transactions attributable to an organized syndicate, in our view, their actions were
not the proximate cause of encashing the checks payable to the CIR. The degree of
Ford’s negligence, if any, could not be characterized as the proximate cause of the
injury to the parties. The Board of Directors of Ford, we note, did not confirm the
request of Godofredo Rivera to recall Citibank Check No. SN-04867. Rivera’s
instruction to replace the said check with PCIBank’s Manager’s Check was not in the
ordinary course of business which could have prompted PCIBank to validate the
same. As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it was
established that these checks were made payable to the CIR. Both were crossed
checks. These checks were apparently turned around by Ford’s employees, who were
acting on their own personal capacity. Given these circumstances, the mere fact that
the forgery was committed by a drawer-payor’s confidential employee or agent, who
by virtue of his position had unusual facilities for perpetrating the fraud and
imposing the forged paper upon the bank, does not entitle the bank to shift the loss
to the drawer-payor, in the absence of some circumstance raising estoppel against
the drawer. This rule likewise applies to the checks fraudulently negotiated or
diverted by the confidential employees who hold them in their possession.
Same; Checks; Collecting Banks; Taxation; A bank authorized to collect the
payment of taxpayers in behalf of the Bureau of Internal Revenue is duty bound to
consult its principal regarding the unwarranted instructions given by the pay or of
its agent.—Citibank Check No. SN-04867 was deposited at PCIBank through its
Ermita Branch. It was coursed through the ordinary banking transaction, sent to
Central Clearing with the indorsement at the back “all prior indorsements and/or
lack of indorsements guaranteed,” and was presented to Citibank for payment.
Thereafter PCIBank, instead of remitting the proceeds to the CIR, prepared two of its
448
4 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial and International Bank vs. Court of
Appeals
Manager's checks and enabled the syndicate to encash the same. On record,
PCIBank failed to verify the authority of Mr. Rivera to negotiate the checks. The
neglect of PCIBank employees to verify whether his letter requesting for the
replacement of the Citibank Check No. SN-04867 was duly authorized, showed lack
of care and prudence required in the circumstances. Furthermore, it was admitted
that PCIBank is authorized to collect the payment of taxpayers in behalf of the BIR.
As an agent of BIR, PCIBank is duty bound to consult its principal regarding the
unwarranted instructions given by the payor or its agent.
Same; Same; Same; Negotiable Instruments; It is a well-settled rule that the
relationship between the payee or holder of commercial paper and the bank to
which it is sent for collection is, in the absence of an agreement to the contrary, that
of principal and agent.—It is a well-settled rule that the relationship between the
payee or holder of commercial paper and the bank to which it is sent for collection is,
in the absence of an agreement to the contrary, that of principal and agent. A bank
which receives such paper for collection is the agent of the payee or holder.
Same; Same; Same; Even considering arguendo, that the diversion of the
amount of a check payable to the collecting bank in behalf of the designated payee
may be allowed, still such diversion must be properly authorized by the payor.—
Even considering arguendo, that the diversion of the amount of a check payable to
the collecting bank in behalf of the designated payee may be allowed, still such
diversion must be properly authorized by the payor. Otherwise stated, the diversion
can be justified only by proof of authority from the drawer, or that the drawer has
clothed his agent with apparent authority to receive the proceeds of such check.
Same; Same; Same; Crossed Checks; Words and Phrases; The crossing of the
check with the phrase “Payee’s Account Only,” is a warning that the check should be
deposited only in the account of the payee; It is the collecting bank which is bound
to scrutinize the check and to know its depositors before it could make the clearing
indorsement “all prior indorsements and lor lack ofindorsement guaranteed.”—
Indeed, the crossing of the check with the phrase “Payee’s Account Only,” is a
warning that the check should be deposited only in the account of the CIR. Thus, it is
the duty of the collecting bank PCIBank to ascertain that the check be deposited in
payee’s account only. Therefore, it is the collecting bank (PCIBank) which is bound to
scrutinize the check and to know its depositors before it could make the clearing
indorsement “all prior indorsements and/or lack of indorsement guaranteed.”
449
VOL. 350, JANUARY 29, 2001 44
9 Philippine Commercial International Bank vs. Court of
Philippine Commercial International Bank vs. Court of
Appeals
Same; Same; Same; A bank which cashes a check drawn upon another bank,
without requiring proof as to the identity of persons presenting it, or making
inquiries with regard to them, cannot hold the proceeds against the drawee when
the proceeds of the checks were afterwards diverted to the hands of a third party.—
Banking business requires that the one who first cashes and negotiates the check
must take some precautions to learn whether or not it is genuine. And if the one
cashing the check through indifference or other circumstance assists the forger in
committing the fraud, he should not be permitted to retain the proceeds of the check
from the drawee whose sole fault was that it did not discover the forgery or the defect
in the title of the person negotiating the instrument before paying the check. For this
reason, a bank which cashes a check drawn upon another bank, without requiring
proof as to the identity of persons presenting it, or making inquiries with regard to
them, cannot hold the proceeds against the drawee when the proceeds of the checks
were afterwards diverted to the hands of a third party. In such cases the drawee bank
has a right to believe that the cashing bank (or the collecting bank) had, by the usual
proper investigation, satisfied itself of the authenticity of the negotiation of the
checks. Thus, one who encashed a check which had been forged or diverted and in
turn received payment thereon from the drawee, is guilty of negligence which
proximately contributed to the success of the fraud practiced on the drawee bank.
The latter may recover from the holder the money paid on the check.
Same; Same; Torts; As a general rule, a banking corporation is liable for the
wrongful or tortuous acts and declarations of its officers or agents within the
course and scope of their employment—it may be liable for the tortuous acts of its
officers even as regards that species of tort of which malice is an essential
element.—In this case, there was no evidence presented confirming the conscious
participation of PCIBank in the embezzlement. As a general rule, however, a banking
corporation is liable for the wrongful or tortuous acts and declarations of its officers
or agents within the course and scope of their employment. A bank will be held liable
for the negligence of its officers or agents when acting within the course and scope of
their employment. It may be liable for the tortuous acts of its officers even as regards
that species of tort of which malice is an essential element. In this case, we find a
situation where the PCIBank appears also to be the victim of the scheme hatched by a
syndicate in which its own management employees had participated.
Same; Same; Same; The general rule is that a bank is liable for the fraudulent
acts or representations of an officer or agent acting within the course and apparent
scope of his employment or authority.—A bank hold-
450
4 SUPREME COURT REPORTS ANNOTATED
50
Appeals
ing out its officers and agents as worthy of confidence will not be permit- ted to
profit by the frauds these officers or agents were enabled to perpetrate in the
apparent course of their employment; nor will it be permitted to shirk its
responsibility for such frauds, even though no benefit may accrue to the bank
therefrom. For the general rule is that a bank is liable for the fraudulent acts or
representations of an officer or agent acting within the course and apparent scope of
his employment or authority. And if an officer or employee of a bank, in his official
capacity, receives money to satisfy an evidence of indebtedness lodged with his bank
for collection, the bank is liable for his misappropriation of such sum.
Same; Same; Same; Negligence; As a business affected with public interest
and because of the nature of its functions, a bank is under obligation to treat the
accounts of its depositors with meticulous care, always having in mind the
fiduciary nature of their relationship.—Citibank should have scrutinized Citibank
Check Numbers SN-10597 and 16508 before paying the amount of the proceeds
thereof to the collecting bank of the BIR. One thing is clear from the record: the
clearing stamps at the back of Citibank Check Nos. SN-10597 and 16508 do not bear
any initials. Citibank failed to notice and verify the absence of the clearing stamps.
Had this been duly examined, the switching of the worthless checks to Citibank
Check Nos. 10597 and 16508 would have been discovered in time. For this reason,
Citibank had indeed failed to perform what was incumbent upon it, which is to
ensure that the amount of the checks should be paid only to its designated payee. The
fact that the drawee bank did not discover the irregularity seasonably, in our view,
constitutes negligence in carrying out the bank’s duty to its depositors. The point is
that as a business affected with public interest and because of the nature of its
functions, the bank is under obligation to treat the accounts of its depositors with
meticulous care, always having in mind the fiduciary nature of their relationship.
Same; Same; Same; Same; Doctrine of Comparative Negligence; Where both
the collecting and drawee banks failed in their respective obligations and both were
negligent in the selection and supervision of their employees, both are equally liable
for the loss of the proceeds of checks fraudulently encashed.—Thus, invoking the
doctrine of comparative negligence, we are of the view that both PCIBank and
Citibank failed in their respective obligations and both were negligent in the selection
and supervision of their employees resulting in the encashment of Citibank Check
Nos. SN-10597 and 16508. Thus, we are constrained to hold them equally liable for
the loss of the proceeds of said checks issued by Ford in favor of the CIR.
451
VOL. 350, JANUARY 29, 2001 45
1 Appeals
Philippine Commercial International Bank vs. Court of
Appeals
Same; Same; Same; Same; The banking business is so impressed with public
interest where the trust and confidence of the public in general is of paramount
importance such that the appropriate standard of diligence must be very high, if
not the highest, degree of diligence.—Time and again, we have stressed that banking
business is so impressed with public interest where the trust and confidence of the
public in general is of paramount importance such that the appropriate standard of
diligence must be very high, if not the highest, degree of diligence. A bank’s liability
as obligor is not merely vicarious but primary, wherein the defense of exercise of due
diligence in the selection and supervision of its employees is of no moment.
Same; Same; Same; Same; Banks are expected to exercise the highest degree
of diligence in the selection and supervision of their employees.—Banks handle daily
transactions involving millions of pesos. By the very nature of their work the degree
of responsibility, care and trustworthiness expected of their employees and officials
is far greater than those of ordinary clerks and employees. Banks are expected to
exercise the highest degree of diligence in the selection and supervision of their
employees.
Same; Same; Same; Prescription; The statute of limitations begins to run
when the bank gives the depositor notice of the payment, and an action upon a
check is ordinarily governed by the statutory period applicable to instruments in
writing; An action upon a written contract must be brought within ten years from
the time the right of action accrues.—The statute of limitations begins to run when
the bank gives the depositor notice of the payment, which is ordinarily when the
check is returned to the alleged drawer as a voucher with a statement of his account,
and an action upon a check is ordinarily governed by the statutory period applicable
to instruments in writing. Our laws on the matter provide that the action upon a
written contract must be brought within ten years from the time the right of action
accrues. Hence, the reckoning time for the prescriptive period begins when the
instrument was issued and the corresponding check was returned by the bank to its
depositor (normally a month thereafter). Applying the same rule, the cause of action
for the recovery of the proceeds of Citibank Check No. SN-04867 would normally be
a month after December 19, 1977, when Citibank paid the face value of the check in
the amount of P4,746,114.41. Since the original complaint for the cause of action was
filed on January 20, 1983, barely six years had lapsed. Thus, we conclude that Ford’s
cause of action to recover the amount of Citibank Check No. SN-04867 was
seasonably filed within the period provided by law.
452
4 SUPREME COURT REPORTS ANNOTATED
52
Philippine Commercial International Bank vs. Court of
Same; Same; Same; Negligence; Failure on the part of the depositor to
examine its passbook, statements of account, and cancelled checks and to give
notice within a reasonable time (or as required by statute) of any discrepancy
which it may in the exercise of due care and diligence find therein, serves to
mitigate the banks’ liability by reducing the award of interest from twelve percent
(12%) to six percent (6%) per annum.—We also find that Ford is not completely
blameless in its failure to detect the fraud. Failure on the part of the depositor to
examine its passbook, statements of account, and cancelled checks and to give notice
within a reasonable time (or as required by statute) of any discrepancy which it may
in the exercise of due care and diligence find therein, serves to mitigate the banks’
liability by reducing the award of interest from twelve percent (12%) to six percent
(6%) per annum. As provided in Article 1172 of the Civil Code of the Philippines,
responsibility arising from negligence in the performance of every kind of obligation
is also demandable, but such liability may be regulated by the courts, according to
the circumstances. In quasi-delicts, the contributory negligence of the plaintiff shall
reduce the damages that he may recover.
PETITIONS for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Romulo, Mabanta, Buenaventura, Sayoc & Delos Angeles for Ford
Philippines, Inc.
Agabin, Verzola, Hermoso, Layaoen and De Castro for private respondent
PCIB.
Angara, Abello, Concepcion, Regala and Cruz for respondent Citibank.
QUISUMBING, J.:
These consolidated petitions involve several fraudulently negotiated checks.
The original actions a quo were instituted by Ford Philippines to recover from the
drawee bank, CITIBANK, N.A. (Citibank) and collecting bank, Philippine
Commercial International Bank (PCI-Bank) [formerly Insular Bank of Asia and
America], the value of several checks payable to the Commissioner of Internal
Revenue, which were embezzled allegedly by an organized syndicate.
453
VOL. 350, JANUARY 29, 2001 453
Philippine Commercial International Bank vs. Court of Appeals
G.R. Nos. 121413 and 121479 are twin petitions for review of the March 27, 1995
Decision1 of the Court of Appeals in CA-G.R. CV No. 25017, entitled “Ford
Philippines, Inc. vs. Citibank, N.A. and Insular Bank of Asia and America (now
Philippine Commercial International Bank), and the August 8, 1995
Resolution,2 ordering the collecting bank, Philippine Commercial International Bank,
to pay the amount of Citibank Check No. SN-04867.
In G.R. No. 128604, petitioner Ford Philippines assails the October 15, 1996
Decision3 of the Court of Appeals and its March 5, 1997 Resolution4 in CA-G.R. No.
28430entitled “Ford Philippines, Inc. vs. Citibank, N.A. and Philippine Commercial
International Bank,” affirming in toto the judgment of the trial court holding the
defendant drawee bank, Citibank, N.A., solely liable to pay the amount of
P12,163,298.10 as damages for the misapplied proceeds of the plaintiff’s Citibank
Check Numbers SN-10597 and 16508.
I. G.R. Nos. 121413 and 121479
The stipulated facts submitted by the parties as accepted by the Court of Appeals are
as follows:
“On October 19, 1977, the plaintiff Ford drew and issued its Citibank Check No. SN-
04867 in the amount of P4,746,114.41, in favor of the Commissioner of Internal
Revenue as payment of plaintiff’s percentage or manufacturer’s sales taxes for the
third quarter of 1977.
The aforesaid check was deposited with the defendant IBAA (now PCIBank) and
was subsequently cleared at the Central Bank. Upon presentment with the defendant
Citibank, the proceeds of the check was paid to IBAA as collecting or depository
bank.
__________________
1 Penned by Justice B. A. Adefuin-dela Cruz and concurred in by Justices Jesus M.
Elbinias and Lourdes K. Tayao-Jaguros, rollo, G.R. No. 121413, pp. 27-42.
2 Rollo, G.R. No. 121413, pp. 44-45.
3 Penned by Justice Jose C. de la Rama and concurred in by Justices Emeterio C.
Cui and Eduardo G. Montenegro, rollo, G.R. No. 128604, pp. 45-60.
4 Rollo, G.R. No. 128604, pp. 42-43.
454
454 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
The proceeds of the same Citibank check of the plaintiff was never paid to or received
by the payee thereof, the Commissioner of Internal Revenue.
As a consequence, upon demand of the Bureau and/or Commissioner of Internal
Revenue, the plaintiff was compelled to make a second payment to the Bureau of
Internal Revenue of its percentage/manufacturers’ sales taxes for the third quarter of
1977 and that said second payment of plaintiff in the amount of P4,746,114.41 was
duly received by the Bureau of Internal Revenue.
It is further admitted by defendant Citibank that during the time of the
transactions in question, plaintiff had been maintaining a checking account with
defendant Citibank; that Citibank Check No. SN-04867 which was drawn and issued
by the plaintiff in favor of the Commissioner of Internal Revenue was a crossed check
in that, on its face were two parallel lines and written in between said lines was the
phrase “Payee’s Account Only”; and that defendant Citibank paid the full face value
of the check in the amount of P4,746,114.41 to the defendant IBAA.
It has been duly established that for the payment of plaintiff’s percentage tax for
the last quarter of 1977, the Bureau of Internal Revenue issued Revenue Tax Receipt
No. 18747002, dated October 20, 1977, designating therein in Muntinlupa, Metro
Manila, as the authorized agent bank of Metrobank, Alabang Branch to receive the
tax payment of the plaintiff.
On December 19, 1977, plaintiff’s Citibank Check No. SN-04867, together with the
Revenue Tax Receipt No. 18747002, was deposited with defendant IBAA, through its
Ermita Branch. The latter accepted the check and sent it to the Central Clearing
House for clearing on the same day, with the indorsement at the back “all prior
indorsements and/or lack of indorsements guaranteed.” Thereafter, defendant IBAA
presented the check for payment to defendant Citibank on same date, December 19,
1977, and the latter paid the face value of the check in the amount of P4,746,114.41.
Consequently, the amount of P4,746,114.41 was debited in plaintiff’s account with the
defendant Citibank and the check was returned to the plaintiff.
Upon verification, plaintiff discovered that its Citibank Check No. SN-04867 in
the amount of P4,746,114.41 was not paid to the Commissioner of Internal Revenue.
Hence, in separate letters dated October 26, 1979, addressed to the defendants, the
plaintiff notified the latter that in case it will be re-assessed by the BIR for the
payment of the taxes covered by the said checks, then plaintiff shall hold the
defendants liable for reim-
455
VOL. 350, JANUARY 29, 2001 455
Philippine Commercial International Bank vs. Court of Appeals
bursement of the face value of the same. Both defendants denied liability and refused
to pay.
In a letter dated February 28, 1980 by the Acting Commissioner of Internal
Revenue addressed to the plaintiff—supposed to be Exhibit “D,” the latter was
officially informed, among others, that its check in the amount of P4,746,114.41 was
not paid to the government or its authorized agent and instead encashed by
unauthorized persons, hence, plaintiff has to pay the said amount within fifteen days
from receipt of the letter. Upon advice of the plaintiff’s lawyers, plaintiff on March 11,
1982, paid to the Bureau of Internal Revenue, the amount of P4,746,114.41,
representing payment of plaintiff’s percentage tax for the third quarter of 1977.
As a consequence of defendant’s refusal to reimburse plaintiff of the payment it
had made for the second time to the BIR of its percentage taxes, plaintiff filed on
January 20, 1983 its original complaint before this Court.
On December 24, 1985, defendant IBAA was merged with the Philippine
Commercial International Bank (PCIBank) with the latter as the surviving entity.
Defendant Citibank maintains that; the payment it made of plaintiffs Citibank
Check No. SN-04867 in the amount of P4,746,114.41 “was in due course”; it merely
relied on the clearing stamp of the depository/collecting bank, the defendant IBAA
that “all prior indorsements and/or lack of indorsements guaranteed”; and the
proximate cause of plaintiff’s injury is the gross negligence of defendant IBAA in
indorsing the plaintiff’s Citibank check in question.
It is admitted that on December 19, 1977 when the proceeds of plaintiff’s Citibank
Check No. SN-04867 was paid to defendant IBAA as collecting bank, plaintiff was
maintaining a checking account with defendant Citibank.”5
Although it was not among the stipulated facts, an investigation by the National
Bureau of Investigation (NBI) revealed that Citibank Check No. SN-04867 was
recalled by Godofredo Rivera, the General Ledger Accountant of Ford. He
purportedly needed to hold back the check because there was an error in the
computation of the tax due to the Bureau of Internal Revenue (BIR). With Rivera’s
instruction, PCIBank replaced the check with two of its own Man-
__________________
5 Supra, see note 1, pp. 32-34 (All citations omitted).
456
456 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
ager’s Checks (MCs). Alleged members of a syndicate later deposited the two MCs
with the Pacific Banking Corporation.
Ford, with leave of court, filed a third-party complaint before the trial court
impleading Pacific Banking Corporation (PBC) and Godofredo Rivera, as third party
defendants. But the court dismissed the complaint against PBC for lack of cause of
action. The court likewise dismissed the third-party complaint against Godofredo
Rivera because he could not be served with summons as the NBI declared him as a
“fugitive from justice.”
On June 15, 1989, the trial court rendered its decision, as follows:
“Premises considered, judgment is hereby rendered as follows:
1. 1.Ordering the defendants Citibank and IBAA (now PCI Bank), jointly and
severally, to pay the plaintiff the amount of P4,746,114.41 representing the
face value of plaintiff’s Citibank Check No. SN-04867, with interest thereon
at the legal rate starting January 20, 1983, the date when the original
complaint was filed until the amount is fully paid, plus costs;
2. 2.On defendant Citibank’s cross-claim: ordering the cross-defendant IBAA
(now PCI BANK) to reimburse defendant Citibank for whatever amount the
latter has paid or may pay to the plaintiff in accordance with the next
preceding paragraph;
3. 3.The counterclaims asserted by the defendants against the plaintiff, as well
as that asserted by the cross-defendant against the cross-claimant are
dismissed, for lack of merits; and
4. 4.With costs against the defendants.
SO ORDERED.”6
Not satisfied with the said decision, both defendants, Citibank and PCIBank, elevated
their respective petitions for review on certiorari to the Court of Appeals. On March
27, 1995, the appellate court issued its judgment as follows:
“WHEREFORE, in view of the foregoing, the court AFFIRMS the appealed decision
with modifications.
The court hereby renders judgment:
_________________
6Rollo, G.R. No. 121413, pp. 131-132.
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VOL. 350, JANUARY 29, 2001 457
Philippine Commercial International Bank vs. Court of Appeals
1. 1.Dismissing the complaint in Civil Case No. 49287 insofar as defendant
Citibank N.A. is concerned;
2. 2.Ordering the defendant IBAA now PCI Bank to pay the plaintiff the amount
of P4,746,114.41 representing the face value of plaintiff’s Citibank Check No.
SN-04867, with interest thereon at the legal rate starting January 20, 1983,
the date when the original complaint was filed until the amount is fully paid;
3. 3.Dismissing the counterclaims asserted by the defendants against the
plaintiff as well as that asserted by the cross-defendant against the cross-
claimant, for lack of merits.
Costs against the defendant IBAA (now PCI Bank).
IT IS SO ORDERED.”7
PCIBank moved to reconsider the above-quoted decision of the Court of Appeals,
while Ford filed a “Motion for Partial Reconsideration.” Both motions were denied
for lack of merit.
Separately, PCIBank and Ford filed before this Court, petitions for review by
certiorari under Rule 45.
In G.R. No. 121413, PCIBank seeks the reversal of the decision and resolution of
the Twelfth Division of the Court of Appeals contending that it merely acted on the
instruction of Ford and such cause of action had already prescribed.
PCIBank sets forth the following issues for consideration:
1. I.Did the respondent court err when, after finding that the petitioner acted on
the check drawn by respondent Ford on the said respondent’s instructions, it
nevertheless found the petitioner liable to the said respondent for the full
amount of the said check.
2. II.Did the respondent court err when it did not find prescription in favor of
the petitioner.8
In a counter move, Ford filed its petition docketed as G.R. No. 121479, questioning
the same decision and resolution of the Court of Appeals, and praying for the
reinstatement in toto of the decision
_________________
7 1d. at 41-42.
8 Id. at 18.
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458 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
of the trial court which found both PCIBank and Citibank jointly and severally liable
for the loss.
In G.R. No. 121479, appellant Ford presents the following propositions for
consideration:
1. I.Respondent Citibank is liable to petitioner Ford considering that:
1. 1.As drawee bank, respondent Citibank owes to petitioner Ford, as the drawer
of the subject check and a depositor of respondent Citibank, an absolute and
contractual duty to pay the proceeds of the subject check only to the payee
thereof, the Commissioner of Internal Revenue.
2. 2.Respondent Citibank failed to observe its duty as banker with respect to the
subject check, which was crossed and payable to “Payee’s Account Only.”
3. 3.Respondent Citibank raises an issue for the first time on appeal; thus the
same should not be considered by the Honorable Court.
4. 4.As correctly held by the trial court, there is no evidence of gross negligence
on the part of petitioner Ford.9
1. II.PCIBank is liable to petitioner Ford considering that:
1. 1.There were no instructions from petitioner Ford to deliver the proceeds of
the subject check to a person other than the payee named therein, the
Commissioner of the Bureau of Internal Revenue; thus, PCIBank’s only
obligation is to deliver the proceeds to the Commissioner of the Bureau of
Internal Revenue.10
2. 2.PCIBank which affixed its indorsement on the subject check (“All prior
indorsement and/or lack of indorsement guaranteed”), is liable as collecting
bank.11
3. 3.PCIBank is barred from raising issues of fact in the instant proceedings.12
4. 4.Petitioner Ford’s cause of action had not prescribed.13
___________________
9 Rollo, G.R. No. 121479, pp. 162-163.
10 Id. at 181.
11 Id. at 186.
12 Id at 188.
 13 Id. at 192.
459
VOL. 350, JANUARY 29, 2001 459
Philippine Commercial International Bank vs. Court of Appeals
II. G.R. No. 128604
The same syndicate apparently embezzled the proceeds of checks intended, this time,
to settle Ford’s percentage taxes appertaining to the second quarter of 1978 and the
first quarter of 1979.
The facts as narrated by the Court of Appeals are as follows:
Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the amount of
P5,851,706.37 representing the percentage tax due for the second quarter of 1978
payable to the Commissioner of Internal Revenue. A BIR Revenue Tax Receipt No.
28645385 was issued for the said purpose.
On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in the
amount of P6,311,591.73, representing the payment of percentage tax for the first
quarter of 1979 arid payable to the Commissioner of Internal Revenue. Again a BIR
Revenue Tax Receipt No. A-1697160 was issued for the said purpose.
Both checks were “crossed checks” and contain two diagonal lines on its upper left
corner between which were written the words “payable to the payee’s account only.”
The checks never reached the payee, CIR. Thus, in a letter dated February 28,
1980, the BIR, Region 4-B, demanded for the said tax payments the corresponding
periods above-mentioned.
As far as the BIR is concerned, the said two BIR Revenue Tax Receipts were
considered “fake and spurious.” This anomaly was confirmed by the NBI upon the
initiative of the BIR. The findings forced Ford to pay the BIR anew, while an action
was filed against Citibank and PCIBank for the recovery of the amount of Citibank
Check Numbers SN-10597 and 16508.
The Regional Trial Court of Makati, Branch 57, which tried the case, made its
findings on the modus operandi of the syndicate, as follows:
“A certain Mr. Godofredo Rivera was employed by the plaintiff FORD as its General
Ledger Accountant. As such, he prepared the plaintiffs check marked Exh. ‘A’
[Citibank Check No. SN-10597] for payment to the BIR. Instead, however, of
delivering the same to the payee, he passed
460
460 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
on the check to a co-conspirator named Remberto Castro who was a promanager of
the San Andres Branch of PCIB.** In connivance with one Winston Dulay, Castro
himself subsequently opened a Checking Account in the name of a fictitious person
denominated as ‘Reynaldo Reyes’ in the Meralco Branch of PCIBank where Dulay
works as Assistant Manager.
After an initial deposit of P100.00 to validate the account, Castro deposited a
worthless Bank of America Check in exactly the same amount as the first FORD
check (Exh. “A,” P5,851,706.37) while this worthless check was coursed through
PCIB’s main office enroute to the Central Bank for clearing, replaced this worthless
check with FORD’s Exhibit ‘A’ and accordingly tampered the accompanying
documents to cover the replacement. As a result, Exhibit ‘A’ was cleared by defendant
CITIBANK, and the fictitious deposit account of ‘Reynaldo Reyes’ was credited at the
PCIB Meralco Branch with the total amount of the FORD check Exhibit ‘A.’ The same
method was again utilized by the syndicate in profiting from Exh. ‘B’ [Citibank Check
No. SN-16508] which was subsequently pilfered by Alexis Marindo, Rivera’s
Assistant at FORD.
From this ‘Reynaldo Reyes’ account, Castro drew various checks distributing the
shares of the other participating conspirators namely (1) CRISANTO BERNABE, the
mastermind who formulated the method for the embezzlement; (2) RODOLFO R. DE
LEON a customs broker who negotiated the initial contact between Bernabe, FORD’s
Godofredo Rivera and PCIB’s Remberto Castro; (3) JUAN CASTILLO who assisted
de Leon in the initial arrangements; (4) GODOFREDO RIVERA, FORD’s accountant
who passed on the first check (Exhibit “A”) to Castro; (5) REMBERTO CASTRO,
PCIB’s pro-manager at San Andres who performed the switching of checks in the
clearing process and opened the fictitious Reynaldo Reyes account at the PCIB
Meralco Branch; (6) WINSTON DULAY, PCIB’s Assistant Manager at its Meralco
Branch, who assisted Castro in switching the checks in the clearing process and
facilitated the opening of the fictitious Reynaldo Reyes’ bank account; (7) ALEXIS
MARINDO, Rivera’s Assistant at FORD, who gave the second check (Exh. “B”) to
Castro; (8) ELEUTERIO JIMENEZ, BIR Collection Agent who provided the fake and
spurious revenue tax receipts to make it appear that the BIR had received FORD’s tax
payments.
Several other persons and entities were utilized by the syndicate as conduits in the
disbursements of the proceeds of the two checks, but like the aforementioned
participants in the conspiracy, have not been im-
___________________
**Initials stand for Philippine Commercial International Bank, or PCIBank.
461
VOL. 350, JANUARY 29, 2001 461
Philippine Commercial International Bank vs. Court of Appeals
pleaded in the present case. The manner by which the said funds were distributed
among them are traceable from the record of checks drawn against the original
“Reynaldo Reyes” account and indubitably identify the parties who illegally benefited
therefrom and readily indicate in what amounts they did so.”14
On December 9, 1988, Regional Trial Court of Makati, Branch 57, held drawee-bank,
Citibank, liable for the value of the two checks while absolving PCIBank from any
liability, disposing as follows:
“WHEREFORE, judgment is hereby rendered sentencing defendant CITIBANK to
reimburse plaintiff FORD the total amount of P12,163,298.10 prayed for in its
complaint, with 6% interest thereon from date of first written demand until full
payment, plus P300,000.00 attorney’s fees and expenses of litigation, and to pay the
defendant, PCIB (on its counterclaim to crossclaim) the sum of P300,000.00 as
attorney’s fees and costs of litigation, and pay the costs.
SO ORDERED.”15
Both Ford and Citibank appealed to the Court of Appeals which affirmed, in toto, the
decision of the trial court. Hence, this petition.
Petitioner Ford prays that judgment be rendered setting aside the portion of the
Court of Appeals decision and its resolution dated March 5, 1997, with respect to the
dismissal of the complaint against PCIBank and holding Citibank solely responsible
for the proceeds of Citibank Check Numbers SN-10597 and 16508 fot P5,851,706.73
and P6,311,591.73 respectively.
Ford avers that the Court of Appeals erred in dismissing the complaint against
defendant PCIBank considering that:
1. I.Defendant PCIBank was clearly negligent when it failed to exercise the
diligence required to be exercised by it as a banking institution.
2. II.Defendant PCIBank clearly failed to observe the diligence re- quired in the
selection and supervision of its officers and employees.
_________________
14Supra, see note 3, pp. 47-49.
15Id. at 46.
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462 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
1. III.Defendant PCIBank was, due to its negligence, clearly liable for the loss or
damage resulting to the plaintiff Ford as a consequence of the substitution of
the check consistent with Section 5 of Central Bank Circular No. 580 series
of 1977.
2. IV.Assuming arguendo that defendant PCIBank did not accept, endorse or
negotiate in due course the subject checks, it is liable, under Article 2154 of
the Civil Code, to return the money which it admits having received, and
which was credited to it in its Central Bank account.16
The main issue presented for our consideration by these petitions could be simplified
as follows: Has petitioner Ford the right to recover from the collecting bank
(PCIBank) and the drawee bank (Citibank) the value of the checks intended as
payment to the Commissioner of Internal Revenue? Or has Ford’s cause of action
already prescribed?
Note that in these cases, the checks were drawn against the drawee bank, but the
title of the person negotiating the same was allegedly defective because the
instrument was obtained by fraud and unlawful means, and the proceeds of the
checks were not remitted to the payee. It was established that instead of paying the
checks to the CIR, for the settlement of the appropriate quarterly percentage taxes of
Ford, the checks were diverted and encashed for the eventual distribution among the
members of the syndicate. As to the unlawful negotiation of the check the applicable
law is Section 55 of the Negotiable Instruments Law (NIL), which provides:
“When title defective—The title of a person who negotiates an instrument is defective
within the meaning of this Act when he obtained the instrument, or any signature
thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal
consideration, or when he negotiates it in breach of faith or under such
circumstances as amount to a fraud.”
Pursuant to this provision, it is vital to show that the negotiation is made by the
perpetrator in breach of faith amounting to fraud. The person negotiating the checks
must have gone beyond
__________________
16 Id. at 24-25.
463
VOL. 350, JANUARY 29, 2001 463
Philippine Commercial International Bank vs. Court of Appeals
the authority given by his principal. If the principal could prove that there was no
negligence in the performance of his duties, he may set up the personal defense to
escape liability and recover from other parties who, through their own negligence,
allowed the commission of the crime.
In this case, we note that the direct perpetrators of the offense, namely the
embezzlers belonging to a syndicate, are now fugitives from justice. They have, even
if temporarily, escaped liability for the embezzlement of millions of pesos. We are
thus left only with the task of determining who of the present parties before us must
bear the burden of loss of these millions. It all boils down to the question of liability
based on the degree of negligence among the parties concerned.
Foremost, we must resolve whether the injured party, Ford, is guilty of the
“imputed contributory negligence” that would defeat its claim for reimbursement,
bearing in mind that its employees, Godofredo Rivera and Alexis Marindo, were
among the members of the syndicate.
 Citibank points out that Ford allowed its very own employee, Godofredo Rivera,
to negotiate the checks to his co-conspirators, instead of delivering them to the
designated authorized collecting bank (Metrobank-Alabang) of the payee, CIR.
Citibank bewails the fact that Ford was remiss in the supervision and control of its
own employees, inasmuch as it only discovered the syndicate’s activities through the
information given by the payee of the checks after an unreasonable period of time.
PCIBank also blames Ford of negligence when it allegedly authorized Godofredo
Rivera to divert the proceeds of Citibank Check No. SN-04867, instead of using it to
pay the BIR. As to the subsequent run-around of funds of Citibank Check Nos. SN-
10597 and 16508, PCIBank claims that the proximate cause of the damage to Ford
lies in its own officers and employees who carried out the fraudulent schemes and the
transactions. These circumstances were not checked by other officers of the
company, including its comptroller or internal auditor. PCIBank contends that the
inaction of Ford despite the enormity of the amount involved was a sheer negligence
and stated that, as between two innocent persons, one of whom must suffer the
consequences of a breach of trust, the
464
464 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
one who made it possible, by his act of negligence, must bear the loss.
For its part, Ford denies any negligence in the performance of its duties. It avers
that there was no evidence presented before the trial court showing lack of diligence
on the part of Ford. And, citing the case of Gempesaw vs. Court of Appeals,17 Ford
argues that even if there was a finding therein that the drawer was negligent, the
drawee bank was still ordered to pay damages.
Furthermore, Ford contends that Godofredo Rivera was not authorized to make
any representation in its behalf, specifically, to divert the proceeds of the checks. It
adds that Citibank raised the issue of imputed negligence against Ford for the first
time on appeal. Thus, it should not be considered by this Court.
On this point, jurisprudence regarding the imputed negligence of employer in a
master-servant relationship is instructive. Since a master may be held for his
servant’s wrongful act, the law imputes to the master the act of the servant, and if
that act is negligent or wrongful and proximately results in injury to a third person,
the negligence or wrongful conduct is the negligence or wrongful conduct of the
master, for which he is liable.18 The general rule is that if the master is injured by the
negligence of a third person and by the concurring contributory negligence of his
own servant or agent, the latter’s negligence is imputed to his superior and will defeat
the superior’s action against the third person, assuming, of course that the
contributory negligence was the proximate cause of the injury of which complaint is
made.19
Accordingly, we need to determine whether or not the action of Godofredo Rivera,
Ford’s General Ledger Accountant, and/or Alexis Marindo, his assistant, was the
proximate cause of the loss or damage. As defined, proximate cause is that which, in
the natural and continuous sequence, unbroken by any efficient, intervening cause
produces the injury, and without which the result would not have occurred.20
___________________
17 218 SCRA 682 (1993).
18 Am Jur 2d, Volume 58, Negligence, Section 458.
19 Am Jur 2d, Volume 58, Negligence, Section 464.
20 Vda. de Bataclan, et al vs. Medina, 102 Phil. 181,186 (1957).
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VOL. 350, JANUARY 29, 2001 465
Philippine Commercial International Bank vs. Court of Appeals
It appears that although the employees of Ford initiated the transactions attributable
to an organized syndicate, in our view, their actions were not the proximate cause of
encashing the checks payable to the CIR. The degree of Ford’s negligence, if any,
could not be characterized as the proximate cause of the injury to the parties.
The Board of Directors of Ford, we note, did not confirm the request of Godofredo
Rivera to recall Citibank Check No. SN-04867. Rivera’s instruction to replace the
said check with PCIBank’s Manager’s Check was not in the ordinary course of
business which could have prompted PCIBank to validate the same.
As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it was
established that these checks were made payable to the CIR. Both were crossed
checks. These checks were apparently turned around by Ford’s employees, who were
acting on their own personal capacity.
Given these circumstances, the mere fact that the forgery was committed by a
drawer-payor’s confidential employee or agent, who by virtue of his position had
unusual facilities for perpetrating the fraud and imposing the forged paper Upon the
bank, does not entitle the bank to shift the loss to the drawer-payor, in the absence of
some circumstance raising estoppel against the drawer.21 This rule likewise applies to
the checks fraudulently negotiated or diverted by the confidential employees who
hold them in their possession.
With respect to the negligence of PCIBank in the payment of the three checks
involved, separately, the trial courts found variations between the negotiation of
Citibank Check No. SN-04867 and the misapplication of total proceeds of Checks SN-
10597 and 16508. Therefore, we have to scrutinize, separately, PCIBank’s share of
negligence when the syndicate achieved its ultimate agenda of stealing the proceeds
of these checks.
G.R. Nos. 121413 and 121479
Citibank Check No. SN-04867 was deposited at PCIBank through its Ermita Branch.
It was coursed through the ordinary
___________________
21 Am Jur 2d, Volume 10, Banks, Section 604 (1963 Edition).
466
466 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
banking transaction, sent to Central Clearing with the indorsement at the back “all
prior indorsements and/or lack of indorsements guaranteed,” and was presented to
Citibank for payment. Thereafter PCIBank, instead of remitting the proceeds to the
CIR, prepared two of its Manager’s checks and enabled the syndicate to encash the
same.
On record, PCIBank failed to verify the authority of Mr. Rivera to negotiate the
checks. The neglect of PCIBank employees to verify whether his letter requesting for
the replacement of the Citibank Check No. SN-04867 was duly authorized, showed
lack of care and prudence required in the circumstances.
Furthermore, it was admitted that PCIBank is authorized to collect the payment
of taxpayers in behalf of the BIR. As an agent of BIR, PCIBank is duty bound to
consult its principal regarding the unwarranted instructions given by the payor or its
agent. As aptly stated by the trial court, to wit:
“x x x. Since the questioned crossed check was deposited with IBAA [now PCIBank],
which claimed to be a depository/collecting bank of the BIR, it has the responsibility
to make sure that the check in question is deposited in Payee’s account only.
xxx xxx xxx
As agent of the BIR (the payee of the check), defendant IBAA should receive
instructions only from its principal BIR and not from any other person especially so
when that person is not known to the defendant. It is very imprudent on the part of
the defendant IBAA to just rely on the alleged telephone call of one Godofredo Rivera
and in his signature to the authenticity of such signature considering that the
plaintiff is not a client of the defendant IBAA.”
It is a well-settled rule that the relationship between the payee or holder of
commercial paper and the bank to which it is sent for collection is, in the absence of
an agreement to the contrary, that of principal and agent.22 A bank which receives
such paper for collection is the agent of the payee or holder.23
__________________
22Id. at Section 697.
23Ibid.
467
VOL. 350, JANUARY 29, 2001 467
Philippine Commercial International Bank vs. Court of Appeals
Even considering arguendo, that the diversion of the amount of a check payable to
the collecting bank in behalf of the designated payee may be allowed, still such
diversion must be properly authorized by the payor. Otherwise stated, the diversion
can be justified only by proof of authority from the drawer, or that the drawer has
clothed his agent with apparent authority to receive the proceeds of such check.
Citibank further argues that PCI Bank’s clearing stamp appearing at the back of
the questioned checks stating that ALL PRIOR INDORSEMENTS AND/OR LACK OF
INDORSEMENTS GUARANTEED should render PCIBank liable because it made it
pass through the clearing house and therefore Citibank had no other option but to
pay it. Thus, Citibank asserts that the proximate cause of Ford’s injury is the gross
negligence of PCIBank. Since the questioned crossed check was deposited with
PCIBank, which claimed to be a depository/collecting bank of the BIR, it had the
responsibility to make sure that the check in question is deposited in Payee’s account
only.
Indeed, the crossing of the check with the phrase “Payee’s Account Only,” is a
warning that the check should be deposited only in the account of the CIR. Thus, it is
the duty of the collecting bank PCIBank to ascertain that the check be deposited in
payee’s account only. Therefore, it is the collecting bank (PCIBank) which is bound to
scrutinize the check and to know its depositors before it could make the clearing
indorsement “all prior indorsements and/or lack of indorsement guaranteed.”
In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking
Corporation,24 we ruled:
“Anent petitioner’s liability on said instruments, this court is in full accord with the
ruling of the PCHC’s Board of Directors that:
‘In presenting the checks for clearing and for payment, the defendant made an
express guarantee on the validity of “all prior endorsements.” Thus, stamped at the
back of the checks are the defendant’s clear warranty: ALL PRIOR
ENDORSEMENTS AND/OR LACK OF EN-
_________________
24157 SCRA 188 (1988).
468
468 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
DORSEMENTS GUARANTEED. Without such warranty, plaintiff would not have
paid on the checks.’
No amount of legal jargon can reverse the clear meaning of defendant’s warranty.
As the warranty has proven to be false and inaccurate, the defendant is liable for any
damage arising out of the falsity of its representation.”25
Lastly, banking business requires that the one who first cashes and negotiates the
check must take some precautions to learn whether or not it is genuine. And if the
one cashing the check through indifference or other circumstance assists the forger
in committing the fraud, he should not be permitted to retain the proceeds of the
check from the drawee whose sole fault was that it did not discover the forgery or the
defect in the title of the person negotiating the instrument before paying the check.
For this reason, a bank which cashes a check drawn upon another bank, without
requiring proof as to the identity of persons presenting it, or making inquiries with
regard to them, cannot hold the proceeds against the drawee when the proceeds of
the checks were afterwards diverted to the hands of a third party. In such cases the
drawee bank has a right to believe that the cashing bank (or the collecting bank) had,
by the usual proper investigation, satisfied itself of the authenticity of the negotiation
of the checks. Thus, one who encashed a check which had been forged or diverted
and in turn received payment thereon from the drawee, is guilty of negligence which
proximately contributed to the success of the fraud practiced on the drawee bank.
The latter may recover from the holder the money paid on the check.26
Having established that the collecting bank’s negligence is the proximate cause of
the loss, we conclude that PCIBank is liable in the amount corresponding to the
proceeds of Citibank Check No SN-04867.
__________________
25 Id. at 194.
26 Supra note 20 at Section 611.
469
VOL. 350, JANUARY 29, 2001 469
Philippine Commercial International Bank vs. Court of Appeals
G.R. No. 128604
The trial court and the Court of Appeals found that PCIBank had no official act in the
ordinary course of business that would attribute to it the case of the embezzlement of
Citibank Check Numbers SN-10597 and 16508, because PCIBank did not actually
receive nor hold the two Ford checks at all. The trial court held, thus:
“Neither is there any proof that defendant PCIBank contributed any official or
conscious participation in the process of the embezzlement. This Court is convinced
that the switching operation (involving the checks while in transit for “clearing”)
were the clandestine or hidden actuations performed by the members of the
syndicate in their own personal, covert and private capacity and done without the
knowledge of the defendant PCIBank. . . .”27
In this case, there was no evidence presented confirming the conscious participation
of PCIBank in the embezzlement. As a general rule, however, a banking corporation
is liable for the wrongful or tortuous acts and declarations of its officers or agents
within the course and scope of their employment.28 A bank will be held liable for the
negligence of its officers or agents when acting within the course and scope of their
employment. It may be liable for the tortuous acts of its officers even as regards that
species of tort of which malice is an essential element. In this case, we find a situation
where the PCIBank appears also to be the victim of the scheme hatched by a
syndicate in which its own management employees had participated.
The pro-manager of San Andres Branch of PCIBank, Remberto Castro, received
Citibank Check Numbers SN-10597 and 16508. He passed the checks to a co-
conspirator, an Assistant Manager of PCIBank’s Meralco Branch, who helped Castro
open a Checking account of a fictitious person named “Reynaldo Reyes.” Castro
deposited a worthless Bank of America Check in exactly the same amount of Ford
checks. The syndicate tampered with the checks
__________________
27 Rollo, G.R. No. 128604, pp. 56-57.
28 Supra note 20 at Section 110.
470
470 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
and succeeded in replacing the worthless checks and the eventual encashment of
Citibank Check Nos, SN-10597 and 16508. The PCIBank Pro-manager, Castro, and
his co-conspirator Assistant Manager apparently performed their activities using
facilities in their official capacity or authority but for their personal and private gain
or benefit.
A bank holding out its officers and agents as worthy of confidence will not be
permitted to profit by the frauds these officers or agents were enabled to perpetrate
in the apparent course of their employment; nor will it be permitted to shirk its
responsibility for such frauds, even though no benefit may accrue to the bank
therefrom. For the general rule is that a bank is liable for the fraudulent acts or
representations of an officer or agent acting within the course and apparent scope of
his employment or authority.29 And if an officer or employee of a bank, in his official
capacity, receives money to satisfy an evidence of indebtedness lodged with his bank
for collection, the bank is liable for his misappropriation of such sum.30
Moreover, as correctly pointed out by Ford, Section 5 31 of Central Bank Circular
No. 580, Series of 1977 provides that any theft affecting items in transit for clearing,
shall be for the account of sending bank, which in this case is PCIBank.
But in this case, responsibility for negligence does not lie on PCIBank’s shoulders
alone.
The evidence on record shows that Citibank as drawee bank was likewise
negligent in the performance of its duties. Citibank failed to establish that its
payment of Ford’s checks were made in due course and legally in order. In its
defense, Citibank claims the genuineness and due execution of said checks,
considering that Citibank (1) has no knowledge of any infirmity in the issuance of the
checks in question (2) coupled by the fact that said checks were sufficiently funded
and (3) the endorsement of the Payee or lack
___________________
29 Id. at Sec. 111.
30 Id. Sec. 113.
31 Sec. 5. Loss of Clearing Items.—Any loss or damage arising from theft,
pilferage, or other causes affecting items in transit shall be for the account of the
sending bank/branch, institution or entity concerned.
471
VOL. 350, JANUARY 29, 2001 471
Philippine Commercial and International Bank vs. Court of
Appeals
thereof was guaranteed by PCI Bank (formerly IBAA), thus, it has the obligation to
honor and pay the same.
For its part, Ford contends that Citibank as the drawee bank owes to Ford an
absolute and contractual duty to pay the proceeds of the subject check only to the
payee thereof, the CIR. Citing Section 6232 of the Negotiable Instruments Law, Ford
argues that by accepting the instrument, the acceptor which is Citibank engages that
it will pay according to the tenor of its acceptance, and that it will pay only to the
payee, (the CIR), considering the fact that here the check was crossed with
annotation “Payees Account Only.”
As ruled by the Court of Appeals, Citibank must likewise answer for the damages
incurred by Ford on Citibank Checks Numbers SN-10597 and 16508, because of the
contractual relationship existing between the two. Citibank, as the drawee bank
breached its contractual obligation with Ford and such degree of culpability
contributed to the damage caused to the latter. On this score, we agree with the
respondent court’s ruling.
Citibank should have scrutinized Citibank Check Numbers SN-10597 and 16508
before paying the amount of the proceeds thereof to the collecting bank of the BIR.
One thing is clear from the record: the clearing stamps at the back of Citibank Check
Nos. SN-10597 and 16508 do not bear any initials. Citibank failed to notice and verify
the absence of the clearing stamps. Had this been duly examined, the switching of the
worthless checks to Citibank Check Nos. SN-10597 and 16508 would have been
discovered in time. For this reason, Citibank had indeed failed to perform what was
incumbent upon it, which is to ensure that the amount of the checks should be paid
only to its designated payee. The fact that the drawee bank did not discover the
irregularity seasonably, in our view, constitutes negligence in carrying out the bank’s
duty to its depositors. The point is that as a business affected with public interest and
because of the nature of its functions, the bank is under obligation to treat the
accounts of its depositors with me-
___________________
32 Sec. 62, Negotiable Instruments Law.
472
472 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
ticulous care, always having in mind the fiduciary nature of their relationship.33
Thus, invoking the doctrine of comparative negligence, we are of the view that
both PCIBank and Citibank failed in their respective obligations and both were
negligent in the selection and supervision of their employees resulting in the
encashment of Citibank Check Nos. SN-10597 and 16508. Thus, we are constrained
to hold them equally liable for the loss of the proceeds of said checks issued by Ford
in favor of the CIR.
Time and again, we have stressed that banking business is so impressed with
public interest where the trust and confidence of the public in general is of
paramount importance such that the appropriate standard of diligence must be very
high, if not the highest, degree of diligence.34A bank’s liability as obligor is not merely
vicarious but primary, wherein the defense of exercise of due diligence in the
selection and supervision of its employees is of no moment.35
Banks handle daily transactions involving millions of pesos.36 By the very nature
of their work the degree of responsibility, care and tnistworthiness expected of their
employees and officials is far greater than those of ordinary clerks and
employees.37 Banks are expected to exercise the highest degree of diligence in the
selection and supervision of their employees.38
On the issue of prescription, PCIBank claims that the action of Ford had
prescribed because of its inability to seek judicial relief seasonably, considering that
the alleged negligent act took place prior to December 19, 1977 but the relief was
sought only in 1983, or seven years thereafter.
The statute of limitations begins to run when the bank gives the depositor notice
of the payment, which is ordinarily when the check
______________________
33 Simex International (Manila), Inc. vs. Court of Appeals, 183 SCRA 360, 367
(1990).
34 Supra, see note 17, at p. 697.
35 Ibid.
36 BPI vs. Court of Appeals, 216 SCRA 51, 71 (1992).
37 Ibid.
38 Ibid.
473
VOL. 350, JANUARY 29, 2001 473
 Philippine Commercial International Bank vs. Court of Appeals
is returned to the alleged drawer as a voucher with a statement of his account, 39 and
an action upon a check is ordinarily governed by the statutory period applicable to
instruments in writing.40
Our laws on the matter provide that the action upon a written contract must be
brought within ten years from the time the right of action accrues.41 Hence, the
reckoning time for the prescriptive period begins when the instrument was issued
and the corresponding check was returned by the bank to its depositor (normally a
month thereafter). Applying the same rule, the cause of action for the recovery of the
proceeds of Citibank Check No. SN-04867 would normally be a month after
December 19, 1977, when Citibank paid the face value of the check in the amount of
P4,746,114.41. Since the original complaint for the cause of action was filed on
January 20, 1983, barely six years had lapsed. Thus, we conclude that Ford’s cause of
action to recover the amount of Citibank Check No. SN-04867 was seasonably filed
within the period provided by law.
Finally, we also find that Ford is not completely blameless in its failure to detect
the fraud. Failure on the part of the depositor to examine its passbook, statements of
account, and cancelled checks and to give notice within a reasonable time (or as
required by statute) of any discrepancy which it may in the exercise of due care and
diligence find therein, serves to mitigate the banks’ liability by reducing the award of
interest from twelve percent (12%) to six percent (6%) per annum. As provided in
Article 1172 of the Civil Code of the Philippines, responsibility arising from
negligence in the performance of every kind of obligation is also demandable, but
such liability may be regulated by the courts, according to the circumstances. In,
quasi-delicts, the. contributory negligence of the plaintiff shall reduce the damages
that he may recover.42
WHEREFORE, the assailed Decision and Resolution of the Court of Appeals in
CA-G.R. CV No. 25017, are AFFIRMED. PCIBank, known formerly as Insular Bank of
Asia and America, is declared solely responsible for the loss of the proceeds of
Citibank
Check No. SN-04867 in the amount of P4,746,114.41, which shall be paid together
with six percent (6%) interest thereon to Ford Philippines, Inc. from the date when
the original complaint was filed until said amount is fully paid.
However, the Decision and Resolution of the Court of Appeals in CA-G.R. No.
28430 are MODIFIED as follows: PCIBank and Citibank are adjudged liable for and
must share the loss, (concerning the proceeds of Citibank Check Numbers SN-10597
and 16508 totalling P12,163,298.10) on a fifty-fifty ratio, and each bank is ORDERED
to pay Ford Philippines, Inc. P6,081,649.05, with six percent (6%) interest thereon,
from the date the complaint was filed until full payment of said amount.
Costs against Philippine Commercial International Bank and Citibank, N.A.
SO ORDERED.
Bellosillo (Chairman), Mendoza, Buena and De Leon, Jr., JJ., concur.
Judgment in CA-G.R. CV No. 25017 affirmed, while in CA-G.R. No. 28430
modified.
Notes.—Issuing a crossed check imposes no legal obligation on the drawee not to
honor such a check. (Gempesaw vs. Court of Appeals, 218 SCRA 682 [19931)
There is no contractual relation created between a drawee bank and the payee as a
result of the payment by the former of the amount of the check. (Security Bank and
Trust Company vs. Court of Appeals, 291 SCRA 33 [1998])
——o0o——

___________________
39 Supra note 20 at Section 605.
40 Ibid.
41 CIVIL CODE, Art. 1144.
42 CIVIL CODE, Art. 2214.

474
474 SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Court of Appeals
 No. L-40796. July 31, 1975.*
REPUBLIC BANK, plaintiff-appellee, vs. MAURICIA T. EBRADA, defendant-
appellant.
Negotiable Instruments Law; Checks; It is only the negotiation predicated on
the forged indorsement that should be declared inoperative.—It can be safely
concluded that it is only the negotiation predicated on the forged indorsement that
should be declared inoperative. This means that the negotiation of the check in
question from Martin Lorenzo, the original payee, to Ramon R. Lorenzo the second
indorser, should be declared of no effect, but the negotiation of the aforementioned
check from Ramon R. Lorenzo to Adeliada Dominguez, the third indorser, and from
Adelaida Dominguez to the defendant-appellant who did not know of the forgery,
should be considered valid and enforceable, barring any claim of forgery.
Same; Same; If the drawee-bank discovers that the signature of the payee was
forged after it has paid the amount of the check to the
* FIRST DIVISION.
681
VOL. 65, JULY 31, 1975 681
Republic Bank vs. Ebrada
holder thereof, it can recover the amount paid from the said holder.—One who
purchases a check or draft is bound to satisfy himself that the paper is genuine and
that by indorsing it or presenting it for payment or putting it into circulation before
presentation he impliedly asserts that he has performed his duty and the drawee who
has paid the forged check, without actual negligence on his part, may recover the
money paid from such negligent purchasers. In such cases the recovery is permitted
because although the drawee was in a way negligent in failing to detect the forgery,
yet if the encasher of the check had performed his duty, the forgery would in all
probability, have been detected and the fraud defeated. x x x Similarly, in the case
before us, the defendant-appellant, upon receiving the check in question from
Adelaida Dominguez, was duty-bound to ascertain whether the check in question was
genuine before presenting it to plaintiff Bank for payment. Her failure to do so makes
her liable for the loss and the plaintiff Bank may recover from her the money she
received for the check.
Same; Same; Fact that the person who encashed the check wherein the
signature of the payee was forged turned over the proceeds to the one who indorsed
said check to the said holder would not exempt the encasher from liability as by
doing so he acted as an accomodation party.—The fact that immediately after
receiving the cash proceeds of the check in question x x x defendant-appellant
immediately turned over said amount to Adelaida Dominguez (Third-Party
defendant and the Fourth-Party Plaintiff) who in turn hand the amount to Justina
Tinio on the same date would not exempt her from liability because by doing so, she
acted as an accommodation party to the check for which she is also liable under
Section 29 of the Negotiable Instruments Law
APPEAL from a decision of the Court of First Instance of Manila. Jarencio, J
The facts are stated in the opinion of the Court.
Sabino de Leon, Jr. for plaintiff-appellee.
Julio Baldonado for defendant-appellant.
MARTIN, J.:
Appeal on a question of law of the decision of the Court of First Instance of Manila,
Branch XXIII in Civil Case No. 69288, entitled “Republic Bank vs. Mauricia T.
Ebrada.”
On or about February 27, 1963 defendant Mauricia T. Ebrada, encashed Back Pay
Check No. 508060 dated January 15, 1963 for P1,246.08 at the main office of the
plaintiff Republic Bank at
682
682 SUPREME COURT REPORTS ANNOTATED
Republic Bank vs. Ebrada
Escolta, Manila. The check was issued by the Bureau of Treasury.1 Plaintiff Bank was
later advised by the said bureau that the alleged indorsement on the reverse side of
the aforesaid check by the payee, “Martin Lorenzo” was a forgery2 since the latter had
allegedly died as of July 14, 1952.3 Plaintiff Bank was then requested by the Bureau of
Treasury to refund the amount of P1,246.08.4 To recover what it had refunded to the
Bureau of Treasury, plaintiff Bank made verbal and formal demands upon defendant
Ebrada to account for the sum of P1,246.08, but said defendant refused to do so. So
plaintiff Bank sued defendant Ebrada before the City Court of Manila.
On July 11, 1966, defendant Ebrada filed her answer denying the material
allegations of the complaint and as affirmative defenses alleged that she was a holder
in due course of the check in question, or at the very least, has acquired her rights
from a holder in due course and therefore entitled to the proceeds thereof. She also
alleged that the plaintiff Bank has no cause of action against her; that it is in
estoppel, or so negligent as not to be entitled to recover anything from her.5
About the same day, July 11, 1966 defendant Ebrada filed a Third-Party complaint
against Adelaida Dominguez who, in turn, filed on September 14, 1966 a Fourth-
Party complaint against Justina Tinio.
On March 21, 1967, the City Court of Manila rendered judgment for the plaintiff
Bank against defendant Ebrada; for Third-Party plaintiff against Third-Party
defendant, Adelaida Dominguez, and for Fourth-Party plaintiff against Fourth-Party
defendant, Justina Tinio.
From the judgment of the City Court, defendant Ebrada took an appeal to the
Court of First Instance of Manila where the parties submitted a partial stipulation of
facts as follows:
“COME NOW the undersigned counsel for the plaintiff, defendant, Third-Party
defendant and Fourth-Party plaintiff and unto this Honorable Court most
respectfully submit the following:
PARTIAL STIPULATION OF FACTS
1. 1.That they admit their respective capacities to sue and be sued;
_______________
1 ROA, p. 2.
2 ROA, p. 2.
3 ROA, p. 2.
4 Exhibit “F-1”.
5 ROA, p. 5.
683
VOL. 65, JULY 31, 1975 683
Republic Bank vs. Ebrada
1. 2.That on January 15, 1963 the Treasury of the Philippines issued its Check
No. BP-508060, payable to the order of one MARTIN 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;
2. 3.That the back side of aforementioned check bears the following signatures,
in this order:
1. 1)MARTIN LORENZO;
2. 2)RAMON R. LORENZO;
3. 3)DELIA DOMINGUEZ; and
4. 4)MAURICIA T. EBRADA;
1. 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;
2. 5.That the signature of defendant MAURICIA T. EBRADA was affixed on said
check on February 27, 1963 when she encashed it with the plaintiff Bank;
3. 6.That immediately after defendant MAURICIA T. EBRADA received the cash
proceeds of said check in the sum of P1,246.08 from the plaintiff Bank, she
immediately turned over the said amount to the third-party defendant and
fourth-party plaintiff ADELAIDA DOMINGUEZ, who in turn handed the
said amount to the fourth-party defendant JUSTINA TINIO on the same
date, as evidenced by the receipt signed by her which will be marked as
Exhibit “1-Dominguez”; and
4. 7.That the parties hereto reserve the right to present evidence on any other
fact not covered by the foregoing stipulations. Manila, Philippines, June 6,
1969.”
Based on the foregoing stipulation of facts and the documentary evidence presented,
the trial court rendered a decision, the dispositive portion of 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:
684
684 SUPREME COURT REPORTS ANNOTATED
Republic Bank vs. Ebrada
“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 11-1/2 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 defendant-appellant 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 defendant-appellant 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:
1. (a)That the instrument is genuine and in all respects what it purports to be.
2. (b)That she has good title to it.”
3. x x x x x x
and under Section 65 of the same Act:
“Every indorser who indorses without qualification warrants to all subsequent
holders in due course:
1. (a)The matters and things mentioned in subdivisions (a), (b) and (c) of the
next preceding sections;
2. (b)That the instrument is at the time of his indorsement valid and subsisting.”
It turned out, however, that the signature of the original payee of the check, Martin
Lorenzo was a forgery because he was already dead7 almost 11 years before the check
in question was issued by the Bureau of Treasury. Under Section 23 of the Negotiable
Instruments Law (Act 2031):
“When a signature is forged or made without the authority of the person whose
signature it purports to be, it is wholly inoperative, and no right to retain the
instruments, or to give a discharge thereof against any party thereto, can be acquired
through or under such
_______________
6 Act No. 2031.
7 He died July 14, 1952 as shown by the Certificate of Death issued by the Local
Civil Registrar of the Municipality of Lubao Pampanga (Exhibit B).
685
VOL. 65, JULY 31, 1975 685
Republic Bank vs. Ebrada
signature unless the party against whom it is sought to enforce such right is
precluded from setting up the forgery or want of authority.”
It is clear from the provision that where the signature on a negotiable instrument if
forged, the negotiation of the check is without force or effect. But does this mean that
the existence of one forged signature therein will render void all the other
negotiations of the check with respect to the other parties whose signatures are
genuine?
In the case of Beam vs. Farrel, 135 Iowa 670, 113 N.W. 590, where a check has
several indorsements on it, it was held that it is only the negotiation based on the
forged or unauthorized signature which is inoperative. Applying this principle to the
case before Us, it can be safely concluded that it is only the negotiation predicated on
the forged indorsement that should be declared inoperative. This means that the
negotiation of the check in question from Martin Lorenzo, the original payee, to
Ramon R. Lorenzo, the second indorser, should be declared of no effect, but the
negotiation of the aforesaid check from Ramon R. Lorenzo to Adelaida Dominguez,
the third indorser, and from Adelaida Dominguez to the defendant-appellant who did
not know of the forgery, should be considered valid and enforceable, barring any
claim of forgery.
What happens then, if, after the drawee bank has paid the amount of the check to
the holder thereof, it was discovered that the signature of the payee was forged? Can
the drawee bank recover from the one who encashed the check?
In the case of State v. Broadway Mut. Bank, 282 S.W. 196, 197, it was held that the
drawee of a check can recover from the holder the money paid to him on a forged
instrument. It is not supposed to be its duty to ascertain whether the signatures of
the payee or indorsers are genuine or not. This is because the indorser is supposed to
warrant to the drawee that the signatures of the payee and previous indorsers are
genuine, warranty not extending only to holders in due course. One who purchases a
check or draft is bound to satisfy himself that the paper is genuine and that by
indorsing it or presenting it for payment or putting it into circulation before
presentation he impliedly asserts that he has performed his duty and the drawee who
has paid the forged check, without actual negligence on his part, may recover the
money paid from such negligent purchasers. In such cases the recovery is permitted
because although the drawee was in a way negligent in failing to
686
686 SUPREME COURT REPORTS ANNOTATED
Republic Bank vs. Ebrada
detect the forgery, yet if the encasher of the check had performed his duty, the
forgery would in all probability, have been detected and the fraud defeated. The
reason for allowing the drawee bank to recover from the encasher is:
“Every one with even the least experience in business knows that no business man
would accept a check in exchange for money or goods unless he is satisfied that the
check is genuine. He accepts it only because he has proof that it is genuine, or
because he has sufficient confidence in the honesty and financial responsibility of the
person who vouches for it. If he is deceived he has suffered a loss of his cash or goods
through his own mistake. His own credulity or recklessness, or misplaced confidence
was the sole cause of the loss. Why should he be permitted to shift the loss due to his
own fault in assuming the risk, upon the drawee, simply because of the accidental
circumstance that the drawee afterwards failed to detect the forgery when the check
was presented?”8
Similarly, in the case before Us, the defendant-appellant, upon receiving the check in
question from Adelaida Dominguez, was duty-bound to ascertain whether the check
in question was genuine before presenting it to plaintiff Bank for payment. Her
failure to do so makes her liable for the loss and the plaintiff Bank may recover from
her the money she received for the check. As reasoned out above, had she performed
the duty of ascertaining the genuineness of the check, in all probability the forgery
would have been detected and the fraud defeated.
In our jurisdiction We have a case of similar import.9The Great Eastern Life
Insurance Company drew its check for P2000.00 on the Hongkong and Shanghai
Banking Corporation payable to the order of Lazaro Melicor. A certain E. M. Maasin
_______________
8 Gloucester Bank v. Salem Bank, 17 Mass. 33; Bank of U. S. Bank of Georgia, 10
Wheat 333, 6 L. Ed. 334; Sional Bank of America v. Bangs, 196 Mass. 441, 8 Am. Rep.
349; First National Bank of Danvers v. First National Bank of Salem, 151 Mass. 280,
24 N.E. 44, 21 Am. St. Rep. 450; First National Bank v. Ricker, 71 Ill. 439, 22 Am.
Rep. 104; Rouvant v. Bank, 63 Tex. 610; Bank, 30 Il. 96 Am. Dec. 554; People’s Bank
v. Franklyn Bank, 88 Tenn. 299, 12 S.W. 716, 6 L.R.A. 724, 17 Am St. Rep. 884; Ellis
& Morton v. Trust Co., 4 Ohio St. 682, 64 Am. Dec. 610; Bank v. Bank, 58 Ohio St.
207, 50 N. E. 723; Bank v. Bingham, 30 wash. 484, 71 Pac. 43, 60 L.R.A. 955.
9 Great Eastern Life insurance Company vs. Hongkong and Shanghai Banking
Corporation, 43 Phil. 678.
687
VOL. 65, JULY 31, 1975 687
Republic Bank vs. Ebrada
fraudulently obtained the check and forged the signature of Melicor, as an indorser,
and then personally indorsed and presented the check to the Philippine National
Bank where the amount of the check was placed to his (Maasin’s) credit. On the next
day, the Philippine National Bank indorsed the check to the Hongkong and Shanghai
Banking Corporation which paid it and charged the amount of the check to the
insurance company. The Court held that the Hongkong and Shanghai Banking
Corporation was liable to the insurance company for the amount of the check and
that the Philippine National Bank was in turn liable to the Hongkong and Shanghai
Banking Corporation. Said the Court:
“Where a check is drawn payable to the order of one person and is presented to a
bank by another and purports upon its face to have been duly indorsed by the payee
of the check, it is the duty of the bank to know that the check was duly indorsed by
the original payee, and where the Bank pays the amount of the check to a third
person, who has forged the signature of the payee, the loss falls upon the bank who
cashed the check, and its only remedy is against the person to whom it paid the
money.”
With the foregoing doctrine We are to concede that the plaintiff Bank should suffer
the loss when it paid the amount of the check in question to defendant-appellant, but
it has the remedy to recover from the latter the amount it paid to her. Although the
defendant-appellant to whom the plaintiff Bank paid the check was not proven to be
the author of the supposed forgery, yet as last indorser of the check, she has
warranted that she has good title to it10 even if in fact she did not have it because the
payee of the check was already dead 11 years before the check was issued. The fact
that immediately after receiving the cash proceeds of the check in question in the
amount of P1,246.08 from the plaintiff Bank, defendant-appellant immediately
turned over said amount to Adelaida Dominguez (Third-Party defendant and the
Fourth-Party plaintiff) who in turn handed the amount to Justina Tinio on the same
date would not exempt her from liability because by doing so, she acted as an
accommodation party in the check for which she is
_______________
10Sec. 65, par. (b). Negotiable Instruments Law (Act 2031). Every person
negotiating an instrument by delivery or by a qualified instrument warrants:
1. (a)x x x x x x
2. (b)That he has a good title to it.”
688
688 SUPREME COURT REPORTS ANNOTATED
Republic Bank vs. Ebrada
also liable under Section 29 of the Negotiable Instruments Law (Act 2031), thus:
“An accommodation party is one who has signed the instrument as maker, drawer,
acceptor, or indorser, without receiving value therefor, and for the purpose of lending
his name to some other person. Such a person is liable on the instrument to a holder
for value, notwithstanding such holder at the time of taking the instrument knew him
to be only an accommodation party.”
IN VIEW OF THE FOREGOING, the judgment appealed from is hereby affirmed in
toto with costs against defendant-appellant.
SO ORDERED.
Makalintal, C.J., Castro, Makasiar and Esguerra, JJ., concur.
Decision affirmed.
Notes.—It is the obligation of a collecting bank to reimburse to the drawee-bank
the value of checks found to contain the forged indorsements of the payee for the
reason that the bank with which the check was deposited has no right to pay the sum
stated therein to the forger or anyone else upon a forged signature. It was the
collecting bank’s duty to know that the endorsement was genuine before cashing the
check. (Great Eastern Life Ins. Co. vs. Hongkong & Shanghai Bank, 53 Phil. 678).
Any person taking checks made payable to a corporation which can act only
though its agents does so at its or his peril, and must abide by the consequences if the
agent who indorses the same is without authority. (Insular Drug Co. vs. National, 58
Phil. 685).
The 24-hour regulation of the Central Bank relative to the clearing of checks is
valid (Republic vs. Equitable Banking Corp., L-15894, Jan. 30, 1964). Consequently,
where a corporation draws a check on a bank and thereafter said checks falls into the
hands of a person who erases the name of the payee, superimposes his own name
and thereafter deposits said check in his bank, the liability of the encashing bank on
its indorsement to the drawee-bank after the 24-hour period had elapsed would
cease. (Hongkong & Shanghai Banking Corp. vs. People’s Bank & Trust Co., 35
SCRA 143).

——o0o——
 VOL. 326, FEBRUARY 29, 2000 641
Bank of the Philippine Islands vs. Court of Appeals
G.R. No. 112392. February 29, 2000.*
BANK OF THE PHILIPPINE ISLANDS, petitioner, vs.COURT OF APPEALS and
BENJAMIN C. NAPIZA, respondents.
Negotiable Instruments Law; Warranties of a person negotiating an
instrument by delivery or by qualified indorsement.—–Section 65, on the other
hand, provides for the following warranties of a person negotiating an instrument by
delivery or by qualified indorsement: (a) that the instrument is genuine and in all
respects what it purports to be; (b) that he has a good title to it; and (c) that all prior
parties had capacity to contract.
Banks and Banking; Passbooks; The requirement of presentation of the
passbook when withdrawing an amount cannot be given mere lip service even
though the person making the withdrawal is authorized by the depositor to do so.—
–The withdrawal slip contains a boxed warning that states: “This receipt must be
signed and pre-
_________________
*FIRST DIVISION.
642
6 SUPREME COURT REPORTS ANNOTATED
42
Bank of the Philippine Islands vs. Court of Appeals
sented with the corresponding foreign currency savings passbook by the
depositor in person. For withdrawals thru a representative, depositor should
accomplish the authority at the back.” The requirement of presentation of the
passbook when withdrawing an amount cannot be given mere lip service even though
the person making the withdrawal is authorized by the depositor to do so. This is
clear from Rule No. 6 set out by petitioner so that, for the protection of the bank’s
interest and as a reminder to the depositor, the withdrawal shall be entered in the
depositor’s passbook. The fact that private respondent’s passbook was not presented
during the withdrawal is evidenced by the entries therein showing that the last
transaction that he made with the bank was on September 3, 1984, the date he
deposited the controversial check in the amount of $2,500.00.
Same; Negotiable Instruments Law; Checks; A negotiable instrument, such as
a check, whether a manager’s check or ordinary check, is not legal tender.—–As
correctly held by the Court of Appeals, in depositing the check in his name, private
respondent did not become the outright owner of the amount stated therein. Under
the above rule, by depositing the check with petitioner, private respondent was, in a
way, merely designating petitioner as the collecting bank. This is in consonance with
the rule that a negotiable instrument, such as a check, whether a manager’s check or
ordinary check, is not legal tender. As such, after receiving the deposit, under its own
rules, petitioner shall credit the amount in private respondent’s account or infuse
value thereon only after the drawee bank shall have paid the amount of the check or
the check has been cleared for deposit. Again, this is in accordance with ordinary
banking practices and with this Court’s pronouncement that “the collecting bank or
last endorser generally suffers the loss because it has the duty to ascertain the
genuineness of all prior endorsements considering that the act of presenting the
check for payment to the drawee is an assertion that the party making the
presentment has done its duty to ascertain the genuineness of the endorsements.”
The rule finds more meaning in this case where the check involved is drawn on a
foreign bank and therefore collection is more difficult than when the drawee bank is
a local one even though the check in question is a manager’s check.
643
VOL. 326, FEBRUARY 29, 2000 64
3
Bank of the Philippine Islands vs. Court of Appeals
Same; Same; Same; Words and Phrases; “Manager’s Check" Explained; A
manager’s check is like a cashier’s check which, in the commercial world, is
regarded substantially to be as good as the money it represents.—–A manager’s
check is like a cashier’s check which, in the commercial world, is regarded
substantially to be as good as the money it represents (Tan v. Court of Appeals, G.R.
No. 108555, 239 SCRA 310, 322 [1994]).
Same; Same; In dealing with its depositors, a bank should exercise its
functions not only with the diligence of a good father of a family but it should do so
with the highest degree of care.—–Said ruling brings to light the fact that the
banking business is affected with public interest. By the nature of its functions, a
bank is under obligation to treat the accounts of its depositors “with meticulous care,
always having in mind the fiduciary nature of their relationship.” As such, in dealing
with its depositors, a bank should exercise its functions not only with the diligence of
a good father of a family but it should do so with the highest degree of care.
Same; Same; Same; Words and Phrases; “Negligence,” Explained; Negligence
is the omission to do something which a reasonable man, guided by those
considerations which ordinarily regulate the conduct of human affairs, would do,
or the doing of something which a prudent and reasonable man would do.—–In the
case at bar, petitioner, in allowing the withdrawal of private respondent’s deposit,
failed to exercise the diligence of a good father of a family. In total disregard of its
own rules, petitioner’s personnel negligently handled private respondent’s account to
petitioner’s detriment. As this Court once said on this matter: “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. The seventy-eight (78)-
year-old, yet still relevant, case of Picart v. Smith, provides the test by which to
determine the existence of negligence in a particular case which may be stated as
follows: Did the defendant in doing the alleged negligent act use that reasonable care
and caution which an ordinarily prudent person would have used in the same
situation? If not, then he is guilty of negligence. The law here in effect adopts the
standard supposed to be supplied by the imaginary conduct of the discreet pater
familias of the Roman law. The existence of negligence in a given case is not
determined by reference to the personal judgment of the actor in the situation
644
6 SUPREME COURT REPORTS ANNOTATED
44
Bank of the Philippine Islands vs. Court of Appeals
before him. The law considers what would be reckless, blameworthy, or
negligent in the man of ordinary intelligence and prudence and determines liability
by that.”
Same; Same; Same; Even after the lapse of the 35-day period, the amount of a
deposited check cannot be withdrawn in the absence of a clearance thereon.—–
From these facts on record, it is at once apparent that petitioner’s personnel allowed
the withdrawal of an amount bigger than the original deposit of $750.00 and the
value of the check deposited in the amount of $2,500.00 although they had not yet
received notice from the clearing bank in the United States on whether or not the
check was funded. Reyes’ contention that after the lapse of the 35-day period the
amount of a deposited check could be withdrawn even in the absence of a clearance
thereon, otherwise it could take a long time before a depositor could make a
withdrawal, is untenable. Said practice amounts to a disregard of the clearance
requirement of the banking system.
Same; Same; Negligence; Words and Phrases; “Proximate Cause,” Explained;
Proximate cause, which is determined by a mixed consideration of logic, common
sense, policy and precedent, 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.”—–While it is true that private
respondent’s having signed a blank withdrawal slip set in motion the events that
resulted in the withdrawal and encashment of the counterfeit check, the negligence of
petitioner’s personnel was the proximate cause of the loss that petitioner sustained.
Proximate cause, which is determined by a mixed consideration of logic, common
sense, policy and precedent, 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.” The proximate cause of the
withdrawal and eventual loss of the amount of $2,500.00 on petitioner’s part was its
personnel’s negligence in allowing such withdrawal in disregard of its own rules and
the clearing requirement in the banking system. In so doing, petitioner assumed the
risk of incurring a loss on account of a forged or counterfeit foreign check and hence,
it should suffer the resulting damage.
PETITION for review on certiorari of a decision of the Court of Appeals.
645
VOL. 326, FEBRUARY 29, 2000 645
Bank of the Philippine Islands vs. Court of Appeals
The facts are stated in the opinion of the Court.
Benedicto, Tale & Versoza and Leonen, Ramirez & Associates for petitioner.
Renato M. Coronado for private respondent.
YNARES-SANTIAGO, J.:
This is a petition for review on certiorari of the Decision1 of the Court of Appeals
in CA-G.R. CV No. 37392 affirming in toto that of the Regional Trial Court of Makati,
Branch 139,2 which dismissed the complaint filed by petitioner Bank of the
Philippine Islands against private respondent Benjamin C. Napiza for sum of money.
On September 3, 1987, private respondent deposited in Foreign Currency Deposit
Unit (FCDU) Savings Account No. 028-1873 which he maintained in petitioner bank’s
Buendia Avenue Extension Branch, Continental Bank Manager’s Check No.
000147574 dated August 17, 1984, payable to “cash” in the amount of Two Thousand
Five Hundred Dollars ($2,500.00) and duly endorsed by private respondent on its
dorsal side.5 It appears that the check belonged to a certain Henry Chan who went to
the office of private respondent and requested him to deposit the check in his dollar
account by way of accommodation and for the purpose of clearing the same. Private
respondent acceded, and agreed to deliver to Chan a signed blank withdrawal slip,
with the understanding that as soon as the check is cleared, both of them would go to
_______________
1 Penned by Associate Justice Jainal D. Rasul and concurred in by Associate
Justices Gloria C. Paras and Ramon Mabutas, Jr.
2 The decision of the RTC was penned by Assisting Judge Jose R. Bautista per
Administrative Order No. 109-91 dated October 3, 1991.
3 Exh. B.
4 Exh. C.
5 Exh. C-1.
646
646 SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Court of Appeals
the bank to withdraw the amount of the check upon private respondent’s
presentation to the bank of his passbook.
Using the blank withdrawal slip given by private respondent to Chan, on October
23, 1984, one Ruben Gayon, Jr. was able to withdraw the amount of $2,541.67 from
FCDU Savings Account No. 028-187. Notably, the withdrawal slip shows that the
amount was payable to Ramon A. de Guzman and Agnes C. de Guzman and was duly
initialed by the branch assistant manager, Teresita Lindo.6
On November 20, 1984, petitioner received communication from the Wells Fargo
Bank International of New York that the said check deposited by private respondent
was a counterfeit check7 because it was “not of the type or style of checks issued by
Continental Bank International.”8 Consequently, Mr. Ariel Reyes, the manager of
petitioner’s Buendia Avenue Extension Branch, instructed one of its employees,
Benjamin D. Napiza IV, who is private respondent’s son, to inform his father that the
check bounced.9 Reyes himself sent a telegram to private respondent regarding the
dishonor of the check. In turn, private respondent’s son wrote to Reyes stating that
the check had been assigned “for encashment” to Ramon A. de Guzman and/or
Agnes C. de Guzman after it shall have been cleared upon instruction of Chan. He
also said that upon learning of the dishonor of the check, his father immediately tried
to contact Chan but the latter was out of town.10
Private respondent’s son undertook to return the amount of $2,500.00 to
petitioner bank. On December 18, 1984, Reyes reminded private respondent of his
son’s promise and warned that should he fail to return that amount within seven (7)
days, the matter would be referred to the bank’s lawyers for appropriate action to
protect the bank’s interest.11 This was
_________________
6 TSN, September 14, 1989, p. 16.
7 Exh. E.
8 Exh. E-1.
9 Exh. F.
10 Ibid.
11 Exh. H.
647
VOL. 326, FEBRUARY 29, 2000 647
Bank of the Philippine Islands vs. Court of Appeals
followed by a letter of the bank’s lawyer dated April 8, 1985 demanding the return of
the $2,500.00.12
In reply, private respondent wrote petitioner’s counsel on April 20, 198513 stating
that he deposited the check “for clearing purposes” only to accommodate Chan. He
added:
“Further, please take notice that said check was deposited on September 3, 1984 and
withdrawn on October 23, 1984, or a total period of fifty (50) days had elapsed at the
time of withdrawal. Also, it may not be amiss to mention here that I merely signed an
authority to withdraw said deposit subject to its clearing, the reason why the
transaction is not reflected in the passbook of the account. Besides, I did not receive
its proceeds as may be gleaned from the withdrawal slip under the captioned
signature of recipient. If at all, my obligation on the transaction is moral in nature,
which (sic) I have been and is (sic) still exerting utmost and maximum efforts to
collect from Mr. Henry Chan who is directly liable under the circumstances.
x x x x x x x x x.”
On August 12, 1986, petitioner filed a complaint against private respondent, praying
for the return of the amount of $2,500.00 or the prevailing peso equivalent plus legal
interest from date of demand to date of full payment, a sum equivalent to 20% of the
total amount due as attorney’s fees, and litigation and/or costs of suit.
Private respondent filed his answer, admitting that he indeed signed a “blank”
withdrawal slip with the understanding that the amount deposited would be
withdrawn only after the check in question has been cleared. He likewise alleged that
he instructed the party to whom he issued the signed blank withdrawal slip to return
it to him after the bank draft’s clearance so that he could lend that party his passbook
for the purpose of withdrawing the amount of $2,500.00. However, without his
knowledge, said party was able to withdraw the amount of $2,541.67 from his dollar
savings account through
_______________
12 Exh. I
13 Exh. 3.
648
648 SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Court of Appeals
collusion with one of petitioner’s employees. Private respondent added that he had
“given the Plaintiff fifty one (51) days with which to clear the bank draft in question.”
Petitioner should have disallowed the withdrawal because his passbook was not
presented. He claimed that petitioner had no one to blame except itself “for being
grossly negligent”; in fact, it had allegedly admitted having paid the amount in the
check “by mistake” x x x “if not altogether due to collusion and/or bad faith on the
part of (its) employees.” Charging petitioner with “apparent ignorance of routine
bank procedures,” by way of counterclaim, private respondent prayed for moral
damages of P100,000.00, exemplary damages of P50,000.00 and attorney’s fees of
30% of whatever amount that would be awarded to him plus an honorarium of
P500.00 per appearance in court.
Private respondent also filed a motion for admission of a third party complaint
against Chan. He alleged that “thru strategem and/or manipulation,” Chan was able
to withdraw the amount of $2,500.00 even without private respondent’s passbook.
Thus, private respondent prayed that third party defendant Chan be made to refund
to him the amount withdrawn and to pay attorney’s fees of P5,000.00 plus P300.00
honorarium per appearance.
 Petitioner filed a comment on the motion for leave of court to admit the third
party complaint, wherein it asserted that per paragraph 2 of the Rules and
Regulations governing BPI savings accounts, private respondent alone was liable “for
the value of the credit given on account of the draft or check deposited.” It contended
that private respondent was estopped from disclaiming liability because he himself
authorized the withdrawal of the amount by signing the withdrawal slip. Petitioner
prayed for the denial of the said motion so as hot to unduly delay the disposition of
the main case asserting that private respondent’s claim could be ventilated in another
case.
Private respondent replied that for the parties to obtain complete relief and to
avoid multiplicity of suits, the motion to admit third party complaint should be
granted. Meanwhile, the trial court issued orders on August 25, 1987 and October
649
VOL. 326, FEBRUARY 29, 2000 649
Bank of the Philippine Islands vs. Court of Appeals
28, 1987 directing private respondent to actively participate in locating Chan. After
private respondent failed to comply, the trial court, on May 18, 1988, dismissed the
third party complaint without prejudice.
On November 4, 1991, a decision was rendered dismissing the complaint. The
lower court held that petitioner could not hold private respondent liable based on the
check’s face value alone. To so hold him liable “would render inutile the requirement
of ‘clearance’ from the drawee bank before the value of a particular foreign check or
draft can be credited to the account of a depositor making such deposit.” The lower
court further held that “it was incumbent upon the petitioner to credit the value of
the check in question to the account of the private respondent only upon receipt of
the notice of final paymentand should not have authorized the withdrawal from the
latter’s account of the value or proceeds of the check.” Having admitted that it
committed a “mistake” in not waiting for the clearance of the check before
authorizing the withdrawal of its value or proceeds, petitioner should suffer the
resultant loss.
On appeal, the Court of Appeals affirmed the lower court’s decision. The appellate
court held that petitioner committed “clear gross negligence” in allowing Ruben
Gayon, Jr. to withdraw the money without presenting private respondent’s passbook
and, before the check was cleared and in crediting the amount indicated therein in
private respondent’s account. It stressed that the mere deposit of a check in private
respondent’s account did not mean that the check was already private respondent’s
property. The check still had to be cleared and its proceeds can only be withdrawn
upon presentation of a passbook in accordance with the bank’s rules and regulations.
Furthermore, petitioner’s contention that private respondent warranted the check’s
genuineness by endorsing it is untenable for it would render useless the clearance
requirement. Likewise, the requirement of presentation of a passbook to ascertain
the propriety of the accounting reflected would be a meaningless exercise. After all,
these require-
650
650 SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Court of Appeals
ments are designed to protect the bank from deception or fraud.
The Court of Appeals cited the case of Roman Catholic Bishop of Malolos, Inc. v.
IAC,14 where this Court stated that a personal check is not legal tender or money, and
held that the check deposited in this case must be cleared before its value could be
properly transferred to private respondent’s account.
Without filing a motion for the reconsideration of the Court of Appeals’ Decision,
petitioner filed this petition for review on certiorari, raising the following issues:
1. 1.WHETHER OR NOT RESPONDENT NAPIZA IS LIABLE UNDER HIS
WARRANTIES AS A GENERAL INDORSER.
2. 2. WHETHER OR NOT A CONTRACT OF AGENCY WAS CREATED
BETWEEN RESPONDENT NAPIZA AND RUBEN GAYON.
3. 3.WHETHER OR NOT PETITIONER WAS GROSSLY NEGLIGENT IN
ALLOWING THE WITHDRAWAL.
Petitioner claims that private respondent, having affixed his signature at the dorsal
side of the check, should be liable for the amount stated therein in accordance with
the following provision of the Negotiable Instruments Law (Act No. 2031):
“SEC. 66. Liability of general indorser.—–Every indorser who indorses without
qualification, warrants to all subsequent holders in due course—–
1. (a)The matters and things mentioned in subdivisions (a), (6), and (c) of the
next preceding section; and
2. (b)That the instrument is at the time of his indorsement, valid and subsisting.
And, in addition, he engages that on due presentment, it shall be accepted or paid,
or both, as the case may be, according to its tenor, and that if it be dishonored, and
the necessary proceedings on
________________
14G.R. No. 72110, 191 SCRA 411 (1990).
651
VOL. 326, FEBRUARY 29, 2000 651
Bank of the Philippine Islands vs. Court of Appeals
dishonor be duly taken, he will pay the amount thereof to the holder, or to any
subsequent indorser who may be compelled to pay it.”
Section 65, on the other hand, provides for the following warranties of a person
negotiating an instrument by delivery or by qualified indorsement: (a) that the
instrument is genuine and in all respects what it purports to be; (b) that he has a
good title to it; and (c) that all prior parties had capacity to contract. 15 In People v.
Maniego,16this Court described the liabilities of an indorser as follows:
“Appellant’s contention that as mere indorser, she may not be made liable on account
of the dishonor of the checks indorsed by her, is likewise untenable. Under the law,
the holder or last indorsee of a negotiable instrument has the right ‘to enforce
payment of the instrument for the full amount thereof against all parties liable
thereon.’ Among the ‘parties liable thereon’ is an indorser of the instrument, i.e., ‘a
person placing his signature upon an instrument otherwise than as a maker, drawer
or acceptor * * unless he clearly indicated by appropriate words his intention to be
bound in some other capacity.’ Such an indorser ‘who indorses without
qualification,’ inter alia ‘engages that on due presentment, * * (the instrument) shall
be accepted or paid, or both, as the case may be, according to its tenor, and that if it
be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay
the amount thereof to the holder, or any subsequent indorser who may be compelled
to pay it.’ Maniego may also be deemed an ‘accommodation party’ in the light of the
facts, i.e., a person ‘who has signed the instrument as maker, drawer, acceptor, or
indorser, without receiving value therefor, and for the purpose of lending his name to
some other person.’ As such, she is under the law ‘liable on the instrument to a
holder for value, notwithstanding such holder at the time of taking the instrument
knew * * (her) to be only an accommodation party,’ although she has the right, after
paying the holder, to obtain reimbursement from the party accommodated, ‘since the
relation between them is in effect that of principal and surety, the accommodation
party being the surety.”
________________
15 Sec. 65, Negotiable Instruments Law.
16 L-30910, 148 SCRA 30, 35 (1987).
652
652 SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Court of Appeals
It is thus clear that ordinarily private respondent may be held liable as an indorser of
the check or even as an accommodation party,17 However, to hold private respondent
liable for the amount of the check he deposited by the strict application of the law
and without considering the attending circumstances in the case would result in an
injustice and in the erosion of the public trust in the banking system. The interest of
justice thus demands looking into the events that led to the encashment of the check.
Petitioner asserts that by signing the withdrawal slip, private respondent
“presented the opportunity for the withdrawal of the amount in question.” Petitioner
relied “on the genuine signature on the withdrawal slip, the personality of private
respondent’s son and the lapse of more than fifty (50) days from date of deposit of
the Continental Bank draft, without the same being returned yet.” 18 We hold,
however, that the propriety of the withdrawal should be gauged by compliance with
the rules thereon that both petitioner bank and its depositors are duty-bound to
observe.
In the passbook that petitioner issued to private respondent, the following rules
on withdrawal of deposits appear:
“4. Withdrawals must be made by the depositor personally but in some exceptional
circumstances, the Bank may allow withdrawal by another upon the depositor’s
written authority duly authenticated; and neither a deposit nor a withdrawal will be
permitted except upon the presentation of the depositor’s savings passbook, in which
the amount deposited withdrawn shall be entered only by the Bank.
_______________
17 In Town Savings and Loan Bank, Inc. v. Court of Appeals, G.R. No.
106011, 223 SCRA 459 (1993), the Court held that the accommodation parties to a
promissory note are liable for the amount of the loan notwithstanding that they were
not the actual beneficiaries of such loan as they merely signed the promissory note in
order that the party accommodated could be granted the full amount of the loan.
18 Petition, p. 7.
653
VOL. 326, FEBRUARY 29, 2000 653
Bank of the Philippine Islands vs. Court of Appeals
5. Withdrawals may be made by draft, mail or telegraphic transfer in currency of the
account at the request of the depositor in writing on the withdrawal slip or by
authenticated cable. Such request must indicate the name of the payee/s, amount
and the place where the funds are to be paid. Any stamp, transmission and other
charges related to such withdrawals shall be for the account of the depositor and
shall be paid by him/her upon demand. Withdrawals may also be made in the form
of travellers checks and in pesos. Withdrawals in the form of notes/bills are allowed
subject however, to their (availability).
6. Deposits shall not be subject to withdrawal by check, and may be withdrawn
only in the manner above provided, upon presentation of the depositor’s savings
passbook and with the withdrawal form supplied by the Bank at the counter.”19
Under these rules, to be able to withdraw from the savings account deposit under the
Philippine foreign currency deposit system, two requisites must be presented to
petitioner bank by the person withdrawing an amount: (a) a duly filled-up
withdrawal slip, and (b) the depositor’s passbook. Private respondent admits that he
signed a blank withdrawal slip ostensibly in violation of Rule No. 6 requiring that the
request for withdrawal must name the payee, the amount to be withdrawn and the
place where such withdrawal should be made. That the withdrawal slip was in fact a
blank one with only private respondent’s two signatures affixed on the proper spaces
is buttressed by petitioner’s allegation in the instant petition that had private
respondent indicated therein the person authorized to receive the money, then
Ruben Gayon, Jr. could not have withdrawn any amount. Petitioner contends that
“(i)n failing to do so (i.e., naming his authorized agent), he practically authorized any
possessor thereof to write any amount and to collect the same.”20
Such contention would have been valid if not for the fact that the withdrawal slip
itself indicates a special instruction that the amount is payable to “Ramon A. de
Guzman &/or
________________
19 Exh. G or 1.
20 Petition, p. 6.
654
654 SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Court of Appeals
Agnes C. de Guzman.” Such being the case, petitioner’s personnel should have been
duly warned that Gayon, who was also employed in petitioner’s Buendia Ave.
Extension branch,21 was not the proper payee of the proceeds of the check.
Otherwise, either Ramon or Agnes de Guzman should have issued another authority
to Gayon for such withdrawal. Of course, at the dorsal side of the withdrawal slip is
an “authority to withdraw” naming Gayon the person who can withdraw the amount
indicated in the check. Private respondent does not deny having signed such
authority. However, considering petitioner’s clear admission that the withdrawal slip
was a blank one except for private respondent’s signature, the unavoidable
conclusion is that the typewritten name of “Ruben C. Gayon, Jr.” was intercalated
and thereafter it was signed by Gayon or whoever was allowed by petitioner to
withdraw the amount. Under these facts, there could not have been a principal-agent
relationship between private respondent and Gayon so as to render the former liable
for the amount withdrawn.
Moreover, the withdrawal slip contains a boxed warning that states: “This receipt
must be signed and presented with the corresponding foreign currency savings
passbook by the depositor in person. For withdrawals thru a representative,
depositor should accomplish the authority at the back.” The requirement of
presentation of the passbook when withdrawing an amount cannot be given mere lip
service even though the person making the withdrawal is authorized by the depositor
to do so. This is clear from Rule No. 6 set out by petitioner so that, for the protection
of the bank’s interest and as a reminder to the depositor, the withdrawal shall be
entered in the depositor’s passbook. The fact that private respondent’s passbook was
not presented during the withdrawal is evidenced by the entries therein showing that
the last transaction that he made with the bank was on September 3, 1984,
______________
21 TSN, September 5, 1989, p. 20.
655
VOL. 326, FEBRUARY 29, 2000 655
Bank of the Philippine Islands vs. Court of Appeals
the date he deposited the controversial check in the amount of $2,500.00.22
In allowing the withdrawal, petitioner likewise overlooked another rule that is
printed in the passbook. Thus:
“2. All deposits will be received as current funds and will be repaid in the same
manner; provided, however, that deposits of drafts, checks, money orders, etc. will
be accepted as subject to collection only and credited to the account only upon
receipt of the notice of final payment. Collection charges by the Bank’s foreign
correspondent in effecting such collection shall be for the account of the depositor. If
the account has sufficient balance, the collection shall be debited by the Bank against
the account. If, for any reason, the proceeds of the deposited checks, drafts, money
orders, etc., cannot be collected or if the Bank is required to return such proceeds,
the provisional entry therefor made by the Bank in the savings passbook and its
records shall be deemed automatically cancelled regardless of the time that has
elapsed, and whether or not the defective items can be returned to the depositor; and
the Bank is hereby authorized to execute immediately the necessary corrections,
amendments or changes in its record, as well as on the savings passbook at the first
opportunity to reflect such cancellation.” (Italics and underlining supplied.)
As correctly held by the Court of Appeals, in depositing the check in his name, private
respondent did not become the outright owner of the amount stated therein. Under
the above rule, by depositing the check with petitioner, private respondent was, in a
way, merely designating petitioner as the collecting bank. This is in consonance with
the rule that a negotiable instrument, such as a check, whether a manager’s check or
ordinary check, is not legal tender.23 As such, after receiving the deposit, under its
own rules, petitioner shall credit the amount in private respondent’s account or
infuse
_______________
22Exh. 2-a.
23Philippine Airlines, Inc. v. Court of Appeals, L-49188, 181 SCRA 557, 568
(1990) citing Sec. 189 of the Negotiable Instruments Law; Art. 1249, Civil
Code; Bryan Landon Co. v. American Bank, 7 Phil. 255; Tan Sunco v. Santos, 9 Phil.
44 and 21 R.C.L. 60, 61.
656
656 SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Court of Appeals
value thereon only after the drawee bank shall have paid the amount of the check or
the check has been cleared for deposit. Again, this is in accordance with ordinary
banking practices and with this Court’s pronouncement that “the collecting bank or
last endorser generally suffers the loss because it has the duty to ascertain the
genuineness of all prior endorsements considering that the act of presenting the
check for payment to the drawee is an assertion that the party making the
presentment has done its duty to ascertain the genuineness of the
endorsements.”24 The rule finds more meaning in this case where the check involved
is drawn on a foreign bank and therefore collection is more difficult than when the
drawee bank is a local one even though the check in question is a manager’s check.25
In Banco Atlantico v. Auditor General,26 Banco Atlantico, a commercial bank in
Madrid, Spain, paid the amounts represented in three (3) checks to Virginia Boncan,
the finance officer of the Philippine Embassy in Madrid. The bank did so without
previously clearing the checks with the drawee bank, the Philippine National Bank in
New York, on account of the “special treatment” that Boncan received from the
personnel of Banco Atlantico’s foreign department. The Court held that the
encashment of the checks without prior clearance is “contrary to normal or ordinary
banking practice specially so where the drawee bank is a foreign bank and the
amounts involved were large.” Accordingly, the Court approved the Auditor General’s
denial of Banco Atlantico’s claim for pay-
________________
24 Associated Bank v. Court of Appeals, 322 Phil. 677, 699-700 citing Bank of the
Philippine Islands v. Court of Appeals, G.R. No. 102383, 216 SCRA 51, 63
(1992), Banco de Oro v. Equitable Banking Corporation, G.R. No. 74917, 157 SCRA
188 (1988) and Great Eastern Life Insurance Co. v. Hongkong and Shanghai Banking
Corporation, 43 Phil. 678.
25 A manager’s check is like a cashier’s check which, in the commercial world, is
regarded substantially to be as good as the money it represents (Tan v. Court of
Appeals, G.R. No. 108555, 239 SCRA 310, 322 [1994]).
26 L-33549, 81 SCRA 335 (1978).
657
VOL. 326, FEBRUARY 29, 2000 657
Bank of the Philippine Islands vs. Court of Appeals
ment of the value of the checks that was withdrawn by Boncan.
Said ruling brings to light the fact that the banking business is affected with public
interest. By the nature of its functions, a bank is under obligation to treat the
accounts of its depositors “with meticulous care, always having in mind the fiduciary
nature of their relationship.”27As such, in dealing with its depositors, a bank should
exercise its functions not only with the diligence of a good father of a family but it
should do so with the highest degree of care.28
In the case at bar, petitioner, in allowing the withdrawal of private respondent’s
deposit, failed to exercise the diligence of a good father of a family. In total disregard
of its own rules, petitioner’s personnel negligently handled private respondent’s
account to petitioner’s detriment. As this Court once said on this matter:
“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. The
seventy-eight (78)-year-old, yet still relevant, case of Picart v. Smith, provides the
test by which to determine the existence of negligence in a particular case which may
be stated as follows: Did the defendant in doing the alleged negligent act use that
reasonable care and caution which an ordinarily prudent person would have used in
the same situation? If not, then he is guilty of negligence. The law here in effect
adopts the standard supposed to be supplied by the imaginary conduct of the
discreet pater familias of the Roman law. The existence of negligence in a given case
is not determined by reference to the personal
__________________
27 Citytrust Banking Corporation v. Intermediate Appellate Court, G.R. No.
84281, 232 SCRA 559, 564 (1994) citing Simex International (Manila), Inc. v. Court
of Appeals, G.R. No. 88013, 183 SCRA 360 (1990).
28 Philippine Bank of Commerce v. Court of Appeals, 336 Phil. 667, 681; 269
SCRA 695, 708-709 (1997) citing Metropolitan Bank and Trust Company v. Court of
Appeals, G.R. No. 112576, 237 SCRA 761, 767 (1994) and Bank of the Philippine
Islands v. Court of Appeals, G.R. No. 102383, 216 SCRA 51 (1992).
658
658 SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Court of Appeals
judgment of the actor in the situation before him. The law considers what would be
reckless, blameworthy, or negligent in the man of ordinary intelligence and prudence
and determines liability by that.”29
Petitioner violated its own rules by allowing the withdrawal of an amount that is
definitely over and above the aggregate amount of private respondent’s dollar
deposits that had yet to be cleared. The bank’s ledger on private respondent’s account
shows that before he deposited $2,500.00, private respondent had a balance of only
$750.00.30 Upon private respondent’s deposit of $2,500.00 on September 3, 1984,
that amount was credited in his ledger as a deposit resulting in the corresponding proximate cause of the withdrawal and eventual loss of the amount of $2,500.00 on
total balance of $3,250.00.31 On September 10, 1984, the amount of $600.00 and the petitioner’s part was its personnel’s negligence in allowing such withdrawal in
additional charges of $10.00 were indicated therein as withdrawn thereby leaving a disregard of its own rules and the clearing requirement in the banking system. In so
balance of $2,640.00. On September 30, 1984, an interest of $11.59 was reflected in doing, petitioner assumed the risk of incurring a loss on account of a forged or
the ledger and on October 23, 1984, the amount of $2,541.67 was entered as counterfeit foreign check and hence, it should suffer the resulting damage.
withdrawn with a balance of $109.92.32 On November 19, 1984 the word “hold” was WHEREFORE, the petition for review on certiorari is DENIED. The Decision of
written beside the balance of $109.92.33 That must have been the time when Reyes, the Court of Appeals in CA-G.R. CV No. 37392 is AFFIRMED.
petitioner’s branch manager, was informed unofficially of the fact that the check SO ORDERED.
deposited was a counterfeit, but petitioner’s Buendia Ave. Extension Branch received Davide, Jr. (C.J., Chairman), Puno, Kapunan and Pardo, JJ., concur.
a copy of the communication thereon from Wells Fargo Bank International in New
York the following day, November 20, 1984.34 According to Reyes, Wells Fargo Bank _______________
International handled the clearing of checks drawn against U.S. banks that were
deposited with petitioner.35 36 TSN, September 21, 1989, p. 21.
From these facts on record, it is at once apparent that petitioner’s personnel 37 Philippine Bank of Commerce v. Court of Appeals, supra, at p. 679.
allowed the withdrawal of an amount big- 660
660 SUPREME COURT REPORTS ANNOTATED
_________________ People vs. Gamer
Petition denied, judgment affirmed.
29 Ibid., at p. 676. Notes.—–A bank, being greatly affected with public interest, should exercise
30 Exh. A. even a higher degree of diligence in the handling of its affairs than that expected of
31 Exh. A-1.
32 Exh. A-2.
an ordinary business firm. (Lim Sio Bio vs. Court of Appeals,221 SCRA 307 [1993])
33 Exh. A-3.
A cashier’s check is a primary obligation of the issuing bank and accepted in
34 Exh: E.
advance by its mere issuance, and, by its peculiar character and general use in the
35 Affidavit of Reyes, p. 3; Record, p. 111.
commercial world is regarded substantially to be as good as the money which it
represents. (Tan vs. Court of Appeals, 239 SCRA 310 [1994])
659 A bank’s act of issuing manager’s checks and corresponding receipt before
VOL. 326, FEBRUARY 29, 2000 659 payment thereof is completely reckless and grossly negligent, an appalling breach of
Bank of the Philippine Islands vs. Court of Appeals bank procedures. (Philippine National Bank vs. Court of Appeals,256 SCRA
ger than the original deposit of $750.00 and the value of the check deposited in the 309 [1996])
amount of $2,500.00 although they had not yet received notice from the clearing
bank in the United States on whether or not the check was funded. Reyes’ contention —–—–o0o—–—–
that after the lapse of the 35-day period the amount of a deposited check could be
withdrawn even in the absence of a clearance thereon, otherwise it could take a long
time before a depositor could make a withdrawal,36 is untenable. Said practice
amounts to a disregard of the clearance requirement of the banking system.
While it is true that private respondent’s having signed a blank withdrawal slip set
in motion the events that resulted in the withdrawal and encashment of the
counterfeit check, the negligence of petitioner’s personnel was the proximate cause of
the loss that petitioner sustained. Proximate cause, which is determined by a mixed
consideration of logic, common sense, policy and precedent, 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.” 37 The
 G.R. No. 141001. May 21, 2009.*
BANK OF AMERICA, NT & SA, petitioner, vs.ASSOCIATED CITIZENS BANK, BA-
FINANCE CORPORATION, MILLER OFFSET PRESS, INC., UY KIAT CHUNG,
CHING UY SENG, UY CHUNG GUAN SENG, and COURT OF APPEALS,
respondents.
G.R. No. 141018. May 21, 2009.*
ASSOCIATED CITIZENS BANK (now UNITED OVERSEAS BANK PHILS.),
petitioner, vs. BA-FINANCE CORPORATION, MILLER OFFSET PRESS, INC., UY
KIAT CHUNG, CHING UY SENG, UY CHUNG GUAN SENG, and BANK OF
AMERICA, NT & SA, respondents.
Negotiable Instruments Law; Banks and Banking; Checks; When the drawee
bank pays a person other than the payee named on the check, it does not comply
with the terms of the check and violates its duty to charge the drawer’s account only
for properly payable items—a drawee should charge to the drawer’s accounts only
the payables authorized by the latter.—The bank on which a check is drawn, known
as the drawee bank, is under strict liability, based on the contract between the bank
and its customer (drawer), to pay the check only to the payee or the payee’s order.
The drawer’s instructions are reflected on the face and by the terms of the check.
When the drawee bank pays a person other than the payee named on the check, it
does not comply with the terms of the check and violates its duty to charge the
drawer’s account only for properly payable items. Thus, we ruled in Philippine
National Bank v. Rodriguez (566 SCRA 513 [2008]) that a drawee should charge to
the drawer’s accounts only the payables authorized by the latter; otherwise, the
drawee will be violating the instructions of the drawer and shall be liable for the
amount charged to the drawer’s account.
Same; Same; Same; Crossed Checks; Judicial Notice; The Supreme Court has
taken judicial cognizance of the practice that a check with two parallel lines in the
upper left hand corner means that it could only be deposited and could not be
converted into cash; The effects of crossing a check as follows: (a) the check may
not be encashed but only deposited in
_______________
* FIRST DIVISION.
52
5 SUPREME COURT REPORTS ANNOTATED
2 endorser warrants “that the instrument is genuine and in all respects what it
Bank of America, NT & SA vs. Associated Citizens Bank
the bank; (b) the check may be negotiated only once—to one who has an
account with a bank; and (c) the act of crossing the check serves as a warning to the
holder that the check has been issued for a definite purpose so that he must inquire
if he has received the check pursuant to that purpose; otherwise, he is not a holder
in due course.—Among the different types of checks issued by a drawer is the crossed
check. The Negotiable Instruments Law is silent with respect to crossed checks,
although the Code of Commerce makes reference to such instruments. This Court has
taken judicial cognizance of the practice that a check with two parallel lines in the
upper left hand corner means that it could only be deposited and could not be
converted into cash. Thus, the effect of crossing a check relates to the mode of
payment, meaning that the drawer had intended the check for deposit only by the
rightful person, i.e., the payee named therein. The crossing may be “special” wherein
between the two parallel lines is written the name of a bank or a business institution,
in which case the drawee should pay only with the intervention of that bank or
company, or “general” wherein between two parallel diagonal lines are written the
words “and Co.” or none at all, in which case the drawee should not encash the same
but merely accept the same for deposit. In Bataan Cigar v. Court of Appeals (230
SCRA 643 [1994]), we enumerated the effects of crossing a check as follows: (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; and (c) the act of
crossing the check serves as a warning to the holder that the check has been issued
for a definite purpose so that he must inquire if he has received the check pursuant to
that purpose; otherwise, he is not a holder in due course.
Same; Same; Same; A collecting bank where a check is deposited, and which
endorses the check upon presentment with the drawee bank, is an endorser; The
Court has repeatedly held that in check transactions, the collecting bank or last
endorser generally suffers the loss because it has the duty to ascertain the
genuineness of all prior endorsements considering that the act of presenting the
check for payment to the drawee is an assertion that the party making the
presentment has done its duty to ascertain the genuineness of the endorsements;
When the collecting bank stamped the back of the four checks with the phrase “all
prior endorsements and/or lack of endorsement guaranteed,” that bank had for all
intents and purposes treated the checks as negotiable instruments and, accordingly,
assumed the warranty of an endorser.—A collecting bank where a check is
deposited, and which endorses the check upon presentment with the drawee bank, is
an endorser. Under Section 66 of the Negotiable Instruments Law, an
53
VOL. 588, MAY 21, 2009 5
3
Bank of America, NT & SA vs. Associated Citizens Bank
purports to be; that he has good title to it; that all prior parties had capacity to
contract; and that the instrument is at the time of his endorsement valid and
subsisting.” This Court has repeatedly held that in check transactions, the collecting
bank or last endorser generally suffers the loss because it has the duty to ascertain
the genuineness of all prior endorsements considering that the act of presenting the
check for payment to the drawee is an assertion that the party making the
presentment has done its duty to ascertain the genuineness of the endorsements.
When Associated Bank stamped the back of the four checks with the phrase “all prior
endorsements and/or lack of endorsement guaranteed,” that bank had for all intents
and purposes treated the checks as negotiable instruments and, accordingly,
assumed the warranty of an endorser. Being so, Associated Bank cannot deny liability
on the checks.
Same; Same; Same; Negligence; When a bank allows its client to collect on
crossed checks issued in the name of another, the bank is guilty of negligence.—
Associated Bank was also clearly negligent in disregarding established banking rules
and regulations by allowing the four checks to be presented by, and deposited in the
personal bank account of, a person who was not the payee named in the checks. The
checks were issued to the “Order of Miller Offset Press, Inc.,” but were deposited, and
paid by Associated Bank, to the personal joint account of Ching Uy Seng (a.k.a.
Robert Ching) and Uy Chung Guan Seng. It could not have escaped Associated
Bank’s attention that the payee of the checks is a corporation while the person who
deposited the checks in his own account is an individual. Verily, when the bank
allowed its client to collect on crossed checks issued in the name of another, the bank
is guilty of negligence. As ruled by this Court in Jai-Alai Corporation of the
Philippines v. Bank of the Philippine Islands (66 SCRA 29 [1975]), one who accepts
and encashes a check from an individual knowing that the payee is a corporation
does so at his peril. Accordingly, we hold that Associated Bank is liable for the
amount of the four checks and should reimburse the amount of the checks to Bank of
America.
Same; Same; Equity; Solutio Indebiti; It is well-settled that a person who had
not given value for the money paid to him has no right to retain the money he
received.—It is well-settled that a person who had not given value for the money paid
to him has no right to retain the money he received. This Court, therefore, quotes
with approval the ruling of the Court of Appeals in its decision: It appearing,
however, from the evidence on record that since Ching Uy Seng and/or Uy Chung
Guan Seng received the
54
5 SUPREME COURT REPORTS ANNOTATED
4 representatives, i.e., Uy Kiat Chung, Ching Uy Seng, and Uy Chung Guan Seng. BA-
Bank of America, NT & SA vs. Associated Citizens Bank
proceeds of the checks as they were deposited in their personal joint account
with Associated Bank, they should, therefore, be obliged to reimburse Associated
Bank for the amount it has to pay to Bank of America, in line with the rule that no
person should be allowed to unjustly enrich himself at the expense of another.
Attorney’s Fees; An award of attorney’s fees necessitates a factual, legal, or
equitable justification.—As regards the trial court’s grant of attorney’s fees to BA-
Finance, the Court of Appeals found that there was no sufficient justification
therefor; hence, the deletion of the award is proper. An award of attorney’s fees
necessitates a factual, legal, or equitable justification. Without such justification, the
award is a conclusion without a premise, its basis being improperly left to
speculation and conjecture.
PETITIONS for review on certiorari of the decision and resolution of the Court of
Appeals.
The facts are stated in the opinion of the Court.
Brillantes, (Nachura), Navarro, Jumamil, Arcilla & Bello Law Offices for Bank
of America Corporation.
Agcaoili & Associates and Villanueva, Caña & Associates Law Offices for
Associated Citizens Bank.
Oscar Bati for respondents Miller Offset Press, Inc., et al.
CARPIO, J.:
The Case
Before the Court are consolidated cases docketed as G.R. No. 141001 and G.R. No.
141018. These two cases are petitions for review on certiorari1 of the Decision2 dated
26 February 1999 and the Resolution dated 6 December 1999 of the Court of Appeals
in CA-G.R. CV No. 48821. The Court of Appeals affirmed with modifications the
Decision of the Regional Trial Court of Makati, Branch 64 (RTC).
_______________
1 Under Rule 45 of the 1997 Rules of Civil Procedure.
2 Penned by Associate Justice Artemon D. Luna with Associate Justices Delilah
Vidallon-Magtolis and Rodrigo V. Cosico, concurring.
55
VOL. 588, MAY 21, 2009 55
Bank of America, NT & SA vs. Associated Citizens Bank
The Antecedent Facts
On 6 October 1978, BA-Finance Corporation (BA-Finance) entered into a
transaction with Miller Offset Press, Inc. (Miller), through the latter’s authorized
Finance granted Miller a credit line facility through which the latter could assign or
discount its trade receivables with the former. On 20 October 1978, Uy Kiat Chung,
Ching Uy Seng, and Uy Chung Guan Seng executed a Continuing Suretyship
Agreement with BA-Finance whereby they jointly and severally guaranteed the full
and prompt payment of any and all indebtedness which Miller may incur with BA-
Finance.
Miller discounted and assigned several trade receivables to BA-Finance by
executing Deeds of Assignment in favor of the latter. In consideration of the
assignment, BA-Finance issued four checks payable to the “Order of Miller Offset having signed the Continuing Suretyship Agreement with BA-Finance. In view
Press, Inc.” with the notation “For Payee’s Account Only.” These checks were drawn thereof, BA-Finance filed an Amended Complaint impleading Bank of America as
against Bank of America and had the following details:3 additional defendant for allegedly allowing encashment and collection of the checks
Check No. Date Amount by person or persons other than the payee named thereon. Ching Uy Seng, on the
other hand, did not file his Answer to the complaint.
128274 13 February 1981 P222,363.33 Bank of America filed a Third Party Complaint against Associated Bank. In its
Answer to the Third Party Complaint, Associated Bank admitted having received the
129067 26 February 1981 252,551.16 four checks for deposit in the joint account of Ching Uy Seng (a.k.a. Robert Ching)
and Uy Chung Guan Seng, but alleged that Robert Ching, being one of the corporate
132133 20 April 1981 206,450.57 officers of Miller, was duly authorized to act for and on behalf of Miller.
On 28 September 1994, the RTC rendered a Decision, the dispositive portion of
133057 7 May 1981 59,862.72 which reads:

---------------- _______________

Total P741,227.78 4 Id., at p. 3.

The four checks were deposited by Ching Uy Seng (a.k.a. Robert Ching), then the
corporate secretary of Miller, in Account No. 989 in Associated Citizens Bank
(Associated Bank). Account No. 989 is a joint bank account under the names of
Ching Uy Seng and Uy Chung Guan Seng. Associated Bank stamped the checks with
the
_______________
3 Records, pp. 107-110.
56
56 SUPREME COURT REPORTS ANNOTATED
Bank of America, NT & SA vs. Associated Citizens Bank
notation “all prior endorsements and/or lack of endorsements guaranteed,” and sent
them through clearing. Later, the drawee bank, Bank of America, honored the checks
and paid the proceeds to Associated Bank as the collecting bank.
Miller failed to deliver to BA-Finance the proceeds of the assigned trade
receivables. Consequently, BA-Finance filed a Complaint against Miller for collection
of the amount of P731,329.63 which BA-Finance allegedly paid in consideration of
the assignment, plus interest at the rate of 16% per annum and penalty
charges.4 Likewise impleaded as party defendants in the collection case were Uy Kiat
Chung, Ching Uy Seng, and Uy Chung Guan Seng.
Miller, Uy Kiat Chung, and Uy Chung Guan Seng filed a Joint Answer (to the BA-
Finance’s Complaint) with Cross-Claim against Ching Uy Seng, wherein they denied
that (1) they received the amount covered by the four Bank of America checks, and
(2) they authorized their co-defendant Ching Uy Seng to transact business with BA-
Finance on behalf of Miller. Uy Kiat Chung and Uy Chung Guan Seng also denied
57
VOL. 588, MAY 21, 2009 57
Bank of America, NT & SA vs. Associated Citizens Bank
“WHEREFORE, in view of the foregoing, judgment is hereby rendered against
defendant Bank of America to pay plaintiff BA Finance Corporation the sum of
P741,277.78, the value of the four (4) checks subject matter of this case, with legal
interest thereon from the time of the filing of this complaint until payment is made
and attorney’s fees corresponding to 15% of the amount due and to pay the costs of
the suit.
Judgment is likewise rendered ordering the third-party defendant Associated
Citizens Bank to reimburse Bank of America, the defendant third-party plaintiff, of
the aforestated amount.
SO ORDERED.”5
The Court of Appeals’ Ruling
On appeal, the Court of Appeals rendered judgment,6affirming with modifications
the decision of the RTC, thus:
“WHEREFORE, judgment is hereby rendered, as follows:
(1) Defendant and third-party plaintiff-appellant, Bank of America, NT & SA, is
ordered to pay plaintiff-appellee BA-Finance Corporation the sum of P741,277.78,
with legal interest thereon from the time of the filing of the complaint until the whole
amount is fully paid;
(2) Third-party defendant-appellant Associated Citizens Bank is likewise
ordered to reimburse Bank of America the aforestated amount;
 (3) Defendants Ching Uy Seng and/or Uy Chung Guan Seng are also ordered to
pay Associated Citizens Bank the aforestated amount; and
(4) The award of attorney’s fees is ordered deleted.
SO ORDERED.”7
Associated Bank and Bank of America filed their respective Motions for
Reconsideration, but these were denied by the Court of Appeals in its Resolution of 6
December 1999.8
Hence, these petitions.
_______________
5 CA Rollo, p. 38.
6 Promulgated on 26 February 1999.
7 Rollo (G.R. No. 141001), pp. 25-26.
8 Id., at pp. 34-35.
58
58 SUPREME COURT REPORTS ANNOTATED
Bank of America, NT & SA vs. Associated Citizens Bank
The Issue
The issues raised in these consolidated cases may be summarized as follows:
“Whether the Court of Appeals erred in rendering judgment finding (1) Bank of
America liable to pay BA-Finance the amount of the four checks; (2) Associated Bank
liable to reimburse Bank of America the amount of the four checks; and (3) Ching Uy
Seng and/or Uy Chung Guan Seng liable to pay Associated Bank the amount of the
four checks.”
The Court’s Ruling
We find the petitions unmeritorious.
The Court of Appeals did not err in finding Bank
of America liable to pay BA-Finance the
amount of the four checks.
Bank of America denies liability for paying the amount of the four checks issued
by BA-Finance to Miller, alleging that it (Bank of America) relied on the stamps made
by Associated Bank stating that “all prior endorsement and/or lack of endorsement
guaranteed,” through which Associated Bank assumed the liability of a general
endorser under Section 66 of the Negotiable Instruments Law. Moreover, Bank of
America contends that the proximate cause of BA-Finance’s injury, if any, is the gross
negligence of Associated Bank which allowed Ching Uy Seng (Robert Ching) to
deposit the four checks issued to Miller in the personal joint bank account of Ching
Uy Seng and Uy Chung Guan Seng.
We are not convinced.
The bank on which a check is drawn, known as the drawee bank, is under strict
liability, based on the contract between the bank and its customer (drawer), to pay
the check only to the payee or the payee’s order. The drawer’s instructions are
reflected on the face and by the terms of the check. When the drawee bank pays a
person other than the payee named on the check, it does not comply with the terms
of the check and violates its duty to charge the
59
VOL. 588, MAY 21, 2009 59
Bank of America, NT & SA vs. Associated Citizens Bank
drawer’s account only for properly payable items.9 Thus, we ruled in Philippine
National Bank v. Rodriguez10 that a drawee should charge to the drawer’s accounts
only the payables authorized by the latter; otherwise, the drawee will be violating the
instructions of the drawer and shall be liable for the amount charged to the
drawer’s account.
Among the different types of checks issued by a drawer is the crossed check. The
Negotiable Instruments Law is silent with respect to crossed checks, although the
Code of Commerce11 makes reference to such instruments.12 This Court has taken
judicial cognizance of the practice that a check with two parallel lines in the upper
left hand corner means that it could only be deposited and could not be converted
into cash.13 Thus, the effect of crossing a check relates to the mode of payment,
meaning that the drawer had intended the check for deposit only by the rightful
person, i.e., the payee named therein.14 The crossing may be “special” wherein
between the two parallel lines is written the name of a bank or a business institution,
in which case the drawee should pay only with the intervention of that bank or
company, or “general” wherein between two parallel diagonal lines are written the
words “and Co.” or none at all, in which case the drawee should not encash the same
but merely accept the same for deposit.15 In Bataan
_______________
9 Associated Bank v. Court of Appeals, 322 Phil. 677, 697; 252 SCRA 620, 631
(1996).
10 G.R. No. 170325, 26 September 2008, 566 SCRA 513.
11 Article 541 of the Code of Commerce states: “The maker or any legal holder of a
check shall be entitled to indicate therein that it be paid to a certain banker or
institution, which he shall do by writing across the face the name of said banker or
institution, or only the words ‘and company.’ ”
12 Yang v. Court of Appeals, 456 Phil. 378, 395; 409 SCRA 159, 171
(2003); Bataan Cigar and Cigarette Factory, Inc. v. Court of Appeals, G.R. No.
93048, 3 March 1994, 230 SCRA 643.
 13 State Investment House v. Intermediate Appellate Court, G.R. No. 72764, 3
July 1989, 175 SCRA 310, 315.
14 Id.
15 Id.
60
60 SUPREME COURT REPORTS ANNOTATED
Bank of America, NT & SA vs. Associated Citizens Bank
Cigar v. Court of Appeals,16 we enumerated the effects of crossing a check as follows:
(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; and (c) the act of
crossing the check serves as a warning to the holder that the check has been issued
for a definite purpose so that he must inquire if he has received the check pursuant to
that purpose; otherwise, he is not a holder in due course.17
In this case, the four checks were drawn by BA-Finance and made payable to the
“Order of Miller Offset Press, Inc.” The checks were also crossed and issued “For
Payee’s Account Only.” Clearly, the drawer intended the check for deposit only by
Miller Offset Press, Inc. in the latter’s bank account. Thus, when a person other than
Miller, i.e., Ching Uy Seng, a.k.a. Robert Ching, presented and deposited the checks
in his own personal account (Ching Uy Seng’s joint account with Uy Chung Guan
Seng), and the drawee bank, Bank of America, paid the value of the checks and
charged BA-Finance’s account therefor, the drawee Bank of America is deemed to
have violated the instructions of the drawer, and therefore, is liable for the amount
charged to the drawer’s account.
The Court of Appeals did not err in finding Associated
Bank liable to reimburse Bank of America the
amount of the four checks.
A collecting bank where a check is deposited, and which endorses the check upon
presentment with the drawee bank, is an endorser.18 Under Section 66 of the
Negotiable Instruments Law, an endorser warrants “that the instrument is genuine
and in all
_______________
16 Supra.
17 Citing Ocampo v. Gatchalian, G.R. No. L-15126, 30 November 1961, 3 SCRA
596; Associated Bank v. Court of Appeals, G.R. No. 89802, 7 May 1992, 208 SCRA
465; and State Investment House v. Intermediate Appellate Court, supra note 13.
See also Gempesaw v. Court of Appeals, G.R. No. 92244, 9 February 1993, 218 SCRA
682.
18 Associated Bank v. Court of Appeals, supra note 9.
61
VOL. 588, MAY 21, 2009 61
Bank of America, NT & SA vs. Associated Citizens Bank
respects what it purports to be; that he has good title to it; that all prior parties had
capacity to contract; and that the instrument is at the time of his endorsement valid
and subsisting.” This Court has repeatedly held that in check transactions, the
collecting bank or last endorser generally suffers the loss because it has the duty to
ascertain the genuineness of all prior endorsements considering that the act of
presenting the check for payment to the drawee is an assertion that the party making
the presentment has done its duty to ascertain the genuineness of the
endorsements.19
When Associated Bank stamped the back of the four checks with the phrase “all
prior endorsements and/or lack of endorsement guaranteed,” that bank had for all
intents and purposes treated the checks as negotiable instruments and, accordingly,
assumed the warranty of an endorser. Being so, Associated Bank cannot deny liability
on the checks. In Banco de Oro Savings and Mortgage Bank v. Equitable Banking
Corporation,20 we held that:
“x x x the law imposes a duty of diligence on the collecting bank to scrutinize
checks deposited with it for the purpose of determining their genuineness and
regularity. The collecting bank being primarily engaged in banking holds itself out to
the public as the expert and the law holds it to a high standard of conduct. x x x In
presenting the checks for clearing and for payment, the defendant [collecting bank]
made an express guarantee on the validity of “all prior endorsements.” Thus,
stamped at the back of the checks are the defendant’s clear warranty: ALL PRIOR
ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS GUARANTEED. Without
such warranty, plaintiff [drawee] would not have paid on the checks. No amount of
legal jargon can reverse the clear meaning of defendant’s warranty. As the warranty
has proven to be false and inaccurate, the defendant is liable for any damage arising
out of the falsity of its representation.”
_______________
19 Id., citing Bank of Philippine Islands v. Court of Appeals, G.R. No. 102383, 26
November 1992, 216 SCRA 51, 63; Banco de Oro Savings and Mortgage Bank v.
Equitable Banking Corporation, 241 Phil. 187; 157 SCRA 188 (1988); and Great
Eastern Life Insurance Co. v. Hongkong & Shanghai Banking Corporation, 43 Phil.
678 (1922).
20 Supra at pp. 200-201.
62
62 SUPREME COURT REPORTS ANNOTATED
Bank of America, NT & SA vs. Associated Citizens Bank
Associated Bank was also clearly negligent in disregarding established banking
rules and regulations by allowing the four checks to be presented by, and deposited
in the personal bank account of, a person who was not the payee named in the
checks. The checks were issued to the “Order of Miller Offset Press, Inc.,” but were
deposited, and paid by Associated Bank, to the personal joint account of Ching Uy
Seng (a.k.a. Robert Ching) and Uy Chung Guan Seng. It could not have escaped
Associated Bank’s attention that the payee of the checks is a corporation while the
person who deposited the checks in his own account is an individual. Verily, when
the bank allowed its client to collect on crossed checks issued in the name of another,
the bank is guilty of negligence.21 As ruled by this Court in Jai-Alai Corporation of
the Philippines v. Bank of the Philippine Islands,22 one who accepts and encashes a
check from an individual knowing that the payee is a corporation does so at his peril.
Accordingly, we hold that Associated Bank is liable for the amount of the four checks
and should reimburse the amount of the checks to Bank of America.
The Court of Appeals did not err in finding Ching Uy Seng and/or Uy
Chung Guan Seng liable to pay Associated Bank
the amount of the four checks.
It is well-settled that a person who had not given value for the money paid to him
has no right to retain the money he received.23 This Court, therefore, quotes with
approval the ruling of the Court of Appeals in its decision:
_______________
equitable justification. Without such justification, the award is a conclusion without a
premise, its basis being improperly left to speculation and conjecture.25
We note that the Decision of the Court of Appeals provides for the amount of
P741,277.78 as the sum of the four checks subject of this case. 26 This amount should
be modified as records show that the total value of the four checks is P741,227.78.27
WHEREFORE, we DENY the petitions. We AFFIRM the Court of Appeals’
Decision dated 26 February 1999 in CA-G.R. CV No. 48821 with the
MODIFICATION that Bank of America, NT & SA is ordered to pay BA-Finance
Corporation the amount of P741,227.78, with legal interest from the time of filing of
the complaint until the amount is fully paid. Associated Citizens Bank is ordered to
reimburse Bank of America the abovementioned amount. Ching Uy Seng and/or Uy
Chung Guan Seng are also ordered to pay Associated Citizens Bank the
abovementioned amount.
SO ORDERED.
_______________
24 Rollo (G.R. No. 141001), p. 25.
25 Buan v. Camaganacan, 123 Phil. 131, 135; 16 SCRA 321, 324 (1966).
26 Rollo (G.R. No. 141001), pp. 25-26.
27 Records, pp. 107-110.

21 Id.; Associated Bank v. Court of Appeals, supra note 9; PhilippineCommercial

International Bank v. Court of Appeals, 403 Phil. 361; 350 SCRA 446 (2001).
22 160 Phil. 741, 747-748; 66 SCRA 29, 35 (1975).
23 Applying Article 22 of the Civil Code of the Philippines which provides: “Every
person who through an act of performance by another, or any other means, acquires
or comes into possession of something at the expense of the latter without just or
legal ground, shall return the same to him.”
63
VOL. 588, MAY 21, 2009 63
Bank of America, NT & SA vs. Associated Citizens Bank
“It appearing, however, from the evidence on record that since Ching Uy Seng
and/or Uy Chung Guan Seng received the proceeds of the checks as they were
deposited in their personal joint account with Associated Bank, they should,
therefore, be obliged to reimburse Associated Bank for the amount it has to pay to
Bank of America, in line with the rule that no person should be allowed to unjustly
enrich himself at the expense of another.”24
As regards the trial court’s grant of attorney’s fees to BA-Finance, the Court of
Appeals found that there was no sufficient justification therefor; hence, the deletion
of the award is proper. An award of attorney’s fees necessitates a factual, legal, or
 G.R. No. 176697. September 10, 2014.*
CESAR V. AREZA and LOLITA B. AREZA, petitioners, vs.EXPRESS SAVINGS
BANK, INC. and MICHAEL POTENCIANO, respondents.
Remedial Law; Civil Procedure; Notice of Hearing; As held in Maturan v.
Araula, 111 SCRA 615 (1982), the rule requiring that the notice be addressed to the
adverse party has been substantially complied with when a copy of the motion for
reconsideration was furnished to the counsel of the adverse party, coupled with the
fact that the trial court acted on said notice of hearing.—Petitioners claim that the
notice of hearing was addressed to the Clerk of Court and not to the adverse party as
the rules require. Petitioners add that the
_______________
* FIRST DIVISION.
589
VOL. 734, SEPTEMBER 10, 2014 58
9 exactly did in this case. It debited the account of Equitable-PCI Bank for the altered
Areza vs. Express Savings Bank, Inc.
hearing on the motion for reconsideration was scheduled beyond 10 days from
the date of filing. As held in Maturan v. Araula, 111 SCRA 615 (1982), the rule
requiring that the notice be addressed to the adverse party has been substantially
complied with when a copy of the motion for reconsideration was furnished to the
counsel of the adverse party, coupled with the fact that the trial court acted on said
notice of hearing and, as prayed for, issued an order setting the hearing of the motion
on 26 March 2004. We would reiterate later that there is substantial compliance with
the foregoing Rule if a copy of the said motion for reconsideration was furnished to
the counsel of the adverse party.
Mercantile Law; Negotiable Instruments Law; Section 63 of Act No. 2031 or
the Negotiable Instruments Law provides that the acceptor, by accepting the
instrument, engages that he will pay it according to the tenor of his acceptance.—
Section 63 of Act No. 2031 or the Negotiable Instruments Law provides that the
acceptor, by accepting the instrument, engages that he will pay it according to the
tenor of his acceptance. The acceptor is a drawee who accepts the bill. In Philippine
National Bank v. Court of Appeals, 28 SCRA 984 (1968), the payment of the amount
of a check implies not only acceptance but also compliance with the drawee’s
obligation.
Same; Same; Material Alterations; Section 124 of the Negotiable Instruments
Law states that a material alteration avoids an instrument except as against an
assenting party and subsequent indorsers, but a holder in due course may enforce
payment according to its original tenor.—The second view is that the
acceptor/drawee despite the tenor of his acceptance is liable only to the extent of the
bill prior to alteration. This view appears to be in consonance with Section 124 of the
Negotiable Instruments Law which states that a material alteration avoids an
instrument except as against an assenting party and subsequent indorsers, but a
holder in due course may enforce payment according to its original tenor. Thus,
when the drawee bank pays a materially altered check, it violates the terms of the
check, as well as its duty to charge its client’s account only for bona
fide disbursements he had made. If the drawee did not pay according to the original
tenor of the instrument, as directed by the drawer, then it has no right to claim
reimbursement from the drawer, much less, the right to deduct the erroneous
payment it made from the drawer’s account which it was expected to treat with
590
5 SUPREME COURT REPORTS ANNOTATED
90
Areza vs. Express Savings Bank, Inc.
utmost fidelity. The drawee, however, still has recourse to recover its loss. It
may pass the liability back to the collecting bank which is what the drawee bank
amount of the checks.
Same; Banks and Banking; Depositary Banks; Collecting Banks; Words and
Phrases; A depositary bank is the first bank to take an item even though it is also
the payor bank, unless the item is presented for immediate payment over the
counter; A collecting bank is defined as any bank handling an item for collection
except the bank on which the check is drawn.—A depositary bank is the first bank to
take an item even though it is also the payor bank, unless the item is presented for
immediate payment over the counter. It is also the bank to which a check is
transferred for deposit in an account at such bank, even if the check is physically
received and indorsed first by another bank. A collecting bank is defined as any bank
handling an item for collection except the bank on which the check is drawn.
Same; Same; Same; Same; If any of the warranties made by the
depositary/collecting bank turns out to be false, then the drawee bank may recover
from it up to the amount of the check.—A depositary/collecting bank where a check is
deposited, and which endorses the check upon presentment with the drawee bank, is
an endorser. Under Section 66 of the Negotiable Instruments Law, an endorser
warrants “that the instrument is genuine and in all respects what it purports to be;
that he has good title to it; that all prior parties had capacity to contract; and that the
instrument is at the time of his endorsement valid and subsisting.” It has been
repeatedly held that in check transactions, the depositary/collecting bank or last
endorser generally suffers the loss because it has the duty to ascertain the
genuineness of all prior endorsements considering that the act of presenting the
check for payment to the drawee is an assertion that the party making the
presentment has done its duty to ascertain the genuineness of the endorsements. If
any of the warranties made by the depositary/collecting bank turns out to be false,
then the drawee bank may recover from it up to the amount of the check.
Same; Same; Collecting Banks; The law imposes a duty of diligence on the
collecting bank to scrutinize checks deposited with it for the purpose of determining
their genuineness and regularity.—The law imposes a duty of diligence on the
collecting bank to scrutinize
591
VOL. 734, SEPTEMBER 10, 2014 5 place.
91
Areza vs. Express Savings Bank, Inc.
checks deposited with it for the purpose of determining their genuineness and
regularity. The collecting bank being primarily engaged in banking holds itself out to
the public as the expert and the law holds it to a high standard of conduct. As
collecting banks, the Bank and Equitable-PCI Bank are both liable for the amount of
the materially altered checks. Since Equitable-PCI Bank is not a party to this case and
the Bank allowed its account with Equitable-PCI Bank to be debited, it has the option
to seek recourse against the latter in another forum.
Same; Same; Collecting Banks; Depositary Banks; A depositary/collecting
bank may resist or defend against a claim for breach of warranty if the drawer, the
payee, or either the drawee bank or depositary bank was negligent and such
negligence substantially contributed to the loss from alteration.—The Bank cannot
debit the savings account of petitioners. A depositary/collecting bank may resist or
defend against a claim for breach of warranty if the drawer, the payee, or either the
drawee bank or depositary bank was negligent and such negligence substantially
contributed to the loss from alteration. In the instant case, no negligence can be
attributed to petitioners. We lend credence to their claim that at the time of the sales
transaction, the Bank’s branch manager was present and even offered the Bank’s
services for the processing and eventual crediting of the checks. True to the branch
manager’s words, the checks were cleared three days later when deposited by
petitioners and the entire amount of the checks was credited to their savings account.
Same; Same; It is well-settled that the relationship of the depositors and the
Bank or similar institution is that of creditor-debtor.—It is well-settled that the
relationship of the depositors and the Bank or similar institution is that of creditor-
debtor. Article 1980 of the New Civil Code provides that fixed, savings and current
deposits of money in banks and similar institutions shall be governed by the
provisions concerning simple loans. The bank is the debtor and the depositor is the
creditor. The depositor lends the bank money and the bank agrees to pay the
depositor on demand. The savings deposit agreement between the bank and the
depositor is the contract that determines the rights and obligations of the parties. But
as previously discussed, petitioners are not liable for the deposit of the altered
checks. The Bank, as the depositary and collecting bank ultimately bears the loss.
Thus, there being no indebt-
592
5 SUPREME COURT REPORTS ANNOTATED
92
Areza vs. Express Savings Bank, Inc.
edness to the Bank on the part of petitioners, legal compensation cannot take
Same; Damages; No damages can be charged to those who exercise such
precious right in good faith, even if done erroneously.—We delete the award of
moral damages. Contrary to the lower court’s finding, there was no showing that the
Bank acted fraudulently or in bad faith. It may have been remiss in its duty to
diligently protect the account of its depositors but its honest but mistaken belief that
petitioners’ account should be debited is not tantamount to bad faith. We also delete
the award of attorney’s fees for it is not a sound public policy to place a premium on
the right to litigate. No damages can be charged to those who exercise such precious
right in good faith, even if done erroneously.
PETITION for review on certiorari of the decision and resolution of the Court of
Appeals.
The facts are stated in the opinion of the Court.
Navarroza Law Offices for petitioners.
Ramon C. Casano for respondent M. Potenciano.
PEREZ, J.:
Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules
of Court, which seeks to reverse the Decision1 and Resolution2 dated 29 June 2006
and 12 February 2007 of the Court of Appeals in C.A.-G.R. CV No. 83192. The Court
of Appeals affirmed with modification the 22 April 2004 Resolution3 of the Regional
Trial Court (RTC) of Calamba, Laguna, Branch 92, in Civil Case No. B-5886.
_______________
1 Penned by Associate Justice Eliezer R. De Los Santos, with Associate Justices
Fernanda Lampas Peralta and Myrna Dimaranan Vidal, concurring. Rollo, pp. 36-49.
2 Id., at p. 50.
3 Penned by Pairing Judge Romeo C. De Leon. Records, pp. 215-218.
593
VOL. 734, SEPTEMBER 10, 2014 593
Areza vs. Express Savings Bank, Inc.
The factual antecedents follow.
 Petitioners Cesar V. Areza and Lolita B. Areza maintained two bank deposits with
respondent Express Savings Bank’s Biñan branch: 1) Savings Account No. 004-01-
000185-5 and 2) Special Savings Account No. 004-02-000092-3.
They were engaged in the business of “buy and sell” of brand new and secondhand
motor vehicles. On 2 May 2000, they received an order from a certain Gerry
Mambuay (Mambuay) for the purchase of a secondhand Mitsubishi Pajero and a
brand-new Honda CR-V.
The buyer, Mambuay, paid petitioners with nine (9) Philippine Veterans Affairs
Office (PVAO) checks payable to different payees and drawn against the Philippine
Veterans Bank (drawee), each valued at Two Hundred Thousand Pesos
(P200,000.00) for a total of One Million Eight Hundred Thousand Pesos
(P1,800,000.00).
About this occasion, petitioners claimed that Michael Potenciano (Potenciano),
the branch manager of respondent Express Savings Bank (the Bank) was present
during the transaction and immediately offered the services of the Bank for the
processing and eventual crediting of the said checks to petitioners’ account.4 On the
other hand, Potenciano countered that he was prevailed upon to accept the checks by
way of accommodation of petitioners who were valued clients of the Bank.5
On 3 May 2000, petitioners deposited the said checks in their savings account
with the Bank. The Bank, in turn, deposited the checks with its depositary bank,
Equitable-PCI Bank, in Biñan, Laguna. Equitable-PCI Bank presented the checks to
the drawee, the Philippine Veterans Bank, which honored the checks.
_______________
4 Records, p. 2.
5 Rollo, p. 68.
594
594 SUPREME COURT REPORTS ANNOTATED
Areza vs. Express Savings Bank, Inc.
On 6 May 2000, Potenciano informed petitioners that the checks they deposited
with the Bank were honored. He allegedly warned petitioners that the clearing of the
checks pertained only to the availability of funds and did not mean that the checks
were not infirmed.6 Thus, the entire amount of P1,800,000.00 was credited to
petitioners’ savings account. Based on this information, petitioners released the two
cars to the buyer.
6 Id.
Sometime in July 2000, the subject checks were returned by PVAO to the drawee
on the ground that the amount on the face of the checks was altered from the original
amount of P4,000.00 to P200,000.00. The drawee returned the checks to Equitable-
PCI Bank by way of Special Clearing Receipts. In August 2000, the Bank was
informed by Equitable-PCI Bank that the drawee dishonored the checks on the
ground of material alterations. Equitable-PCI Bank initially filed a protest with the
Philippine Clearing House. In February 2001, the latter ruled in favor of the drawee
Philippine Veterans Bank. Equitable-PCI Bank, in turn, debited the deposit account
of the Bank in the amount of P1,800,000.00.
The Bank insisted that they informed petitioners of said development in August
2000 by furnishing them copies of the documents given by its depositary bank. 7 On
the other hand, petitioners maintained that the Bank never informed them of these
developments.
7 Id.
On 9 March 2001, petitioners issued a check in the amount of P500,000.00. Said
check was dishonored by the Bank for the reason “Deposit Under Hold.” According to
petitioners, the Bank unilaterally and unlawfully put their account with the Bank on
hold. On 22 March 2001, petitioners’ counsel sent a demand letter asking the Bank to
honor their check. The Bank refused to heed their request and instead, closed the
Special Savings Account of the petitioners with a balance of
595
VOL. 734, SEPTEMBER 10, 2014 595
Areza vs. Express Savings Bank, Inc.
P1,179,659.69 and transferred said amount to their savings account. The Bank then
withdrew the amount of P1,800,000.00 representing the returned checks from
petitioners’ savings account.
Acting on the alleged arbitrary and groundless dishonoring of their checks and the
unlawful and unilateral withdrawal from their savings account, petitioners filed a
Complaint for Sum of Money with Damages against the Bank and Potenciano with
the RTC of Calamba.
On 15 January 2004, the RTC, through Judge Antonio S. Pozas, ruled in favor of
petitioners. The dispositive portion of the Decision reads:
WHEREFORE, the foregoing considered, the Court orders that judgment be
rendered in favor of plaintiffs and against the defendants jointly and severally to pay
plaintiffs as follows, to wit:
1. P1,800,000.00 representing the amount unlawfully withdrawn by the
defendants from the account of plaintiffs;
2. P500,000.00 as moral damages; and
3. P300,000.00 as attorney’s fees.8
The trial court reduced the issue to whether or not the rights of petitioners were
violated by respondents when the deposits of the former were debited by
respondents without any court order and without their knowledge and consent.
According to the trial court, it is the depositary bank which should safeguard the
right of the depositors over their money. Invoking Article 1977 of the Civil Code, the
trial court stated that the depositary cannot make use of the thing deposited without
the express permission of the depositor. The trial court also held that respondents
should have observed the 24-hour clearing house rule that checks should be returned
_______________
8 Records, p. 178.
596
596 SUPREME COURT REPORTS ANNOTATED
Areza vs. Express Savings Bank, Inc.
within 24-hours after discovery of the forgery but in no event beyond the period fixed
by law for filing a legal action. In this case, petitioners deposited the checks in May
2000, and respondents notified them of the problems on the check three months
later or in August 2000. In sum, the trial court characterized said acts of respondents
as attended with bad faith when they debited the amount of P1,800,000.00 from the
account of petitioners.
Respondents filed a motion for reconsideration while petitioners filed a motion
for execution from the Decision of the RTC on the ground that respondents’ motion
for reconsideration did not conform with Section 5, Rule 16 of the Rules of Court;
hence, it was a mere scrap of paper that did not toll the running of the period to
appeal.
On 22 April 2004, the RTC, through Pairing Judge Romeo C. De Leon granted the
motion for reconsideration, set aside the Pozas Decision, and dismissed the
complaint. The trial court awarded respondents their counterclaim of moral and
exemplary damages of P100,000.00 each.
The trial court first applied the principle of liberality when it disregarded the
alleged absence of a notice of hearing in respondents’ motion for reconsideration. On
the merits, the trial court considered the relationship of the Bank and petitioners
with respect to their savings account deposits as a contract of loan with the bank as
the debtor and petitioners as creditors. As such, Article 1977 of the Civil Code
prohibiting the depository from making use of the thing deposited without the
express permission of the depositor is not applicable. Instead, the trial court applied
Article 1980 which provides that fixed, savings and current deposits of money in
banks and similar institutions shall be governed by the provisions governing simple
loan. The trial court then opined that the Bank had all the right to set-off against
petitioners’ savings deposits the value of their nine checks that were returned.
597
VOL. 734, SEPTEMBER 10, 2014 597
Areza vs. Express Savings Bank, Inc.
On appeal, the Court of Appeals affirmed the ruling of the trial court but deleted
the award of damages. The appellate court made the following ratiocination:
Any argument as to the notice of hearing has been resolved when the pairing
judge issued the order on February 24, 2004 setting the hearing on March 26, 2004.
A perusal of the notice of hearing shows that request was addressed to the Clerk of
Court and plaintiffs’ counsel for hearing to be set on March 26, 2004.
The core issues in this case revolve on whether the appellee bank had the right to
debit the amount of P1,800,000.00 from the appellants’ accounts and whether the
bank’s act of debiting was done “without the plaintiffs’ knowledge.”
We find that the elements of legal compensation are all present in the case at bar.
Hence, applying the case of the Bank of the Philippine Islands v. Court of Appeals,
the obligors bound principally are at the same time creditors of each other. Appellee
bank stands as a debtor of appellant, a depositor. At the same time, said bank is the
creditor of the appellant with respect to the dishonored treasury warrant checks
which amount were already credited to the account of appellants. When the
appellants had withdrawn the amount of the checks they deposited and later on said
checks were returned, they became indebted to the appellee bank for the
corresponding amount.
It should be noted that [G]erry Mambuay was the appellants’ walk-in buyer. As
sellers, appellants ought to have exercised due diligence in assessing his credit or
personal background. The 24-hour clearing house rule is not the one that governs in
this case since the nine checks were discovered by the drawee bank to contain
material alterations.
Appellants merely allege that they were not informed of any development on the
checks returned. However, this Court believes that the bank and appellants had
opportunities to communicate about the checks con-
598
598 SUPREME COURT REPORTS ANNOTATED
Areza vs. Express Savings Bank, Inc.
sidering that several transactions occurred from the time of alleged return of the
checks to the date of the debit.
However, this Court agrees with appellants that they should not pay moral and
exemplary damages to each of the appellees for lack of basis. The appellants were not
shown to have acted in bad faith.9
Petitioners filed the present petition for review on certiorari raising both
procedural and substantive issues, to wit:
1. Whether or not the Honorable Court of Appeals committed a reversible error of
law and grave abuse of discretion in upholding the legality and/or propriety of the
Motion for Reconsideration filed in violation of Section 5, Rule 15 of the Rules on
Civil Procedure;
2. Whether or not the Honorable Court of Appeals committed a grave abuse of
discretion in declaring that the private respondents “had the right to debit the
amount of P1,800,000.00 from the appellants’ accounts” and the bank’s act of
debiting was done with the plaintiff’s knowledge.10
Before proceeding to the substantive issue, we first resolve the procedural issue
raised by petitioners.
 Sections 5, Rule 15 of the Rules of Court states:
Section 5. Notice of hearing.—The notice of hearing shall be addressed to all
parties concerned, and shall specify the time and date of the hearing which must not
be later than ten (10) days after the filing of the motion.
Petitioners claim that the notice of hearing was addressed to the Clerk of Court
and not to the adverse party as the rules require. Petitioners add that the hearing on
the motion for
_______________
9 Rollo, pp. 48-49.
10 Id., at p. 17.
599
VOL. 734, SEPTEMBER 10, 2014 599
Areza vs. Express Savings Bank, Inc.
reconsideration was scheduled beyond 10 days from the date of filing.
As held in Maturan v. Araula,11 the rule requiring that the notice be addressed to
the adverse party has been substantially complied with when a copy of the motion for
reconsideration was furnished to the counsel of the adverse party, coupled with the
fact that the trial court acted on said notice of hearing and, as prayed for, issued an
order12setting the hearing of the motion on 26 March 2004.
We would reiterate later that there is substantial compliance with the foregoing
Rule if a copy of the said motion for reconsideration was furnished to the counsel of
the adverse party.13
Now to the substantive issues to which procedural imperfection must, in this case,
give way.
The central issue is whether the Bank had the right to debit P1,800,000.00 from
petitioners’ accounts.
On 6 May 2000, the Bank informed petitioners that the subject checks had been
honored. Thus, the amount of P1,800,000.00 was accordingly credited to petitioners’
accounts, prompting them to release the purchased cars to the buyer.
Unknown to petitioners, the Bank deposited the checks in its depositary bank,
Equitable-PCI Bank. Three months had passed when the Bank was informed by its
depositary bank that the drawee had dishonored the checks on the ground of
material alterations.
The return of the checks created a chain of debiting of accounts, the last loss
eventually falling upon the savings ac-
_______________
11 197 Phil. 583; 111 SCRA 615 (1982).
12 Records, p. 190.
13 Philippine National Bank v. Judge Paneda, 544 Phil. 565, 579; 515 SCRA 639,
653 (2007), citing Un Giok v. Matusa, 101 Phil. 727, 734 (1957).
600
600 SUPREME COURT REPORTS ANNOTATED
Areza vs. Express Savings Bank, Inc.
count of petitioners with respondent bank. The trial court in its reconsidered
decision and the appellate court were one in declaring that petitioners should bear
the loss.
We reverse.
The fact that material alteration caused the eventual dishonor of the checks issued
by PVAO is undisputed. In this case, before the alteration was discovered, the checks
were already cleared by the drawee bank, the Philippine Veterans Bank. Three
months had lapsed before the drawee dishonored the checks and returned them to
Equitable-PCI Bank, the respondents’ depositary bank. And it was not until 10
months later when petitioners’ accounts were debited. A question thus arises: What
are the liabilities of the drawee, the intermediary banks, and the petitioners for the
altered checks?
Liability of the Drawee
Section 63 of Act No. 2031 or the Negotiable Instruments Law provides that the
acceptor, by accepting the instrument, engages that he will pay it according to the
tenor of his acceptance. The acceptor is a drawee who accepts the bill. In Philippine
National Bank v. Court of Appeals,14 the payment of the amount of a check implies
not only acceptance but also compliance with the drawee’s obligation.
In case the negotiable instrument is altered before acceptance, is the drawee liable
for the original or the altered tenor of acceptance? There are two divergent
interpretations proffered by legal analysts.15 The first view is supported by the
_______________
14 134 Phil. 829; 28 SCRA 984 (1968).
15 Agbayani, Commentaries and Jurisprudence on the Commercial Law of the
Philippines, Vol. I, pp. 324-326, 1992 edition.—x x x.
836. Where original tenor is altered before acceptance. Suppose the bill
is originally for P1,000. Before the drawee X accepts it, it is altered by the payee B to
P4,000. Then X accepts it. How much is X liable to a holder in due course? Before
the adoption of the Negotiable Instruments
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Areza vs. Express Savings Bank, Inc.
leading case of National City Bank of Chicago v. Bank of the
_______________
 Law, at common law, an acceptor was liable according to the tenor of the
bill. Since the adoption of the Negotiable Instruments Law, a diversity of opinion has
arisen as to the effect of Section 62.
837. View that altered tenor is tenor of acceptance.—According to one
view, X is liable for P4,000 not P1,000. The reason is that the tenor of X’s acceptance
is for P4,000. Since an acceptor, by Section 62 engages to pay the bill ‘according to
the tenor of his acceptance,’ he must pay to the innocent payee or subsequent holder
the amount called for by the time he accepted, even though larger than the original
amount ordered by the drawer. Moreover, he would be a party who has himself
assented to the alteration.”
xxxx
839. View that original tenor is tenor of acceptance.—A learned writer
takes the opposite view and he is supported by some decisions. He suggests that the
Illinois view overlooks other pertinent sections of the Negotiable Instruments Law
and that Section 62 should be paraphrased to state that the liability of the acceptor
depends upon the terms of his acceptance, that is, whether it is a general acceptance
or a qualified acceptance or an acceptance for honor. He suggests that all three of
these acceptance contracts are within the purview of the provision of Section 62 that
the acceptor, by accepting the instrument, engages that the will pay it not according
to the tenor of the bill since this would deny him the right to qualify the acceptance
or to accept for honor but according to the tenor of his acceptance.
840. Effect of Section 124.—Under the first view, what is the effect of Section
124 which provides that a holder in due course can recover only the original tenor of
the instrument? It seems that this refers to the original tenor of the instrument taken
from the standpoint of the person principally liable, in the first illustration, from X’s
standpoint. In other words, the original tenor of the instrument is P4,000, which is
the tenor of X’s acceptance. If after his acceptance, a subsequent indorsee alters the
bill to read P9,000, then X could be liable only for P4,000, the original tenor of his
acceptance, even as to a holder in due course.
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602 SUPREME COURT REPORTS ANNOTATED
Areza vs. Express Savings Bank, Inc.
Republic.16 In said case, a certain Andrew Manning stole a draft and substituted his
name for that of the original payee. He offered it as payment to a jeweler in exchange
for certain jewelry. The jeweler deposited the draft to the defendant bank which
collected the equivalent amount from the drawee. Upon learning of the alteration,
the drawee sought to recover from the defendant bank the amount of the draft, as
money paid by mistake. The court denied recovery on the ground that the drawee by
accepting admitted the existence of the payee and his capacity to endorse. 17 Still,
in Wells Fargo Bank & Union Trust Co. v. Bank of Italy,18 the court echoed the
court’s interpretation in National City Bank of Chicago, in this wise:
We think the construction placed upon the section by the Illinois court is correct
and that it was not the legislative intent that the obligation of the acceptor should be
limited to the tenor of the instrument as drawn by the maker, as was the rule at
common law, but that it should be enforceable in favor of a holder in due course
against the acceptor according to its tenor at the time of its acceptance or
certification.
The foregoing opinion and the Illinois decision which it follows give effect to the
literal words of the Negotiable Instruments Law. As stated in the Illinois case: “The
court must take the act as it is written and should give to the words their natural and
common meaning . . . if the language of the act conflicts with statutes or decisions in
force before its enactment the courts should not give the act a strained construction
in order to make it harmonize with earlier statutes or decisions.” The wording of the
act suggests that a change in the common law was intended. A careful reading
thereof, independent of any common-
_______________
16 300 Ill. 103, 132 N.E. 832, 22 A.L.R. 1153.
17 Effect of Alteration of a Negotiable Instrument upon Drawee’s Acceptance or
Payment (March 1, 1922), Columbia Law Review, p.
260. https://archive.org/details/jstor-1112225. Columbia Law Review, Vol. XXII, No.
3 (Mar., 1922), pp. 260-263.
18 214 Cal. 156; 4 P.2d 781; 1931 Cal. LEXIS 409.
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Areza vs. Express Savings Bank, Inc.
law influence, requires that the words “according to the tenor of his acceptance” be
construed as referring to the instrument as it was at the time it came into the hands
of the acceptor for acceptance, for he accepts no other instrument than the one
presented to him — the altered form — and it alone he engages to pay. This
conclusion is in harmony with the law of England and the continental countries. It
makes for the usefulness and currency of negotiable paper without seriously
endangering accepted banking practices, for banking institutions can readily protect
themselves against liability on altered instruments either by qualifying their
acceptance or certification or by relying on forgery insurance and special paper which
will make alterations obvious. All of the arguments advanced against the conclusion
herein announced seem highly technical in the face of the practical facts that the
drawee bank has authenticated an instrument in a certain form, and that commercial
policy favors the protection of anyone who, in due course, changes his position on the
faith of that authentication.19
 The second view is that the acceptor/drawee despite the tenor of his acceptance is
liable only to the extent of the bill prior to alteration. 20 This view appears to be in
consonance with Section 124 of the Negotiable Instruments Law which states that a
material alteration avoids an instrument except as against an assenting party and
subsequent indorsers, but a holder in due course may enforce payment according to
its original tenor. Thus, when the drawee bank pays a materially altered check, it
violates the terms of the check, as well as its duty to charge its client’s account only
for bona fide disbursements he had made. If the drawee did not pay according to the
original tenor of the instrument, as directed by the drawer, then it has no right to
claim reimbursement from the drawer, much less, the right to deduct the erroneous
payment it made from the drawer’s account which it was expected to
_______________
19 Id.
20 Villanueva, Cesar, Commercial Law Review, p. 447 (2003).
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604 SUPREME COURT REPORTS ANNOTATED
Areza vs. Express Savings Bank, Inc.
treat with utmost fidelity.21 The drawee, however, still has recourse to recover its loss.
It may pass the liability back to the collecting bank which is what the drawee bank
exactly did in this case. It debited the account of Equitable-PCI Bank for the altered
amount of the checks.
Liability of Depositary Bank and
Collecting Bank
A depositary bank is the first bank to take an item even though it is also the payor
bank, unless the item is presented for immediate payment over the counter. 22 It is
also the bank to which a check is transferred for deposit in an account at such bank,
even if the check is physically received and indorsed first by another bank.23 A
collecting bank is defined as any bank handling an item for collection except the bank
on which the check is drawn.24
When petitioners deposited the check with the Bank, they were designating the
latter as the collecting bank. This is in consonance with the rule that a negotiable
instrument, such as a check, whether a manager’s check or ordinary check, is not
legal tender. As such, after receiving the deposit, under its own rules, the Bank shall
credit the amount in petitioners’ account or infuse value thereon only after the
drawee bank shall have paid the amount of the check or the check has been cleared
for deposit.25
_______________
21 Metropolitan Bank and Trust Co. v. Cabilzo, 539 Phil. 316, 327-328; 510
SCRA 259, 272 (2006).
22 U.C.C. – Article 4 – Bank Deposits and Collections (2002), Part 1. General
Provisions and Definitions, § 4-105.
23 12 USCS § 5002 (3) (B), Title 12. Banks and Banking; Chapter 50. Check
Truncation.
24 Id.
25 BPI v. Court of Appeals, 383 Phil. 538, 553; 326 SCRA 641, 655-656 (2000).
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Areza vs. Express Savings Bank, Inc.
The Bank and Equitable-PCI Bank are both depositary and collecting banks.
A depositary/collecting bank where a check is deposited, and which endorses the
check upon presentment with the drawee bank, is an endorser. Under Section 66 of
the Negotiable Instruments Law, an endorser warrants “that the instrument is
genuine and in all respects what it purports to be; that he has good title to it; that all
prior parties had capacity to contract; and that the instrument is at the time of his
endorsement valid and subsisting.” It has been repeatedly held that in check
transactions, the depositary/collecting bank or last endorser generally suffers the
loss because it has the duty to ascertain the genuineness of all prior endorsements
considering that the act of presenting the check for payment to the drawee is an
assertion that the party making the presentment has done its duty to ascertain the
genuineness of the endorsements.26 If any of the warranties made by the
depositary/collecting bank turns out to be false, then the drawee bank may recover
from it up to the amount of the check.27
26 Metropolitan Bank and Trust Co. v. BA Finance Corporation, G.R. No.
179952, 4 December 2009, 607 SCRA 620, 632; Bank of America NT & SA v.
Associated Citizens Bank, G.R. No. 141001, 21 May 2009, 588 SCRA 51, 60-
61; Associated Bank v. Court of Appeals, 322 Phil. 677, 699-700; 252 SCRA 620, 633
(1996).
27 Bank of America NT & SA v. Associated Citizens Bank, id., at p. 61.
The law imposes a duty of diligence on the collecting bank to scrutinize checks
deposited with it for the purpose of determining their genuineness and regularity.
The collecting bank being primarily engaged in banking holds itself out to the public
as the expert and the law holds it to a high standard of conduct.28
28 Banco de Oro Savings and Mortgage Bank v. Equitable Banking
Corporation, 241 Phil. 187, 200; 157 SCRA 188, 200 (1988).
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606 SUPREME COURT REPORTS ANNOTATED
Areza vs. Express Savings Bank, Inc.
As collecting banks, the Bank and Equitable-PCI Bank are both liable for the
amount of the materially altered checks. Since Equitable-PCI Bank is not a party to
this case and the Bank allowed its account with Equitable-PCI Bank to be debited, it
has the option to seek recourse against the latter in another forum.
24-Hour Clearing Rule
Petitioners faulted the drawee bank for not following the 24-hour clearing period
because it was only in August 2000 that the drawee bank notified Equitable-PCI that
there were material alterations in the checks.
We do not subscribe to the position taken by petitioners that the drawee bank was
at fault because it did not follow the 24-hour clearing period which provides that
when a drawee bank fails to return a forged or altered check to the collecting bank
within the 24-hour clearing period, the collecting bank is absolved from liability.
Section 21 of the Philippine Clearing House Rules and Regulations provides:
Sec. 21. Special Return Items Beyond The Reglementary Clearing Period.—
Items which have been the subject of material alteration or items bearing forged
endorsement when such endorsement is necessary for negotiation shall be returned
by direct presentation or demand to the Presenting Bank and not through the regular
clearing house facilities within the period prescribed by law for the filing of a legal
action by the returning bank/branch, institution or entity sending the same.
Antonio Viray, in his book Handbook on Bank Deposits, elucidated:
It is clear that the so-called “24-hour” rule has been modified. In the case
of Hongkong & Shanghai v. People’s Bank reiterated in Metropolitan Bank and
Trust Co. v.
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Areza vs. Express Savings Bank, Inc.
FNCB, the Supreme Court strictly enforced the 24-hour rule under which the drawee
bank forever loses the right to claim against presenting/collecting bank if the check is
not returned at the next clearing day or within 24 hours. Apparently, the commercial
banks felt strict enforcement of the 24-hour rule is too harsh and therefore made
representations and obtained modification of the rule, which modification is now
incorporated in the Manual of Regulations. Since the same commercial banks
controlled the Philippine Clearing House Corporation, incorporating the amended
rule in the PCHC Rules naturally followed.
As the rule now stands, the 24-hour rule is still in force, that is, any check which
should be refused by the drawee bank in accordance with long standing and accepted
banking practices shall be returned through the PCHC/local clearing office, as the
case may be, not later than the next regular clearing (24-hour). The modification,
however, is that items which have been the subject of material alteration or bearing
forged endorsement may be returned even beyond 24 hours so long that the same is
returned within the prescriptive period fixed by law. The consensus among lawyers is
that the prescriptive period is ten (10) years because a check or the endorsement
thereon is a written contract. Moreover, the item need not be returned through the
clearing house but by direct presentation to the presenting bank.29
In short, the 24-hour clearing rule does not apply to altered checks.
Liability of Petitioners
The 2008 case of Far East Bank & Trust Company v. Gold Palace Jewellery
Co.30 is in point. A foreigner purchased several pieces of jewelry from Gold Palace
Jewellery using a
_______________
29 1988 Revised Edition, p. 169.
30 584 Phil. 579; 562 SCRA 604 (2008).
608
608 SUPREME COURT REPORTS ANNOTATED
Areza vs. Express Savings Bank, Inc.
United Overseas Bank (Malaysia) issued draft addressed to the Land Bank of the
Philippines (LBP). Gold Palace Jewellery deposited the draft in the company’s
account with Far East Bank. Far East Bank presented the draft for clearing to LBP.
The latter cleared the same and Gold Palace Jewellery’s account was credited with
the amount stated in the draft. Consequently, Gold Palace Jewellery released the
pieces of jewelries to the foreigner. Three weeks later, LBP informed Far East Bank
that the amount in the foreign draft had been materially altered from P300,000.00
to P380,000.00. LBP returned the check to Far East Bank. Far East Bank refunded
LBP the P380,000.00 paid by LBP. Far East Bank initially debited P168,053.36 from
Gold Palace Jewellery’s account and demanded the payment of the difference
between the amount in the altered draft and the amount debited from Gold Palace
Jewellery.
However, for the reasons already discussed above, our pronouncement in the Far
East Bank and Trust Companycase that “the drawee is liable on its payment of the
check according to the tenor of the check at the time of payment, which was the
raised amount”31 is inapplicable to the factual milieu obtaining herein.
We only adopt said decision insofar as it adjudged liability on the part of the
collecting bank, thus:
Thus, considering that, in this case, Gold Palace is protected by Section 62 of the
NIL, its collecting agent, Far East, should not have debited the money paid by the
drawee bank from respondent company’s account. When Gold Palace deposited the
check with Far East, the latter, under the terms of the deposit and the provisions of
the NIL, became an agent of the former for the collection of the amount in the draft.
The subsequent payment by the drawee bank and the collection of the amount by the
collecting bank closed the transaction insofar as the
_______________
 31 Id., at p. 588; p. 612.
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Areza vs. Express Savings Bank, Inc.
drawee and the holder of the check or his agent are concerned, converted the check
into a mere voucher, and, as already discussed, foreclosed the recovery by the drawee
of the amount paid. This closure of the transaction is a matter of course; otherwise,
uncertainty in commercial transactions, delay and annoyance will arise if a bank at
some future time will call on the payee for the return of the money paid to him on the
check.
As the transaction in this case had been closed and the principal-agent
relationship between the payee and the collecting bank had already ceased, the latter
in returning the amount to the drawee bank was already acting on its own and should
now be responsible for its own actions. x x x Likewise, Far East cannot invoke the
warranty of the payee/depositor who indorsed the instrument for collection to shift
the burden it brought upon itself. This is precisely because the said indorsement is
only for purposes of collection which, under Section 36 of the NIL, is a restrictive
indorsement. It did not in any way transfer the title of the instrument to the
collecting bank. Far East did not own the draft, it merely presented it for payment.
Considering that the warranties of a general indorser as provided in Section 66 of the
NIL are based upon a transfer of title and are available only to holders in due course,
these warranties did not attach to the indorsement for deposit and collection made
by Gold Palace to Far East. Without any legal right to do so, the collecting bank,
therefore, could not debit respondent’s account for the amount it refunded to the
drawee bank.
The foregoing considered, we affirm the ruling of the appellate court to the extent
that Far East could not debit the account of Gold Palace, and for doing so, it must
return what it had erroneously taken.32
Applying the foregoing ratiocination, the Bank cannot debit the savings account of
petitioners. A depositary/collecting bank may resist or defend against a claim for
breach of war-
_______________
32 Id., at pp. 591-592; pp. 615-617.
610
610 SUPREME COURT REPORTS ANNOTATED
Areza vs. Express Savings Bank, Inc.
ranty if the drawer, the payee, or either the drawee bank or depositary bank was
negligent and such negligence substantially contributed to the loss from alteration.
In the instant case, no negligence can be attributed to petitioners. We lend credence
to their claim that at the time of the sales transaction, the Bank’s branch manager
was present and even offered the Bank’s services for the processing and eventual
crediting of the checks. True to the branch manager’s words, the checks were cleared
three days later when deposited by petitioners and the entire amount of the checks
was credited to their savings account.
On Legal Compensation
Petitioners insist that the Bank cannot be considered a creditor of the petitioners
because it should have made a claim of the amount of P1,800,000.00 from
Equitable-PCI Bank, its own depositary bank and the collecting bank in this case and
not from them.
The Bank cannot set-off the amount it paid to Equitable-PCI Bank with
petitioners’ savings account. Under Art. 1278 of the New Civil Code, compensation
shall take place when two persons, in their own right, are creditors and debtors of
each other. And the requisites for legal compensation are:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same
time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the latter has
been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
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Areza vs. Express Savings Bank, Inc.
(5) That over neither of them there be any retention or controversy, commenced
by third persons and communicated in due time to the debtor.
It is well-settled that the relationship of the depositors and the Bank or similar
institution is that of creditor-debtor. Article 1980 of the New Civil Code provides that
fixed, savings and current deposits of money in banks and similar institutions shall
be governed by the provisions concerning simple loans. The bank is the debtor and
the depositor is the creditor. The depositor lends the bank money and the bank
agrees to pay the depositor on demand. The savings deposit agreement between the
bank and the depositor is the contract that determines the rights and obligations of
the parties.33
But as previously discussed, petitioners are not liable for the deposit of the altered
checks. The Bank, as the depositary and collecting bank ultimately bears the loss.
Thus, there being no indebtedness to the Bank on the part of petitioners, legal
compensation cannot take place.
Damages
 The Bank incurred a delay in informing petitioners of the checks’ dishonor. The
Bank was informed of the dishonor by Equitable-PCI Bank as early as August 2000
but it was only on 7 March 2001 when the Bank informed petitioners that it will debit
from their account the altered amount. This delay is tantamount to negligence on the
part of the collecting bank which would entitle petitioners to an award for damages
under Article 1170 of the New Civil Code which reads:
Art. 1170. Those who in the performance of their obligations are guilty of fraud,
negligence, or delay, and
_______________
33 Central Bank of the Philippines v. Citytrust Banking Corporation, G.R. No.
141835, 4 February 2009, 578 SCRA 27, 32.
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612 SUPREME COURT REPORTS ANNOTATED
Areza vs. Express Savings Bank, Inc.
those who in any manner contravene the tenor thereof, are liable for damages.
The damages in the form of actual or compensatory damages represent the
amount debited by the Bank from petitioners’ account.
We delete the award of moral damages. Contrary to the lower court’s finding,
there was no showing that the Bank acted fraudulently or in bad faith. It may have
been remiss in its duty to diligently protect the account of its depositors but its
honest but mistaken belief that petitioners’ account should be debited is not
tantamount to bad faith. We also delete the award of attorney’s fees for it is not a
sound public policy to place a premium on the right to litigate. No damages can be
charged to those who exercise such precious right in good faith, even if done
erroneously.34
To recap, the drawee bank, Philippine Veterans Bank in this case, is only liable to
the extent of the check prior to alteration. Since Philippine Veterans Bank paid the
altered amount of the check, it may pass the liability back as it did, to Equitable-PCI
Bank, the collecting bank. The collecting banks, Equitable-PCI Bank and the Bank,
are ultimately liable for the amount of the materially altered check. It cannot further
pass the liability back to the petitioners absent any showing in the negligence on the
part of the petitioners which substantially contributed to the loss from alteration.
_______________
34 Supra note 30 at p. 593; pp. 617-618, citing National Trucking and
Forwarding Corp. v. Lorenzo Shipping Corp., 491 Phil. 151, 158-159; 450 SCRA 550,
558 (2005); Pajuyo v. Court of Appeals, G.R. No. 146364, 3 June 2004, 430 SCRA
492, 524; Alonso v. Cebu Country Club, Inc., 426 Phil. 61, 88; 375 SCRA 390, 410
(2002); Orosa v. Court of Appeals, 386 Phil. 94, 105; 329 SCRA 652, 664 (2000); “J”
Marketing Corporation v. Sia, Jr., 349 Phil. 513, 517; 285 SCRA 580, 583 (1998).
613
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Areza vs. Express Savings Bank, Inc.
Based on the foregoing, we affirm the Pozas decision only insofar as it ordered
respondents to jointly and severally pay petitioners P1,800,000.00, representing the
amount withdrawn from the latter’s account. We do not conform with said ruling
regarding the finding of bad faith on the part of respondents, as well as its failure to
observe the 24-hour clearing rule.
WHEREFORE, the petition is GRANTED. The Decision and Resolution dated
29 June 2006 and 12 February 2007 respectively of the Court of Appeals in C.A.-G.R.
CV No. 83192 are REVERSED and SET ASIDE. The 15 January 2004 Decision of
the Regional Trial Court of Calamba City, Branch 92 in Civil Case No. B-5886
rendered by Judge Antonio S. Pozas is REINSTATED only insofar as it ordered
respondents to jointly and severally pay petitioners P1,800,000.00 representing the
amount withdrawn from the latter’s account. The award of moral damages and
attorney’s fees are DELETED.
SO ORDERED.
Velasco, Jr.,** Leonardo-De Castro*** (Acting Chairperson), Bersamin and
Perlas-Bernabe, JJ., concur.
Petition granted, judgment and resolution reversed and set aside.
Notes.—A material alteration is defined in Section 125 of the Negotiable
Instruments Law (NIL) to be one which changes the date, the sum payable, the time
or place of payment, the number or relations of the parties, the currency in which
payment is to be made or one which adds a place of payment where no place of
payment is specified, or any change or addition which alters the effect of the
instrument in
_______________
* * Designated acting member per Special Order No. 1772 dated 28 August 2014.
* ** Per Special Order No. 1771 dated 28 August 2014.
614
614 SUPREME COURT REPORTS ANNOTATED
Areza vs. Express Savings Bank, Inc.
any respect. (Bank of America NT & SA vs. Philippine Racing Club, 594 SCRA
301 [2009])
 Per Article 1980 of the Civil Code, a creditor-debtor relationship exists between
the bank and its depositor. (Goyanko, Jr. vs. United Coconut Planters Bank, Mango
Avenue Branch, 690 SCRA 79 [2013])
——o0o——
 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.
Appeals; Evidence; It is well settled that the findings of fact of the lower
court, especially when affirmed by the Court of Appeals, are binding upon the
Supreme Court.—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.
While there
_______________
*FIRST DIVISION.
517
VOL. 351, FEBRUARY 12, 2001 51
7 issue. In the case of a bill of exchange, presentment is sufficient if made within a
International Corporate Bank vs. Gueco
are exceptions to this rule, the present case does not fall under any one of them,
the petitioner’s claim to the contrary, notwithstanding.
Obligations and Contracts; Fraud; Words and Phrases; Fraud is the deliberate
intention to cause damage or prejudice, 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
an obligation.—Fraud has been defined as the deliberate intention to cause damage
or prejudice. It is the voluntary execution of a wrongful act, or a willful omission,
knowing and intending the effects which naturally and necessarily arise from such
act or omission; the fraud referred to in Article 1170 of the Civil Code is the deliberate
and intentional evasion of the normal fulfillment of obligation. We fail to see how the
act of the petitioner bank in requiring the respondent to sign the joint motion to
dismiss could constitute as fraud. 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 cannot 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 cannot 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.
The law presumes good faith.
Banks and Banking; Checks; Negotiable Instruments; Words and Phrases; A
stale check is one which has not been presented for payment within a reasonable
time after its issue.—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
518
5 SUPREME COURT REPORTS ANNOTATED
18
International Corporate Bank vs. Gueco
reasonable time after the last negotiation thereof.
Same; Same; Same; A check must be presented for payment within a
reasonable time after its issue, 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.—A check must
be presented for payment within a reasonable time after its issue, 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. The test is whether the payee employed such diligence as a prudent
man exercises in his own affairs. 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. Failure of a payee to encash a check for more than ten (10)
years undoubtedly resulted in the check becoming stale. Thus, even a delay of one (1)
week or two (2) days, under the specific circumstances of the cited cases constituted
unreasonable time as a matter of law.
Same; Same; Same; Words and Phrases; A manager’s check is one drawn by
the bank’s manager upon the bank itself, and 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—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.—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. 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. 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.
Same; Same; Same; Even assuming that presentment is needed, failure to
present a manager’s check for payment within a reasonable time will result to the
discharge of the drawer only to the extent of the loss caused by
519
VOL. 351, FEBRUARY 12, 2001 51
9 was detained inside the bank’s compound.
International Corporate Bank vs. Gueco
the delay.—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. 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.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Tomas R. Leonidas for petitioners.
Estrella, Estrella, Estrella & Associates for private respondents.
KAPUNAN, J.:
The respondents Gueco Spouses obtained a loan from petitioner International
Corporate Bank (now Union Bank of the Philippines) to purchase a car—a Nissan
Sentra 1600 4DR, 1989 Model. In consideration thereof, the Spouses executed
promissory notes which were payable in monthly installments and chattel mortgage
over the car to serve as security for the notes.
The Spouses defaulted in payment of installments. Consequently, the Bank filed
on August 7,1995 a civil action docketed as Civil Case No. 658-95 for “Sum of Money
with Prayer for a Writ of Replevin”1 before the Metropolitan Trial Court of Pasay City,
Branch 45.2 On August 25, 1995, Dr. Francis Gueco was served summons and was
fetched by the sheriff and representative of the bank for a meeting in the bank
premises. Desi Tomas, the Bank’s Assistant Vice President demanded payment of the
amount of P184,000.00 which represents the unpaid balance for the car loan.
________________
1 Rollo, p. 26.
2 This case was eventually dismissed for failure or lack of interest to, prosecute
(Annex 16), Id., at 158.
520
520 SUPREME COURT REPORTS ANNOTATED
International Corporate Bank vs. Gueco
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
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 the amount of
P150.000.00 but the car was not released because of his refusal to sign the Joint
Motion to Dismiss. It is the contention of the Gueco spouses and their counsel that
Dr. Gueco need not sign the motion for joint dismissal considering that they had not
yet filed their Answer. Petitioner, however, insisted that the joint motion to dismiss is
standard operating procedure in their bank to effect a compromise and to preclude
future filing of claims, counterclaims or suits for damages.
After several demand letters and meetings with bank representatives, the
respondents Gueco spouses initiated a civil action for damages before the
Metropolitan Trial Court of Quezon City, Branch 33. The Metropolitan Trial Court
dismissed the complaint for lack of merit.3
On appeal to the Regional Trial Court, Branch 227 of Quezon City, the decision of
the Metropolitan Trial Court was reversed. In its decision, the RTC held that there
was a meeting of the minds between the parties as to the reduction of the amount of
indebtedness and the release of the car but said agreement did not include the
signing of the joint motion to dismiss as a condition sine qua non for the effectivity of
the compromise. The court further ordered the bank:
1. 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
________________
3Rollo, p. 30
521
VOL. 351, FEBRUARY 12, 2001 521
International Corporate Bank vs. Gueco
1. paid by appellants to secure said Manager’s Check, over which appellants
have no control;
2. 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. 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 who related that respondent Dr. Gueco was aware that the signing of the draft of the
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.
________________
4Id., at 29.
5Id., at 35.
522
522 SUPREME COURT REPORTS ANNOTATED
International Corporate Bank vs. Gueco
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.7While there are
exceptions to this rule,8 the present case does not fall under any one 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
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).
_________________
6 Id., at 11.
7 Amigo, et al. v. Teves, 96 Phil. 252 (1954).
8 Ramos v. Pepsi Cola, 195 SCRA 289 (1967).
523
VOL. 351, FEBRUARY 12, 2001 523
 International Corporate Bank vs. Gueco
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—
‘x x x 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
524
524 SUPREME COURT REPORTS ANNOTATED
International Corporate Bank vs. Gueco
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 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.’ x x x.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
respondents tender of payment in the form of a manager’s check, the former
intentionally evaded its
________________
9 Rollo, pp. 31-33.
525
VOL. 351, FEBRUARY 12, 2001 525
International Corporate Bank vs. Gueco
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 cannot 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 cannot 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
________________
10 Id., at 34.
11 Legaspi Oil Co., Inc. vs. CA, 224 SCRA 213, 216 (1993).
12 Article 2220 of the NEW CIVIL CODE.
526
526 SUPREME COURT REPORTS ANNOTATED
International Corporate Bank vs. Gueco
the withholding of his car by petitioner, he has only himself to blame. Necessarily,
the claim for exemplary damages must fail. In no way, may the conduct of petitioner
be characterized as “wanton, fraudulent, reckless, oppressive or malevolent.”13
We, likewise, find for the petitioner with respect to the third assigned error. In the
meeting of August 29, 1995, respondent Dr. Gueco delivered a 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,17 it appears from the pleadings that said check has not been
encashed.
The decision of the Regional Trial Court, which was affirmed in toto by the Court
of Appeals, orders the petitioner:
1. 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
________________
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.
527
VOL. 351, FEBRUARY 12, 2001 527
International Corporate Bank vs. Gueco
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
________________
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, 319 SCRA 595).
20 Citing New Pacific Timber and Supply Co., Inc. v. Sevens, 101 SCRA
686 (1980); see also Tan v. Court of Appeals, 239 SCRA 310 (1994); Tibajia, 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 Jell Bros. Stones v. McCullough (1934) 188 Ark 1108, 69 S.W. (2d) 863.
528
528 SUPREME COURT REPORTS ANNOTATED
International Corporate Bank vs. Gueco
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.30 The check becomes the
primary obligation of the bank which issues it and constitutes its written promise to
pay upon demand. The mere issuance of it is considered an acceptance thereof. If
treated as promissory note, the drawer would be the maker and in which case the
holder need not prove presentment for payment or present the bill to the drawee for
acceptance.31
Even assuming that presentment is needed, failure to present for payment within
a reasonable time will result to the discharge of the drawer only to the extent of the
loss caused by the delay.32 Failure to present on time, thus, does not totally wipe out
all liability. In fact, the legal situation amounts to an acknowledgment of liability in
the sum stated in the check. In this case, the Gueco spouses have not alleged, much
less shown that they or the bank which issued the manager’s check has suffered
damage or loss
_______________
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, 213 111. 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 1st National Bank v. Comm. Ins. Co., 113 Pac. 815.
32 Section 186, NIL.
529
VOL. 351, FEBRUARY 12, 2001 529
International Corporate Bank vs. Gueco
caused by the delay or non-presentment. Definitely, the original obligation to pay
certainly has not been erased.
It has been held that, if the check had become stale, it becomes imperative that
the circumstances that caused its non-presentment be determined.33 In the case at
bar, there is no doubt that the petitioner bank held on the check and refused to
encash the same because of the controversy surrounding the signing of the joint
motion to dismiss. We see no bad faith or negligence in this position taken by the
Bank.
WHEREFORE, premises considered, the petition for review is given due course.
The decision of the Court of Appeals affirming the decision of the Regional Trial
Court is SET ASIDE. Respondents are further ordered to pay the original obligation
amounting to P150,000.00 to the petitioner upon surrender or cancellation of the
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. (C.J., Chairman), Puno, Pardo and Ynares-Santiago, JJ., concur.
Petition granted, judgment set aside.
Notes.—There is an element of certainty or assurance in an ordinary check that it
will be paid upon presentation that is why it is perceived as a convenient substitute
for currency in commercial and financial transactions. (Tan vs. Court of
Appeals, 239 SCRA 310 [1994])
A manager’s check is like a cashier’s check which, in the commercial world, is
regarded substantially to be as good as the money it represents. (Bank of the
Philippine Islands vs. Court of Appeals, 326 SCRA 641 [2000])
 ——o0o——

________________
33 Crystal v. Court of Appeals, 71 SCRA 443 (1976).

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-49188 January 30, 1990
PHILIPPINE AIRLINES, INC., petitioner,
vs.
HON. COURT OF APPEALS, HON. JUDGE RICARDO D. GALANO, Court
of First Instance of Manila, Branch XIII, JAIME K. DEL ROSARIO,
Deputy Sheriff, Court of First Instance, Manila, and AMELIA
TAN, respondents.
GUTIERREZ, JR., J.:
Behind the simple issue of validity of an alias writ of execution in this case is a more
fundamental question. Should the Court allow a too literal interpretation of the Rules
with an open invitation to knavery to prevail over a more discerning and just
approach? Should we not apply the ancient rule of statutory construction that laws
are to be interpreted by the spirit which vivifies and not by the letter which killeth?
This is a petition to review on certiorari the decision of the Court of Appeals in CA-
G.R. No. 07695 entitled "Philippine Airlines, Inc. v. Hon. Judge Ricardo D. Galano,
et al.", dismissing the petition for certiorari against the order of the Court of First
Instance of Manila which issued an alias writ of execution against the petitioner.
The petition involving the alias writ of execution had its beginnings on November 8,
1967, when respondent Amelia Tan, under the name and style of Able Printing Press
commenced a complaint for damages before the Court of First Instance of Manila.
The case was docketed as Civil Case No. 71307, entitled Amelia Tan, et al. v.
Philippine Airlines, Inc.
After trial, the Court of First Instance of Manila, Branch 13, then presided over by the
late Judge Jesus P. Morfe rendered judgment on June 29, 1972, in favor of private
respondent Amelia Tan and against petitioner Philippine Airlines, Inc. (PAL) as
follows:
WHEREFORE, judgment is hereby rendered, ordering the defendant
Philippine Air Lines:
1. On the first cause of action, to pay to the plaintiff the amount of
P75,000.00 as actual damages, with legal interest thereon from
plaintiffs extra-judicial demand made by the letter of July 20, 1967;
2. On the third cause of action, to pay to the plaintiff the amount of
P18,200.00, representing the unrealized profit of 10% included in the
contract price of P200,000.00 plus legal interest thereon from July
20,1967;
3. On the fourth cause of action, to pay to the plaintiff the amount of
P20,000.00 as and for moral damages, with legal interest thereon
from July 20, 1 967;
4. On the sixth cause of action, to pay to the plaintiff the amount of
P5,000.00 damages as and for attorney's fee.
Plaintiffs second and fifth causes of action, and defendant's counterclaim, are
dismissed.
With costs against the defendant. (CA Rollo, p. 18)
On July 28, 1972, the petitioner filed its appeal with the Court of Appeals. The case
was docketed as CA-G.R. No. 51079-R.
On February 3, 1977, the appellate court rendered its decision, the dispositive portion
of which reads:
IN VIEW WHEREOF, with the modification that PAL is condemned to pay
plaintiff the sum of P25,000.00 as damages and P5,000.00 as attorney's fee,
judgment is affirmed, with costs. (CA Rollo, p. 29)
Notice of judgment was sent by the Court of Appeals to the trial court and on dates
subsequent thereto, a motion for reconsideration was filed by respondent Amelia
Tan, duly opposed by petitioner PAL.
On May 23,1977, the Court of Appeals rendered its resolution denying the
respondent's motion for reconsideration for lack of merit.
No further appeal having been taken by the parties, the judgment became final and
executory and on May 31, 1977, judgment was correspondingly entered in the case.
The case was remanded to the trial court for execution and on September 2,1977,
respondent Amelia Tan filed a motion praying for the issuance of a writ of execution
of the judgment rendered by the Court of Appeals. On October 11, 1977, the trial
court, presided over by Judge Galano, issued its order of execution with the
corresponding writ in favor of the respondent. The writ was duly referred to Deputy
Sheriff Emilio Z. Reyes of Branch 13 of the Court of First Instance of Manila for
enforcement.
Four months later, on February 11, 1978, respondent Amelia Tan moved for the
issuance of an alias writ of execution stating that the judgment rendered by the lower
court, and affirmed with modification by the Court of Appeals, remained unsatisfied.
On March 1, 1978, the petitioner filed an opposition to the motion for the issuance of
an alias writ of execution stating that it had already fully paid its obligation to
plaintiff through the deputy sheriff of the respondent court, Emilio Z. Reyes, as
evidenced by cash vouchers properly signed and receipted by said Emilio Z. Reyes.
On March 3,1978, the Court of Appeals denied the issuance of the alias writ for being
premature, ordering the executing sheriff Emilio Z. Reyes to appear with his return
and explain the reason for his failure to surrender the amounts paid to him by
petitioner PAL. However, the order could not be served upon Deputy Sheriff Reyes
who had absconded or disappeared.
On March 28, 1978, motion for the issuance of a partial alias writ of execution was
filed by respondent Amelia Tan.
On April 19, 1978, respondent Amelia Tan filed a motion to withdraw "Motion for
Partial Alias Writ of Execution" with Substitute Motion for Alias Writ of Execution.
On May 1, 1978, the respondent Judge issued an order which reads:
As prayed for by counsel for the plaintiff, the Motion to Withdraw 'Motion for
Partial Alias Writ of Execution with Substitute Motion for Alias Writ of
Execution is hereby granted, and the motion for partial alias writ of execution
is considered withdrawn.
Let an Alias Writ of Execution issue against the defendant for the fall
satisfaction of the judgment rendered. Deputy Sheriff Jaime K. del Rosario is
hereby appointed Special Sheriff for the enforcement thereof. (CA Rollo, p.
34)
On May 18, 1978, the petitioner received a copy of the first alias writ of execution
issued on the same day directing Special Sheriff Jaime K. del Rosario to levy on
execution in the sum of P25,000.00 with legal interest thereon from July 20,1967
when respondent Amelia Tan made an extra-judicial demand through a letter. Levy
was also ordered for the further sum of P5,000.00 awarded as attorney's fees.
On May 23, 1978, the petitioner filed an urgent motion to quash the alias writ of
execution stating that no return of the writ had as yet been made by Deputy Sheriff
Emilio Z. Reyes and that the judgment debt had already been fully satisfied by the
petitioner as evidenced by the cash vouchers signed and receipted by the server of the
writ of execution, Deputy Sheriff Emilio Z. Reyes.
On May 26,1978, the respondent Jaime K. del Rosario served a notice of garnishment
on the depository bank of petitioner, Far East Bank and Trust Company, Rosario
Branch, Binondo, Manila, through its manager and garnished the petitioner's deposit
in the said bank in the total amount of P64,408.00 as of May 16, 1978. Hence, this
petition for certiorari filed by the Philippine Airlines, Inc., on the grounds that:
I
AN ALIAS WRIT OF EXECUTION CANNOT BE ISSUED WITHOUT PRIOR
RETURN OF THE ORIGINAL WRIT BY THE IMPLEMENTING OFFICER.
II
PAYMENT OF JUDGMENT TO THE IMPLEMENTING OFFICER AS
DIRECTED IN THE WRIT OF EXECUTION CONSTITUTES SATISFACTION
OF JUDGMENT.
III
INTEREST IS NOT PAYABLE WHEN THE DECISION IS SILENT AS TO
THE PAYMENT THEREOF.
IV
 SECTION 5, RULE 39, PARTICULARLY REFERS TO LEVY OF PROPERTY
OF JUDGMENT DEBTOR AND DISPOSAL OR SALE THEREOF TO
SATISFY JUDGMENT.
Can an alias writ of execution be issued without a prior return of the original writ by
the implementing officer?
We rule in the affirmative and we quote the respondent court's decision with
approval:
The issuance of the questioned alias writ of execution under the
circumstances here obtaining is justified because even with the absence of a
Sheriffs return on the original writ, the unalterable fact remains that such a
return is incapable of being obtained (sic) because the officer who is to make
the said return has absconded and cannot be brought to the Court despite the
earlier order of the court for him to appear for this purpose. (Order of Feb. 21,
1978, Annex C, Petition). Obviously, taking cognizance of this circumstance,
the order of May 11, 1978 directing the issuance of an alias writ was therefore
issued. (Annex D. Petition). The need for such a return as a condition
precedent for the issuance of an alias writ was justifiably dispensed with by
the court below and its action in this regard meets with our concurrence. A
contrary view will produce an abhorent situation whereby the mischief of an
erring officer of the court could be utilized to impede indefinitely the
undisputed and awarded rights which a prevailing party rightfully deserves to
obtain and with dispatch. The final judgment in this case should not indeed
be permitted to become illusory or incapable of execution for an indefinite
and over extended period, as had already transpired. (Rollo, pp. 35-36)
Judicium non debet esse illusorium; suum effectum habere debet (A judgment ought
not to be illusory it ought to have its proper effect).
Indeed, technicality cannot be countenanced to defeat the execution of a judgment
for execution is the fruit and end of the suit and is very aptly called the life of the law
(Ipekdjian Merchandising Co. v. Court of Tax Appeals, 8 SCRA 59 [1963];
Commissioner of Internal Revenue v. Visayan Electric Co., 19 SCRA 697, 698 [1967]).
A judgment cannot be rendered nugatory by the unreasonable application of a strict
rule of procedure. Vested rights were never intended to rest on the requirement of a
return, the office of which is merely to inform the court and the parties, of any and all
actions taken under the writ of execution. Where such information can be established
in some other manner, the absence of an executing officer's return will not preclude a
judgment from being treated as discharged or being executed through an alias writ of
execution as the case may be. More so, as in the case at bar. Where the return cannot
be expected to be forthcoming, to require the same would be to compel the
enforcement of rights under a judgment to rest on an impossibility, thereby allowing
the total avoidance of judgment debts. So long as a judgment is not satisfied, a
plaintiff is entitled to other writs of execution (Government of the Philippines v.
Echaus and Gonzales, 71 Phil. 318). It is a well known legal maxim that he who
cannot prosecute his judgment with effect, sues his case vainly.
More important in the determination of the propriety of the trial court's issuance of
an alias writ of execution is the issue of satisfaction of judgment.
Under the peculiar circumstances surrounding this case, did the payment made to
the absconding sheriff by check in his name operate to satisfy the judgment debt?
The Court rules that the plaintiff who has won her case should not be adjudged as
having sued in vain. To decide otherwise would not only give her an empty but a
pyrrhic victory.
It should be emphasized that under the initial judgment, Amelia Tan was found to
have been wronged by PAL.
She filed her complaint in 1967.
After ten (10) years of protracted litigation in the Court of First Instance and the
Court of Appeals, Ms. Tan won her case.
It is now 1990.
Almost twenty-two (22) years later, Ms. Tan has not seen a centavo of what the
courts have solemnly declared as rightfully hers. Through absolutely no fault of her
own, Ms. Tan has been deprived of what, technically, she should have been paid from
the start, before 1967, without need of her going to court to enforce her rights. And
all because PAL did not issue the checks intended for her, in her name.
Under the peculiar circumstances of this case, the payment to the absconding sheriff
by check in his name did not operate as a satisfaction of the judgment debt.
In general, a payment, in order to be effective to discharge an obligation, must be
made to the proper person. Article 1240 of the Civil Code provides:
Payment shall be made to the person in whose favor the obligation has been
constituted, or his successor in interest, or any person authorized to receive
it. (Emphasis supplied)
Thus, payment must be made to the obligee himself or to an agent having authority,
express or implied, to receive the particular payment (Ulen v. Knecttle 50 Wyo 94, 58
[2d] 446, 111 ALR 65). Payment made to one having apparent authority to receive the
money will, as a rule, be treated as though actual authority had been given for its
receipt. Likewise, if payment is made to one who by law is authorized to act for the
creditor, it will work a discharge (Hendry v. Benlisa 37 Fla. 609, 20 SO 800,34 LRA
283). The receipt of money due on ajudgment by an officer authorized by law to
accept it will, therefore, satisfy the debt (See 40 Am Jm 729, 25; Hendry v. Benlisa
supra; Seattle v. Stirrat 55 Wash. 104 p. 834,24 LRA [NS] 1275).
The theory is where payment is made to a person authorized and recognized by the
creditor, the payment to such a person so authorized is deemed payment to the
creditor. Under ordinary circumstances, payment by the judgment debtor in the case
at bar, to the sheriff should be valid payment to extinguish the judgment debt.
There are circumstances in this case, however, which compel a different conclusion.
The payment made by the petitioner to the absconding sheriff was not in cash or
legal tender but in checks. The checks were not payable to Amelia Tan or Able
Printing Press but to the absconding sheriff.
Did such payments extinguish the judgment debt?
Article 1249 of the Civil Code provides:
The payment of debts in money shall be made in the currency stipulated, and
if it is not possible to deliver such currency, then in the currency which is
legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or
other mercantile documents shall produce the effect of payment only when
they have been cashed, or when through the fault of the creditor they have
been impaired.
In the meantime, the action derived from the original obligation shall be held
in abeyance.
In the absence of an agreement, either express or implied, payment means the
discharge of a debt or obligation in money (US v. Robertson, 5 Pet. [US] 641, 8 L. ed.
257) and unless the parties so agree, a debtor has no rights, except at his own peril, to
substitute something in lieu of cash as medium of payment of his debt (Anderson v.
Gill, 79 Md.. 312, 29 A 527, 25 LRA 200,47 Am. St. Rep. 402). Consequently, unless
authorized to do so by law or by consent of the obligee a public officer has no
authority to accept anything other than money in payment of an obligation under a
judgment being executed. Strictly speaking, the acceptance by the sheriff of the
petitioner's checks, in the case at bar, does not, per se, operate as a discharge of the
judgment debt.
Since a negotiable instrument is only a substitute for money and not money, the
delivery of such an instrument does not, by itself, operate as payment (See. 189, Act
2031 on Negs. Insts.; Art. 1249, Civil Code; Bryan Landon Co. v. American Bank, 7
Phil. 255; Tan Sunco v. Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check, whether a
manager's check or ordinary cheek, is not legal tender, and an offer of a check in
payment of a debt is not a valid tender of payment and may be refused receipt by the
obligee or creditor. Mere delivery of checks does not discharge the obligation under a
judgment. The obligation is not extinguished and remains suspended until the
payment by commercial document is actually realized (Art. 1249, Civil Code, par. 3).
If bouncing checks had been issued in the name of Amelia Tan and not the Sheriff's,
there would have been no payment. After dishonor of the checks, Ms. Tan could have
run after other properties of PAL. The theory is that she has received no value for
what had been awarded her. Because the checks were drawn in the name of Emilio Z.
Reyes, neither has she received anything. The same rule should apply.
It is argued that if PAL had paid in cash to Sheriff Reyes, there would have been
payment in full legal contemplation. The reasoning is logical but is it valid and
proper? Logic has its limits in decision making. We should not follow rulings to their
logical extremes if in doing so we arrive at unjust or absurd results.
In the first place, PAL did not pay in cash. It paid in cheeks.
And second, payment in cash always carries with it certain cautions. Nobody hands
over big amounts of cash in a careless and inane manner. Mature thought is given to
the possibility of the cash being lost, of the bearer being waylaid or running off with
what he is carrying for another. Payment in checks is precisely intended to avoid the
possibility of the money going to the wrong party. The situation is entirely different
where a Sheriff seizes a car, a tractor, or a piece of land. Logic often has to give way to
experience and to reality. Having paid with checks, PAL should have done so
properly.
Payment in money or cash to the implementing officer may be deemed absolute
payment of the judgment debt but the Court has never, in the least bit, suggested that
judgment debtors should settle their obligations by turning over huge amounts of
cash or legal tender to sheriffs and other executing officers. Payment in cash would
result in damage or interminable litigations each time a sheriff with huge amounts of
cash in his hands decides to abscond.
As a protective measure, therefore, the courts encourage the practice of payments by
cheek provided adequate controls are instituted to prevent wrongful payment and
illegal withdrawal or disbursement of funds. If particularly big amounts are involved,
escrow arrangements with a bank and carefully supervised by the court would be the
safer procedure. Actual transfer of funds takes place within the safety of bank
premises. These practices are perfectly legal. The object is always the safe and
incorrupt execution of the judgment.
It is, indeed, out of the ordinary that checks intended for a particular payee are made
out in the name of another. Making the checks payable to the judgment creditor
would have prevented the encashment or the taking of undue advantage by the
sheriff, or any person into whose hands the checks may have fallen, whether
wrongfully or in behalf of the creditor. The issuance of the checks in the name of the
sheriff clearly made possible the misappropriation of the funds that were withdrawn.
As explained and held by the respondent court:
... [K]nowing as it does that the intended payment was for the private party
respondent Amelia Tan, the petitioner corporation, utilizing the services of its
personnel who are or should be knowledgeable about the accepted procedures
and resulting consequences of the checks drawn, nevertheless, in this
instance, without prudence, departed from what is generally observed and
done, and placed as payee in the checks the name of the errant Sheriff and not
the name of the rightful payee. Petitioner thereby created a situation which
permitted the said Sheriff to personally encash said checks and
misappropriate the proceeds thereof to his exclusive personal benefit. For the
prejudice that resulted, the petitioner himself must bear the fault. The judicial
guideline which we take note of states as follows:
As between two innocent persons, one of whom must suffer the consequence
of a breach of trust, the one who made it possible by his act of confidence
must bear the loss. (Blondeau, et al. v. Nano, et al., L-41377, July 26, 1935, 61
Phil. 625)
Having failed to employ the proper safeguards to protect itself, the judgment debtor
whose act made possible the loss had but itself to blame.
The attention of this Court has been called to the bad practice of a number of
executing officers, of requiring checks in satisfaction of judgment debts to be made
out in their own names. If a sheriff directs a judgment debtor to issue the checks in
the sheriff's name, claiming he must get his commission or fees, the debtor must
report the sheriff immediately to the court which ordered the execution or to the
Supreme Court for appropriate disciplinary action. Fees, commissions, and salaries
are paid through regular channels. This improper procedure also allows such officers,
who have sixty (60) days within which to make a return, to treat the moneys as their
personal finds and to deposit the same in their private accounts to earn sixty (60)
days interest, before said finds are turned over to the court or judgment creditor (See
Balgos v. Velasco, 108 SCRA 525 [1981]). Quite as easily, such officers could put up
the defense that said checks had been issued to them in their private or personal
capacity. Without a receipt evidencing payment of the judgment debt, the
misappropriation of finds by such officers becomes clean and complete. The practice
is ingenious but evil as it unjustly enriches court personnel at the expense of litigants
and the proper administration of justice. The temptation could be far greater, as
proved to be in this case of the absconding sheriff. The correct and prudent thing for
the petitioner was to have issued the checks in the intended payee's name.
The pernicious effects of issuing checks in the name of a person other than the
intended payee, without the latter's agreement or consent, are as many as the ways
that an artful mind could concoct to get around the safeguards provided by the law
on negotiable instruments. An angry litigant who loses a case, as a rule, would not
want the winning party to get what he won in the judgment. He would think of ways
to delay the winning party's getting what has been adjudged in his favor. We cannot
condone that practice especially in cases where the courts and their officers are
involved.1âwphi1 We rule against the petitioner.
Anent the applicability of Section 15, Rule 39, as follows:
Section 15. Execution of money judgments. — The officer must enforce an
execution of a money judgment by levying on all the property, real and
personal of every name and nature whatsoever, and which may be disposed of
for value, of the judgment debtor not exempt from execution, or on a
sufficient amount of such property, if they be sufficient, and selling the
same, and paying to the judgment creditor, or his attorney, so much of the
proceeds as will satisfy the judgment. ...
the respondent court held:
We are obliged to rule that the judgment debt cannot be considered satisfied
and therefore the orders of the respondent judge granting the alias writ of
execution may not be pronounced as a nullity.
 xxx xxx xxx SO ORDERED.

It is clear and manifest that after levy or garnishment, for a judgment to be Fernan, C.J., Cruz, Paras, Bidin, Griño-Aquino, Medialdea and Regalado, JJ.,
executed there is the requisite of payment by the officer to the judgment concur.
creditor, or his attorney, so much of the proceeds as will satisfy the judgment
and none such payment had been concededly made yet by the absconding
Sheriff to the private respondent Amelia Tan. The ultimate and essential step
to complete the execution of the judgment not having been performed by the
City Sheriff, the judgment debt legally and factually remains unsatisfied. Separate Opinions

Strictly speaking execution cannot be equated with satisfaction of a judgment. Under

unusual circumstances as those obtaining in this petition, the distinction comes out
clearly.
Execution is the process which carries into effect a decree or judgment (Painter v.
Berglund, 31 Cal. App. 2d. 63, 87 P 2d 360, 363; Miller v. London, 294 Mass 300, 1
NE 2d 198, 200; Black's Law Dictionary), whereas the satisfaction of a judgment is
the payment of the amount of the writ, or a lawful tender thereof, or the conversion
by sale of the debtor's property into an amount equal to that due, and, it may be done
otherwise than upon an execution (Section 47, Rule 39). Levy and delivery by an
execution officer are not prerequisites to the satisfaction of a judgment when the
same has already been realized in fact (Section 47, Rule 39). Execution is for the
sheriff to accomplish while satisfaction of the judgment is for the creditor to achieve.
Section 15, Rule 39 merely provides the sheriff with his duties as executing officer
including delivery of the proceeds of his levy on the debtor's property to satisfy the
judgment debt. It is but to stress that the implementing officer's duty should not stop
at his receipt of payments but must continue until payment is delivered to the obligor
or creditor.
Finally, we find no error in the respondent court's pronouncement on the inclusion of
interests to be recovered under the alias writ of execution. This logically follows from
our ruling that PAL is liable for both the lost checks and interest. The respondent
court's decision in CA-G.R. No. 51079-R does not totally supersede the trial court's
judgment in Civil Case No. 71307. It merely modified the same as to the principal
amount awarded as actual damages.
WHEREFORE, IN VIEW OF THE FOREGOING, the petition is hereby DISMISSED.
The judgment of the respondent Court of Appeals is AFFIRMED and the trial court's
issuance of the alias writ of execution against the petitioner is upheld without
prejudice to any action it should take against the errant sheriff Emilio Z. Reyes. The
Court Administrator is ordered to follow up the actions taken against Emilio Z.
Reyes.
NARVASA, J., dissenting:
The execution of final judgments and orders is a function of the sheriff, an officer of
the court whose authority is by and large statutorily determined to meet the
particular exigencies arising from or connected with the performance of the
multifarious duties of the office. It is the acknowledgment of the many dimensions of
this authority, defined by statute and chiselled by practice, which compels me to
disagree with the decision reached by the majority.
A consideration of the wide latitude of discretion allowed the sheriff as the officer of
the court most directly involved with the implementation and execution of final
judgments and orders persuades me that PAL's payment to the sheriff of its
judgment debt to Amelia Tan, though made by check issued in said officer's name,
lawfully satisfied said obligation and foreclosed further recourse therefor against
PAL, notwithstanding the sheriffs failure to deliver to Tan the proceeds of the check.
It is a matter of history that the judiciary .. is an inherit or of the Anglo-
American tradition. While the common law as such .. "is not in force" in this
jurisdiction, "to breathe the breath of life into many of the institutions,
introduced [here] under American sovereignty, recourse must be had to the
rules, principles and doctrines of the common law under whose protecting
aegis the prototypes of these institutions had their birth" A sheriff is "an
officer of great antiquity," and was also called the shire reeve. A shire in
English law is a Saxon word signifying a division later called a county. A reeve
is an ancient English officer of justice inferior in rank to an alderman ..
appointed to process, keep the King's peace, and put the laws in execution.
From a very remote period in English constitutional history .. the shire had
another officer, namely the shire reeve or as we say, the sheriff. .. The Sheriff
was the special representative of the legal or central authority, and as such
 usually nominated by the King. .. Since the earliest times, both in England
and the United States, a sheriff has continued his status as an adjunct of the
court .. . As it was there, so it has been in the Philippines from the time of the
organization of the judiciary .. . (J. Fernando's concurring opinion in
Bagatsing v. Herrera, 65 SCRA 434)
One of a sheriff s principal functions is to execute final judgments and orders. The
Rules of Court require the writs of execution to issue to him, directing him to enforce
such judgments and orders in the manner therein provided (Rule 39). The mode of
enforcement varies according to the nature of the judgment to be carried out:
whether it be against property of the judgment debtor in his hands or in the hands of
a third person i e. money judgment), or for the sale of property, real or personal (i.e.
foreclosure of mortgage) or the delivery thereof, etc. (sec. 8, Rule 39).
Under sec. 15 of the same Rule, the sheriff is empowered to levy on so much of the
judgment debtor's property as may be sufficient to enforce the money judgment and
sell these properties at public auction after due notice to satisfy the adjudged
amount. It is the sheriff who, after the auction sale, conveys to the purchaser the
property thus sold (secs. 25, 26, 27, Rule 39), and pays the judgment creditor so
much of the proceeds as will satisfy the judgment. When the property sold by him on
execution is an immovable which consequently gives rise to a light of redemption on
the part of the judgment debtor and others (secs. 29, 30, Rule 39), it is to him (or to
the purchaser or redemptioner that the payments may be made by those declared by
law as entitled to redeem (sec. 31, Rule 39); and in this situation, it becomes his duty
to accept payment and execute the certificate of redemption (Enage v. Vda. y Hijos de
Escano, 38 Phil. 657, cited in Moran, Comments on the Rules of Court, 1979 ed., vol.
2, pp. 326-327). It is also to the sheriff that "written notice of any redemption must
be given and a duplicate filed with the registrar of deeds of the province, and if any
assessments or taxes are paid by the redemptioner or if he has or acquires any lien
other than that upon which the redemption was made, notice thereof must in like
manner be given to the officer and filed with the registrar of deeds," the effect of
failure to file such notice being that redemption may be made without paying such
assessments, taxes, or liens (sec. 30, Rule 39).
The sheriff may likewise be appointed a receiver of the property of the judgment
debtor where the appointment of the receiver is deemed necessary for the execution
of the judgment (sec. 32, Rule 39).
At any time before the sale of property on execution, the judgment debtor may
prevent the sale by paying the sheriff the amount required by the execution and the
costs that have been incurred therein (sec. 20, Rule 39).
The sheriff is also authorized to receive payments on account of the judgment debt
tendered by "a person indebted to the judgment debtor," and his "receipt shall be a
sufficient discharge for the amount so paid or directed to be credited by the judgment
creditor on the execution" (sec. 41, Rule 39).
Now, obviously, the sheriff s sale extinguishes the liability of the judgment debtor
either in fun, if the price paid by the highest bidder is equal to, or more than the
amount of the judgment or pro tanto if the price fetched at the sale be less. Such
extinction is not in any way dependent upon the judgment creditor's receiving the
amount realized, so that the conversion or embezzlement of the proceeds of the sale
by the sheriff does not revive the judgment debt or render the judgment creditor
liable anew therefor.
So, also, the taking by the sheriff of, say, personal property from the judgment debtor
for delivery to the judgment creditor, in fulfillment of the verdict against him,
extinguishes the debtor's liability; and the conversion of said property by the sheriff,
does not make said debtor responsible for replacing the property or paying the value
thereof.
In the instances where the Rules allow or direct payments to be made to the sheriff,
the payments may be made by check, but it goes without saying that if the sheriff so
desires, he may require payment to be made in lawful money. If he accepts the check,
he places himself in a position where he would be liable to the judgment creditor if
any damages are suffered by the latter as a result of the medium in which payment
was made (Javellana v. Mirasol, et al., 40 Phil. 761). The validity of the payment
made by the judgment debtor, however, is in no wise affected and the latter is
discharged from his obligation to the judgment creditor as of the moment the check
issued to the sheriff is encashed and the proceeds are received by Id. office. The
issuance of the check to a person authorized to receive it (Art. 1240, Civil Code; See.
46 of the Code of Civil Procedure; Enage v. Vda y Hijos de Escano, 38 Phil. 657, cited
in Javellana v. Mirasol, 40 Phil. 761) operates to release the judgment debtor from
any further obligations on the judgment.
The sheriff is an adjunct of the court; a court functionary whose competence involves
both discretion and personal liability (concurring opinion of J. Fernando, citing Uy
Piaoco v. Osmena, 9 Phil. 299, in Bagatsing v. Herrera, 65 SCRA 434). Being an
officer of the court and acting within the scope of his authorized functions, the sheriff
s receipt of the checks in payment of the judgment execution, may be deemed, in
legal contemplation, as received by the court itself (Lara v. Bayona, 10 May 1955, No.
L- 10919).
That the sheriff functions as a conduit of the court is further underscored by the fact
that one of the requisites for appointment to the office is the execution of a bond,
"conditioned (upon) the faithful performance of his (the appointee's) duties .. for the
delivery or payment to Government, or the person entitled thereto, of all properties
or sums of money that shall officially come into his hands" (sec. 330, Revised
Administrative Code).
There is no question that the checks came into the sheriffs possession in his official
capacity. The court may require of the judgment debtor, in complying with the
judgment, no further burden than his vigilance in ensuring that the person he is
paying money or delivering property to is a person authorized by the court to receive
it. Beyond this, further expectations become unreasonable. To my mind, a proposal
that would make the judgment debtor unqualifiedly the insurer of the judgment
creditor's entitlement to the judgment amount which is really what this case is all
about begs the question.
That the checks were made out in the sheriffs name (a practice, by the way, of long
and common acceptance) is of little consequence if juxtaposed with the extent of the
authority explicitly granted him by law as the officer entrusted with the power to
execute and implement court judgments. The sheriffs requirement that the checks in
payment of the judgment debt be issued in his name was simply an assertion of that
authority; and PAL's compliance cannot in the premises be faulted merely because of
the sheriffs subsequent malfeasance in absconding with the payment instead of
turning it over to the judgment creditor.
If payment had been in cash, no question about its validity or of the authority and
duty of the sheriff to accept it in settlement of PAL's judgment obligation would even
have arisen. Simply because it was made by checks issued in the sheriff s name does
not warrant reaching any different conclusion.
As payment to the court discharges the judgment debtor from his responsibility on
the judgment, so too must payment to the person designated by such court and
authorized to act in its behalf, operate to produce the same effect.
It is unfortunate and deserving of commiseration that Amelia Tan was deprived of
what was adjudged to her when the sheriff misappropriated the payment made to
him by PAL in dereliction of his sworn duties. But I submit that her remedy lies, not
here and in reviving liability under a judgment already lawfully satisfied, but
elsewhere.
ACCORDINGLY, I vote to grant the petition.
Melencio-Herrera, Gancayco, J., concurs.
FELICIANO, J., dissenting:
I concur in the able dissenting opinions of Narvasa and Padilla, JJ. and would merely
wish to add a few footnotes to their lucid opinions.
1. Narvasa, J. has demonstrated in detail that a sheriff is authorized by the
Rules of Court and our case law to receive either legal tender or checks from
the judgment debtor in satisfaction of the judgment debt. In addition, Padilla,
J. has underscored the obligation of the sheriff, imposed upon him by the
nature of his office and the law, to turn over such legal tender, checks and
proceeds of execution sales to the judgment creditor. The failure of a sheriff to
effect such turnover and his conversion of the funds (or goods) held by him to
his own uses, do not have the effect of frustrating payment by and consequent
discharge of the judgment debtor.
To hold otherwise would be to throw the risk of the sheriff faithfully
performing his duty as a public officer upon those members of the general
public who are compelled to deal with him. It seems to me that a judgment
debtor who turns over funds or property to the sheriff can not reasonably be
made an insurer of the honesty and integrity of the sheriff and that the risk of
the sheriff carrying out his duties honestly and faithfully is properly lodged in
the State itself The sheriff, like all other officers of the court, is appointed and
paid and controlled and disciplined by the Government, more specifically by
this Court. The public surely has a duty to report possible wrongdoing by a
sheriff or similar officer to the proper authorities and, if necessary, to testify
in the appropriate judicial and administrative disciplinary proceedings. But to
make the individual members of the general community insurers of the
honest performance of duty of a sheriff, or other officer of the court, over
whom they have no control, is not only deeply unfair to the former. It is also a
confession of comprehensive failure and comes too close to an abdication of
duty on the part of the Court itself. This Court should have no part in that.
2. I also feel compelled to comment on the majority opinion written by
Gutierrez, J. with all his customary and special way with words. My learned
and eloquent brother in the Court apparently accepts the proposition that
payment by a judgment debtor of cash to a sheriff produces the legal effects of
 payment, the sheriff being authorized to accept such payment. Thus, in page
10 of his ponencia, Gutierrez, J. writes:
The receipt of money due on a judgment by an officer authorized by law to
accept it will satisfy the debt. (Citations omitted)
The theory is where payment is made to a person authorized and recognized
by the creditor, the payment to such a person so authorized is deemed
payment to the creditor. Under ordinary circumstances, payment by the
judgment debtor in the case at bar, to the sheriff would be valid payment to
extinguish the judgment debt.
Shortly thereafter, however, Gutierrez, J. backs off from the above position
and strongly implies that payment in cash to the sheriff is sheer imprudence
on the part of the judgment debtor and that therefore, should the sheriff
abscond with the cash, the judgment debtor has not validly discharged the
judgment debt:
It is argued that if PAL had paid in cash to Sheriff Reyes, there would have
been payment in full legal contemplation. The reasoning is logical but is it
valid and proper?
In the first place, PAL did not pay in cash. It paid in checks.
And second, payment in cash always carries with it certain cautions. Nobody
hands over big amounts of cash in a careless and inane manner. Mature
thought is given to the possibility of the cash being lost, of the bearer being
waylaid or running off with what he is carrying for another. Payment in
checks is precisely intended to avoid the possibility of the money going to the
wrong party....
Payment in money or cash to the implementing officer may be deemed
absolute payment of the judgment debt but the court has never, in the least
bit, suggested that judgment debtors should settle their obligations by turning
over huge amounts of cash or legal tender to sheriffs and other executing
officers. ... (Emphasis in the original) (Majority opinion, pp. 12-13)
There is no dispute with the suggestion apparently made that maximum safety is
secured where the judgment debtor delivers to the sheriff not cash but a check made
out, not in the name of the sheriff, but in the judgment creditor's name. The
fundamental point that must be made, however, is that under our law only cash is
legal tender and that the sheriff can be compelled to accept only cash and not
checks, even if made out to the name of the judgment creditor. 1 The sheriff could
have quite lawfully required PAL to deliver to him only cash, i.e., Philippine currency.
If the sheriff had done so, and if PAL had complied with such a requirement, as it
would have had to, one would have to agree that legal payment must be deemed to
have been effected. It requires no particularly acute mind to note that a dishonest
sheriff could easily convert the money and abscond. The fact that the sheriff in the
instant case required, not cash to be delivered to him, but rather a check made out in
his name, does not change the legal situation. PAL did not thereby become negligent;
it did not make the loss anymore possible or probable than if it had instead delivered
plain cash to the sheriffs.
It seems to me that the majority opinion's real premise is the unspoken one that the
judgment debtor should bear the risk of the fragility of the sheriff s virtue until the
money or property parted with by the judgment debtor actually reaches the hands of
the judgment creditor. This brings me back to my earlier point that risk is most
appropriately borne not by the judgment debtor, nor indeed by the judgment
creditor, but by the State itself. The Court requires all sheriffs to post good and
adequate fidelity bonds before entering upon the performance of their duties and,
presumably, to maintain such bonds in force and effect throughout their stay in
office.2 The judgment creditor, in circumstances like those of the instant case, could
be allowed to execute upon the absconding sheriff s bond.3
I believe the Petition should be granted and I vote accordingly.
PADILLA, J., Dissenting Opinion
From the facts that appear to be undisputed, I reach a conclusion different from that
of the majority. Sheriff Emilio Z. Reyes, the trial court's authorized sheriff, armed
with a writ of execution to enforce a final money judgment against the petitioner
Philippine Airlines (PAL) in favor of private respondent Amelia Tan, proceeded to
petitioner PAL's office to implement the writ.
There is no question that Sheriff Reyes, in enforcing the writ of execution, was acting
with full authority as an officer of the law and not in his personal capacity. Stated
differently, PAL had every right to assume that, as an officer of the law, Sheriff Reyes
would perform his duties as enjoined by law. It would be grossly unfair to now charge
PAL with advanced or constructive notice that Mr. Reyes would abscond and not
deliver to the judgment creditor the proceeds of the writ of execution. If a judgment
debtor cannot rely on and trust an officer of the law, as the Sheriff, whom else can he
trust?
Pursued to its logical extreme, if PAL had delivered to Sheriff Reyes the amount of
the judgment in CASH, i.e. Philippine currency, with the corresponding receipt
signed by Sheriff Reyes, this would have been payment by PAL in full legal
contemplation, because under Article 1240 of the Civil Code, "payment shall be made
to the person in whose favor the obligation has been constituted or his successor in
interest or any person authorized to receive it." And said payment if made by PAL in
cash, i.e., Philippine currency, to Sheriff Reyes would have satisfied PAL's judgment
obligation, as payment is a legally recognized mode for extinguishing one's
obligation. (Article 1231, Civil Code).
Under Sec. 15, Rule 39, Rules of Court which provides that-
Sec. 15. Execution of money judgments. — The officer must enforce an
execution of a money judgment by levying on all the property, real and
personal of every name and nature whatsoever, and which may be disposed of
for value, of the judgment debtor not exempt from execution, or on a
sufficient amount of such property, if there be sufficient, and selling the same,
and paying to the judgment creditor, or his attorney, so much of the
proceeds as will satisfy the judgment. ... .(emphasis supplied)
it would be the duty of Sheriff Reyes to pay to the judgment creditor the proceeds of
the execution i.e., the cash received from PAL (under the above assumption). But, the
duty of the sheriff to pay the cash to the judgment creditor would be a matter
separate the distinct from the fact that PAL would have satisfied its judgment
obligation to Amelia Tan, the judgment creditor, by delivering the cash amount due
under the judgment to Sheriff Reyes.
Did the situation change by PAL's delivery of its two (2) checks totalling P30,000.00
drawn against its bank account, payable to Sheriff Reyes, for account of the judgment
rendered against PAL? I do not think so, because when Sheriff Reyes encashed the
checks, the encashment was in fact a payment by PAL to Amelia Tan through Sheriff
Reyes, an officer of the law authorized to receive payment, and such payment
discharged PAL'S obligation under the executed judgment.
If the PAL cheeks in question had not been encashed by Sheriff Reyes, there would be
no payment by PAL and, consequently no discharge or satisfaction of its judgment
obligation. But the checks had been encashed by Sheriff Reyes giving rise to a
situation as if PAL had paid Sheriff Reyes in cash, i.e., Philippine currency. This, we
repeat, is payment, in legal contemplation, on the part of PAL and this payment
legally discharged PAL from its judgment obligation to the judgment creditor. To be
sure, the same encashment by Sheriff Reyes of PAL's checks delivered to him in his
official capacity as Sheriff, imposed an obligation on Sheriff Reyes to pay and deliver
the proceeds of the encashment to Amelia Tan who is deemed to have acquired a
cause of action against Sheriff Reyes for his failure to deliver to her the proceeds of
the encashment. As held:
Payment of a judgment, to operate as a release or satisfaction, even pro
tanto must be made to the plaintiff or to some person authorized by him, or
by law, to receive it. The payment of money to the sheriff having an execution
satisfies it, and, if the plaintiff fails to receive it, his only remedy is against the
officer (Henderson v. Planters' and Merchants Bank, 59 SO 493, 178 Ala.
420).
Payment of an execution satisfies it without regard to whether the officer pays
it over to the creditor or misapplies it (340, 33 C.J.S. 644, citing Elliot v.
Higgins, 83 N.C. 459). If defendant consents to the Sheriff s misapplication of
the money, however, defendant is estopped to claim that the debt is satisfied
(340, 33 C.J.S. 644, citing Heptinstall v. Medlin 83 N.C. 16).
The above rulings find even more cogent application in the case at bar because, as
contended by petitioner PAL (not denied by private respondent), when Sheriff Reyes
served the writ of execution on PAL, he (Reyes) was accompanied by private
respondent's counsel. Prudence dictated that when PAL delivered to Sheriff Reyes
the two (2) questioned checks (payable to Sheriff Reyes), private respondent's
counsel should have insisted on their immediate encashment by the Sheriff with the
drawee bank in order to promptly get hold of the amount belonging to his client, the
judgment creditor.
ACCORDINGLY, I vote to grant the petition and to quash the court a quo's alias writ
of execution.
Melencio-Herrera, Gancayco, Sarmiento, Cortes, JJ., concurs.
Melencio-Herrera, Gancayco, Sarmiento, Cortes, JJ., concurs.
Footnotes
1Art. 1249, Civil Code; e.g., Belisario v. Natividad, 60 Phil. 156 (1934);
Villanueva v. Santos, 67 Phil 648 (1938).

2See e.g., Sec. 46, Republic Act No. 296, as amended by Republic Act No.
4814.

3 See e.g., Sec. 9, Act No. 3598.

 G.R. No. 72764. July 13, 1989.*
STATE INVESTMENT HOUSE, petitioner, vs.INTERMEDIATE APPELLATE
COURT, ANITA PEÑA CHUA and HARRIS CHUA, respondents.
Negotiable Instruments Law; Checks; Holder in due course, defined.—Section
52(c) of the Negotiable Instruments Law defines a holder in due course as one who
takes the instrument “in good faith and for value”. On the other hand, Section 52(d)
provides that in order that one may be a holder in due course, it is necessary that “at
the time the instrument was negotiated to him he had no notice of any x x x defect in
the title of the person negotiating it.” However, under Section 59 every holder is
deemed prima facie to be a holder in due course.
Same; Same; Same; Crossed checks; Duty of the payee to ascertain the holder’s
title to the check or the nature of his possession.—Admittedly, the Negotiable
Instruments Law regulating the issuance of negotiable checks as well as the rights
and liabilities arising therefrom, does not mention “crossed checks”. But this Court
has taken cognizance of the practice that a check with two parallel lines in the upper
left hand corner means that it could only be deposited and may not be converted into
cash. Consequently, such circumstance should put the payee on inquiry and upon
him devolves the duty to ascertain the holder’s title to the check or the nature of his
possession. Failing in this respect, the payee is declared guilty of gross negligence
amounting to legal absence of good faith and as such the consensus of authority is to
the effect that the holder of the check is not a holder in good faith.
Same; Same; Same; Same; Effects of crossing a check.—Relying on the ruling
in Ocampo v. Gatchalian (supra), the Intermediate Appellate Court (now Court of
Appeals), correctly elucidated that the effects of crossing a check are; the check may
not be encashed but only deposited in the bank; the check may be negotiated only
once—to one who has an account with a bank; and the act of crossing the check
serves as a warning to the holder that the check has been issued for a definite
purpose so that he must inquire if he has received the check pursuant to that
purpose, otherwise he is not a holder in due course.
________________
*THIRD DIVISION.
311
VOL. 175, JULY 13, 1989 311
State Investment House vs. Intermediate Appellate Court
Same; Same; Same; Same; Same; Drawee should not encash a crossed check
but merely accept the same for deposit.—Under usual practice, crossing a check is
done by placing two parallel lines diagonally on the left top portion of the check. The
crossing may be special wherein between the two parallel lines is written the name of
a bank or a business institution, in which case the drawee should pay only with the
intervention of that bank or company, or crossing may be general wherein between
two parallel diagonal lines are written the words “and Co.” or none at all as in the
case at bar, in which case the drawee should not encash the same but merely accept
the same for deposit.
Same; Same; Same; Same; Presentment for payment; No right of recourse is
available to petitioner against the drawer; Reasons; Case at bar.—The three subject
checks in the case at bar had been crossed generally and issued payable to New
Sikatuna Wood Industries, Inc. which could only mean that the drawer had intended
the same for deposit only by the rightful person, i.e., the payee named therein.
Apparently, it was not the payee who presented the same for payment and therefore,
there was no proper presentment, and the liability did not attach to the drawer. Thus,
in the absence of due presentment, the drawer did not become liable. Consequently,
no right of recourse is available to petitioner against the drawer of the subject checks,
private respondent wife, considering that petitioner is not the proper party
authorized to make presentment of the checks in question.
Same; Same; Holder not in due course; Disadvantage of; Defense of; The
Negotiable Instruments Law, does not provide that a holder not in due course may
not in any case recover on the instrument; Reasons; Case at bar.—Yet it does not
follow as a legal proposition that simply because petitioner was not a holder in due
course as found by the appellate court for having taken the instruments in question
with notice that the same is for deposit only to the account of payee named in the
subject checks, petitioner could not recover of the checks. The Negotiable
Instruments Law does not provide that a holder who is not a holder in due course
may not in any case recover on the instrument for in the case at bar, petitioner may
recover from the New Sikatuna Wood Industries, Inc. if the latter has no valid excuse
for refusing payment. The only disadvantage of a holder who is not in due course is
that the negotiable instrument is subject to defenses as if it were non-negotiable.
That the subject checks had been issued subject to the condition that private
respondents on due date would make the back up deposit for said checks but which
condition apparently was not
312
3 SUPREME COURT REPORTS ANNOTATED
12
State Investment House vs. Intermediate Appellate Court
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.
PETITION to review the decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Macalino, Salonga & Associates for petitioner.
Edgardo F. Sundiam for respondents.
FERNAN, C.J.:
Petitioner State Investment House seeks a review of the decision of respondent
Intermediate Appellate Court (now Court of Appeals) in AC-G.R. CV No.
04523 reversing the decision of the Regional Trial Court of Manila, Branch XXXVII
dated April 30, 1984 and dismissing the complaint for collection filed by petitioner
against private respondents Spouses Anita Peña Chua and Harris Chua.
It appears that shortly before September 5, 1980, New Sikatuna Wood Industries,
Inc. requested for a loan from private respondent Harris Chua. The latter agreed to
grant the same subject to the condition that the former should wait until December
1980 when he would have the money. In view of this agreement, private respondent-
wife, Anita Peña Chua issued three (3) crossed checks payable to New Sikatuna Wood
Industries, Inc. all postdated December 22, 1980 as follows:
DRAWEE BANK CHECK NO. DATE AMOUNT
1. China Banking
Corporation 589053 Dec. 22, 1980 P98,750.00
2. International
Corporate Bank 04045549 Dec. 22, 1980 102,313.00
3. Metropolitan
Bank & Trust Co. 036512 Dec. 22, 1980 98,387.00
The total value of the three (3) postdated checks amounted to P299,450.00.
313
VOL. 175, JULY 13, 1989 313
State Investment House vs. Intermediate Appellate Court
Subsequently, New Sikatuna Wood Industries, Inc. entered into an agreement with
herein petitioner State Investment House, Inc. whereby for and in consideration of
the sum of P1,047,402.91 under a deed of sale, the former assigned and discounted
with petitioner eleven (11) postdated checks including the aforementioned three (3)
postdated checks issued by herein private respondent-wife Anita Peña Chua to New
Sikatuna Wood Industries, Inc.
When the three checks issued by private respondent Anita Peña Chua were
allegedly deposited by petitioner, these checks were dishonored by reason of
“insufficient funds”, “stop payment” and “account closed”, respectively. Petitioner
claims that despite demands on private respondent Anita Peña to make good said
checks, the latter failed to pay the same necessitating the former to file an action for
collection against the latter and her husband Harris Chua before the Regional Trial
Court of Manila, Branch XXXVII docketed as Civil Case No. 82-10547.
Private respondents-defendants filed a third party complaint against New
Sikatuna Wood Industries, Inc. for reimbursement and indemnification in the event
that they be held liable to petitioner-plaintiff. For failure of third party defendant to
answer the third party complaint despite due service of summons, the latter was
declared in default. On April 30, 1984, the lower court1 rendered judgment against
herein private respondents spouses, the dispositve portion of which reads:
“WHEREFORE, judgment is hereby rendered in favor of the plaintiff or against the
defendants ordering the defendants to pay jointly and severally to the plaintiff the
following amounts:
1. “1.P229,450.00 with interest at the rate of 12% per annum from February 24,
1981 until fully paid;
2. “2.P29,945.00 as and for attorney’s fees; and
3. “3.the costs of suit.
“On the third party complaint, third party defendant New Sikatuna Wood
Industries, Inc. is ordered to pay third party plaintiffs Anita
_______________
1 Presided over by then Judge (now Court of Appeals Justice) Bienvenido C.
Ejercito.
314
314 SUPREME COURT REPORTS ANNOTATED
State Investment House vs. Intermediate Appellate Court
Peña Chua and Harris Chua all amounts said defendants-third party plaintiffs may
pay to the plaintiff on account of this case.”2
On appeal filed by private respondents in AC-G.R. CV No. 04523, the Intermediate
Appellate Court3 (now Court of Appeals) reversed the lower court’s judgment in the
now assailed decision, the dispositive portion of which reads:
“WHEREFORE, finding this appeal meritorious, We Reverse and Set Aside the
appealed judgment, dated April 30, 1984 and a new judgment is hereby rendered
dismissing the complaint, with costs against plaintiff-appellee.”4
Hence, this petition.
The pivotal issue in this case is whether or not petitioner is a holder in due course
as to entitle it to proceed against private respondents for the amount stated in the
dishonored checks.
Section 52(c) of the Negotiable Instruments Law defines a holder in due course as
one who takes the instrument “in good faith and for value”. On the other hand,
Section 52(d) provides that in order that one may be a holder in due course, it is
necessary that “at the time the instrument was negotiated to him he had no notice of
any x x x defect in the title of the person negotiating it.” However, under Section 59
every holder is deemed prima facie to be a holder in due course.
Admittedly, the Negotiable Instruments Law regulating the issuance of negotiable
checks as well as the rights and liabilities arising therefrom, does not mention
“crossed checks”. But this Court has taken cognizance of the practice that a check
with two parallel lines in the upper left hand corner means that it could only be
deposited and may not be converted into cash. Consequently, such circumstance
should put the payee on inquiry and upon him devolves the duty to ascertain the
holder’s
_______________
2 Petition, Annex “A”, RTC Decision, Rollo, pp. 42-43.
3 Penned by Justice Eduardo P. Caguioa, concurred in by Presiding Justice Ramon
G. Gaviola, Jr., Justices Ma. Rosario Quetulio-Losa and Leonor Ines-Luciano.
4 Rollo, p. 51.
315
VOL. 175, JULY 13, 1989 315
State Investment House vs. Intermediate Appellate Court
title to the check or the nature of his possession. Failing in this respect, the payee is
declared guilty of gross negligence amounting to legal absence of good faith and as
such the consensus of authority is to the effect that the holder of the check is not a
holder in good faith.5
Petitioner submits that at the time of the negotiation and endorsement of the
checks in question by New Sikatuna Wood Industries, it had no knowledge of the
transaction and/or arrangement made between the latter and private respondents.
We agree with respondent appellate court.
Relying on the ruling in Ocampo v. Gatchalian (supra), the Intermediate
Appellate Court (now Court of Appeals), correctly elucidated that the effects of
crossing a check are: the check may not be encashed but only deposited in the bank;
the check may be negotiated only once—to one who has an account with a bank; and
the act of crossing the check serves as a warning to the holder that the check has been
issued for a definite purpose so that he must inquire if he has received the check
pursuant to that purpose, otherwise he is not a holder in due course.
Further, the appellate court said:
“It results therefore that when appellee rediscounted the check knowing that it was a
crossed check he was knowingly violating the avowed intention of crossing the check.
Furthermore, his failure to inquire from the holder, party defendant New Sikatuna
Wood Industries, Inc., the purpose for which the three checks were crossed, despite
the warning of the crossing, prevents him from being considered in good faith and
thus he is not a holder in due course. Being not a holder in due course, plaintiff is
subject to personal defenses, such as lack of consideration between appellants and
New Sikatuna Wood Industries. Note that under the facts the checks were postdated
and issued only as a loan to New Sikatuna Wood Industries, Inc. if and when deposits
were made to back up the checks. Such deposits were not made, hence no loan was
made, hence the three checks are without consideration (Sec. 28, Negotiable
Instruments Law).
“Likewise New Sikatuna Wood Industries negotiated the three checks in breach of
faith in violation of Article (sic) 55, Negotiable Instruments Law, which is a personal
defense available to the drawer
_______________
5 Ocampo & Co. v. Gatchalian, 3 SCRA 603 (1961).
316
316 SUPREME COURT REPORTS ANNOTATED
State Investment House vs. Intermediate Appellate Court
of the check.”6
In addition, such instruments are mentioned in Section 541 of the Negotiable
Instruments Law as follows:
“Sec. 541. The maker or any legal holder of a check shall be entitled to indicate
therein that it be paid to a certain banker or institution, which he shall do by writing
across the face the name of said banker or institution, or only the words “and
company.”
“The payment made to a person other than the banker or institution shall not
exempt the person on whom it is drawn, if the payment was not correctly made.”
Under usual practice, crossing a check is done by placing two parallel lines diagonally
on the left top portion of the check. The crossing may be special wherein between the
two parallel lines is written the name of a bank or a business institution, in which
case the drawee should pay only with the intervention of that bank or company, or
crossing may be general wherein between two parallel diagonal lines are written the
words “and Co.” or none at all as in the case at bar, in which case the drawee should
not encash the same but merely accept the same for deposit.
The effect therefore of crossing a check relates to the mode of its presentment for
payment. Under Section 72 of the Negotiable Instruments Law, presentment for
payment to be sufficient must be made (a) by the holder, or by some person
authorized to receive payment on his behalf x x x. As to who the holder or authorized
person will be depends on the instructions stated on the face of the check.
The three subject checks in the case at bar had been crossed generally and issued
payable to New Sikatuna Wood Indutries, 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.
________________
6Petition, Annex “B”, IAC Decision, Rollo, pp. 50-51.
317
 VOL. 175, JULY 13, 1989 317 Sec. 52(c) provides that a holder in due course is one who takes the instrument “in
State Investment House vs. Intermediate Appellate Court good faith and for value; and Sec. 52(d) provides that in order that one may be a
Thus, in the absence of due presentment, the drawer did not become holder in due course it is necessary that “at the time the instrument was negotiated to
liable.7 Consequently, no right of recourse is available to petitioner against the him he had no notice of any x x x x defect in the title of the person negotiating it; and
drawer of the subject checks, private respondent wife, considering that petitioner is lastly Sec. 59 provides that every holder is deemed prima facie to be a holder in due
not the proper party authorized to make presentment of the checks in question. course. (Vicente R. de Ocampo & Co. vs. Gatchalian, 3 SCRA 597).
Yet it does not follow as a legal proposition that simply because petitioner was not
——o0o——
a holder in due course as found by the appellate court for having taken the
instruments in question with notice that the same is for deposit only to the account of
payee named in the subject checks, petitioner could not recover on the checks. The
Negotiable Instruments Law does not provide that a holder who is not a holder in
due course may not in any case recover on the instrument for in the case at bar,
petitioner may recover from the New Sikatuna Wood Industries, Inc. if the latter
has no valid excuse for refusing payment. The only disadvantage of a holder who is
not in due course is that the negotiable instrument is subject to defenses as if it were
non-negotiable.8
That the subject checks had been issued subject to the condition that private
respondents on due date would make the back up deposit for said checks but which
condition apparently was not made, thus resulting in the non-consummation of the
loan intended to be granted by private respondents to New Sikatuna Wood
Industries, Inc., constitutes a good defense against petitioner who is not a holder in
due course.
WHEREFORE, the decision appealed from is hereby AFFIRMED with costs
against petitioner.
SO ORDERED.
Gutierrez, Jr., Bidin and Cortés, JJ., concur.
Feliciano, J., on leave.
Decision affirmed.

_______________
7 Chan Wan v. Tan Kim and Chen So, L-15380, September 30, 1960, 109 Phil.
706 (1960).
8 Chan Wan v. Tan Kim and Chen So, supra.

318
318 SUPREME COURT REPORTS ANNOTATED
Lucien Tran Van Nghia vs. Liwag
Notes.—A holder for value under Sec. 29 of the Negotiable Instruments Law is
one who must meet all the requirements of a holder in due course under Sec. 52 of
the same law except notice of want of consideration. (Prudencio vs. Court of
Appeals, 143 SCRA 7.)
PAULINO GULLAS, plaintiff and appellant, vs. THE PHILIPPINE NATIONAL
BANK, defendant and appellant.
1. 1.BANKS AND BANKING; CIVIL CODE, ARTICLES 1195 et seq. AND 1758 et
seq. CONSTRUED; RELATIONSHIP BETWEEN DEPOSITOR AND
BANK.—The relation existing between a depositor and a bank is that of
creditor and debtor.
1. 2.ID.; ID.; ID.; BANK'S RIGHT OF SET OFF.—The general rule is adopted for
this jurisdiction that a bank has a right of set off of the deposit in its hands
for the payment of any indebtedness to it on the part of the depositor.
1. 3.ID.; NEGOTIABLE INSTRUMENTS LAW CONSTRUED; LIABILITY OF
INDORSERS OF NEGOTIABLE INSTRUMENTS.—Notice of dishonor is
necessary in order to charge an indorser, and the right of action against him
does not accrue until the notice is given.
APPEAL from a judgment of the Court of First Instance of Cebu. Pablo, J.
The facts are stated in the opinion of the court.
Gullas, Lopez, Tuaño & Leuterio for plaintiff-appellant.
Jose Delgado for defendant-appellant.
MALCOLM, J.:
Both parties to this case appealed from a judgment of the Court of First Instance of
Cebu, which sentenced the defendant to return to the account of the plaintiff the sum
of P509, with legal interest and costs, the plaintiff to secure damages in the amount
of P10,000 more or less, and the defendant to be absolved totally from the amended
complaint. As it is conceded that the plaintiff has already received the sum
represented by the United States treasury warrant, which is in question, the appeal
will thus determine the amount, if any, which should be paid to the plaintiff by the
defendant.
The parties to the case are Paulino Gullas and the Philippine National Bank. The
first named is a member of the
520
520 PHILIPPINE REPORTS ANNOTATED
Gullas vs. National Bank
Philippine Bar, resident in the City of Cebu, The second named is a banking
corporation with a branch in the same city. Attorney Gullas has had a current
account with the bank.
It appears from the record that on August 2, 1933, the Treasurer of the United
States for the United States Veterans Bureau issued a warrant in the amount of $361,
payable to the order of Francisco Sabectoria Bacos. Paulino Gullas and Pedro Lopez
signed as indorsers of this check. Thereupon it was cashed by the Philippine National
Bank. Subsequently the treasury warrant was dishonored by the Insular Treasurer.
At that time the outstanding balance of Attorney Gullas on the books of the bank
was P509. Against this balance he had issued certain checks which could not be paid
when the money was sequestered by the bank. On August 20, 1933, Attorney Gullas
left his residence for Manila.
The bank on learning of the dishonor of the treasury warrant sent notices by mail
to Mr. Gullas which could not be delivered to him at that time because he was in
Manila. In the bank's letter of August 21, 1933, addressed to Messrs. Paulino Gullas
and Pedro Lopez, they were informed that the United States Treasury warrant No.
20175 in the name of Francisco Sabectoria Bacos for $361 or P722, the payment for
which had been received has been returned by our Manila office with the notation
that the payment of his check has been stopped by the Insular Treasurer. "In view of
this therefore we have applied the outstanding balances of your current accounts
with us to the part payment of the foregoing check", namely, Mr. Paulino Gullas
P509. On the return of Attorney Gullas to Cebu on August 31, 1933, notice of
dishonor was received and the unpaid balance of the United States Treasury warrant
was immediately paid by him.
As a consequence of these happenings, two occurrences transpired which
inconvenienced Attorney Gullas. In the first place, as above indicated, checks
including one for his
521
VOL. 62, NOVEMBER 13, 1935 521
Gullas vs. National Bank
insurance were not paid because of the lack of f unds standing to his credit in the
bank. In the second place, periodicals in the vicinity gave prominence to the news to
the great mortification of Gullas.
A variety of incidental questions have been suggested on the record which it can
be taken for granted as having been adversely disposed of in this opinion. The main
issues are two, namely, (1) as to the right of the Philippine National Bank to apply a
deposit to the debt of a depositor to the bank, and (2) as to the amount of damages, if
any, which should be awarded Gullas.
The Civil Code contains provisions regarding compensation (set off) and deposit.
(Articles 1195 et seq.,1758 et seq.) These portions of Philippine law provide that
compensation shall take place when two persons are reciprocally creditor and debtor
of each other (Civil Code, article 1195). In this connection, it has been held that the
relation existing between a depositor and a bank is that of creditor and debtor.
(Fulton Iron Works Co. vs. China Banking Corporation [1930], 55 Phil., 208; San
Carlos Milling Co. vs. Bank of the Philippine Islands and China Banking
Corporation [1933], 59 Phil., 59.)
 The Negotiable Instruments Law contains provisions establishing the liability of a Mercantile Bank of China vs. Uy Quioco
general indorser and giving the procedure for notice of dishonor. The general notice should actually have been given him in order that he might protect his
indorser of a negotiable instrument engages that if it be dishonored and the interests.
necessary proceedings of dishonor be duly taken, he will pay the amount thereof to We accordingly are of the opinion that the action of the bank was prejudicial to
the holder. (Negotiable Instruments Law, sec. 66.) In this connection, it has been Gullas. But to follow up that statement with others proving exact damages is not so
held by a long line of authorities that notice of dishonor is necessary in order to easy. For instance, for alleged libelous articles the bank would not be primarily liable.
charge an indorser and that the right of action against him does not accrue until the The same remark could be made relative to the loss of business which Gullas claims
notice is given. (Asia Banking Corporation vs. Javier [1923], 44 Phil., 777; 5 Uniform but which could not be traced definitely to this occurrence. Also Gullas having
Laws Annotated.) eventually been reimbursed lost little through the actual levy by the bank on his
As a general rule, a bank has a right of set off of the deposits in its hands for the funds. On the other hand, it was not agreeable for one to draw checks in all good
payment of any indebtedness to it on the part of a depositor. In Louisiana, however, a faith, then leave for Manila, and on return find that those checks had not been cashed
522 because of the action taken by the bank. That caused a disturbance in Gullas'
622 PHILIPPINE REPORTS ANNOTATED finances, especially with reference to his insurance, which was injurious to him. All
Gullas vs. National Bank facts and circumstances considered, we are of the opinion that Gullas should be
civil law jurisdiction, the rule is denied, and it is held that a bank has no right, awarded nominal damages because of the premature action of the bank against
without an order from or special assent of the depositor to retain out of his deposit an which Gullas had no means of protection, and have finally determined that the
amount sufficient to meet his indebtedness. The basis of the Louisiana doctrine is the amount should be P250.
theory of confidential contracts arising from irregular deposits, e. g., the deposit of Agreeable to the foregoing, the errors assigned by the parties will in the main be
money with a banker. With freedom of selection and after full consideration, we have overruled, .with the result that the judgment of the trial court will be modified by
decided to adopt the general rule in preference to the minority rule as more in sentencing the defendant to pay the plaintiff the sum of P250, and the costs of both
harmony with modern banking practice. (1 Morse on Banks and Banking, 5th ed., instances.
sec. 324; Garrison vs. Union Trust Company, [1905], 111 A. S. R., 407; Louisiana Civil Villa-Real, Imperial, Butte, and Goddard, JJ., concur.
Code Annotated, arts. 2207 et seq.; Gordon & Gomila vs. Muchler [1882], 34 L. Ann., Judgment modified.
604; 8 Manresa, Comentarios al Código Civil Español, 4th ed., 359 et seq.; 11
Manresa, pp. 694 et seq.) _______________
Starting, therefore, from the premise that the Philippine National Bank had with
respect to the deposit of Gullas a right of set off, we next consider if that remedy was
enforced properly. The fact we believe is undeniable that prior to the mailing of
notice of dishonor, and without waiting for any action by Gullas, the bank made use
of the money standing in his account to make good for the treasury warrant. At this
point recall that Gullas was merely an, indorser and had issued checks in good faith.
As to a depositor who has funds sufficient to meet payment of a check drawn by
him in favor of a third party, it has been held that he has a right of action against the
bank for its refusal to pay such a check in the absence of notice to him that the bank
has applied the funds so deposited in extinguishment of past due claims held against
him. (Callahan vs, Bank of Anderson [1904], 2 Ann. Cas., 203.) The decision cited
represents the minority doctrine, for on principle it would seem that notice is not
necessary to a maker because the right is based on the doctrine that the relationship
is that of creditor and debtor. However this may be, as to an indorser the situation is
different, and
523
VOL. 62, NOVEMBER 14, 1935 523
PRODUCERS BANK OF THE PHILIPPINES, petitioner, vs. EXCELSA
INDUSTRIES, INC., respondent.
Real Estate Mortgage; Mortgages; Negotiable Instruments Law; Where the
drawer executes a separate letter of undertaking in consideration for the bank’s
negotiation of its sight drafts, the Court held that the drawer can still be made liable
under the letter of undertaking even if he is discharged due to the bank’s failure to
protest the non-acceptance of the drafts.—In Velasquez v. Solidbank Corporation,
550 SCRA 119 (2008), where the drawer therein also executed a separate letter of
undertaking in consideration for the bank’s negotiation of its sight drafts, the Court
held that the drawer can still be made liable under the letter of undertaking even if he
is discharged due to the bank’s failure to protest the non-acceptance of the drafts.
The Court explained, thus: Petitioner, however, can still be made liable under the
letter of undertaking. It bears stressing that it is a separate contract from the sight
draft. The liability of petitioner under the letter of undertaking is direct and primary.
It is independent from his liability under the sight draft. Liability subsists on it even
if the sight draft was dishonored for non-acceptance or non-payment.
Same; Same; It has been settled in a long line of decisions that mortgages
given to secure future advancements are valid and legal contracts, and the amounts
named as consideration in said contracts do not limit the amount for which the
mortgage may stand as security if from the four corners of the instrument the
intent to secure future and other indebtedness can be gathered.—Respondent
executed a real estate mortgage containing a “blanket mortgage clause,” also known
as a “dragnet clause.” It has been settled in a long line of decisions that mortgages
given to secure future advancements are valid and legal contracts, and the amounts
named as consideration in said contracts do not limit the amount for which the
mortgage may stand as security if from the four corners of the instrument the intent
to secure future and other indebtedness can be gathered.
_______________
* SECOND DIVISION.
371
VOL. 587, MAY 8, 2009 371
Procedures Bank of the Philippines vs. Excelsa Industries, Inc.
PETITION for review on certiorari of the decision and resolution of the Court of
Appeals.
The facts are stated in the opinion of the Court.
Pangilinan, Britanico, Sarmiento & Franco Law Offices for petitioners.
Ricardo J.M. Rivera Law Office for respondent.
TINGA, J.:
This is a petition for review on certiorari1 under Rule 43 of the 1997 Rules of Civil
Procedure, assailing the decision2and resolution3 of the Court of Appeals in CA-G.R.
CV No. 59931. The Court of Appeals’ decision4 reversed the decision of the Regional
Trial Court (RTC), Branch 73, Antipolo, Rizal, upholding the extrajudicial foreclosure
of the mortgage on respondent’s properties, while the resolution denied petitioner’s
motion for reconsideration.5
As borne by the records of the case, the following factual antecedents appear:
Respondent Excelsa Industries, Inc. is a manufacturer and exporter of fuel
products, particularly charcoal briquettes, as an alternative fuel source. Sometime in
January 1987, respondent applied for a packing credit line or a credit export advance
with petitioner Producers Bank of the Philippines, a banking institution duly
organized and existing under Philippines laws.6
_______________
1 Rollo, pp. 10-38.
2 Dated 30 May 2001 and penned by Justice Oswaldo D. Agcaoili and concurred
in by Justices Cancio C. Garcia, Chairman of the First Division, and Elvi John S.
Asuncion; id., at pp. 47-75.
3 Dated 29 January 2002; id., at pp. 77.
4 Id., at pp. 117-125.
5 Id., at pp. 126-137.
6 Id., at p. 48.
372
372 SUPREME COURT REPORTS ANNOTATED
Procedures Bank of the Philippines vs. Excelsa Industries, Inc.
The application was supported by Letter of Credit No. M3411610NS2970 dated 14
October 1986. Kwang Ju Bank, Ltd. of Seoul, Korea issued the letter of credit through
its correspondent bank, the Bank of the Philippine Islands, in the amount of
US$23,000.00 for the account of Shin Sung Commercial Co., Ltd., also located in
Seoul, Korea. T.L. World Development Corporation was the original beneficiary of
the letter of credit. On 05 December 1986, for value received, T.L. World transferred
to respondent all its rights and obligations under the said letter of credit. Petitioner
approved respondent’s application for a packing credit line in the amount of
P300,000.00, of which about P96,000.00 in principal remained
outstanding.7Respondent executed the corresponding promissory notes evidencing
the indebtedness.8
Prior to the application for the packing credit line, respondent had obtained a
loan from petitioner in the form of a bill discounted and secured credit
accommodation in the amount of P200,000.00, of which P110,000.00 was
outstanding at the time of the approval of the packing credit line. The loan was
secured by a real estate mortgage dated 05 December 1986 over respondent’s
properties covered by Transfer Certificates of Titles (TCT) No. N-68661, N-68662, N-
68663, N-68664, N-68665 and N-68666, all issued by the Register of Deeds of _______________
Marikina.9
Significantly, the real estate mortgage contained the following clause: 10 Records, p. 366.
“For and in consideration of those certain loans, overdraft and/or other credit 11 Id., at p. 121; id., pp. 335-337.
accommodations on this date obtained from the MORTGAGEE, and to secure the 12 Rollo, p. 48.
payment of the same, the principal of all of which is hereby fixed at FIVE HUNDRED 13 Records, pp. 361-365.
THOUSAND PESOS ONLY (P500,000.00) Pesos, Philippine Currency, as well as 374
those that the MORTGAGEE may hereafter extend to the MORT- 374 SUPREME COURT REPORTS ANNOTATED
Procedures Bank of the Philippines vs. Excelsa Industries, Inc.
_______________ Petitioner demanded from respondent the payment of the peso equivalent of the
export documents, plus interest and other charges, and also of the other due and
7 Id.
unpaid loans. Due to respondent’s failure to heed the demand, petitioner moved for
8 Records, pp. 340-350.
the extrajudicial foreclosure on the real estate mortgage over respondent’s
9 Rollo, p. 48.
properties.
373
Per petitioner’s computation, aside from charges for attorney’s fees and sheriff’s
VOL. 587, MAY 8, 2009 373 fees, respondent had a total due and demandable obligation of P573,225.60,
Procedures Bank of the Philippines vs. Excelsa Industries, Inc. including interest, in six different accounts, namely:
GAGOR, including interest and expenses or any other obligation owing to the 1) EBP-PHO-87-1121 (US$4,585.97 x = P119,165.06
MORTGAGEE, the MORTGAGOR does hereby transfer and convey by way of 21.212)
mortgage unto the MORTGAGEE, its successors or assigns, the parcel(s) of land
which is/are described in the list inserted on the back of this document, and/or 2) EBP-PHO-87-1095 (US$ 5,739.76 x = 151,580.97
appended hereto, together with all the buildings and improvements now existing or
21.212)
which may hereafter be erected or constructed thereon, of which the MORTGAGOR
declares that he/it is the absolute owner, free from all liens and encumbrances.”10
3) BDS-001-87 = 61,777.78
On 17 March 1987, respondent presented for negotiation to petitioner drafts
drawn under the letter of credit and the corresponding export documents in 4) BDS-030/86 A = 123,555.55
consideration for its drawings in the amounts of US$5,739.76 and US$4,585.79.
Petitioner purchased the drafts and export documents by paying respondent the peso 5) BDS-PC-002-/87 = 55,822.91
equivalent of the drawings. The purchase was subject to the conditions laid down in
two separate undertakings by respondent dated 17 March 1987 and 10 April 1987.11 6) BDS-005/87 = 61,323.33
On 24 April 1987, Kwang Ju Bank, Ltd. notified petitioner through cable that the
Korean buyer refused to pay respondent’s export documents on account of P573,225.6014
typographical discrepancies. Kwang Ju Bank, Ltd. returned to petitioner the export
documents.12
Upon learning about the Korean importer’s non-payment, respondent sent The total approved bid price, which included the attorney’s fees and sheriff fees,
petitioner a letter dated 27 July 1987, informing the latter that respondent had was pegged at P752,074.63. At the public auction held on 05 January 1988, the
brought the matter before the Korea Trade Court and that it was ready to liquidate its Sheriff of Antipolo, Rizal issued a Certificate of Sale in favor of petitioner as the
past due account with petitioner. Respondent sent another letter dated 08 September highest bidder.15 The certificate of sale was registered on 24 March 1988.16
1987, reiterating the same assurance. In a letter 05 October 1987, Kwang Ju Bank, On 12 June 1989, petitioner executed an affidavit of consolidation over the
Ltd. informed petitioner that it would be returning the export documents on account foreclosed properties after respondent failed to redeem the same. As a result, the
of the non-acceptance by the importer.13 Register of Deeds of Marikina issued new certificates of title in the name of
petitioner.17
_______________
14 Id., at pp. 369-370.
15 Id.
16 Rollo, p. 124.
17 Id., at pp. 48-49.
375
VOL. 587, MAY 8, 2009 375
Procedures Bank of the Philippines vs. Excelsa Industries, Inc.
On 17 November 1989, respondent instituted an action for the annulment of the
extrajudicial foreclosure with prayer for preliminary injunction and damages against
petitioner and the Register of Deeds of Marikina. Docketed as Civil Case No. 1587-A,
the complaint was raffled to Branch 73 of the RTC of Antipolo, Rizal. The complaint
prayed, among others, that the defendants be enjoined from causing the transfer of
ownership over the foreclosed properties from respondent to petitioner.18
On 05 April 1990, petitioner filed a petition for the issuance of a writ of
possession, docketed as LR Case No. 90-787, before the same branch of the RTC of
Antipolo, Rizal. The RTC ordered the consolidation of Civil Case No, 1587-A and LR
Case No. 90-787.19
On 18 December 1997, the RTC rendered a decision upholding the validity of the
extrajudicial foreclosure and ordering the issuance of a writ of possession in favor of
petitioner, to wit:
“WHEREFORE, in Case No. 1587-A, the court hereby rules that the foreclosure of
mortgage for the old and new obligations of the plaintiff Excelsa Industries Corp.,
which has remained unpaid up to the time of foreclosure by defendant Producers
Bank of the Philippines was valid, legal and in order; In Case No. 787-A, the court
hereby orders for the issuance of a writ of possession in favor of Producer’s Bank of
the Philippines after the properties of Excelsa Industries Corp., which were
foreclosed and consolidated in the name of Producers Bank of the Philippines under
TCT No. 169031, 169032, 169033, 169034 and 169035 of the Register of Deeds of
Marikina.
SO ORDERED.”20
The RTC held that petitioner, whose obligation consisted only of receiving, and
not of collecting, the export proceeds for
_______________
18 Records, p. 1.
19 Rollo, pp. 1-5.
20 Id., at pp. 125.
376
376 SUPREME COURT REPORTS ANNOTATED
Procedures Bank of the Philippines vs. Excelsa Industries, Inc.
the purpose of converting into Philippine currency and remitting the same to
respondent, cannot be considered as respondent’s agent. The RTC also held that
petitioner cannot be presumed to have received the export proceeds, considering that
respondent executed undertakings warranting that the drafts and accompanying
documents were genuine and accurately represented the facts stated therein and
would be accepted and paid in accordance with their tenor.21
Furthermore, the RTC concluded that petitioner had no obligation to return the
export documents and respondent could not expect their return prior to the payment
of the export advances because the drafts and export documents were the evidence
that respondent received export advances from petitioner.22
The RTC also found that by its admission, respondent had other loan obligations
obtained from petitioner which were due and demandable; hence, petitioner
correctly exercised its right to foreclose the real estate mortgage, which provided that
the same secured the payment of not only the loans already obtained but also the
export advances.23
Lastly, the RTC found respondent guilty of laches in questioning the foreclosure
sale considering that petitioner made several demands for payment of respondent’s
outstanding loans as early as July 1987 and that respondent acknowledged the failure
to pay its loans and advances.24
The RTC denied respondent’s motion for reconsideration.25 Thus, respondent
elevated the matter to the Court of Appeals, reiterating its claim that petitioner was
not only a collection agent but was considered a purchaser of the export.
_______________
21 Id., at pp. 49-50.
22 Rollo, at p. 51.
23 Id., at pp. 51-52.
24 Id., at p. 52.
25 Records, pp. 279-280.
377
VOL. 587, MAY 8, 2009 377
Procedures Bank of the Philippines vs. Excelsa Industries, Inc.
On 30 May 2001, the Court of Appeals rendered the assailed decision, reversing
the RTC’s decision, thus:
“WHEREFORE, the appeal is hereby GRANTED. The decision of the trial court
dated December 18, 1997 is REVERSED and SET ASIDE. Accordingly, the
foreclosure of mortgage on the properties of appellant is declared as INVALID. The
issuance of the writ of possession in favor of appellee is ANNULLED. The following
damages are hereby awarded in favor of appellant:
(a) Moral damages in the amount of P100,000.00;
 (b) Exemplary damages in the amount of P100,000.00; and
(c) Costs.
SO ORDERED.”26
The Court of Appeals held that respondent should not be faulted for the dishonor
of the drafts and export documents because the obligation to collect the export
proceeds from Kwang Ju Bank, Ltd. devolved upon petitioner. It cited the testimony
of petitioner’s manager for the foreign currency department to the effect that
petitioner was respondent’s agent, being the only entity authorized under Central
Bank Circular No. 491 to collect directly from the importer the export proceeds on
respondent’s behalf and converting the same to Philippine currency for remittance to
respondent. The appellate court found that respondent was not authorized and even
powerless to collect from the importer and it appeared that respondent was left at the
mercy of petitioner, which kept the export documents during the time that
respondent attempted to collect payment from the Korean importer.
The Court of Appeals disregarded the RTC’s finding that the export documents
were the only evidence of respondent’s export advances and that petitioner was
justified in refusing to return them. It opined that granting petitioner had no
obligation to return the export documents, the former should
_______________
26 Rollo, pp. 74-75.
378
378 SUPREME COURT REPORTS ANNOTATED
Procedures Bank of the Philippines vs. Excelsa Industries, Inc.
have helped respondent in the collection efforts instead of augmenting respondent’s
dilemma.
Furthermore, the Court of Appeals found petitioner’s negligence as the cause of
the refusal by the Korean buyer to pay the export proceeds based on the
following: first, petitioner had a hand in preparing and scrutinizing the export
documents wherein the discrepancies were found; and, second, petitioner failed to
advise respondent about the warning from Kwang Ju Bank, Ltd. that the export
documents would be returned if no explanation regarding the discrepancies would be
made.
The Court of Appeals invalidated the extrajudicial foreclosure of the real estate
mortgage on the ground that the posting and publication of the notice of extrajudicial
foreclosure proceedings did not comply with the personal notice requirement under
paragraph 1227 of the real estate mortgage executed between petitioner and
respondent. The Court of Appeals also overturned the RTC’s finding that respondent
was guilty of estoppel by laches in questioning the extrajudicial foreclosure sale.
Petitioner’s motion for reconsideration28 was denied in a Resolution dated 29
January 2002. Hence, the instant petition, arguing that the Court of Appeals erred in
finding peti-
_______________
27 12. All correspondence relative to this mortgage, including demand letters,
summonses, subpoenas, or notifications of any judicial or extrajudicial action shall
be sent to the mortgagor at x x x, or at the address that may hereafter be given in
writing by the MORTGAGOR to the MORTGAGEE. The mere act of sending any
correspondence by mail or by personal delivery to the said address shall be valid and
effective notice to the MORTGAGOR for all legal purposes, and the fact that any
communication is not actually received by the MORTGAGOR or that it has been
returned unclaimed to the MORTGAGEE, or that no person was found at the address
given, or that the address is fictitious or cannot be located, shall not excuse or relieve
the MORTGAGOR from the effects of such notice.
28 CA Rollo, pp. 126-137.
379
VOL. 587, MAY 8, 2009 379
Procedures Bank of the Philippines vs. Excelsa Industries, Inc.
tioner as respondent’s agent, which was liable for the discrepancies in the export
documents, in invalidating the foreclosure sale and in declaring that respondent was
not estopped from questioning the foreclosure sale.29
The validity of the extrajudicial foreclosure of the mortgage is dependent on the
following issues posed by petitioner: (1) the coverage of the “blanket mortgage
clause;” (2) petitioner’s failure to furnish personal notice of the foreclosure to
respondent; and (3) petitioner’s obligation as negotiating bank under the letter of
credit.
Notably, the errors cited by petitioners are factual in nature. Although the instant
case is a petition for review under Rule 45 which, as a general rule, is limited to
reviewing errors of law, findings of fact being conclusive as a matter of general
principle, however, considering the conflict between the factual findings of the RTC
and the Court of Appeals, there is a need to review the factual issues as an exception
to the general rule.30
Much of the discussion has revolved around who should be liable for the dishonor
of the draft and export documents. In the two undertakings executed by respondent
as a condition for the negotiation of the drafts, respondent held itself liable if the
drafts were not accepted. The two undertakings signed by respondent are similarly-
worded and contained respondent’s express warranties, to wit:
“In consideration of your negotiating the above described draft(s), we hereby
warrant that the said draft(s) and accompanying documents thereon are
valid, genuine and accurately represent the facts stated therein, and that
such draft(s) will be accepted and paid in accordance with its/their
tenor. We further undertake and agree, jointly and severally, to defend and hold you
free and harmless from any and all
_______________
29 Id., at pp. 18-19.
30 Agasen v. Court of Appeals, 382 Phil. 391; 325 SCRA 504 (2000).
380
380 SUPREME COURT REPORTS ANNOTATED
Procedures Bank of the Philippines vs. Excelsa Industries, Inc.
actions, claims and demands whatsoever, and to pay on demand all damages actual
or compensatory including attorney’s fees, costs and other awards or be adjudged to
pay, in case of suit, which you may suffer arising from, by reason, or on account of
your negotiating the above draft(s) because of the following discrepancies or reasons
or any other discrepancy or reason whatever.
We hereby undertake to pay on demand the full amount of the above
draft(s) or any unpaid balance thereof, the Philippine peso equivalent
converted at the prevailing selling rate(or selling rate prevailing at the date you
negotiate our draft, whichever is higher) allowed by the Central Bank with interest at
the rate prevailing today from the date of negotiation, plus all charges and expenses
whatsoever incurred in connection therewith. You shall neither be obliged to contest
or dispute any refusal to accept or to pay the whole or any part of the above draft(s),
nor proceed in any way against the drawee, the issuing bank or any endorser thereof,
before making a demand on us for the payment of the whole or any unpaid balance of
the draft(s).” (Emphasis supplied)31
In Velasquez v. Solidbank Corporation,32 where the drawer therein also executed
a separate letter of undertaking in consideration for the bank’s negotiation of its sight
drafts, the Court held that the drawer can still be made liable under the letter of
undertaking even if he is discharged due to the bank’s failure to protest the non-
acceptance of the drafts. The Court explained, thus:
“Petitioner, however, can still be made liable under the letter of undertaking. It
bears stressing that it is a separate contract from the sight draft. The liability of
petitioner under the letter of undertaking is direct and primary. It is independent
from his liability under the sight draft. Liability subsists on it even if the sight draft
was dishonored for non-acceptance or non-payment.
Respondent agreed to purchase the draft and credit petitioner its value upon the
undertaking that he will reimburse the amount in case the sight draft is dishonored.
The bank would certainly not have
_______________
31 Id., at p. 335.
32 G.R. No. 157309, 28 March 2008, 550 SCRA 119.
381
VOL. 587, MAY 8, 2009 381
Procedures Bank of the Philippines vs. Excelsa Industries, Inc.
agreed to grant petitioner an advance export payment were it not for the letter of
undertaking. The consideration for the letter of undertaking was petitioner’s promise
to pay respondent the value of the sight draft if it was dishonored for any reason by
the Bank of Seoul.”33
Thus, notwithstanding petitioner’s alleged failure to comply with the
requirements of notice of dishonor and protest under Sections 89 34 and
152,35 respectively, of the Negotiable Instruments Law, respondent may not escape its
liability under the separate undertakings, where respondent promised to pay on
demand the full amount of the drafts.
The next question, therefore, is whether the real estate mortgage also served as
security for respondent’s drafts that were not accepted and paid by the Kwang Ju
Bank, Ltd.
Respondent executed a real estate mortgage containing a “blanket mortgage
clause,” also known as a “dragnet clause.” It has been settled in a long line of
decisions that mortgages given to secure future advancements are valid and legal
contracts, and the amounts named as consideration in said contracts do not limit the
amount for which the mortgage may stand as security if from the four corners of the
instrument
_______________
33 Id., at p. 129.
34 SEC. 89. TO WHOM NOTICE OF DISHONOR MUST BE GIVEN.—Except
as herein otherwise provided, when a negotiable instrument has been dishonored by
non-acceptance or non-payment, notice of dishonor must be given to the drawer and
to each indorser and any drawer or indorser to whom such notice is not given is
discharged.
35 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 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.
382
382 SUPREME COURT REPORTS ANNOTATED
Procedures Bank of the Philippines vs. Excelsa Industries, Inc.
the intent to secure future and other indebtedness can be gathered.36
In Union Bank of the Philippines v. Court of Appeals,37the nature of a dragnet
clause was explained, thus:
“Is one which is specifically phrased to subsume all debts of past and future
origins. Such clauses are “carefully scrutinized and strictly construed.” Mortgages of
this character enable the parties to provide continuous dealings, the nature or extent
of which may not be known or anticipated at the time, and they avoid the expense
and inconvenience of executing a new security on each new transaction. A “dragnet
clause” operates as a convenience and accommodation to the borrowers as it makes
available additional funds without their having to execute additional security
documents, thereby saving time, travel, loan closing costs, costs of extra legal
services, recording fees, et cetera.38
x x x”
Petitioner, therefore, was not precluded from seeking the foreclosure of the real
estate mortgage based on the unpaid drafts drawn by respondent. In any case,
respondent had admitted that aside from the unpaid drafts, respondent also had due
and demandable loans secured from another account as evidenced by Promissory
Notes (PN Nos.) BDS-001-87, BDS-030/86 A, BDS-PC-002-/87 and BDS-005/87.
However, the Court of Appeals invalidated the extrajudicial foreclosure of the
mortgage on the ground that petitioner had failed to furnish respondent personal
notice of the sale contrary to the stipulation in the real estate mortgage.
Petitioner, on the other hand, claims that under paragraph 1239 of the real estate
mortgage, personal notice of the foreclo-
_______________
36 Prudential Bank v. Alviar, G.R. No. 150197, 28 July 2005, 464 SCRA 353, 363.
37 G.R. No. 164910, 30 September 2005, 471 SCRA 751.
38 Id., at pp. 758-759.
39 Supra.
383
VOL. 587, MAY 8, 2009 383
Procedures Bank of the Philippines vs. Excelsa Industries, Inc.
sure sale is not a requirement to the validity of the foreclosure sale.
A perusal of the records of the case shows that a notice of sheriff’s sale 40was sent
by registered mail to respondent and received in due course.41 Yet, respondent claims
that it did not receive the notice but only learned about it from petitioner. In any
event, paragraph 12 of the real estate mortgage requires petitioner merely to furnish
respondent with the notice and does not oblige petitioner to ensure that respondent
actually receives the notice. On this score, the Court holds that petitioner has
performed its obligation under paragraph 12 of the real estate mortgage.
As regards the issue of whether respondent may still question the foreclosure sale,
the RTC held that the sale was conducted according to the legal procedure, to wit:
“Plaintiff is estopped from questioning the foreclosure. The plaintiff is guilty of
laches and cannot at this point in time question the foreclosure of the subject
properties. Defendant bank made demands against the plaintiff for the payment of
plaintiff’s outstanding loans and advances with the defendant as early as July 1997.
Plaintiff acknowledged such outstanding loans and advances to the defendant bank
and committed to liquidate the same. For failure of the plaintiff to pay its obligations
on maturity, defendant bank foreclosed the mortgage on subject properties on
January 5, 1988 the certificate of sale was annotated on March 24, 1988 and there
being no redemption made by the plaintiff, title to said properties were consolidated
in the name of defendant in July 1989. Undeniably, subject foreclosure was done in
accordance with the prescribed rules as may be borne out by the exhibits submitted
to this Court which are Exhibit “33,” a notice of extrajudicial sale executed by the
Sheriff of Antipolo, Exhibit “34” certificate posting of extrajudicial sale, Exhibit “35”
return card evidencing receipt by plaintiff of the notice of extrajudicial sale and
Exhibit “21” affidavit of publication.”
_______________
40 Records, p. 113.
41 Id., at p. 416. The registry return card evidencing receipt of the copy of the
notice of sheriff’s sale set for 05 January 1988 on 21 December 1987 is marked as
Exhibit 35.
384
384 SUPREME COURT REPORTS ANNOTATED
Procedures Bank of the Philippines vs. Excelsa Industries, Inc.
The Court adopts and approves the aforequoted findings by the RTC, the same
being fully supported by the evidence on record.
WHEREFORE, the instant petition for review on certiorari is GRANTED and the
decision and resolution of the Court of Appeals in CA-G.R. CV No. 59931 are
REVERSED and SET ASIDE. The decision of the Regional Trial Court Branch 73,
Antipolo, Rizal in Civil Case No. 1587-A and LR Case No. 90-787 is REINSTATED.
SO ORDERED.
Carpio-Morales,** Velasco, Jr., Leonardo-De Castro*** and Brion, JJ., concur.
Petition granted, judgment and resolution reversed and set aside.
Note.—It is settled that personal notice to the mortgagor in extrajudicial
foreclosure proceedings is not necessary, hence, not a ground to set aside the
foreclosure sale. (Ardiente vs. Provincial Sheriff, 436 SCRA 655 [2004])
——o0o——
_______________
 ** Acting Chairperson in lieu of Senior Associate Justice Leonardo A.
Quisumbing, who is on official leave, per Special Order No. 618.
*** Designated as an additional member of the Second Division in lieu of Senior
Associate Justice Leonardo A. Quisumbing, who is on official leave, per Special Order
No. 618.
 G.R. No. 146511. September 5, 2007.*
TOMAS ANG, petitioner, vs. ASSOCIATED BANK AND ANTONIO ANG ENG
LIONG, respondents.
Appeals; Assignment of Errors; Pleadings and Practice; It is well within the
authority of the Court of Appeals to raise, if it deems proper under the
circumstances obtaining, error/s not assigned on an appealed case—an appellate
court has the broad discretionary power to waive the lack of proper assignment of
errors and to consider errors not assigned.—Procedurally, it is well within the
authority of the Court of Appeals to raise, if it deems proper under the circumstances
obtaining, error/s not assigned on an appealed case. In Mendoza v. Bautista, 453
SCRA 691 (2005), this Court recognized the broad discretionary power of an
appellate court to waive the lack of proper assignment of errors and to consider
errors not assigned, thus: As a rule, no issue may be raised on appeal unless it has
been brought before the lower tribunal for its consideration. Higher courts are
precluded from entertaining matters neither alleged in the pleadings nor raised
during the proceedings below, but ventilated for the first time only in a motion for
reconsideration or on appeal. However, as with most procedural rules, this maxim is
subject to exceptions. Indeed, our rules recognize the broad discretionary power of
an appellate court to waive the lack of proper assignment of errors and to consider
errors not assigned. Section 8 of Rule 51 of the Rules of Court provides: SEC.
8. Questions that may be decided.—No error which does not affect the jurisdiction
over the subject matter or the validity of the judgment appealed from or the
proceedings therein will be considered, unless stated in the assignment of errors, or
closely related to or dependent on an assigned error and properly argued in the brief,
save as the court may pass upon plain errors and clerical errors. Thus, an appellate
court is clothed with ample authority to review rulings even if they are not assigned
as errors in the appeal in these instances: (a) grounds not assigned as errors but
affecting jurisdiction over the subject matter; (b) matters not assigned as errors on
appeal but are evidently plain or clerical errors within contemplation of law; (c)
matters not assigned as errors on appeal but consideration of which is necessary in
arriving at a just
_______________
*FIRST DIVISION.
245
VOL. 532, SEPTEMBER 5, 2007 24
5 Same; Actions; Parties; While a bank held by the Asset Privatization Trust
Ang vs. Associated Bank
decision and complete resolution of the case or to serve the interests of justice or
to avoid dispensing piecemeal justice; (d) matters not specifically assigned as errors
on appeal but raised in the trial court and are matters of record having some bearing
on the issue submitted which the parties failed to raise or which the lower court
ignored; (e) matters not assigned as errors on appeal but closely related to an error
assigned; and (f) matters not assigned as errors on appeal but upon which the
determination of a question properly assigned is dependent.
Asset Privatization Trust; History.—Taking into account the imperative need of
formally launching a program for the rationalization of the government corporate
sector, then President Corazon C. Aquino issued Proclamation No. 50 on December
8, 1986. As one of the twin cornerstones of the program was to establish the
privatization of a good number of government corporations, the proclamation
created the Asset Privatization Trust, which would, for the benefit of the National
Government, take title to and possession of, conserve, provisionally manage and
dispose of transferred assets that were identified for privatization or disposition. In
accordance with the provisions of Section 23 of the proclamation, then President
Aquino subsequently issued Administrative Order No. 14 on February 3, 1987, which
approved the identification of and transfer to the National Government of certain
assets (consisting of loans, equity investments, accrued interest receivables, acquired
assets and other assets) and liabilities (consisting of deposits, borrowings, other
liabilities and contingent guarantees) of the Development Bank of the Philippines
(DBP) and the Philippine National Bank (PNB). The transfer of assets was
implemented through a Deed of Transfer executed on February 27, 1987 between the
National Government, on one hand, and the DBP and PNB, on the other. In turn, the
National Government designated the Asset Privatization Trust to act as its trustee
through a Trust Agreement, whereby the non-performing accounts of DBP and PNB,
including, among others, the DBP’s equity with respondent Bank, were entrusted to
the Asset Privatization Trust. As provided for in the Agreement, among the powers
and duties of the Asset Privatization Trust with respect to the trust properties
consisting of receivables was to handle their administration and collection by
bringing suit to enforce payment of the obligations or any installment thereof or
settling or compromising any of such obligations or any other claim or demand
which the Govern-
246
2 SUPREME COURT REPORTS ANNOTATED
46
Ang vs. Associated Bank
ment may have against any person or persons, and to do all acts, institute all
proceedings, and to exercise all other rights, powers, and privileges of ownership that
an absolute owner of the properties would otherwise have the right to do.
may not appear to be the real party in interest at the time the action for collection
was instituted, the issue had been rendered moot with the occurrence of a
supervening event—the reacquisition of the bank by its former owner when the case
was still pending in the lower court, thus reclaiming its real and actual interest
over the unpaid promissory notes.—Based on the above backdrop, respondent Bank
does not appear to be the real party in interest when it instituted the collection suit
on August 28, 1990 against Antonio Ang Eng Liong and petitioner Tomas Ang. At the
time the complaint was filed in the trial court, it was the Asset Privatization Trust
which had the authority to enforce its claims against both debtors. In fact, during the
pre-trial conference, Atty. Roderick Orallo, counsel for the bank, openly admitted
that it was under the trusteeship of the Asset Privatization Trust. The Asset
Privatization Trust, which should have been represented by the Office of the
Government Corporate Counsel, had the authority to file and prosecute the case. The
foregoing notwithstanding, this Court can not, at present, readily subscribe to
petitioner’s insistence that the case must be dismissed. Significantly, it stands
without refute, both in the pleadings as well as in the evidence presented during the
trial and up to the time this case reached the Court, that the issue had been rendered
moot with the occurrence of a supervening event—the “buy-back” of the bank by its
former owner, Leonardo Ty, sometime in October 1993. By such re-acquisition from
the Asset Privatization Trust when the case was still pending in the lower court, the
bank reclaimed its real and actual interest over the unpaid promissory notes; hence,
it could rightfully qualify as a “holder” thereof under the NIL.
Negotiable Instruments Law; Accommodation Party; Requisites; Words and
Phrases; An accommodation party is a person “who has signed the instrument as
maker, drawer, acceptor, or indorser, without receiving value therefor, and for the
purpose of lending his name to some other person.”—Notably, Section 29 of the NIL
defines an accommodation party as a person “who has signed the instrument as
maker, drawer, acceptor, or indorser, without receiving value there-
247
VOL. 532, SEPTEMBER 5, 2007 24
7 bank.
Ang vs. Associated Bank
for, and for the purpose of lending his name to some other person.” As gleaned
from the text, an accommodation party is one who meets all the three requisites, viz.:
(1) he must be a party to the instrument, signing as maker, drawer, acceptor, or
indorser; (2) he must not receive value therefor; and (3) he must sign for the purpose
of lending his name or credit to some other person. An accommodation party lends
his name to enable the accommodated party to obtain credit or to raise money; he
receives no part of the consideration for the instrument but assumes liability to the
other party/ies thereto. The accommodation party is liable on the instrument to a
holder for value even though the holder, at the time of taking the instrument, knew
him or her to be merely an accommodation party, as if the contract was not for
accommodation.
Same; Same; Suretyship; The relation between an accommodation party and
the accommodated party is one of principal and surety—the accommodation party
being the surety; Although a contract of suretyship is in essence accessory or
collateral to a valid principal obligation, the surety’s liability to the creditor is
immediate, primary and absolute—he is directly and equally bound with the
principal.—As petitioner acknowledged it to be, the relation between an
accommodation party and the accommodated party is one of principal and surety—
the accommodation party being the surety. As such, he is deemed an original
promisor and debtor from the beginning; he is considered in law as the same party as
the debtor in relation to whatever is adjudged touching the obligation of the latter
since their liabilities are interwoven as to be inseparable. Although a contract of
suretyship is in essence accessory or collateral to a valid principal obligation, the
surety’s liability to the creditor is immediate, primary and absolute; he
is directly and equally bound with the principal. As an equivalent of a regular party
to the undertaking, a surety becomes liable to the debt and duty of the principal
obligor even without possessing a direct or personal interest in the obligations nor
does he receive any benefit therefrom.
Obligations and Contracts; Suretyship; Article 2080 of the Civil Code does not
apply in a contract of suretyship—Articles 1207 up to 1222 of the Code (on joint and
solidary obligations) govern the relationship.—Contrary to petitioner’s adamant
stand, however, Article 2080 of the Civil Code does not apply in a contract of
suretyship. Art. 2047 of the Civil Code states that if a person binds himself solidarily
248
2 SUPREME COURT REPORTS ANNOTATED
48
Ang vs. Associated Bank
with the principal debtor, the provisions of Section 4, Chapter 3, Title I, Book IV
of the Civil Code must be observed. Accordingly, Articles 1207 up to 1222 of the Code
(on joint and solidary obligations) shall govern the relationship of petitioner with the
Negotiable Instruments Law; Accommodation Party; Words and Phrases; The
phrase “without receiving value therefor” used in Sec. 29 of the Negotiable
Instruments Law (NIL) means “without receiving value by virtue of the instrument”
and not as it is apparently supposed to mean, “without receiving payment for
lending his name”—when a third person advances the face value of the note to the
accommodated party at the time of its creation, the consideration for the note as
regards its maker is the money advanced to the accommodated party.—In issuing
the two promissory notes, petitioner as accommodating party warranted to the
holder in due course that he would pay the same according to its tenor. It is no
defense to state on his part that he did not receive any value therefor because the
phrase “without receiving value therefore” used in Sec. 29 of the NIL means
“without receiving value by virtue of the instrument” and not as it is apparently
supposed to mean, “without receiving payment for lending his name.” Stated
differently, when a third person advances the face value of the note to the
accommodated party at the time of its creation, the consideration for the note as
regards its maker is the money advanced to the accommodated party. It is enough
that value was given for the note at the time of its creation. As in the instant case, a
sum of money was received by virtue of the notes, hence, it is immaterial so far as the
bank is concerned whether one of the signers, particularly petitioner, has or has not
received anything in payment of the use of his name.
Same; Same; Upon the maturity of the note, a surety may pay the debt,
demand the collateral security, if there be any, and dispose of it to his benefit, or, if
applicable, subrogate himself in the place of the creditor with the right to enforce
the guaranty against the other signers of the note for the reimbursement of what he
is entitled to recover from them.—Under the law, upon the maturity of the note, a
surety may pay the debt, demand the collateral security, if there be any, and dispose
of it to his benefit, or, if applicable, subrogate himself in the place of the creditor with
the right to enforce the guaranty against the other signers of the note for the
reimbursement of what he is entitled to recover from them. Regrettably, none of
these were
249
VOL. 532, SEPTEMBER 5, 2007 24
9 essentially inconsistent with the relation of the parties to the note. (21 R.C.L., 1032-
Ang vs. Associated Bank
prudently done by petitioner. When he was first notified by the bank sometime
in 1982 regarding his accountabilities under the promissory notes, he lackadaisically
relied on Antonio Ang Eng Liong, who represented that he would take care of the
matter, instead of directly communicating with the bank for its settlement. Thus,
petitioner cannot now claim that he was prejudiced by the supposed “extension of
time” given by the bank to his co-debtor.
Same; Same; Since the liability of an accommodation party remains not only
primary but also unconditional to a holder for value, even if the accommodated
party receives an extension of the period for payment without the consent of the
accommodation party, the latter is still liable for the whole obligation and such
extension does not release him because as far as a holder for value is concerned, he
is a solidary co-debtor; It is a recognized doctrine in the matter of suretyship that
with respect to the surety, the creditor is under no obligation to display any
diligence in the enforcement of his rights as a creditor.—Since the liability of an
accommodation party remains not only primary but also unconditional to a holder
for value, even if the accommodated party receives an extension of the period for
payment without the consent of the accommodation party, the latter is still liable for
the whole obligation and such extension does not release him because as far as a
holder for value is concerned, he is a solidary co-debtor. In Clark v. Sellner, 42 Phil.
384 (1921), this Court held: x x x The mere delay of the creditor in enforcing the
guaranty has not by any means impaired his action against the defendant. It should
not be lost sight of that the defendant’s signature on the note is an assurance to the
creditor that the collateral guaranty will remain good, and that otherwise, he, the
defendant, will be personally responsible for the payment. True, that if the creditor
had done any act whereby the guaranty was impaired in its value, or discharged, such
an act would have wholly or partially released the surety; but it must be born in mind
that it is a recognized doctrine in the matter of suretyship that with respect to the
surety, the creditor is under no obligation to display any diligence in the enforcement
of his rights as a creditor. His mere inaction indulgence, passiveness, or delay in
proceeding against the principal debtor, or the fact that he did not enforce the
guaranty or apply on the payment of such funds as were available, constitute no
defense at all for the surety, unless the contract expressly requires diligence and
promptness on the part of the creditor, which is not the case in the present action.
250
2 SUPREME COURT REPORTS ANNOTATED
50
Ang vs. Associated Bank
There is in some decisions a tendency toward holding that the creditor’s laches
may discharge the surety, meaning by laches a negligent forbearance. This theory,
however, is not generally accepted and the courts almost universally consider it
1034)
PETITION for review on certiorari of the decision and resolution of the Court of
Appeals.
The facts are stated in the opinion of the Court.
Breva and Breva Law Firm for petitioner.
Hildegardo F. Iñigo for Associated Bank.
Bernardino Bolcan, Jr. for Ang Eng Liong.
AZCUNA, J.:
This petition for certiorari under Rule 45 of the Rules on Civil Procedure seeks to
review the October 9, 2000 Decision1 and December 26, 2000 Resolution2 of the
Court of Appeals in CA-G.R. CV No. 53413 which reversed and set aside the January
5, 1996 Decision3 of the Regional Trial Court, Branch 16, Davao City, in Civil Case No.
20,299-90, dismissing the complaint filed by respondents for collection of a sum of
money.
On August 28, 1990, respondent Associated Bank (formerly Associated Banking
Corporation and now known as United Overseas Bank Philippines) filed a collection
suit against Antonio Ang Eng Liong and petitioner Tomas Ang for the two (2)
promissory notes that they executed as principal debtor and co-maker, respectively.
_______________
 1 Penned by Associate Justice Martin S. Villarama, Jr., with Associate Justices 4 Records, pp. 1-5.
Romeo J. Callejo, Sr. (now retired Supreme Court Associate Justice) and Juan Q. 5 Id., at pp. 500, 563.
Enriquez, Jr. concurring. 6 Id., at pp. 501, 564.
2 CA Rollo, p. 137. 252
3 Penned by Judge Romeo D. Marasigan.
252 SUPREME COURT REPORTS ANNOTATED
251 Ang vs. Associated Bank
VOL. 532, SEPTEMBER 5, 2007 251 In his Answer,7 Antonio Ang Eng Liong only admitted to have secured a loan
Ang vs. Associated Bank amounting to P80,000. He pleaded though that the bank “be ordered to submit a
In the Complaint,4 respondent Bank alleged that on October 3 and 9, 1978, the more reasonable computation” considering that there had been “no correct and
defendants obtained a loan of P50,000, evidenced by a promissory note bearing PN- reasonable statement of account” sent to him by the bank, which was allegedly
No. DVO-78-382, and P30,000, evidenced by a promissory note bearing PN-No. collecting excessive interest, penalty charges, and attorney’s fees despite knowledge
DVO-78-390. As agreed, the loan would be payable, jointly and severally, on January that his business was destroyed by fire, hence, he had no source of income for several
31, 1979 and December 8, 1978, respectively. In addition, subsequent years.
amendments5 to the promissory notes as well as the disclosure statements6 stipulated For his part, petitioner Tomas Ang filed an Answer with Counterclaim and Cross-
that the loan would earn 14% interest rate per annum, 2% service charge per annum, claim.8 He interposed the affirmative defenses that: the bank is not the real party in
1% penalty charge per month from due date until fully paid, and attorney’s fees interest as it is not the holder of the promissory notes, much less a holder for value or
equivalent to 20% of the outstanding obligation. a holder in due course; the bank knew that he did not receive any valuable
Despite repeated demands for payment, the latest of which were on September 13, consideration for affixing his signatures on the notes but merely lent his name as an
1988 and September 9, 1986, on Antonio Ang Eng Liong and Tomas Ang, accommodation party; he accepted the promissory notes in blank, with only the
respectively, respondent Bank claimed that the defendants failed and refused to printed provisions and the signature of Antonio Ang Eng Liong appearing therein; it
settle their obligation, resulting in a total indebtedness of P539,638.96 as of July 31, was the bank which completed the notes upon the orders, instructions, or
1990, broken down as follows: representations of his co-defendant; PN-No. DVO-78-382 was completed in excess of
PN-No. DVO-78-382 PN-No. DVO-78-390 or contrary to the authority given by him to his co-defendant who represented that he
Outstanding P50,000.00 P30,000.00 would only borrow P30,000 from the bank; his signature in PN-No. DVO-78-390
was procured through fraudulent means when his co-defendant claimed that his first
Balance
loan did not push through; the promissory notes did not indicate in what capacity he
Add Past due charges for Past due charges for was intended to be bound; the bank granted his co-defendant successive extensions
4,199 days (from 01-31- 4,253 days (from 12-8- of time within which to pay, without his (Tomas Ang) knowledge and consent; the
79 to 07-31-90) 78 to 07-31-90) bank imposed new and additional stipulations on interest, penalties, services charges
14% Interest P203,538.98 P125,334.41 and attorney’s fees more onerous than the terms of the notes, without his knowledge
and consent, in the absence of legal and factual basis and in violation of the Usury
2% Service P11,663.89 P7,088.34
Law; the bank caused the
Charge
12% Overdue P69,983.34 P42,530.00 _______________
Charge
Total P285,186.21 P174,952.75
7 Id., at pp. 14-16.
8 Id., at pp. 20-26.
Less: Charges P500.00 None
253
paid
VOL. 532, SEPTEMBER 5, 2007 253
Amount Due P334,686.21 P204,952.75
Ang vs. Associated Bank
_______________ inclusion in the promissory notes of stipulations such as waiver of presentment for
payment and notice of dishonor which are against public policy; and the notes had
been impaired since they were never presented for payment and demands were made
only several years after they fell due when his co-defendant could no longer pay
them.
Regarding his counterclaim, Tomas Ang argued that by reason of the bank’s acts
or omissions, it should be held liable for the amount of P50,000 for attorney’s fees
and expenses of litigation. Furthermore, on his cross-claim against Antonio Ang Eng
Liong, he averred that he should be reimbursed by his co-defendant any and all sums
that he may be adjudged liable to pay, plus P30,000, P20,000 and P50,000 for
moral and exemplary damages, and attorney’s fees, respectively.
In its Reply,9 respondent Bank countered that it is the real party in interest and is
the holder of the notes since the Associated Banking Corporation and Associated
Citizens Bank are its predecessors-in-interest. The fact that Tomas Ang never
received any moneys in consideration of the two (2) loans and that such was known
to the bank are immaterial because, as an accommodation maker, he is considered as
a solidary debtor who is primarily liable for the payment of the promissory notes.
Citing Section 29 of the Negotiable Instruments Law (NIL), the bank posited that
absence or failure of consideration is not a matter of defense; neither is the fact that
the holder knew him to be only an accommodation party.
Respondent Bank likewise retorted that the promissory notes were completely
filled up at the time of their delivery. Assuming that such was not the case, Sec. 14 of
the NIL provides that the bank has the prima facie authority to complete the blank
form. Moreover, it is presumed that one who has signed as a maker acted with care
and had signed the document with full knowledge of its content. The bank noted that
Tomas Ang is a prominent businessman in Davao City who
_______________
9 Id., at pp. 32-46.
254
254 SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
has been engaged in the auto parts business for several years, hence, certainly he is
not so naïve as to sign the notes without knowing or bothering to verify the amounts
of the loans covered by them. Further, he is already in estoppel since despite receipt
of several demand letters there was not a single protest raised by him that he signed
for only one note in the amount of P30,000.
It was denied by the bank that there were extensions of time for payment
accorded to Antonio Ang Eng Liong. Granting that such were the case, it said that the
same would not relieve Tomas Ang from liability as he would still be liable for the
whole obligation less the share of his co-debtor who received the extended term.
The bank also asserted that there were no additional or new stipulations imposed
other than those agreed upon. The penalty charge, service charge, and attorney’s fees
were reflected in the amendments to the promissory notes and disclosure statements.
Reference to the Usury Law was misplaced as usury is legally non-existent; at
present, interest can be charged depending on the agreement of the lender and the
borrower.
Lastly, the bank contended that the provisions on presentment for payment and
notice of dishonor were expressly waived by Tomas Ang and that such waiver is not
against public policy pursuant to Sections 82 (c) and 109 of the NIL. In fact, there is
even no necessity therefor since being a solidary debtor he is absolutely required to
pay and primarily liable on both promissory notes.
On October 19, 1990, the trial court issued a preliminary pre-trial order directing
the parties to submit their respective pre-trial guide.10 When Antonio Ang Eng Liong
failed to submit his brief, the bank filed an ex parte motion to declare him in
default.11 Per Order of November 23, 1990, the court
_______________
10 Id., at pp. 27-28.
11 Id., at pp. 59-60.
255
VOL. 532, SEPTEMBER 5, 2007 255
Ang vs. Associated Bank
granted the motion and set the ex parte hearing for the presentation of the bank’s
evidence.12 Despite Tomas Ang’s motion13 to modify the Order so as to exclude or
cancel the ex parte hearing based on then Sec. 4, Rule 18 of the old Rules of Court
(now Sec. 3[c.], Rule 9 of the Revised Rules on Civil Procedure), the hearing
nonetheless proceeded.14
Eventually, a decision15 was rendered by the trial court on February 21, 1991. For
his supposed bad faith and obstinate refusal despite several demands from the bank,
Antonio Ang Eng Liong was ordered to pay the principal amount of P80,000 plus
14% interest per annum and 2% service charge per annum. The overdue penalty
charge and attorney’s fees were, however, reduced for being excessive, thus:
“WHEREFORE, judgment is rendered against defendant Antonio Ang Eng Liong and
in favor of plaintiff, ordering the former to pay the latter:
On the first cause of action:
1. 1)the amount of P50,000.00 representing the principal obligation with 14%
interest per annum from June 27, 1983 with 2% service charge and 6%
overdue penalty charges per annum until fully paid;
2. 2)P11,663.89 as accrued service charge; and
3. 3)P34,991.67 as accrued overdue penalty charge.
On the second cause of action: 16 Id., at p. 86.
17 Id., at pp. 88-90, 144.
18 Id., at p. 91.
1. 1)the amount of P50,000.00 (sic) representing the principal account with
19 Id., at pp. 92-94.
14% interest from June 27, 1983 with 2% service charge and 6% overdue
20 Id., at pp. 95-96.
penalty charges per annumuntil fully paid;
21 Id., at pp. 119-120, 123-127, 140.
2. 2)P7,088.34 representing accrued service charge;
22 Id., at p. 152.
3. 3)P21,265.00 as accrued overdue penalty charge;
4. 4)the amount of P10,000.00 as attorney’s fees; and 257
VOL. 532, SEPTEMBER 5, 2007 257
_______________ Ang vs. Associated Bank
Liong, the Decision dated February 21, 1991 rendered against him based on such
12 Id., at p. 62. evidence, and the Writ of Execution issued on April 5, 1991.23
13 Id., at pp. 64-66. Trial then ensued between the bank and Tomas Ang. Upon the latter’s motion
14 Id., at pp. 72-73.
during the pre-trial conference, Antonio Ang Eng Liong was again declared in default
15 Id., at pp. 84-86.
for his failure to answer the cross-claim within the reglementary period.24
256 When Tomas Ang was about to present evidence in his behalf, he filed a Motion
256 SUPREME COURT REPORTS ANNOTATED for Production of Documents,25reasoning:
Ang vs. Associated Bank “x x x
5) the amount of P620.00 as litigation expenses and to pay the costs. 2. That corroborative to, and/or preparatory or incident to his testimony[,] there
SO ORDERED.”16 is [a] need for him to examine original records in the custody and possession of
The decision became final and executory as no appeal was taken therefrom. Upon the plaintiff, viz.:
bank’s ex parte motion, the court accordingly issued a writ of execution on April 5,
1991.17 1. a.original Promissory Note (PN for brevity) # DVO-78-382 dated October 3,
Thereafter, on June 3, 1991, the court set the pre-trial conference between the 1978[;]
bank and Tomas Ang,18 who, in turn, filed a Motion to Dismiss19 on the ground of 2. b.original of Disclosure Statement in reference to PN # DVO-78-382;
lack of jurisdiction over the case in view of the alleged finality of the February 21, 3. c.original of PN # DVO-78-390 dated October 9, 1978;
1991 Decision. He contended that Sec. 4, Rule 18 of the old Rules sanctions only one 4. d.original of Disclosure Statement in reference to PN # DVO-78-390;
judgment in case of several defendants, one of whom is declared in default. 5. e.Statement or Record of Account with the Associated Banking Corporation
Moreover, in his Supplemental Motion to Dismiss,20Tomas Ang maintained that he is or its successor, of Antonio Ang in CA No. 470 (cf. Exh. “O”) including bank
released from his obligation as a solidary guarantor and accommodation party records, withdrawal slips, notices, other papers and relevant dates relative to
because, by the bank’s actions, he is now precluded from asserting his cross-claim the overdraft of Antonio Eng Liong in CA No. 470;
against Antonio Ang Eng Liong, upon whom a final and executory judgment had 6. f.Loan Applications of Antonio Ang Eng Liong or borrower relative to PN
already been issued. Nos. DVO-78-382 and DVO-78-390 (supra);
The court denied the motion as well as the motion for reconsideration 7. g.Other supporting papers and documents submitted by Antonio Ang Eng
thereon.21 Tomas Ang subsequently filed a petition for certiorari and prohibition Liong relative to his loan application vis-à-vis PN. Nos. DVO-78-382 and
before this Court, which, however, resolved to refer the same to the Court of DVO-78-390 such as financial
Appeals.22 In accordance with the prayer of Tomas Ang, the appellate court
promulgated its Decision on January 29, 1992 in CA-G.R. SP No. 26332, which _______________
annulled and set aside the portion of the Order dated November 23, 1990 setting
the ex parte presentation of the bank’s evidence against Antonio Ang Eng 23 Id., at pp. 164-170.
24 TSN, January 18, 1993, p. 2.
_______________ 25 Records, pp. 223-226.
 258
258 SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
1. statements, income tax returns, etc. as required by the Central Bank or bank
rules and regulations.
3. That the above matters are very material to the defenses of defendant Tomas
Ang, viz.:
– the bank is not a holder in due course when it
accepted the [PNs] in blank.
– The real borrower is Antonio Ang Eng Liong which
fact is known to the bank.
– That the PAYEE not being a holder in due course
and knowing that defendant Tomas Ang is merely an
accommodation party, the latter may raise against
such payee or holder or successor-in-interest (of the
notes) PERSONAL and EQUITABLE DEFENSES
such as FRAUD in INDUCEMENT, DISCHARGE ON
NOTE, Application of [Articles] 2079, 2080 and
1249 of the Civil Code, NEGLIGENCE in delaying
collection despite Eng Liong’s OVERDRAFT in C.A.
No. 470, etc.”26
In its Order dated May 16, 1994,27 the court denied the motion stating that the
promissory notes and the disclosure statements have already been shown to and
inspected by Tomas Ang during the trial, as in fact he has already copies of the same;
the Statements or Records of Account of Antonio Ang Eng Liong in CA No. 470,
relative to his overdraft, are immaterial since, pursuant to the previous ruling of the
court, he is being sued for the notes and not for the overdraft which is personal to
Antonio Ang Eng Liong; and besides its nonexistence in the bank’s records, there
would be legal obstacle for the production and inspection of the income tax return of
Antonio Ang Eng Liong if done without his consent.
When the motion for reconsideration of the aforesaid Order was denied, Tomas
Ang filed a petition for certiorariand prohibition with application for preliminary
injunction and restraining order before the Court of Appeals docketed as CA-G.R. SP
No. 34840.28 On August 17, 1994, however, the Court
_______________
26 Id., at pp. 223-224.
27 Id., at pp. 234-235.
28 Id., at pp. 236-240, 247, 250-275.
259
VOL. 532, SEPTEMBER 5, 2007 259
Ang vs. Associated Bank
of Appeals denied the issuance of a Temporary Restraining Order.29
Meanwhile, notwithstanding its initial rulings that Tomas Ang was deemed to
have waived his right to present evidence for failure to appear during the pendency of
his petition before the Court of Appeals, the trial court decided to continue with the
hearing of the case.30
After the trial, Tomas Ang offered in evidence several documents, which included
a copy of the Trust Agreement between the Republic of the Philippines and the Asset
Privatization Trust, as certified by the notary public, and news clippings from the
Manila Bulletin dated May 18, 1994 and May 30, 1994.31 All the documentary exhibits
were admitted for failure of the bank to submit its comment to the formal
offer.32 Thereafter, Tomas Ang elected to withdraw his petition in CA-G.R. SP No.
34840 before the Court of Appeals, which was then granted.33
On January 5, 1996, the trial court rendered judgment against the bank,
dismissing the complaint for lack of cause of action.34 It held that:
“Exh. “9” and its [sub-markings], the Trust Agreement dated 27 February 1987 for
the defense shows that: the Associated Bank as of June 30, 1986 is one of DBP’s or
Development Bank of the [Philippines’] non-performing accounts for transfer; on
February 27, 1987 through Deeds of Transfer executed by and between the Philippine
National Bank and Development Bank of the Philippines and the National
Government, both financial institutions assigned, transferred and conveyed their
non-performing assets to the National Government; the National Government in
turn and as TRUSTOR,
_______________
29 Id., at p. 350.
30 Id., at pp. 358, 395, 401-402.
31 Id., at pp. 450, 529-542, 560-561; Exhibit “9” and its submarkings.
32 Id., at p. 487.
33 Rollo, p. 182.
34 Records, pp. 490-493.
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260 SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
transferred, conveyed and assigned by way of trust unto the Asset Privatization Trust
said non-performing assets, [which] took title to and possession of, [to] conserve,
provisionally manage and dispose[,] of said assets identified for privatization or
disposition; one of the powers and duties of the APT with respect to trust properties
consisting of receivables is to handle the administration, collection and enforcement
of the receivables; to bring suit to enforce payment of the obligations or any
installment thereof or to settle or compromise any of such obligations, or any other
claim or demand which the government may have against any person or persons[.]
The Manila Bulletin news clippings dated May 18, 1994 and May 30, 1994, Exh.
“9-A,” “9-B, “9-C,” and “9-D,” show that the Monetary Board of the Bangko Sentral
ng Pilipinas approved the rehabilitation plan of the Associated Bank. One main
feature of the rehabilitation plan included the financial assistance for the bank by the
Philippine Deposit Insurance Corporation (PDIC) by way of the purchase of AB
Assets worth P1.3945 billion subject to a buy-back arrangement over a 10 year
period. The PDIC had approved of the rehab scheme, which included the purchase of
AB’s bad loans worth P1.86 at 25% discount. This will then be paid by AB within a 10-
year period plus a yield comparable to the prevailing market rates x x x.
Based then on the evidence presented by the defendant Tomas Ang, it would
readily appear that at the time this suit for Sum of Money was filed which was on
August [28], 1990, the notes were held by the Asset Privatization Trust by virtue of
the Deeds of Transfer and Trust Agreement, which was empowered to bring suit to
enforce payment of the obligations. Consequently, defendant Tomas Ang has
sufficiently established that plaintiff at the time this suit was filed was not the holder
of the notes to warrant the dismissal of the complaint.”35
Respondent Bank then elevated the case to the Court of Appeals. In the appellant’s
brief captioned, “ASSOCIATED BANK, Plaintiff-Appellant versus ANTONIO ANG
ENG LIONG and TOMAS ANG, Defendants, TOMAS ANG, Defendant-Appellee,” the
following errors were alleged:
_______________
35Id., at pp. 492-493.
261
VOL. 532, SEPTEMBER 5, 2007 261
Ang vs. Associated Bank
I.
THE LOWER COURT ERRED IN NOT HOLDING DEFENDANT ANTONIO ANG
ENG LIONG AND DEFENDANT-APPELLEE TOMAS ANG LIABLE TO PLAINTIFF-
APPELLANT ON THEIR UNPAID LOANS DESPITE THE LATTER’S
DOCUMENTARY EXHIBITS PROVING THE SAID OBLIGATIONS.
II.
THE LOWER COURT ERRED IN DISMISSING PLAINTIFF-APPELLANT’S
COMPLAINT ON THE BASIS OF NEWSPAPER CLIPPINGS WHICH WERE
COMPLETELY HEARSAY IN CHARACTER AND IMPROPER FOR JUDICIAL
NOTICE.36
The bank stressed that it has established the causes of action outlined in its
Complaint by a preponderance of evidence. As regards the Deed of Transfer and
Trust Agreement, it contended that the same were never authenticated by any
witness in the course of the trial; the Agreement, which was not even legible, did not
mention the promissory notes subject of the Complaint; the bank is not a party to the
Agreement, which showed that it was between the Government of the Philippines,
acting through the Committee on Privatization represented by the Secretary of
Finance as trustor and the Asset Privatization Trust, which was created by virtue of
Proclamation No. 50; and the Agreement did not reflect the signatures of the
contracting parties. Lastly, the bank averred that the news items appearing in the
Manila Bulletin could not be the subject of judicial notice since they were completely
hearsay in character.37
On October 9, 2000, the Court of Appeals reversed and set aside the trial court’s
ruling. The dispositive portion of the Decision38 reads:
_______________
36 CA Rollo, p. 23.
37 Id., at pp. 27-30.
38 Id., at pp. 79-84.
262
262 SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
“WHEREFORE, premises considered, the Decision of the Regional Trial Court of
Davao City, Branch 16, in Civil Case No. 20,299-90 is hereby REVERSED AND SET
ASIDE and another one entered ordering defendant-appellee Tomas Ang to pay
plaintiff-appellant Associated Bank the following:
1. 1.P50,000.00 representing the principal amount of the loan under PN-No.
DVO-78-382 plus 14% interest thereon per annum computed from January
31, 1979 until the full amount thereof is paid;
2. 2.P30,000.00 representing the principal amount of the loan under PN-No.
DVO-78-390 plus 14% interest thereon per annum computed from
December 8, 1978 until the full amount thereof is paid;
All other claims of the plaintiff-appellant are DISMISSED for lack of legal basis.
Defendant-appellee’s counterclaim is likewise DISMISSED for lack of legal and
factual bases.
 No pronouncement as to costs.
SO ORDERED.”39
The appellate court disregarded the bank’s first assigned error for being “irrelevant in
the final determination of the case” and found its second assigned error as “not
meritorious.” Instead, it posed for resolution the issue of whether the trial court
erred in dismissing the complaint for collection of sum of money for lack of cause of
action as the bank was said to be not the “holder” of the notes at the time the
collection case was filed.
In answering the lone issue, the Court of Appeals held that the bank is a “holder”
under Sec. 191 of the NIL. It concluded that despite the execution of the Deeds of
Transfer and Trust Agreement, the Asset Privatization Trust cannot be declared as
the “holder” of the subject promissory notes for the reason that it is neither the payee
or indorsee of the notes in possession thereof nor is it the bearer of said notes. The
Court of Appeals observed that the bank, as the payee, did not indorse
_______________
39 Id., at p. 83.
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VOL. 532, SEPTEMBER 5, 2007 263
Ang vs. Associated Bank
the notes to the Asset Privatization Trust despite the execution of the Deeds of
Transfer and Trust Agreement and that the notes continued to remain with the bank
until the institution of the collection suit.
With the bank as the “holder” of the promissory notes, the Court of Appeals held
that Tomas Ang is accountable therefor in his capacity as an accommodation party.
Citing Sec. 29 of the NIL, he is liable to the bank in spite of the latter’s knowledge, at
the time of taking the notes, that he is only an accommodation party. Moreover, as a
co-maker who agreed to be jointly and severally liable on the promissory notes,
Tomas Ang cannot validly set up the defense that he did not receive any
consideration therefor as the fact that the loan was granted to the principal debtor
already constitutes a sufficient consideration.
Further, the Court of Appeals agreed with the bank that the experience of Tomas
Ang in business rendered it implausible that he would just sign the promissory notes
as a comaker without even checking the real amount of the debt to be incurred, or
that he merely acted on the belief that the first loan application was cancelled.
According to the appellate court, it is apparent that he was negligent in falling for the
alibi of Antonio Ang Eng Liong and such fact would not serve to exonerate him from
his responsibility under the notes.
Nonetheless, the Court of Appeals denied the claims of the bank for service,
penalty and overdue charges as well as attorney’s fees on the ground that the
promissory notes made no mention of such charges/fees.
In his motion for reconsideration,40 Tomas Ang raised for the first time the
assigned errors as follows:
“x x x
2) Related to the above jurisdictional issues, defendant-appellee Tomas Ang has
recently discovered that upon the filing of
_______________
40 Id., at pp. 89-133.
264
264 SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
the complaint on August 28, 1990, under the jurisdictional rule laid down in BP Blg.
129, appellant bank fraudulently failed to specify the amount of compounded interest
at 14% per annum, service charges at 2% per annum and overdue penalty charges at
12% per annum in the prayer of the complaint as of the time of its filing, paying a
total of only P640.00(!!!) as filing and court docket fees although the total sum
involved as of that time was P647,566.75 including 20% attorney’s fees. In fact, the
stated interest in the body of the complaint alone amount to P328,373.39 (which is
actually compounded and capitalized) in both causes of action and the total service
and overdue penalties and charges and attorney’s fees further amount to P239,193.36
in both causes of action, as of July 31, 1990, the time of filing of the complaint.
Significantly, appellant fraudulently misled the Court, describing the 14% imposition
as interest, when in fact the same was capitalized as principal by appellant bank
every month to earn more interest, as stated in the notes. In view thereof, the trial
court never acquired jurisdiction over the case and the same may not be now
corrected by the filing of deficiency fees because the causes of action had already
prescribed and more importantly, the jurisdiction of the Municipal Trial Court had
been increased to P100,000.00 in principal claims last March 20, 1999, pursuant to
SC Circular No. 21-99, section 5 of RA No. 7691, and section 31, Book I of the 1987
Administrative Code. In other words, as of today, jurisdiction over the subject falls
within the exclusive jurisdiction of the MTC, particularly if the bank foregoes
capitalization of the stipulated interest.
3) BY FAILING TO GIVE NOTICE OF ITS APPEAL AND APPEAL BRIEF TO
APPELLEE ANG ENG LIONG, THE APPEALED JUDGMENT OF THE TRIAL
COURT WHICH LEFT OUT TOMAS ANG’S CROSS-CLAIM AGAINST ENG LIONG
(BECAUSE IT DISMISSED THE MAIN CLAIM), HAD LONG BECOME FINAL AND
EXECUTORY, AS AGAINST ENG LIONG. Accordingly, Tomas Ang’s right of
subrogation against Ang Eng Liong, expressed in his cross-claim, is now SEVERAL
TIMES foreclosed because of the fault or negligence of appellant bank since 1979 up
to its insistence of an ex parte trial, and now when it failed to serve notice of appeal
and appellant’s brief upon him. Accordingly, appellee Tomas Ang should be released
from his suretyship obligation pursuant to Art. 2080 of the Civil Code. The above is
related to the issues abovestated.
265
VOL. 532, SEPTEMBER 5, 2007 265
Ang vs. Associated Bank
4) This Court may have erred in ADDING or ASSIGNING its own bill of error for the
benefit of appellant bank which defrauded the judiciary by the payment of deficient
docket fees.”41
Finding no cogent or compelling reason to disturb the Decision, the Court of Appeals
denied the motion in its Resolution dated December 26, 2000.42
Petitioner now submits the following issues for resolution:
1. “1.Is [A]rticle 2080 of the Civil Code applicable to discharge petitioner Tomas
Ang as accommodation maker or surety because of the failure of [private]
respondent bank to serve its notice of appeal upon the principal debtor,
respondent Eng Liong?
2. 2.Did the trial court have jurisdiction over the case at all?
3. 3.Did the Court of Appeals [commit] error in assigning its own error and
raising its own issue?
4. 4.Are petitioner’s other real and personal defenses such as successive
extensions coupled with fraudulent collusion to hide Eng Liong’s default, the
payee’s grant of additional burdens, coupled with the insolvency of the
principal debtor, and the defense of incomplete but delivered instrument,
meritorious?”43
Petitioner allegedly learned after the promulgation of the Court of Appeals’ decision
that, pursuant to the parties’ agreement on the compounding of interest with the
principal amount (per month in case of default), the interest on the promissory notes
as of July 31, 1990 should have been only P81,647.22 for PN No. DVO-78-382
(instead of P203,538.98) and P49,618.33 for PN No. DVO-78-390 (instead of
P125,334.41) while the principal debt as of said date should increase to P647,566.75
(instead of P539,638.96). He submits that the bank carefully and shrewdly hid the
fact by describing the amounts as interest instead of being part of either the principal
or penalty in order to pay a lesser amount of docket
_______________
41 Id., at pp. 90-91.
42 Id., at p. 137.
43 Rollo, pp. 33-34.
266
266 SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
fees. According to him, the total fees that should have been paid at the time of the
filing of the complaint on August 28, 1990 was P2,216.30 and not P614.00 or a
shortage of 71%. Petitioner contends that the bank may not now pay the deficiency
because the last demand letter sent to him was dated September 9, 1986, or more
than twenty years have elapsed such that prescription had already set in.
Consequently, the bank’s claim must be dismissed as the trial court loses jurisdiction
over the case.
Petitioner also argues that the Court of Appeals should not have assigned its own
error and raised it as an issue of the case, contending that no question should be
entertained on appeal unless it has been advanced in the court below or is within the
issues made by the parties in the pleadings. At any rate, he opines that the appellate
court’s decision that the bank is the real party in interest because it is the payee
named in the note or the holder thereof is too simplistic since: (1) the power and
control of Asset Privatization Trust over the bank are clear from the explicit terms of
the duly certified trust documents and deeds of transfer and are confirmed by the
newspaper clippings; (2) even under P.D. No. 902-A or the General Banking Act,
where a corporation or a bank is under receivership, conservation or rehabilitation, it
is only the representative (liquidator, receiver, trustee or conservator) who may
properly act for said entity, and, in this case, the bank was held by Asset Privatization
Trust as trustee; and (3) it is not entirely accurate to say that the payee who has not
indorsed the notes in all cases is the real party in interest because the rights of the
payee may be subject of an assignment of incorporeal rights under Articles 1624 and
1625 of the Civil Code.
Lastly, petitioner maintains that when respondent Bank served its notice of
appeal and appellant’s brief only on him, it rendered the judgment of the trial court
final and executory with respect to Antonio Ang Eng Liong, which, in effect, released
him (Antonio Ang Eng Liong) from any and all liability under the promissory notes
and, thereby, foreclosed peti-
267
VOL. 532, SEPTEMBER 5, 2007 267
Ang vs. Associated Bank
tioner’s cross-claims. By such act, the bank, even if it be the “holder” of the
promissory notes, allegedly discharged a simple contract for the payment of money
(Sections 119 [d] and 122, NIL [Act No. 2031]), prevented a surety like petitioner
from being subrogated in the shoes of his principal (Article 2080, Civil Code), and
impaired the notes, producing the effect of payment (Article 1249, Civil Code).
The petition is unmeritorious.
Procedurally, it is well within the authority of the Court of Appeals to raise, if it
deems proper under the circumstances obtaining, error/s not assigned on an
appealed case. In Mendoza v. Bautista,44 this Court recognized the broad
discretionary power of an appellate court to waive the lack of proper assignment of
errors and to consider errors not assigned, thus:
“As a rule, no issue may be raised on appeal unless it has been brought before the
lower tribunal for its consideration. Higher courts are precluded from entertaining
matters neither alleged in the pleadings nor raised during the proceedings below, but
ventilated for the first time only in a motion for reconsideration or on appeal.
However, as with most procedural rules, this maxim is subject to exceptions.
Indeed, our rules recognize the broad discretionary power of an appellate court to
waive the lack of proper assignment of errors and to consider errors not assigned.
Section 8 of Rule 51 of the Rules of Court provides:
SEC. 8. Questions that may be decided.—No error which does not affect the
jurisdiction over the subject matter or the validity of the judgment appealed from or
the proceedings therein will be considered, unless stated in the assignment of errors,
or closely related to or dependent on an assigned error and properly argued in the
brief, save as the court may pass upon plain errors and clerical errors.
Thus, an appellate court is clothed with ample authority to review rulings even if
they are not assigned as errors in the appeal in these instances: (a) grounds not
assigned as errors but affecting
_______________
44 G.R. No. 143666, March 18, 2005, 453 SCRA 691.
268
268 SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
jurisdiction over the subject matter; (b) matters not assigned as errors on appeal but
are evidently plain or clerical errors within contemplation of law; (c) matters not
assigned as errors on appeal but consideration of which is necessary in arriving at a
just decision and complete resolution of the case or to serve the interests of justice or
to avoid dispensing piecemeal justice; (d) matters not specifically assigned as errors
on appeal but raised in the trial court and are matters of record having some bearing
on the issue submitted which the parties failed to raise or which the lower court
ignored; (e) matters not assigned as errors on appeal but closely related to an error
assigned; and (f) matters not assigned as errors on appeal but upon which the
determination of a question properly assigned is dependent. (Citations omitted)”45
To the Court’s mind, even if the Court of Appeals regarded petitioner’s two assigned
errors as “irrelevant” and “not meritorious,” the issue of whether the trial court erred
in dismissing the complaint for collection of sum of money for lack of cause of action
(on the ground that the bank was not the “holder” of the notes at the time of the filing
of the action) is in reality closely related to and determinant of the resolution of
whether the lower court correctly ruled in not holding Antonio Ang Eng Liong and
petitioner Tomas Ang liable to the bank on their unpaid loans despite documentary
exhibits allegedly proving their obligations and in dismissing the complaint based on
newspaper clippings. Hence, no error could be ascribed to the Court of Appeals on
this point.
Now, the more relevant question is: who is the real party in interest at the time of
the institution of the complaint, is it the bank or the Asset Privatization Trust?
To answer the query, a brief history on the creation of the Asset Privatization
Trust is proper.
Taking into account the imperative need of formally launching a program for the
rationalization of the government corporate sector, then President Corazon C.
Aquino
_______________
45 Id., at pp. 702-703.
269
VOL. 532, SEPTEMBER 5, 2007 269
Ang vs. Associated Bank
issued Proclamation No. 5046 on December 8, 1986. As one of the twin cornerstones
of the program was to establish the privatization of a good number of government
corporations, the proclamation created the Asset Privatization Trust, which would,
for the benefit of the National Government, take title to and possession of, conserve,
provisionally manage and dispose of transferred assets that were identified for
privatization or disposition.47
In accordance with the provisions of Section 2348 of the proclamation, then
President Aquino subsequently issued Administrative Order No. 14 on February 3,
1987, which
_______________
46 PROCLAIMING AND LAUNCHING APROGRAM FOR THE EXPEDITIOUS
DISPOSITION AND PRIVATIZATION OF CERTAIN GOVERNMENT
CORPORATIONS AND/OR THE ASSETS THEREOF AND CREATING THE
COMMITTEE ON PRIVATIZATION AND THE ASSET PRIVATIZATION TRUST.
47 Sec. 3, Art. II and Sec. 9, Art. III of Proclamation No. 50. In addition, the term
“assets” is defined under Sec. 2 (1) of the Proclamation as:
1) Assets shall include (i) receivables and other obligations due to government
institutions under credit, lease, indemnity and other agreements together with all
collateral security and other rights (including but not limited to rights in relation to
shares of stock in corporations such as voting rights as well as rights to appoint
directors of corporations or otherwise engage in the management thereof) granted to
such institutions by contract or operation of law to secure or enforce the right of
payment of such obligations; (ii) real and personal property of any kind owned or
held by the government institutions, including shares of stock in corporations,
obtained by such government institutions, whether directly or indirectly, through
foreclosure or other means, in settlement of such obligations; (iii) shares of stock and
other investments held by government institutions; and (iv) the government
institutions themselves, whether as parent or subsidiary corporations.
48 Sec. 23 of the Proclamation reads:
SEC. 23. Mechanics of Transfer of Assets.—As soon as practicable, but not later than
six months from the date of the issuance of this Proclamation, the President, acting
through
270
270 SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
approved the identification of and transfer to the National Government of certain
assets (consisting of loans, equity investments, accrued interest receivables, acquired
assets and other assets) and liabilities (consisting of deposits, borrowings, other
liabilities and contingent guarantees) of the De-
_______________
the Committee on Privatization, shall identify such assets of government institutions
as appropriate for privatization and divestment in an appropriate instrument
describing such assets or identifying the loan or other transactions giving rise to the
receivables, obligations and other property constituting assets to be transferred.
The Committee shall, from the list of assets deemed appropriate for divestment,
identify assets to be transferred to the Trust or to be referred to the government
institutions in an appropriate instrument, which upon execution by the Committee
shall constitute as the operative act of transfer or referral of the assets described
therein, and the Trust or the government institution may thereupon proceed with the
divestment in accordance with the provisions of this Proclamation and guidelines
issued by the Committee.
Nothing in this Proclamation shall:
1. (1)Affect the rights of the National Government to pursue the enforcement of
any claim of a government institution in respect of or in relation to any asset
transferred hereunder;
2. (2)In relation to any debt hereby assigned and transferred to the National
Government of which a government institution is the original creditor, give
rise to any novation or requirement to obtain the consent of the debtor; and
3. (3)In relation to any share of stock or any interest therein, give rise to any
claim by any other stockholder for enforcement of rights of pre-emption or
of first refusal or other similar rights, the provision of any law to the
contrary notwithstanding.
Where the contractual rights of creditors of any of the government institutions
involved may be affected by the exercise of the Committee or the Trust of the powers
granted herein, the Committee or the Trust shall see to it that such rights are not
impaired.
271
VOL. 532, SEPTEMBER 5, 2007 271
Ang vs. Associated Bank
velopment Bank of the Philippines (DBP) and the Philippine National Bank (PNB).
The transfer of assets was implemented through a Deed of Transfer executed on
February 27, 1987 between the National Government, on one hand, and the DBP and
PNB, on the other. In turn, the National Government designated the Asset
Privatization Trust to act as its trustee through a Trust Agreement, whereby the
nonperforming accounts of DBP and PNB, including, among others, the DBP’s equity
with respondent Bank, were entrusted to the Asset Privatization Trust.49 As provided
for in the Agreement, among the powers and duties of the Asset Privatization Trust
with respect to the trust properties consisting of receivables was to handle their
administration and collection by bringing suit to enforce payment of the obligations
or any installment thereof or settling or compromising any of such obligations or any
other claim or demand which the Government may have against any person or
persons, and to do all acts, institute all proceedings, and to exercise all other rights,
powers, and privileges of ownership that an absolute owner of the properties would
otherwise have the right to do.50Incidentally, the existence of the Asset Privatization
Trust would have expired five (5) years from the date of issuance of Proclamation No.
50.51 However, its original term was extended from December 8, 1991 up to August
31, 1992,52and again from December 31, 1993 until June 30, 1995,53and then from
July 1, 1995 up to December 31, 1999,54 and further from January 1, 2000 until
December 31, 2000.55Thenceforth, the Privatization and Management Office was
established and
_______________
49 Records, pp. 529-533, 543.
50 Id., at p. 530.
51 Sec. 9, Art. III of Proclamation No. 50.
52 Sec. 1 of Republic Act (R.A.) No. 7181.
53 Sec. 1 of R.A. No. 7661.
54 Sec. 1 of R.A. No. 7886.
55 Sec. 1 of R.A. No. 8758.
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272 SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
took over, among others, the powers, duties and functions of the Asset Privatization
Trust under the proclamation.56
Based on the above backdrop, respondent Bank does not appear to be the real
party in interest when it instituted the collection suit on August 28, 1990 against
Antonio Ang Eng Liong and petitioner Tomas Ang. At the time the complaint was
filed in the trial court, it was the Asset Privatization Trust which had the authority to
enforce its claims against both debtors. In fact, during the pre-trial conference, Atty.
Roderick Orallo, counsel for the bank, openly admitted that it was under the
trusteeship of the Asset Privatization Trust.57 The Asset Privatization Trust, which
should have been represented by the Office of the Government Corporate Counsel,
had the authority to file and prosecute the case.
The foregoing notwithstanding, this Court can not, at present, readily subscribe to
petitioner’s insistence that the case must be dismissed. Significantly, it stands
without refute, both in the pleadings as well as in the evidence presented during the
trial and up to the time this case reached the Court, that the issue had been rendered
moot with the occurrence of a supervening event—the “buy-back” of the bank by its
former owner, Leonardo Ty, sometime in October 1993. By such re-acquisition from
the Asset Privatization Trust when the case was still pending in the lower court, the
bank reclaimed its real and actual interest over the unpaid promissory notes; hence,
it could rightfully qualify as a “holder”58 thereof under the NIL.
Notably, Section 29 of the NIL defines an accommodation party as a person “who
has signed the instrument as maker, drawer, acceptor, or indorser, without receiving
value there-
_______________
56 Sec. 2, Art. III of Executive Order No. 323, Series of 2000.
57 TSN, January 18, 1993, p. 7.
58 A “Holder” is defined under Sec. 191 of the NIL, as:
“Holder” means the payee or indorsee of a bill or note, who is in possession of it, or
the bearer thereof.
273
VOL. 532, SEPTEMBER 5, 2007 273
Ang vs. Associated Bank
for, and for the purpose of lending his name to some other person.” As gleaned from
the text, an accommodation party is one who meets all the three requisites, viz.: (1)
he must be a party to the instrument, signing as maker, drawer, acceptor, or
indorser; (2) he must not receive value therefor; and (3) he must sign for the purpose
of lending his name or credit to some other person.59 An accommodation party lends
his name to enable the accommodated party to obtain credit or to raise money; he
receives no part of the consideration for the instrument but assumes liability to the
other party/ies thereto.60 The accommodation party is liable on the instrument to a
holder for value even though the holder, at the time of taking the instrument, knew
him or her to be merely an accommodation party, as if the contract was not for
accommodation.61
As petitioner acknowledged it to be, the relation between an accommodation
party and the accommodated party is one of principal and surety—the
accommodation party being the surety.62 As such, he is deemed an original promisor
and
_______________
59 Lim v. Saban, G.R. No. 163720, December 16, 2004, 447 SCRA 232, 244
and Crisologo-Jose v. Court of Appeals, G.R. No. 80599, September 15, 1989, 177
SCRA 594, 598.
60 Spouses Gardose v. Tarroza, 352 Phil. 797, 807; 290 SCRA 186, 195-196 (1998)
citing Philippine Bank of Commerce v. Aruego, G.R. Nos. L-25836-37, January 31,
1981, 102 SCRA 530, 539-540.
61 Lim v. Saban, supra at p. 244; Garcia v. Llamas, G.R. No. 154127, December 8,
2003, 417 SCRA 292, 304-305; Spouses Gardose v. Tarroza, supra at p. 807; p.
196; Travel-On, Inc. v. Court of Appeals, G.R. No. 56169, June 26, 1992, 210 SCRA
351, 357; and Ang Tiong v. Ting, 130 Phil. 741, 744; 22 SCRA 713, 716 (1968).
62 Garcia v. Llamas, supra at p. 305; Agro Conglomerates, Inc. v. Court of
Appeals, 401 Phil. 644, 654-655; 348 SCRA 450, 457-458 (2000); Spouses Gardose
v. Tarroza, supra at p. 807; p. 196; Caneda, Jr. v. Court of Appeals, G.R. No. 81322,
February 5, 1990, 181 SCRA 762, 772; Crisologo-Jose v. Court of Appeals, supra at p.
598; Prudencio v. Court of Appeals, 227 Phil. 7, 12; 143 SCRA 7, 14 (1986);
and Philippine Bank of Commerce v. Aruego, supra at p. 539.
274
274 SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
debtor from the beginning;63 he is considered in law as the same party as the debtor
in relation to whatever is adjudged touching the obligation of the latter since their
liabilities are interwoven as to be inseparable.64 Although a contract of suretyship is
in essence accessory or collateral to a valid principal obligation, the surety’s liability
to the creditor is immediate, primary and absolute; he is directlyand equally bound
with the principal.65 As an equivalent of a regular party to the undertaking, a surety
becomes liable to the debt and duty of the principal obligor even without possessing a
direct or personal interest in the obligations nor does he receive any benefit
therefrom.66
Contrary to petitioner’s adamant stand, however, Article 208067 of the Civil Code
does not apply in a contract of suretyship.68 Art. 2047 of the Civil Code states that if a
person binds
_______________
63 Garcia v. Llamas, supra at p. 305.
64 Trade & Investment Development Corp. v. Roblett Industrial Construction
Corp., G.R. No. 139290, November 11, 2005, 474 SCRA 510, 531.
65 International Finance Corporation v. Imperial Textile Mills, Inc., G.R. No.
160324, November 15, 2005, 475 SCRA 149, 160; Trade & Investment Development
Corp. v. Roblett Industrial Construction Corp., Id., at p. 531; Garcia v. Llamas,
supra at p. 305; Agro Conglomerates, Inc. v. Court of Appeals, supra at p. 655; p.
458; and Philippine Bank of Commerce v. Aruego, supra at p. 540.
66 International Finance Corporation v. Imperial Textile Mills, Inc., Id., at pp.
160-161 and Trade & Investment Development Corp. v. Roblett Industrial
Construction Corp., Id., at p. 531.
67 Art. 2080 of the Civil Code provides:
Art. 2080. The guarantors, even though they be solidary, are released from their
obligation whenever by some act of the creditor they cannot be subrogated to the
rights, mortgages, and preferences of the latter.
68 E. Zobel, Inc. v. Court of Appeals, 352 Phil. 608, 618; 290 SCRA 1, 10
(1998); Inciong, Jr. v. Court of Appeals, 327 Phil. 364, 372-373; 257 SCRA 578, 586
(1996); and Bicol Savings & Loan Association v. Guinhawa, G.R. No. 62415, August
20, 1990, 188 SCRA 642, 647.
275
VOL. 532, SEPTEMBER 5, 2007 275
Ang vs. Associated Bank
himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3,
Title I, Book IV of the Civil Code must be observed. Accordingly, Articles 1207 up to
1222 of the Code (on joint and solidary obligations) shall govern the relationship of
petitioner with the bank.
The case of Inciong, Jr. v. CA69 is illuminating:
“Petitioner also argues that the dismissal of the complaint against Naybe, the
principal debtor, and against Pantanosas, his comaker, constituted a release of his
obligation, especially because the dismissal of the case against Pantanosas was upon
the motion of private respondent itself. He cites as basis for his argument, Article
2080 of the Civil Code which provides that:
“The guarantors, even though they be solidary, are released from their obligation
whenever by come act of the creditor, they cannot be subrogated to the rights,
mortgages, and preferences of the latter.”
It is to be noted, however, that petitioner signed the promissory note as a solidary
co-maker and not as a guarantor. This is patent even from the first sentence of the
promissory note which states as follows:
“Ninety one (91) days after date, for value received, I/we, JOINTLY and
SEVERALLY promise to pay to the PHILIPPINE BANK OF COMMUNICATIONS at
its office in the City of Cagayan de Oro, Philippines the sum of FIFTY THOUSAND
ONLY (P50,000.00) Pesos, Philippine Currency, together with interest x x x at the
rate of SIXTEEN (16) percent per annumuntil fully paid.”
A solidary or joint and several obligation is one in which each debtor is liable for
the entire obligation, and each creditor is entitled to demand the whole obligation.
On the other hand, Article 2047 of the Civil Code states:
“By guaranty a person, called the guarantor, binds himself to the creditor to fulfill
the obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of
Section 4, Chapter 3, Title I of this Book shall be
_______________
69 327 Phil. 364; 257 SCRA 578 (1996).
276
276 SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
observed. In such a case the contract is called a suretyship.” (Italics supplied.)
While a guarantor may bind himself solidarily with the principal debtor, the
liability of a guarantor is different from that of a solidary debtor. Thus, Tolentino
explains:
“A guarantor who binds himself in solidum with the principal debtor under the
provisions of the second paragraph does not become a solidary co-debtor to all
intents and purposes. There is a difference between a solidary co-debtor, and a fiador
in solidum(surety). The later, outside of the liability he assumes to pay the debt
before the property of the principal debtor has been exhausted, retains all the other
rights, actions and benefits which pertain to him by reason of rights of the fiansa;
while a solidary co-debtor has no other rights than those bestowed upon him in
Section 4, Chapter 3, Title I, Book IV of the Civil Code.”
Section 4, Chapter 3, Title I, Book IV of the Civil Code states the law on joint and
several obligations. Under Art. 1207 thereof, when there are two or more debtors in
one and the same obligation, the presumption is that obligation is joint so that each
of the debtors is liable only for a proportionate part of the debt. There is a solidarily
liability only when the obligation expressly so states, when the law so provides or
when the nature of the obligation so requires.
Because the promissory note involved in this case expressly states that the three
signatories therein are jointly and severally liable, any one, some or all of them may
be proceeded against for the entire obligation. The choice is left to the solidary
creditor to determine against whom he will enforce collection. (Citations omitted)”70
In the instant case, petitioner agreed to be “jointly and severally” liable under the
two promissory notes that he cosigned with Antonio Ang Eng Liong as the principal
debtor. This being so, it is completely immaterial if the bank would opt to proceed
only against petitioner or Antonio Ang Eng Liong or both of them since the law
confers upon the creditor the prerogative to choose whether to enforce the entire
obligation against any one, some or allof the debtors. Nonetheless, petitioner, as an
accommodation party, may seek reimburse-
_______________
70 Id., at pp. 372-374; pp. 586-588.
277
VOL. 532, SEPTEMBER 5, 2007 277
Ang vs. Associated Bank
ment from Antonio Ang Eng Liong, being the party accommodated.71
It is plainly mistaken for petitioner to say that just because the bank failed to
serve the notice of appeal and appellant’s brief to Antonio Ang Eng Liong, the trial
court’s judgment, in effect, became final and executory as against the latter and,
thereby, bars his (petitioner’s) cross-claims against him: First, although no notice of
appeal and appellant’s brief were served to Antonio Ang Eng Liong, he was
nonetheless impleaded in the case since his name appeared in the caption of both the
notice and the brief as one of the defendants-appellees;72 Second, despite including in
the caption of the appellee’s brief his co-debtor as one of the defendants-appellees,
petitioner did not also serve him a copy thereof;73 Third, in the caption of the Court
of Appeals’ decision, Antonio Ang Eng Liong was expressly named as one of the
defendants-appellees;74 and Fourth, it was only in his motion for reconsideration
from the adverse judgment of the Court of Appeals that petitioner belatedly chose to
serve notice to the counsel of his co-defendant-appellee.75
Likewise, this Court rejects the contention of Antonio Ang Eng Liong, in his
“special appearance” through counsel, that the Court of Appeals, much less this
Court, already lacked jurisdiction over his person or over the subject matter relating
to him because he was not a party in CA-G.R. CV No. 53413. Stress must be laid of
the fact that he had twice put himself in default—one, in not filing a pre-trial brief
and another, in not filing his answer to petitioner’s cross-claims. As a matter of
course, Antonio Ang Eng Liong, being a party declared in
_______________
71 Lim v. Saban, supra at p. 244; Agro Conglomerates, Inc. v. Court of Appeals,
supra at p. 654; p. 457; and Caneda, Jr. v. Court of Appeals, supra at p. 772.
72 CA Rollo, p. 21.
73 Id., at pp. 40, 75.
74 Id., at p. 79.
75 Id., at p. 133.
278
278 SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
default, already waived his right to take part in the trial proceedings and had to
contend with the judgment rendered by the court based on the evidence presented by
the bank and petitioner. Moreover, even without considering these default
judgments, Antonio Ang Eng Liong even categorically admitted having secured a
loan totaling P80,000. In his Answer to the complaint, he did not deny such liability
but merely pleaded that the bank “be ordered to submit a more reasonable
computation” instead of collecting excessive interest, penalty charges, and attorney’s
fees. For failing to tender an issue and in not denying the material allegations stated
in the complaint, a judgment on the pleadings76 would have also been proper since
not a single issue was generated by the Answer he filed.
As the promissory notes were not discharged or impaired through any act or
omission of the bank, Sections 119 (d)77
_______________
76 Sec. 1, Rule 34 of the 1997 Revised Rules on Civil Procedure states:
Section 1. Judgment on the pleadings.—Where an answer fails to tender an issue, or
otherwise admits the material allegations of the adverse party’s pleading, the court
may, on motion of that party, direct judgment on such pleading. However, in actions
for declaration of nullity or annulment of marriage or for legal separation, the
material facts alleged in the complaint shall always be proved.
77 Sec. 119 of the NIL provides:
SECTION 119. Instrument; how discharged.—A negotiable instrument is discharged:
1. (a.)By payment in due course by or on behalf of the principal debtor;
2. (b.)By payment in due course by the party accommodated, where the
instrument is made or accepted for his accommodation;
3. (c.)By the intentional cancellation thereof by the holder;
4. (d.)By any other act which will discharge a simple contract for
the payment of money;
279
VOL. 532, SEPTEMBER 5, 2007 279
Ang vs. Associated Bank
and 12278 of the NIL as well as Art. 124979 of the Civil Code would necessarily find no
application. Again, neither was petitioner’s right of reimbursement barred nor was
the bank’s right to proceed against Antonio Ang Eng Liong expressly renounced by
the omission to serve notice of appeal and appellant’s brief to a party already
declared in default.
 Consequently, in issuing the two promissory notes, petitioner as accommodating
party warranted to the holder in due course that he would pay the same according to
its tenor.80 It is no defense to state on his part that he did not receive any
_______________
1. (e.)When the principal debtor becomes the holder of the instrument at or
after maturity in his own right. (Emphasis ours)
78 Sec. 122 of the NIL states:
SECTION 122. Renunciation by holder.—The holder may expressly renounce his
rights against any party to the instrument before, at, or after its maturity. An
absolute and unconditional renunciation of his rights against the principal debtor
made at or after the maturity of the instrument discharges the instrument. But a
renunciation does not affect the rights of a holder in due course without notice. A
renunciation must be in writing unless the instrument is delivered up to the person
primarily liable thereon.
79 Art. 1249 of the Civil Code provides:
Art. 1249. The payment of debts in money shall be made in the currency stipulated,
and if it is not possible to deliver such currency, then in the currency which is legal
tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other
mercantile documents shall produce the effect of payment only when they have been
cashed, or when through the fault of the creditor they have been
impaired. (Emphasis ours)
80 Travel-On, Inc. v. Court of Appeals, supra at p. 357.
280
280 SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
value therefor because the phrase “without receiving value therefor” used in Sec.
81
29 of the NIL means “without receiving value by virtue of the instrument” and not as
it is apparently supposed to mean, “without receiving payment for lending his
name.”82 Stated differently, when a third person advances the face value of the note
to the accommodated party at the time of its creation, the consideration for the note
as regards its maker is the money advanced to the accommodated party. It is enough
that value was given for the note at the time of its creation.83 As in the instant case, a
sum of money was received by virtue of the notes, hence, it is immaterial so far as the
bank is concerned whether one of the signers, particularly petitioner, has or has not
received anything in payment of the use of his name.84
Under the law, upon the maturity of the note, a surety may pay the debt, demand
the collateral security, if there be any, and dispose of it to his benefit, or, if applicable,
subrogate himself in the place of the creditor with the right to enforce the guaranty
against the other signers of the note for the reimbursement of what he is entitled to
recover from them.85 Regrettably, none of these were prudently done by petitioner.
When he was first notified by the bank sometime in 1982 regarding his
accountabilities under the promissory notes, he lackadaisically relied on Antonio Ang
Eng Liong, who represented that he would take care of the matter, instead of directly
communicating with the bank for its settlement.86 Thus, petitioner cannot now claim
that he was prejudiced by the
_______________
81 Caneda, Jr. v. Court of Appeals, supra at p. 772; Crisologo-Jose v. Court of
Appeals, supra at p. 598; and Ang Tiong v. Ting, supra at p. 744; p. 716.
82 Clark v. Sellner, 42 Phil. 384, 386 (1921).
83 Caneda, Jr. v. Court of Appeals, supra at p. 772.
84 Clark v. Sellner, supra at p. 386.
85 Id., at pp. 386-387.
86 TSN, February 21, 1995, p. 27 and TSN, April 4, 1995, p. 15.
281
VOL. 532, SEPTEMBER 5, 2007 281
Ang vs. Associated Bank
supposed “extension of time” given by the bank to his co-debtor.
Furthermore, since the liability of an accommodation party remains not
only primary but also unconditional to a holder for value, even if the accommodated
party receives an extension of the period for payment without the consent of the
accommodation party, the latter is still liable for the whole obligation and such
extension does not release him because as far as a holder for value is concerned, he is
a solidary co-debtor.87 In Clark v. Sellner,88 this Court held:
“x x x The mere delay of the creditor in enforcing the guaranty has not by any means
impaired his action against the defendant. It should not be lost sight of that the
defendant’s signature on the note is an assurance to the creditor that the collateral
guaranty will remain good, and that otherwise, he, the defendant, will be personally
responsible for the payment.
True, that if the creditor had done any act whereby the guaranty was impaired in
its value, or discharged, such an act would have wholly or partially released the
surety; but it must be born in mind that it is a recognized doctrine in the matter of
suretyship that with respect to the surety, the creditor is under no obligation to
display any diligence in the enforcement of his rights as a creditor. His mere inaction
indulgence, passiveness, or delay in proceeding against the principal debtor, or the
fact that he did not enforce the guaranty or apply on the payment of such funds as
were available, constitute no defense at all for the surety, unless the contract
expressly requires diligence and promptness on the part of the creditor, which is not
the case in the present action. There is in some decisions a tendency toward holding
that the creditor’s laches may discharge the surety, meaning by laches a negligent 91Batangas State University v. Bonifacio, G.R. No. 167762, December 15,
forbearance. This theory, however, is not generally accepted and the courts almost 2005, 478 SCRA 142, 147-148 and Local Superior of the Servants of Charity
universally consider it essentially inconsistent with the relation of the parties to the (Guanellians), Inc. v. Jody King Construction &
note. (21 R.C.L., 1032-1034)”89 283
VOL. 532, SEPTEMBER 5, 2007 283
_______________ Ang vs. Associated Bank
WHEREFORE, the October 9, 2000 Decision and December 26, 2000 Resolution of
87 Prudencio v. Court of Appeals, supra at pp. 12-13; p. 14.
the Court of Appeals in CA-G.R. CV No. 53413 are AFFIRMED. The petition is
88 42 Phil. 384 (1921).
89 Id., at pp. 387-388. DENIED for lack of merit.
No costs.
282
SO ORDERED.
282 SUPREME COURT REPORTS ANNOTATED Puno (C.J., Chairperson), Sandoval-Gutierrez, Corona and Garcia, JJ.,
Ang vs. Associated Bank concur.
Neither can petitioner benefit from the alleged “insolvency” of Antonio Ang Eng Judgment and resolution affirmed, petition denied.
Liong for want of clear and convincing evidence proving the same. Assuming it to be Notes.—Payment is a mode of extinguishing an obligation—it should be made to
true, he also did not exercise diligence in demanding security to protect himself from the person in whose favor the obligation has been constituted, or his successor-in-
the danger thereof in the event that he (petitioner) would eventually be sued by the interest, or any person authorized to receive it. (Culaba vs. Court of Appeals, 427
bank. Further, whether petitioner may or may not obtain security from Antonio Ang SCRA 721 [2004])
Eng Liong cannot in any manner affect his liability to the bank; the said remedy is a Payment of the entire obligation by one or some of the solidary debtors results in
matter of concern exclusively between themselves as accommodation party and a corresponding obligation of the other debtors to reimburse the paying debtor.
accommodated party. The fact that petitioner stands only as a surety in relation to (Republic Glass Corporation vs. Qua, 435 SCRA 480 [2004])
Antonio Ang Eng Liong is immaterial to the claim of the bank and does not a whit
diminish nor defeat the rights of the latter as a holder for value. To sanction his ——o0o——
theory is to give unwarranted legal recognition to the patent absurdity of a situation
where a co-maker, when sued on an instrument by a holder in due course and for _______________
value, can escape liability by the convenient expedient of interposing the defense that
he is a merely an accommodation party.90 Development Corporation, G.R. No. 141715, October 12, 2005, 472 SCRA 445,
In sum, as regards the other issues and errors alleged in this petition, the Court 451.
notes that these were the very same questions of fact raised on appeal before the
Court of Appeals, although at times couched in different terms and explained more
lengthily in the petition. Suffice it to say that the same, being factual, have been
satisfactorily passed upon and considered both by the trial and appellate courts. It is
doctrinal that only errors of law and not of fact are reviewable by this Court in
petitions for review on certiorari under Rule 45 of the Rules of Court. Save for the
most cogent and compelling reason, it is not our function under the rule to examine,
evaluate or weigh the probative value of the evidence presented by the parties all over
again.91

_______________
90 Ang Tiong v. Ting, supra at p. 744; p. 716.
 G.R. No. 107508. April 25, 1996.*
PHILIPPINE NATIONAL BANK, petitioner, vs. COURT OF APPEALS, CAPITOL
CITY DEVELOPMENT BANK, PHILIPPINE BANK OF COMMUNICATIONS, and F.
ABANTE MARKETING, respondents.
Banks and Banking; Negotiable Instruments Law (Act No. 2031); Checks;
Words and Phrases; An alteration is said to be material if it alters the effect of the
instrument.—We shall first deal with the effect of the alteration of the serial number
on the negotiability of the check in question. Petitioner anchors its position on
Section 125 of the Negotiable Instruments Law (ACT No. 2031). Petitioner alleges
that there is no hard and fast rule in the interpretation of the aforequoted provision
of the Negotiable Instruments Law. It maintains that under Section 125(f), any
change that alters the effect of the instrument is a material alteration. We do not
agree. An alteration is said to be material if it alters the effect of the instrument. It
means an unauthorized change in an instrument that purports to modify in any
respect the obligation of a party or an unauthorized addition of words or numbers or
other change to an incomplete instrument relating to the obligation of a party. In
other
______________
*FIRST DIVISION.
492
4 SUPREME COURT REPORTS ANNOTATED
92
Philippine National Bank vs. Court of Appeals
words, a material alteration is one which changes the items which are required
to be stated under Section 1 of the Negotiable Instruments Law.
Same; Same; Same; The drawee bank cannot refuse to accept a check on the
ground that the serial number of said check was altered, since the serial number is
an item which is not an essential requisite for negotiability under Section 1 of the
Negotiable Instruments Law.—The case at bench is unique in the sense that what
was altered is the serial number of the check in question, an item which, it can
readily be observed, is not an essential requisite for negotiability under Section 1 of
the Negotiable Instruments Law. The aforementioned alteration did not change the
relations between the parties. The name of the drawer and the drawee were not
altered. The intended payee was the same. The sum of money due to the payee
remained the same. The check’s serial number is not the sole indication of its origin.
As succinctly found by the Court of Appeals, the name of the government agency
which issued the subject check was prominently printed therein. The check’s issuer
was therefore sufficiently identified, rendering the referral to the serial number
redundant and inconsequential. Petitioner, thus cannot refuse to accept the check in
question on the ground that the serial number was altered, the same being an
immaterial or innocent one.
Damages; Attorney’s Fees; Where the lower courts fail to explicitly state the
rationale for the award of attorney’s fees, the same shall be disallowed.—The
amount of P10,000.00 as attorney’s fees is hereby deleted. In their respective
decisions, the trial court and the Court of Appeals failed to explicitly state the
rationale for the said award. The foregoing is in conformity with the guiding
principles laid down in a long line of cases and reiterated recently in Consolidated
Bank & Trust Corporation (Solidbank) v. Court of Appeals: The award of attorney’s
fees lies within the discretion of the court and depends upon the circumstances of
each case. However, the discretion of the court to award attorney’s fees under Article
2208 of the Civil Code of the Philippines demands factual, legal and equitable
justification, without which the award is a conclusion without a premise and
improperly left to speculation and conjecture. It becomes a violation of the
proscription against the imposition of a penalty on the right to litigate (Universal
Shipping Lines, Inc. v. Intermediate Appellate Court, 188 SCRA 170 [1990]). The
reason for the award must be stated in the text of the court’s decision. If it is
493
VOL. 256, APRIL 25, 1996 493
Philippine National Bank vs. Court of Appeals
stated only in the dispositive portion of the decision, the same shall be
disallowed. As to the award of attorney’s fees being an exception rather than the rule,
it is necessary for the court to make findings of fact and law that would bring the case
within the exception and justify the grant of the award (Refractories Corporation of
the Philippines v. Intermediate Appellate Court, 176 SCRA 539 [1989]).
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Monsod, Tamargo, Valencia & Associates for private respondent Capitol City
Development Bank.
Siguion Reyna, Montecillo & Ongsiako for private respondent Philippine Bank
of Communications.
KAPUNAN, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court
assailing the decision dated April 29, 1992 of respondent Court of Appeals in CA-G.R.
CV No. 24776 and its resolution dated September 16, 1992, denying petitioner
Philippine National Bank’s motion for reconsideration of said decision.
The facts of the case are as follows:
 A check with serial number 7-3666-223-3, dated August 7, 1981 in the amount of
P97,650.00 was issued by the Ministry of Education and Culture (now Department of
Education, Culture and Sports [DECS]) payable to F. Abante Marketing. This check
was drawn against Philippine National Bank (herein petitioner).
On August 11, 1981, F. Abante Marketing, a client of Capitol City Development
Bank (Capitol), deposited the questioned check in its savings account with said bank.
In turn, Capitol deposited the same in its account with the Philippine Bank of
Communications (PBCom) which, in turn, sent the check to petitioner for clearing.
494
494 SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Court of Appeals
Petitioner cleared the check as good and, thereafter, PBCom credited Capitol’s
account for the amount stated in the check. However, on October 19, 1981, petitioner
returned the check to PBCom and debited PBCom’s account for the amount covered
by the check, the reason being that there was a “material alteration” of the check
number.
PBCom, as collecting agent of Capitol, then proceeded to debit the latter’s account
for the same amount, and subsequently, sent the check back to petitioner. Petitioner,
however, returned the check to PBCom.
On the other hand, Capitol could not, in turn, debit F. Abante Marketing’s account
since the latter had already withdrawn the amount of the check as of October 15,
1981. Capitol sought clarification from PBCom and demanded the recrediting of the
amount. PBCom followed suit by requesting an explanation and re-crediting from
petitioner.
Since the demands of Capitol were not heeded, it filed a civil suit with the
Regional Trial Court of Manila against PBCom which, in turn, filed a third-party
complaint against petitioner for reimbursement/indemnity with respect to the claims
of Capitol. Petitioner, on its part, filed a fourth-party complaint against F. Abante
Marketing.
On October 3, 1989, the Regional Trial Court rendered its decision the dispositive
portion of which reads:
WHEREFORE, judgment is hereby rendered as follows:
3. 3.)On Philippine National Bank’s fourth-party complaint, F. Abante
Marketing is ordered to reimburse and indemnify PNB for whatever amount
PNB pays to PBCom;
495
VOL. 256, APRIL 25, 1996 495
Philippine National Bank vs. Court of Appeals
1. 4.)On attorney’s fees, Philippine Bank of Communications is ordered to pay
Capitol City Development Bank attorney’s fees in the amount of Ten
Thousand (P10,000.00) Pesos; but PBCom is entitled to
reimbursement/indemnity from PNB; and Philippine National Bank to be,
in turn, reimbursed or indemnified by F. Abante Marketing for the same
amount;
2. 5.)The Counterclaims of PBCom and PNB are hereby dismissed;
3. 6.)No pronouncement as to costs.
SO ORDERED.1
An appeal was interposed before the respondent Court of Appeals which rendered its
decision on April 29, 1992, the decretal portion of which reads:
WHEREFORE, the judgment appealed from is modified by exempting PBCom from
liability to plaintiff-appellee for attorney’s fees and ordering PNB to honor the check
for P97,650.00, with interest as declared by the trial court, and pay plaintiff-appellee
attorney’s fees of P10,000.00. After the check shall have been honored by PNB,
PBCom shall re-credit plaintiff-appellee’s account with it with the amount. No
pronouncement as to costs.
SO ORDERED.2
A motion for reconsideration of the decision was denied by the respondent Court in
its resolution dated September 16, 1992 for lack of merit.3
Hence, petitioner filed the instant petition which raises the following issues:
I

1. 1.)On plaintiff’s complaint, defendant Philippine Bank of Communications is WHETHER OR NOT AN ALTERATION OF THE SERIAL NUMBER OF A CHECK IS
ordered to re-credit or reimburse plaintiff Capitol City Development Bank A MATERIAL ALTERATION UNDER THE NEGOTIABLE INSTRUMENTS LAW.
the amount of P97,650.00, plus interest of 12 percent thereto from October
19, 1981 until the amount is fully paid; _____________
2. 2.)On Philippine Bank of Communications third-party complaint, third-party
defendant PNB is ordered to reimburse and indemnify Philippine Bank of 1 CA Rollo, p. 28.
Communications for whatever amount PBCom pays to plaintiff; 2 Rollo, pp. 21-28.
3 Id., at 30-31.

496
496 SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Court of Appeals
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:
Section 125. What constitutes a material alteration.—Any alteration which changes:
1. (a)The date;
2. (b)The sum payable, either for principal or interest;
3. (c)The time or place of payment;
4. (d)The number or the relations of the parties;
5. (e)The medium or currency in which payment is to be made;
______________
4Id., at 10-11.
5The 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, pp. 99-100.)
497
VOL. 256, APRIL 25, 1996 497
Philippine National Bank vs. Court of Appeals
1. (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:
Section 1.—Form of negotiable instruments. An instrument to be negotiable must
conform to the following requirements:
1. (a)It must be in writing and signed by the maker or drawer;
2. (b)Must contain an unconditional promise or order to pay a sum certain in
money;
3. (c)Must be payable on demand, or at a fixed or determinable future time;
4. (d)Must be payable to order or to bearer; and
5. (e)Where the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty.
_____________
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.
498
498 SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Court of Appeals
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
accordingly to its original tenor.”9
 Reproduced hereunder are some examples of material and immaterial alterations:
A. Material Alterations:
1. (1)Substituting the words “or bearer” for “order.”
2. (2)Writing “protest waived” above blank indorsements.
3. (3)A change in the date from which interest is to run.
4. (4)A check was originally drawn as follows: “Iron County Bank, Crystal Falls,
Mich. Aug. 5, 1901. Pay to G.L. or order $9 fifty cents CTR.” The insertion of
the figure 5 before the figure 9, the instrument being otherwise unchanged.
5. (5)Adding the words “with interest” with or without a fixed rate.
6. (6)An alteration in the maturity of a note, whether the time for payment is
thereby curtailed or extended.
7. (7)An instrument was payable “First Nat’l. Bank,” the plaintiff added the word
“Marion.”
8. (8)Plaintiff, without consent of the defendant, struck out the name of the
defendant as payee and inserted the name of the maker of the original note.
9. (9)Striking out the name of the payee and substituting that of the person who
actually discounted the note.
10. (10)Substituting the address of the maker for the name of a co-maker.10
______________
Vitug, Pandect of Commercial Law and Jurisprudence, 1990 ed., p. 55.
9 ______________
Agbayani, Commentaries & Jurisprudence on the COMMERCIAL LAWS OF
10
THE PHILIPPINES, Vol. 1, 1992 ed., pp. 403-404.
499
VOL. 256, APRIL 25, 1996 499
Philippine National Bank vs. Court of Appeals
B. Immaterial Alterations:
1. (1)Changing “I promise to pay” to “We promise to pay,” where there are two
makers.
2. (2)Adding the word “annual” after the interest clause.
3. (3)Adding the date of maturity as a marginal notation.
4. (4)Filling in the date of actual delivery where the makers of a note gave it with
the date in blank, “July . . . .”
5. (5)An alteration of the marginal figures of a note where the sum stated in
words in the body remained unchanged.
6. (6)The insertion of the legal rate of interest where the note had a provision for
“interest at . . . . . . . per cent.”
7. (7)A printed form of promissory note had on the margin the printed words,
“Extended to . . . .” The holder on or after maturity wrote in the blank space
the words “May 1, 1913,” as a reference memorandum of a promise made by
him to the principal maker at the time the words were written to extend the
time of payment.
8. (8)Where there was a blank for the place of payment, filling in the blank with
the place desired.
9. (9)Adding to an indorsee’s name the abbreviation “Cash” when it had been
agreed that the draft should be discounted by the trust company of which
the indorsee was cashier.
10. (10)The indorsement of a note by a stranger after its delivery to the payee at
the time the note was negotiated to the plaintiff.
11. (11)An extension of time given by the holder of a note to the principal maker,
without the consent of a surety co-maker.11
The case at bench is unique in the sense that what was altered is the serial number of
the check in question, an item which, it can readily be observed, is not an essential
requisite for negotiability under Section 1 of the Negotiable Instruments Law. The
aforementioned alteration did not change the relations between the parties. The
name of the drawer and the drawee were not altered. The intended payee was the
same. The sum of money due to the payee remained the same. Despite these findings,
however, petitioner insists, that:
11 Id., at 404-405.
500
500 SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Court of Appeals
x x x.
It is an accepted concept, besides being a negotiable instrument itself, that a
TCAA check by its very nature is the medium of exchange of governments (sic)
instrumentalities or agencies. And as (a) safety measure, every government office
o(r) agency (is) assigned TCAA checks bearing different number series.
A concrete example is that of the disbursements of the Ministry of Education and
Culture. It is issued by the Bureau of Treasury sizeable bundles of checks in booklet
form with serial numbers different from other government office or agency. Now, for
fictitious payee to succeed in its malicious intentions to defraud the government, all
it need do is to get hold of a TCAA Check and have the serial numbers of portion (sic)
thereof changed or altered to make it appear that the same was issued by the MEC.
Otherwise, stated, it is through the serial numbers that (a) TCAA Check is
determined to have been issued by a particular office or agency of the government. 12
 xxx
Petitioner’s arguments fail to convince. The check’s serial number is not the sole
indication of its origin. As succinctly found by the Court of Appeals, the name of the
government agency which issued the subject check was prominently printed therein.
The check’s issuer was therefore sufficiently identified, rendering the referral to the
serial number redundant and inconsequential. Thus, we quote with favor the findings
of the respondent court:
xxx
If the purpose of the serial number is merely to identify the issuing government
office or agency, its alteration in this case had no material effect whatsoever on the
integrity of the check. The identity of the issuing government office or agency was not
changed thereby and the amount of the check was not charged against the account of
another government office or agency which had no liability under the check. The
owner and issuer of the check is boldly and clearly printed on its face, second line
from the top: ”MINISTRY OF EDUCATION AND CULTURE,” and below the name
of the payee
______________
12 Rollo, p. 78.
501
VOL. 256, APRIL 25, 1996 501
Philippine National Bank vs. Court of Appeals
are the rubber-stamped words: ”Ministry of Educ. & Culture.” These words are not
alleged to have been falsely or fraudulently intercalated into the check. The
ownership of the check is established without the necessity of recourse to the serial
number. Neither is there any proof that the amount of the check was erroneously
charged against the account of a government office or agency other than the Ministry
of Education and Culture. Hence, the alteration in the number of the check did not
affect or change the liability of the Ministry of Education and Culture under the check
and, therefore, is immaterial. The genuineness of the amount and the signatures
therein of then Deputy Minister of Education Hermenegildo C. Dumlao and of the
resident Auditor, Penomio C. Alvarez are not challenged. Neither is the authenticity
of the different codes appearing therein questioned x x x.13 (Italics ours.)
Petitioner, thus cannot refuse to accept the check in question on the ground that the
serial number was altered, the same being an immaterial or innocent one.
We now go to the second issue. It is petitioner’s submission that the certification
issued by Minrado C. Batonghinog, Cashier III of the MEC clearly shows that the
check was altered. Said certification reads:
July 22, 1985
TO WHOM IT MAY CONCERN:
This is to certify that according to the records of this Office, TCAA PNB Check No.
SN7-3666223-3 dated August 7, 1981 drawn in favor of F. Abante Marketing in the
amount of NINETY (S)EVEN THOUSAND SIX HUNDRED FIFTY PESOS ONLY
(P97,650.00) was not issued by this Office nor released to the payee concerned. The
series number of said check was not included among those requisition by this Office
from the Bureau of Treasury.
Very truly yours,
(SGD.) MINRADO C. BATONGHINOG
Cashier III.14
______________
13 Rollo, pp. 21-28.
14 Rollo, p. 26.
502
502 SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Court of Appeals
Petitioner claims that even if the author of the certification issued by the Ministry of
Education and Culture (MEC) was not presented, still the best evidence of the
material alteration would be the disputed check itself and the serial number thereon.
Petitioner thus assails the refusal of respondent court to give weight to the
certification because the author thereof was not presented to identify it and to be
cross-examined thereon.15
We agree with the respondent court.
The one who signed the certification was not presented before the trial court to
prove that the said document was really the document he prepared and that the
signature below the said document is his own signature. Neither did petitioner
present an eyewitness to the execution of the questioned document who could
possibly identify it.16Absent this proof, we cannot rule on the authenticity of the
contents of the certification. Moreover, as we previously emphasized, there was no
material alteration on the check, the change of its serial number not being substantial
to its negotiability.
Anent the third issue—whether or not the drawee bank may still recover the value
of the check from the collecting bank even if it failed to return the check within the
twenty-four (24) hour clearing period because the check was tampered—suffice it to
state that since there is no material alteration in the check, petitioner has no right to
dishonor it and return it to PBCom, the same being in all respects negotiable.
______________
15 Ibid.
16 R.J. Francisco, Evidence, 1993 ed., p. 505.
The due execution of a document could be proved through the testimony of (1) the
person who executed it; (2) the person before whom its execution was acknowledged;
or (3) any person who was present and saw it executed and delivered, or who, after
its execution and delivery, saw it and recognized the signatures, or by a person to
whom the parties to the instrument had previously confessed the execution thereof . .
..
503
VOL. 256, APRIL 25, 1996 503
Philippine National Bank vs. Court of Appeals
However, the amount of P10,000.00 as attorney’s fees is hereby deleted. In their
respective decisions, the trial court and the Court of Appeals failed to explicitly state
the rationale for the said award. The trial court merely ruled as follows:
With respect to Capitol’s claim for damages consisting of alleged loss of opportunity,
this Court finds that Capitol failed to adequately substantiate its claim. What Capitol
had presented was a self-serving, unsubstantiated and speculative computation of
what it allegedly could have earned or realized were it not for the debit made by
PBCom which was triggered by the return and debit made by PNB. However, this
Court finds that it would be fair and reasonable to impose interest at 12% per annum
on the principal amount of the check computed from October 19, 1981 (the date
PBCom debited Capitol’s account) until the amount is fully paid and reasonable
attorney’s fees.17 (Italics ours.)
And contrary to the Court of Appeals’ resolution, petitioner unambiguously
questioned before it the award of attorney’s fees, assigning the latter as one of the
errors committed by the trial court.18
The foregoing is in conformity with the guiding principles laid down in a long line
of cases and reiterated recently in Consolidated Bank & Trust Corporation
(Solidbank) v. Court of Appeals:19
The award of attorney’s fees lies within the discretion of the court and depends upon
the circumstances of each case. However, the discretion of the court to award
attorney’s fees under Article 2208 of the Civil Code of the Philippines demands
factual, legal and equitable justification, without which the award is a conclusion
without a premise and improperly left to speculation and conjecture. It becomes a
violation of the proscription against the imposition of a penalty on the right to litigate
(Universal Shipping Lines, Inc. v.
_______________
17CA Rollo, Decision of RTC, p. 5.
18CA Rollo, Brief of Appellant PNB, pp. 15-16.
19 246 SCRA 193 (1995); See also, Toyota Shaw, Inc. v. CA, 244 SCRA 320(1995).
504
504 SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Court of Appeals
Intermediate Appellate Court, 188 SCRA 170 [1990]). The reason for the award must
be stated in the text of the court’s decision. If it is stated only in the dispositive
portion of the decision, the same shall be disallowed. As to the award of attorney’s
fees being an exception rather than the rule, it is necessary for the court to make
findings of fact and law that would bring the case within the exception and justify the
grant of the award (Refractories Corporation of the Philippines v. Intermediate
Appellate Court, 176 SCRA 539 [1989]).
WHEREFORE, premises considered, except for the deletion of the award of
attorney’s fees, the decision of the Court of Appeals is hereby AFFIRMED.
SO ORDERED.
Padilla (Chairman), Bellosillo, Vitug and Hermosisima, Jr., JJ., concur.
Judgment affirmed.
Notes.—The award of attorney’s fees must be disallowed where the award of
exemplary damages is eliminated. (Albenson Enterprises Corporation vs. Court of
Appeals, 217 SCRA 16 [1993])
Where a party had been paying his indebtedness in checks even when the amount
was only P6,350.00, with more reason then should he be expected to pay in checks
when the amount involved was P95,730.00. (Rubio vs. Court of Appeals, 246 SCRA
255 [1995])
——o0o——
505
VOL. 256, APRIL 25, 1996 505
People vs. Alba
 G.R. No. 208321. July 30, 2014.*
WESLEYAN UNIVERSITY-PHILIPPINES, petitioner, vs.NOWELLA REYES,
respondent.
Remedial Law; Civil Procedure; Courts; Court of Appeals; Jurisdiction; It is
settled that under Section 9 of Batas Pambansa (BP) Blg. 129, as amended by
Republic Act (RA) No. 7902, the Court of Appeals (CA), pursuant to the exercise of
its original jurisdiction over petitions for certiorari, is specifically given the power
to pass upon the evidence, if and when necessary, to resolve factual issues.—It is
settled that under Section 9 of Batas Pambansa Blg. 129, as amended by Republic
Act No. 7902, the CA, pursuant to the exercise of its original jurisdiction over
petitions for certiorari, is specifically given the power to pass upon the evidence, if
and when necessary, to resolve factual issues. Sec. 9 clearly states: The Court of
Appeals shall have the power to try cases and conduct hearings, receive evidence and
perform any and all acts necessary to resolve factual issues raised in cases falling
within its original and appellate jurisdiction, including the power to grant and
conduct new trials or further proceedings. x x x Hence, the appellate court acted
within its sound discretion when it reevaluated the NLRC’s factual findings and
substituted the latter’s own judgment.
_______________
* THIRD DIVISION.
517
VOL. 731, JULY 30, 2014 517
Wesleyan University-Philippines vs. Reyes
Labor Law; Termination of Employment; Loss of Trust and Confidence; The
question of whether she was a managerial or rank-and-file employee does not
matter in this case because not only is there basis for believing that she breached
the trust of her employer, her involvement in the irregularities attending to
petitioner’s finances has also been proved.—There is no doubt that respondent held
a position of trust; thus, greater fidelity is expected of her. She was not an ordinary
rank-and-file employee but an employee occupying a very sensitive position. As
University Treasurer, she handled and supervised all monetary transactions and was
the highest custodian of funds belonging to WUP. To be sure, in the normal exercise
of her functions, she regularly handled significant amounts of money of her employer
and managed a critical department. The presence of the first requisite is certain. So is
as regards the second requisite. Indeed, the Court finds that petitioner adequately
proved respondent’s dismissal was for a just cause, based on a willful breach of trust
and founded on clearly established facts as required by jurisprudence. At the end of
the day, the question of whether she was a managerial or rank-and-file employee
does not matter in this case because not only is there basis for believing that she
breached the trust of her employer, her involvement in the irregularities attending to
petitioner’s finances has also been proved.
Mercantile Law; Negotiable Instruments Law; Checks; Crossed Checks;
Jurisprudence has pronounced that the crossing of a check means that the check
may not be encashed but only deposited in the bank.—Jurisprudence has
pronounced that the crossing of a check means that the check may not be encashed
but only deposited in the bank. As Treasurer, respondent knew or is at least expected
to be aware of and abide by this basic banking practice and commercial custom.
Clearly, the issuance of a crossed check reflects management’s intention to safeguard
the funds covered thereby, its special instruction to have the same deposited to
another account and its restriction on its encashment.
Labor Law; Termination of Employment; An employer cannot be compelled to
retain an employee who is guilty of acts inimical to the interests of the employer.—
An employer cannot be compelled to retain an employee who is guilty of acts inimical
to the interests of the employer. A company has the right to dismiss its employees if
only as a measure of self-protection. This is all the more true in the
518
5 SUPREME COURT REPORTS ANNOTATED
18
Wesleyan University-Philippines vs. Reyes
case of supervisors or personnel occupying positions of responsibility. In this
case, let it be remembered that respondent was not an ordinary rank-and-file
employee as she was no less the Treasurer who was in charge of the coffers of the
University. It would be oppressive to require petitioner to retain in their
management an officer who has admitted to knowingly and intentionally committing
acts which jeopardized its finances and who was untrustworthy in the handling and
custody of University funds.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
J.V. Bautista Law Offices for petitioner.
Romeo V. Viloria for respondent.
VELASCO, JR., J.:
Nature of the Case
The issue in this petition boils down to the legality of respondent Nowella Reyes’
termination as University Treasurer of petitioner Wesleyan University-Philippines
(WUP) on the ground of loss of trust and confidence. Petitioner prays in this recourse
that We reverse the February 28, 2013 Decision of the Court of Appeals (CA) in C.A.-
G.R. S.P. No. 122536 which declared respondent’s termination illegal.
The Facts
 On March 16, 2004, respondent Nowella Reyes was appointed as WUP’s
University Treasurer on probationary basis. A little over a year after, she was
appointed as full time University Treasurer.
On April 27, 2009, a new WUP Board of Trustees was constituted. Among its first
acts was to engage the services of Nepomuceno Suner & Associates Accounting Firm
(External
519
VOL. 731, JULY 30, 2014 519
Wesleyan University-Philippines vs. Reyes
Auditor) to investigate circulating rumors on alleged anomalies in the contracts
entered into by petitioner and in its finances.
Discovered following an audit were irregularities in the handling of petitioner’s
finances, mainly, the encashment by its Treasury Department of checks issued to
WUP personnel, a practice purportedly in violation of the imprest system of cash
management, and the encashment of various crossed checks payable to the
University Treasurer by Chinabank despite management’s intention to merely have
the funds covered thereby transferred from one of petitioner’s bank accounts to
another. The External Auditor’s report embodied the following findings and
recommendations:1
Treasury Department (Cash Management):
Findings:
1. It was noted that checks consisting of various checks payable to teachers, staffs and
other third parties had been the subject of encashment directly with the Treasury
Department under the stewardship of Mrs. Nowella A. Reyes, the University
Treasurer. This practice is a clear violation of imprest system of cash management,
hence, resulting to unsound accounting practice. This laxity in cash management of
those checks were paid as intended for them.
Recommendations:
For internal control reasons, the treasury should not accept any check
encashment from its daily collections. Checks are being issued for encashment with
our depository bank for security reasons. The mere acceptance of checks from the
collections is tantamount to cash disbursement out of collections.
_______________
1 Rollo, p. 36.
520
520 SUPREME COURT REPORTS ANNOTATED
Wesleyan University-Philippines vs. Reyes
Findings:
2. It was also noted that various checks payable to the Treasurer of WUP x x x had
been negotiated for encashment directly to China Bank-Cabanatuan Branch, while
the intention of the management for these checks were merely for fund transfer with
the other account maintained at China Bank. This practice is a violation not only in
the practice of
accounting/cash custodianship but had been mingled with spurious elements.
Unfortunately, check vouchers relating to this exception are nowhere to be found or
not on file.
Findings:
3. A crossed check payable to the Treasurer-[WUP] x x x had been negotiated for
encashment to China Bank-Cabanatuan Branch despite of the restriction indicated in
the face of the check. Unfortunately, the used check was no longer found on file.
As a result of said audit, petitioner served respondent a Show Cause Order and
placed her under preventive suspension.2 The said Show Cause Order required her to
explain the following matters found by the External Auditors:
(a) your encashment of Php300,000.00 of a crossed check you issued payable to
yourself (Chinabank Check No. 000873613 dated 26 November 2008) x x x;
(b) the encashment of various checks without any supporting vouchers x x x;
(c) unliquidated cash advances in the aggregate amount of Php9.7 million x x x.3
On June 18, 2009, respondent submitted her Explanation. Following which,
WUP’s Human Resources Development
_______________
2 Id., at p. 47.
3 Id.
521
VOL. 731, JULY 30, 2014 521
Wesleyan University-Philippines vs. Reyes
Office (HRDO) conducted an investigation. Finding respondent’s Explanation
unsatisfactory, the HRDO, on July 2, 2009, submitted an Investigation Report 4 to
the University President containing its findings and recommending respondent’s
dismissal as University Treasurer.
Upon receipt of her notice of termination on July 9, 2009, respondent post-haste
filed a complaint for illegal dismissal with the Arbitration Branch of the National
Labor Relations Commission. She contended that her dismissal was illegal, void and
unjust, for the following reasons:
First, her 60-day preventive suspension violated the Labor Code provisions
prohibiting such suspensions to last for more than thirty (30) days. Thus, the fact
that she was not reinstated to her former position before the lapse of thirty (30) days,
amounted to constructive dismissal;5
Second, there was a violation of her right to substantive and procedural due
process, as evidenced by petitioner’s failure to apply the pertinent due process
provisions under its Administrative and Personnel Policy Manual;6 and
 Finally, the charges against her were based on mere suspicion and speculations
and unsupported by evidence.7
Petitioner, for its part, predicated its defense on the contention that respondent
was a highly confidential employee who handled significant amounts of money as
University Treasurer and that the irregularities attributed to her in the performance
of her duties justify her dismissal on the basis of loss of trust and confidence.8
Petitioner also averred that the 60-day preventive suspension thus imposed does
not necessarily make such suspension
_______________
4 Id., at pp. 58-62.
5 Id., at p. 23.
6 Id.
7 Id.
8 Id.
522
522 SUPREME COURT REPORTS ANNOTATED
Wesleyan University-Philippines vs. Reyes
void, inasmuch as the law merely requires that after a 30-day preventive suspension,
the affected employee shall automatically be reinstated. But in the case of
respondent, there was no need for her automatic reinstatement inasmuch as she was
duly terminated within the 30-day period of her preventive suspension.9 Moreover,
respondent was duly afforded her right to due process since WUP substantially
complied with the twin-notice rule.
Ruling of the Labor Arbiter
On December 15, 2010, Labor Arbiter Reynaldo V. Abdon rendered a Decision
finding for respondent. The dispositive portion of the Labor Arbiter Decision reads:
WHEREFORE, premises considered, judgment is hereby rendered, DECLARING
that complainant Nowella Reyes x x x [was] illegally dismissed by respondent
Wesleyan University Philippines.
Accordingly, respondent Wesleyan University Philippines through its President is
hereby DIRECTED to:
(1) Reinstate complainant Nowella Reyes to her former or equivalent position
without loss of seniority right;
(1.1) Since reinstatement is immediately executory, to render a Report of
Compliance to this Office within ten (10) days from receipt of this Decision.
(2) Pay complainant Reyes her backwages, from the time of her dismissal until
reinstatement, the present sum of which is P429,000.00;
(3) Pay complainant Reyes, her 13th month pay in the sum of P52,000; her shared
(sic) in related learning experience fee, P12,000.00; clothing allowance, P6,000.00;
Honorarium as member of standing
_______________
9 Id., at p. 24.
523
VOL. 731, JULY 30, 2014 523
Wesleyan University-Philippines vs. Reyes
committees, P4,000.00; and her vacation leave credits in the sum of P17,862.59;
(4) Pay complainant Reyes, moral damages in the sum of P150,000.00,
exemplary damages in the amount of P100,000.00, and 10% attorney’s fees in the
sum of P77,086.25;
xxxx
SO ORDERED.10
The Labor Arbiter noted, as respondent has insisted, that the charges against the
latter were based on mere rumors and speculations. As observed too by the Labor
Arbiter, petitioner itself was in the wrong because it had no proper policies on its
accounting and financial procedures and that the encashment and accommodation of
checks to personnel, especially after banking hours, had been the practice of its
previous and present administrations. Thus, it was unfair to put all the blame on
respondent without any evidence that her actions were highly irregular, unfair or
unjustified.11
As regards petitioner’s findings on the alterations in the Check Disbursement
Voucher (CDV), unliquidated cash advances and duplicate checks, the Labor Arbiter
found and wrote:
Anent the alleged finding of the university that there was material alteration on
the documents as regards the Check Disbursement Voucher (CDV), for allegedly
there was an absence of Board Resolution entry in the CDV filed in the Accounting
while the copy submitted by the Treasurer has a Board Resolution entry as well as the
word ATM on the payee portion on the photocopy as crossed out while in the original
it was not crossed out, respondent cannot summarily state that complainant was at
fault. The Human Resource should have con-
_______________
10 Id., at pp. 24-25.
11 Id., at p. 39.
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ducted an in-depth investigation on this matter. Unfortunately, respondent just
followed the twin-notice rule, and did not conduct a thorough administrative
investigation in accordance with their own internal rules and policies in the Manual.
Consequently, this Office has serious doubt that such matter was the fault of the
complainant for the blame may fall on the accounting personnel who is handling the
CDV.
With respect to the unliquidated cash advances, it is not likewise the fault of the
complainant. She pointed out that follow ups of the liquidation is [sic] being handled
by the auditor, while respondent claims that she was previously handling the same
before it was transferred to Accounting Office in August 2008. We see no evidence to
prove that the liquidation is being handled by the complainant prior to August 2008.
Moreover, it is common practice that the Treasurer disburses the funds such as cash
advances but the liquidation must be done by the beneficiary of the fund, and the
responsible people who should follow up the liquidation is the accounting office.
With respect to the duplicate checks, the same were done by a syndicate or
individuals not connected with the University. The bank has already admitted
responsibility in the encashment of these checks and had returned the amounts to
the respondent University, thus complainant has no fault about this incident.12
Ruling of the NLRC
Petitioner filed an appeal with the National Labor Relations Commission (NLRC)
which was granted in the tribunal’s Decision dated July 11, 2011, declaring that
respondent was legally dismissed. However, petitioner was ordered to pay
respondent her proportionate 13th month pay, the monetary value of her vacation
leave, and attorney’s fees.
_______________
12 Id., at p. 40.
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Wesleyan University-Philippines vs. Reyes
Adopting a stance entirely opposite to that of the Labor Arbiter, the NLRC held
that respondent failed to controvert and disprove the established charges of
petitioner (as appellant-respondent) and instead conveniently put the blame on other
departments for her inculpatory acts. The NLRC opined that her termination was not
motivated by the change of petitioner’s officers but by the University’s goal to
promote the economy and efficiency of its Treasury Department.13
In net effect, the NLRC found petitioner’s contention of loss of trust and
confidence in respondent with sufficient basis. While respondent, so the NLRC notes,
may not have been guilty of willful breach of trust, the fact that she held a highly
confidential position, and considering that anomalous transactions transpired under
her command responsibility, provided petitioner with ample ground to distrust and
dismiss her.14 The NLRC explained:
In this case, complainant-appellee [herein respondent] may not have been guilty
of willful breach of trust. But as Treasurer of [WUP] who handles and supervises all
monetary transactions in the University and being a highly confidential employee at
that, holding trust and confidence and after considering the series of irregular and
anomalous transactions that transpired under complainant-appellee’s command
responsibility, respondent has basis or ample reason to distrust complainant-
appellee. Thus, we cannot justly deny [WUP] the authority to dismiss complainant-
appellee.
The principle of respondent (sic) superior or command responsibility may be
cited as basis for the termination of employment of managerial employees based on
loss of trust and confidence.
In the Etcuban case (ibid.) the Supreme Court in upholding the validity of
petitioner-employee’s dismissal on the ground of loss of trust and confidence, ruled
that
_______________
13 Id., at p. 62.
14 Id., at p. 63.
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Wesleyan University-Philippines vs. Reyes
even if the employee x x x had no actual and direct participation in the alleged
anomalies, his failure to detect any anomaly that would normally fall within the
scope of his work reflects his ineffectiveness and amounts to gross negligence and
incompetence which are likewise justifiable grounds for his irregularity, for what is
material is that his actuations were more than sufficient to sow in his employer the
seed of mistrust and loss of confidence.
As found by the External Auditor, complainant-appellee should have
implemented an imprest system of cash management in order to secure the indicated
payees in those checks and they were paid of the checks as intended for them. It
appears that checks payable to teachers, staffs and other third parties had been the
subject of encashment directly with the Treasury Department x x x and this is an
unsound accounting practice.
Moreover, the External Auditors found that various checks payable to the
Treasurer of Wesleyan University has been negotiated for encashment directly to
China Bank-Cabanatuan Branch while the intention of the management for those
checks were merely for fund transfer with the other account maintained at China
Bank. That this practice violated accounting or cash custodianship and check
vouchers are nowhere to be found.
Further, the crossed check payable to the Treasurer (complainant-appellee) in the
amount of P300,000.00 dated 26 November 2008 had been negotiated for
encashment to China Bank-Cabanatuan Branch despite of restriction indicated in the
face of the check and that the used check was no longer found on file. There is a need
for a clear policy when to issue crossed-checks or otherwise and the use of
debit/credit memo to transfer one account to another with the same bank. That these
acts of violation of cash and check custodianship by complainant-appellee resulted in
the loss of respondent-appellant thus affecting the economy of the respondent-
appellant institution.
In view of our finding that respondents-appellants (sic) has validly terminated
complainant-appellee the latter’s claim for damages and attorney’s fees lacks suffi-
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Wesleyan University-Philippines vs. Reyes
cient factual and legal basis. Accordingly, the Labor Arbiter’s decision directing the
reinstatement of complainant-appellee with full backwages is hereby vacated and set
aside.15
The NLRC denied respondent’s motion for reconsideration in a Resolution dated
September 29, 2011. Therefrom, respondent went on Certiorari to the CA, in C.A.-
G.R. S.P. No. 122536.
Ruling of the Court of Appeals
On February 28, 2013, the CA, through its assailed Decision, 16 found the NLRC’s
ruling tainted with grave abuse of discretion and reinstated the Decision of the Labor
Arbiter. The fallo of the CA Decision reads:
WHEREFORE, premises considered, the assailed Decision and Resolution of
the National Labor Relations Commission dated July 11, 2011 and September 29,
2011 are REVERSED and SET ASIDE. The Decision of the Labor Arbiter dated
December 15, 2010 is hereby REINSTATED, subject to the modification that if
reinstatement is no longer feasible, petitioner shall be awarded separation pay
equivalent to one month salary for every year of service reckoned from the time of
employment to the finality of this decision.17
Holding that respondent’s termination was unjust, the CA, in virtual
restoration of the findings and conclusions of the Labor Arbiter, pointed out, among
others, that: (1) respondent sufficiently countered all charges against her; (2) it had
been
_______________
15 Id., at pp. 63-64.
16 Penned by Associate Justice Pricilla J. Baltazar-Padilla and concurred in by
Associate Justices Rosalinda Asuncion-Vicente and Agnes Reyes-Carpio.
17 Rollo, p. 41.
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the practice of the previous and present administrations of petitioner to encash and
accommodate checks of WUP personnel; thus, it would be unjust to penalize
respondent for observing a practice already in place when she assumed office; (3) the
duty to liquidate cash advances is assigned to the internal auditor; (4) it has been
established that the encashments of spurious duplicate checks were perpetrated by
individuals not connected with WUP, and that the bank admitted responsibility
therefor and had returned the amount involved to petitioner; (5) there was no
imputation of any violation of the University’s Administration and Personnel Policy
Manual; (6) while the acts complained of violated the imprest system of cash
management, there was no showing that the said system had been adopted and
observed in the school’s accounting and financial procedures; and (7) there was no
showing that respondent had the responsibility to implement changes in petitioner’s
accounting system even if it were not in accordance with the generally accepted
principles of accounting.18
Hence, the instant petition.
The Issues
For consideration herein are the following issues raised by petitioner:
1. Whether or not the CA overreached its power of review under Rule 65 of the
Rules of Court when it reversed the judgment of the NLRC; and
2. Whether or not the CA erred in finding respondent illegally dismissed by
petitioner on the ground of loss of trust and confidence.
_______________
18 Id., at pp. 37-38.
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The Court’s Ruling
The petition is impressed with merit. The CA erred in reinstating the Labor
Arbiter’s Decision and in finding that respondent was illegally dismissed.
The CA’s power of review
We first resolve the procedural issue raised in this recourse. Petitioner contends
that the CA overreached its power of review under Rule 65 when it substituted its
own judgment over errors of judgment that it found in the NLRC Decision, stressing
that the province of a writ of certiorari is to correct only errors of jurisdiction and not
errors of judgment.
This contention is misplaced. It is settled that under Section 9 of Batas Pambansa
Blg. 129,19 as amended by Republic Act No. 7902,20 the CA, pursuant to the exercise
of its original jurisdiction over petitions for certiorari, is specifically given the power
to pass upon the evidence, if and when necessary, to resolve factual issues. Sec. 9
clearly states:
 The Court of Appeals shall have the power to try cases and conduct hearings,
receive evidence and perform any and all acts necessary to resolve factual issues
raised in cases falling within its original and appellate jurisdiction, including the
power to grant and conduct new trials or further proceedings. x x x
_______________
19 An Act Reorganizing the Judiciary, Appropriating Funds therefor, and for
Other Purposes.
20 An Act Expanding the Jurisdiction of the Court of Appeals, Amending for the
Purpose Section Nine of Batas Pambansa Blg. 129, as Amended, Known as the
Judiciary Reorganization Act of 1980.
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Wesleyan University-Philippines vs. Reyes
Hence, the appellate court acted within its sound discretion when it reevaluated
the NLRC’s factual findings and substituted the latter’s own judgment.
Loss of trust and confidence as a ground for termination
We now proceed to the substantive issue on the propriety of respondent’s
dismissal due to loss of trust and confidence. As provided in Art. 282(c) of
Presidential Decree No. 442, otherwise known as the Labor Code of the Philippines:
Article 282. Termination by employer.—An employer may terminate an
employment for any of the following causes:
xxxx
c. Fraud or willful breach by the employee of the trust reposed in him by his
employer or duly authorized representative;
We explained in M+W Zander Philippines, Inc. v. Enriquez21 the requisites of a
valid dismissal based on loss of trust and confidence. As the case elucidates:
Article 282(c) of the Labor Code allows an employer to terminate the services of
an employee for loss of trust and confidence. Certain guidelines must be observed for
the employer to terminate an employee for loss of trust and confidence. We held
in General Bank and Trust Company v. Court of Appeals, viz.:
[L]oss of confidence should not be simulated. It should not be used as a
subterfuge for causes which are improper, illegal, or unjustified. Loss of confidence
may not be arbitrarily asserted in the face of overwhelming evidence
_______________
21 G.R. No. 169173, June 5, 2009, 588 SCRA 590.
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to the contrary. It must be genuine, not a mere afterthought to justify earlier action
taken in bad faith.
The first requisite for dismissal on the ground of loss of trust and confidence is
that the employee concerned must be one holding a position of trust and confidence.
There are two classes of positions of trust: managerial employees and fiduciary
rank-and-file employees.
Managerial employees are defined as those vested with the powers or prerogatives
to lay down management policies and to hire, transfer, suspend, lay-off, recall,
discharge, assign or discipline employees or effectively recommend such managerial
actions. They refer to those whose primary duty consists of the management of the
establishment in which they are employed or of a department or a subdivision
thereof, and to other officers or members of the managerial staff. Officers and
members of the managerial staff perform work directly related to management
policies of their employer and customarily and regularly exercise discretion and
independent judgment.
The second class or fiduciary rank-and-file employees consist of cashiers,
auditors, property custodians, etc., or those who, in the normal exercise of their
functions, regularly handle significant amounts of money or property. These
employees, though rank-and-file, are routinely charged with the care and custody of
the employer’s money or property, and are thus classified as occupying positions of
trust and confidence.22
xxxx
The second requisite of terminating an employee for loss of trust and confidence
is that there must be an act that would justify the loss of trust and confidence. To be a
valid cause for dismissal, the loss of confidence must
_______________
22 Id., at pp. 602-604.
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532 SUPREME COURT REPORTS ANNOTATED
Wesleyan University-Philippines vs. Reyes
be based on a willful breach of trust and founded on clearly established facts.23
To summarize, the first requisite is that the employee concerned must be one
holding a position of trust and confidence, thus, one who is either: (1) a managerial
employee; or (2) a fiduciary rank-and-file employee, who, in the normal exercise of
his or her functions, regularly handles significant amounts of money or property of
the employer. The second requisite is that the loss of confidence must be based on a
willful breach of trust and founded on clearly established facts.
In Lima Land, Inc. v. Cuevas,24 We discussed the difference between the criteria
for determining the validity of invoking loss of trust and confidence as a ground for
terminating a managerial employee on the one hand and a rank-and-file employee on
the other. In the said case, We held that with respect to rank-and-file personnel, loss
of trust and confidence, as ground for valid dismissal, requires proof of involvement
in the alleged events in question, and that mere uncorroborated assertions and
accusations by the employer would not suffice. With respect to a managerial
employee, the mere existence of a basis for believing that such employee has
breached the trust of his employer would suffice for his dismissal. The following
excerpts from Lima Land are instructive:
As firmly entrenched in our jurisprudence, loss of trust and confidence, as a just
cause for termination of employment, is premised on the fact that an employee
concerned holds a position where greater trust is placed by management and from
whom greater fidelity to duty is correspondingly expected. This includes managerial
personnel entrusted with confidence on delicate matters, such as the custody,
handling, or care and protection of
_______________
23 Id., at p. 606.
24 G.R. No. 169523, June 16, 2010, 621 SCRA 36.
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Wesleyan University-Philippines vs. Reyes
the employer’s property. The betrayal of this trust is the essence of the offense for
which an employee is penalized.
It must be noted, however, that in a plethora of cases, this Court has distinguished
the treatment of managerial employees from that of rank-and-file personnel, insofar
as the application of the doctrine of loss of trust and confidence is concerned. Thus,
with respect to rank-and-file personnel, loss of trust and confidence, as ground for
valid dismissal, requires proof of involvement in the alleged events in question, and
that mere uncorroborated assertions and accusations by the employer will not be
sufficient. But as regards a managerial employee, the mere existence of a basis for
believing that such employee has breached the trust of his employer would suffice for
his dismissal. Hence, in the case of managerial employees, proof beyond reasonable
doubt is not required, it being sufficient that there is some basis for such loss of
confidence, such as when the employer has reasonable ground to believe that the
employee concerned is responsible for the purported misconduct, and the nature of
his participation therein renders him unworthy of the trust and confidence
demanded of his position.
On the other hand, loss of trust and confidence as a ground of dismissal has never
been intended to afford an occasion for abuse because of its subjective nature. It
should not be used as a subterfuge for causes which are illegal, improper, and
unjustified. It must be genuine, not a mere afterthought intended to justify an earlier
action taken in bad faith. Let it not be forgotten that what is at stake is the means of
livelihood, the name, and the reputation of the employee. To countenance an
arbitrary exercise of that prerogative is to negate the employee’s constitutional right
to security of tenure.25
_______________
25 Id., at pp. 46-47.
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Respondent’s employment classification is irrelevant in light of her
proven willful breach
There is no doubt that respondent held a position of trust; thus, greater fidelity is
expected of her. She was not an ordinary rank-and-file employee but an employee
occupying a very sensitive position. As University Treasurer, she handled and
supervised all monetary transactions and was the highest custodian of funds
belonging to WUP.26 To be sure, in the normal exercise of her functions, she regularly
handled significant amounts of money of her employer and managed a critical
department.
The presence of the first requisite is certain. So is as regards the second requisite.
Indeed, the Court finds that petitioner adequately proved respondent’s dismissal was
for a just cause, based on a willful breach of trust and founded on clearly established
facts as required by jurisprudence. At the end of the day, the question of whether she
was a managerial or rank-and-file employee does not matter in this case because not
only is there basis for believing that she breached the trust of her employer, her
involvement in the irregularities attending to petitioner’s finances has also been
proved.
To recall, petitioner, per its account, allegedly lost trust and confidence in
respondent owing to any or an interplay of the following events: (1) she encashed a
check payable to the University Treasurer in the amount of three hundred thousand
pesos (Php300,000); (2) she encashed crossed checks payable to the University
Treasurer, when the intention of management in this regard was to merely transfer
funds from one of petitioner’s accounts to another in the same bank; (3) she allowed
the Treasury Department to encash the checks issued to WUP personnel rather than
requiring the latter to have said checks encashed by the bank, in violation of the
_______________
26 Rollo, p. 52.
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Wesleyan University-Philippines vs. Reyes
imprest system of accounting; (4) she caused the disbursement of checks without
supporting check vouchers; (5) there were unliquidated cash advances; and (6)
spurious duplicate checks bearing her signature were encashed causing damage to
petitioner.
We disagree with the CA’s finding that respondent has sufficiently countered all
inculpatory allegations and accusations against her. On the contrary, We find that
here, there was an admitted, actual and real breach of duty committed by
respondent, which translates into a breach of trust and confidence in her. For
perspective, respondent’s explanation as to the charges against her is as follows:
1. That the alleged crossed check issued by her payable to THE TREASURER
– WUP was done in the exercise of her duty and function as such, and not with her
name and not to herself and personal favor, and that said check had been prepared
passing through the usual system;
2. That the University heads were the beneficiaries of said amount who
strongly requested that their love gift be given, hence, the encashment;
3. That the amount of the check was properly disposed of as evidenced by the
document bearing the signatures of recipients;
4. That the Office to point to if vouchers and supporting documents will have
to be checked concerning payments made is the Accounting Office;
5. That cash advances to various University personnel pass through her
office in the exercise of her duties as such but the office who follow up the
liquidation of payments received is the Office of the University Auditor;
6. That respondent Reyes adopted her reply on the show-cause order in the
investigation previously conducted by Dr. Jeremias Garcia about the duplicated
checks alleging among others:
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536 SUPREME COURT REPORTS ANNOTATED
Wesleyan University-Philippines vs. Reyes
a) She and her staff confirmed that only the checks issued to General
Capulong and Leodigario David were encashed by the University Teller;
b) The check issued to Norma de Jesus was encashed by the Pick-up Chinabank
Teller on December 5, 2008 while collecting deposits from the University with the
assistance of the University teller;
c) That the check issued to Mercedes was not encashed with the University
teller but with WEMCOOP;
d) As to the encashment and accommodation of checks to personnel, it has been
the practice of previous and present administration moreso when employees cannot
anymore go to Chinabank to transact business as it is mostly beyond banking hours
when checks are ready for disbursement;
e) That Respondent’s department has no control over fraudulent transactions
done outside the University, that it is the Bank’s duty to protect its clients as to the
proper procedures to secure our account;
f) That the computer system program of the University’s depository bank has
very limited capabilities to detect fraudulent entries;
g) That the signature verifier also had been remiss in carefully checking the
authenticity of previous signatories.27
a. Respondent’s encashment of checks
As it were, respondent did not deny, in fact admitted, the encashment of the three
hundred thousand peso (Php300,000) crossed check payable to the University
Treasurer which covered the total amount of the “love gift” for administrative and
academic officials of WUP. Neither did she deny the fact
_______________
27 Id., at pp. 61-62.
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Wesleyan University-Philippines vs. Reyes
that the Treasury Department encashed checks issued to WUP personnel rather than
requiring them to have the checks encashed by the bank. Instead, she explained that
the beneficiaries of the amounts strongly requested that their love gifts be given in
cash, hence the encashment of the Php300,000 crossed check and, thereafter, the
accommodation and encashment of their checks directly by the Treasury
Department. Moreover, she submitted a document bearing the signatures of the
recipients of the “love gift” as proof that the amount was disposed properly. 28 She
further insisted that this was the usual practice of the University and that she merely
accommodated the requests of WUP personnel especially when Chinabank was
already closed.
Jurisprudence has pronounced that the crossing of a check means that the check
may not be encashed but only deposited in the bank.29 As Treasurer, respondent
knew or is at least expected to be aware of and abide by this basic banking practice
and commercial custom. Clearly, the issuance of a crossed check reflects
management’s intention to safeguard the funds covered thereby, its special
instruction to have the same deposited to another account and its restriction on its
encashment.
Here, respondent, as aptly detailed in the auditor’s report, disregarded
management’s intentions and ignored the measures in place to secure the handling of
WUP’s funds. By encashing the crossed checks, respondent put the funds covered
thereby under the risk of being lost, stolen, co-mingled with other funds or spent for
other purposes. Furthermore, the accommodation and encashment by the Treasury
Department of checks issued to WUP personnel were highly irregular. First, WUP,
not being a bank, had no business encashing the
_______________
28 Id., at p. 97.
 29 Bataan Cigar and Cigarette Factory, Inc. v. Court of Appeals, G.R. No.
93048, March 3, 1994, 230 SCRA 643.
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538 SUPREME COURT REPORTS ANNOTATED
Wesleyan University-Philippines vs. Reyes
checks of its personnel.30 More importantly, in encashing the said checks, the
Treasury Department made disbursements contrary to the wishes of management
because, in issuing said checks, management has made clear its intention that
monies therefor would be sourced from petitioner’s deposit with Chinabank, under a
specific account, and not from the cash available in the Treasury Department.
That the encashment of crossed checks and payment of checks directly to WUP
personnel had been the practice of the previous and present administration of
petitioner is of no moment. To Our mind, this was simply respondent’s convenient
excuse, a poorly disguised afterthought, when her unbecoming carelessness in
managing WUP’s finances was exposed. Moreover, the prevalence of this practice
could have been contained if only respondent consistently observed the regular
procedure for encashing crossed checks and properly handled requests for
accommodation of checks issued to the WUP personnel.
b. Unliquidated cash advances
On the matter of unliquidated cash advances in the aggregate amount of nine
million seven hundred thousand pesos (Php9,700,000), respondent explained that
while it was true that cash advances to WUP personnel passed through her office in
the exercise of her duties as University Treasurer, the office that follows up the
liquidation of advances received is the office of the University Auditor. 31 However,
granting that the responsibility of handling the liquidation of cash
_______________
30 By definition, a check is a written order addressed to a bank or a person
carrying on the business of banking, by a party having money in their hands,
requesting them to pay on presentment, to a person named therein or to bearer or
order, a named sum of money. See Moran v. Court of Appeals, G.R. No. 105836,
March 7, 1994, 230 SCRA 799.
31 Rollo, p. 98.
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advances is no longer lodged in her office, there is proof showing that before the
Treasury Department was relieved of said responsibility, the total unliquidated cash
advances was even bigger, amounting to eleven million five hundred thirty-three
thousand two hundred thirty pesos and thirty-seven centavos (Php11,533,230.37).
There is nothing in the records before us showing that respondent denied the
following findings in the Investigation Report of the WUP’s Human Resource
Development Office (HRDO) on this matter, to wit:
In the matter of unliquidated cash advances in the aggregate amount of
Php9.7million as found by the External Auditors, respondent’s contention was that
cash advances to various University personnel pass through her office in the
exercise of her duties as such but the office who follows up the liquidation of
payments received is the Office of the University Auditor.
On the inquiry done x x x of the Internal Auditor, Treasury and Accounting
officer on July 1, 2009, it was found out that the responsibility of handling cash
advances and liquidation report was transferred from Treasury Office to
Accounting Office on August 2008, when Ms. Luzviminda Torres, the personnel
handling the same detailed at the Treasury Office went on leave. It was transferred
to Ms. Julieta Mateo. What was surprising was that as per certification and
summary submitted by Ms. Mateo, the amount of unliquidated cash advances
previous to August 2008, when the same was under the responsibility of the
Treasury Office, was even bigger with the total amount of ELEVEN MILLION FIVE
HUNDRED THIRTY-THREE THOUSAND, TWO HUNDRED THIRTY PESOS AND
THIRTY-SEVEN CENTAVOS (Attached as Annex “G”).
Even if there is truth in the contention of herein Respondent that she was no longer
the one in charge of the liquidation proceedings, the same would not absolve her
from gross negligence of duties. The fact that the said function was with her office
until August 2008, with unliquidated cash advances even bigger, still showed that
she reneged in her duties which she had overlooked for so540
540 SUPREME COURT REPORTS ANNOTATED
Wesleyan University-Philippines vs. Reyes
long. She now mistakenly points the responsibility to the Office of the University
Auditor. These informations are enough to be considered as Respondent’s acts
constitutive of breach of trust and confidence.32 x x x
c. Other irregularities in respondent’s performance
In all, We find the Investigation Report of the HRDO a credible, extensive and
thorough account of respondent’s involvement in incidents which are sufficient
grounds for petitioner’s loss of trust and confidence in her, to wit:
Respondent Nowella C. Reyes has committed breach of trust and
confidence in the conduct of her office.
In her answer, Respondent admitted the encashment of the crossed check with
the defense that the same was done in the performance of her duty, not for her
personal use but because of the request of University heads who wanted their love
gifts be given. She also admitted habitual encashment of checks issued by the
University to its personnel on the basis of practice of previous administration.
The charge against Respondent of the act of improper encashment of a check,
which aside from being irregular is clearly violative of imprest system of cash
management. Moreover, the same being a crossed check, should not be negotiated
for encashment to Chinabank-Cabanatuan Branch because of the restriction
indicated on its face, which Mrs. Reyes, by reason of her office knew very well.
During the investigation conducted, it was revealed that the check disbursement
voucher attached by Respondent on her answer to justify the regularity of its
issuance and eventual encashment was not exactly the same as the one filed at the
Accounting Office. It showed that the pho-
_______________
32 Id., at pp. 59-60.
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tocopy of the original CDV which was attached by Respondent (attached as Annex
“E” of this report) bear some material alterations, namely:
1. The absence of entry of the Board Resolution which was reflected as a sort
of inquiry by the Internal Auditor, and which at present was left blank on the
original, as compared to the photocopy submitted by respondent bearing an entry
of the Board Resolution number;
2. The word ATM on the payee portion of the CDV in the original as
compared to the photocopy wherein the entry ATM was crossed out.
During a discussion with the external auditors, it was categorically stated by
them that during the course of external audit, said document was inexistent in the
records presented by the Accounting and Treasurer’s Offices. The production of the
photocopy by Respondent already altered only after the suspension was effected
cast doubt on the regularity of its issuance, negating her otherwise claim. Another
significant observation was that the original copy of CDV (attached as Annex “F” of
this report) and corresponding signatures of administrative heads who received
payments showed folded marks halfways, with the fastener holes unmatched,
showing that those two documents were not really filed together, as regularly done,
and the same were not filed in the regular course and must have been kept
previously on a different manner in possession of person other than the office which
must file the same.
xxxx
On the last charge in the show cause order specifically the existence of duplicate
checks in the account of the University amounting to Php1.050 Million, included in
Respondent’s defenses were that among the checks duplicated, only two of them
were encashed with the University Teller, and the check originally named to Norma
de Jesus as payee was paid by the pick-up teller only through the assistance of the
University teller.
542
542 SUPREME COURT REPORTS ANNOTATED
Wesleyan University-Philippines vs. Reyes
Again, Respondent’s defense were void of truth and merit. The act of
encashing checks issued by the Treasury Office, clearly violative of imprest system
of cash management which Mrs. Reyes by reason of her office knew very well,
showed that Respondent directly reneged in her duty to observe economic security
measures.
As found on the documents attached to the Investigation report of Dr. Garcia
which had been expressly adopted by herein respondent in her answer is an
Affidavit of Norma de Jesus stating that she actually encashed the check with the
personnel of the Treasury Office particularly Shirley Punay, who gave her the
amount equivalent days after the check was handed to the Treasury office.
However noble the intention of herein Respondent in helping her fellow workers
in the University by her acts of accommodation by encashing their checks directly
with the Treasury Office when Chinabank was already closed, the same still
reneged in her duty to protect the economic security of the University. An act of
misconduct which caused [sic].33
An employer cannot be compelled to retain an employee who is guilty of acts
inimical to the interests of the employer. A company has the right to dismiss its
employees if only as a measure of self-protection. This is all the more true in the case
of supervisors or personnel occupying positions of responsibility.34 In this case, let it
be remembered that respondent was not an ordinary rank-and-file employee as she
was no less the Treasurer who was in charge of the coffers of the University. It would
be oppressive to require petitioner to retain in their management an officer who has
admitted to knowingly and intentionally committing acts which jeopardized its
finances and who was untrustworthy in the handling and custody of University
funds.
_______________
33 Id., at pp. 58-60.
34 MGG Marine Services, Inc. v. NLRC, G.R. No. 114313, July 29, 1996, 259
SCRA 664.
543
VOL. 731, JULY 30, 2014 543
Wesleyan University-Philippines vs. Reyes
WHEREFORE, premises considered, we GRANT the petition. The assailed
Decision of the Court of Appeals in C.A.-G.R. S.P. No. 122536 is, thus, SET ASIDE.
The Decision of the National Labor Relations Commission in NLRC RAB III Case No.
07-15131-09 is REINSTATED.
SO ORDERED.
Peralta, Villarama, Jr.,** Mendoza and Leonen, JJ., concur.
 Petition granted, judgment set aside.

Notes.—When a bank allows its client to collect on crossed checks issued in the
name of another, the bank is guilty of negligence. (Bank of America, NT & SA vs.
Associated Citizens Bank, 588 SCRA 51 [2009])
Loss of trust and confidence as a ground for dismissal has never been intended to
afford an occasion for abuse because of its subjective nature. (Torres vs. Rural Bank
of San Juan, Inc., 693 SCRA 357 [2013])

——o0o——

_______________
** Acting member per Special Order No. 1691 dated May 22, 2014.
 G.R. No. 105188. January 23, 1998.*
MYRON C. PAPA, Administrator of the Testate Estate of Angela M. Butte,
petitioner, vs. A.U. VALENCIA and CO., INC., FELIX PEÑARROYO, SPS. ARSENIO
B. REYES & AMANDA SANTOS, and DELFIN JAO, respondents.
Negotiable Instruments; Checks; Presumptions; After more than ten (10) years
from the payment in part by cash and in part by check, the presumption is that the
check had been encashed.—It is an undisputed fact that respondents Valencia and
Peñarroyo had given petitioner Myron C. Papa the amounts of Five Thousand Pesos
(P5,000.00) in cash on 24 May 1973, and Forty Thousand Pesos (P40,000.00) in
check on 15 June 1973, in payment of the purchase price of the subject lot. Petitioner
himself admits having received said amounts, and having issued receipts therefor.
Petitioner’s assertion that he never encashed the aforesaid check is not substantiated
and is at odds with his statement in his answer that “he can no longer recall the
transaction which is supposed to have happened 10 years ago.” After more than ten
(10) years from the payment in part by cash and in part by check, the presumption is
that the check had been encashed. As already stated, he even waived the presentation
of oral evidence.
Same; Same; Failure of a payee to encash a check for more than ten (10) years
undoubtedly resulted in the impairment of the check through his unreasonable and
unexplained delay.—Granting that petitioner had never encashed the check, his
failure to do so for more than ten (10) years undoubtedly resulted in the impairment
of the check through his unreasonable and unexplained delay.
Same; Same; Obligations; The acceptance of a check implies an undertaking of
due diligence in presenting it for payment, and if he from whom it is received
sustains loss by want of such diligence, it will be held to operate as actual payment
of the debt or obligation for which it was given.—While it is true that the delivery of
a check produces the effect of payment only when it is cashed, pursuant to Art. 1249
of the Civil Code, the rule is otherwise if the debtor is prejudiced by the creditor’s
unreasonable delay in presentment. The
___________________
*FIRST DIVISION.
644
6 SUPREME COURT REPORTS ANNOTATED
44
Papa vs. A.U. Valencia and Co., Inc.
acceptance of a check implies an undertaking of due diligence in presenting it
for payment, and if he from whom it is received sustains loss by want of such
diligence, it will be held to operate as actual payment of the debt or obligation for
which it was given. It has, likewise, been held that if no presentment is made at all,
the drawer cannot be held liable irrespective of loss or injury unless presentment is
otherwise excused. This is in harmony with Article 1249 of the Civil Code under
which payment by way of check or other negotiable instrument is conditioned on its
being cashed, except when through the fault of the creditor, the instrument is
impaired. The payee of a check would be a creditor under this provision and if its
non-payment is caused by his negligence, payment will be deemed effected and the
obligation for which the check was given as conditional payment will be discharged.
Actions; Parties; Settlement of Estates; An executor or administrator may sue
or be sued without joining the party for whose benefit the action is presented or
defended.—The estate of Angela M. Butte is not an indispensable party. Under
Section 3 of Rule 3 of the Rules of Court, an executor or administrator may sue or be
sued without joining the party for whose benefit the action is presented or defended.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Quijano & Padilla for petitioner.
Padilla, Jimenez, Kintanar & Asuncion Law Officesfor private respondent
Delfin Jao.
KAPUNAN, J.:
In this petition for review on certiorari under Rule 45 of the Rules of Court,
petitioner Myron C. Papa seeks to reverse and set aside 1) the Decision dated 27
January 1992 of the Court of Appeals which affirmed with modification the decision
of the trial court; and 2) the Resolution dated 22 April 1992 of
645
VOL. 284, JANUARY 23, 1998 645
Papa vs. A.U. Valencia and Co., Inc.
the same court, which denied petitioner’s motion for reconsideration of the above
decision.
The antecedent facts of this case are as follows:
Sometime in June 1982, herein private respondents A.U. Valencia and Co., Inc.
(hereinafter referred to as respondent Valencia, for brevity) and Felix Peñarroyo
(hereinafter called respondent Peñarroyo), filed with the Regional Trial Court of
Pasig, Branch 151, a complaint for specific performance against herein petitioner
Myron C. Papa, in his capacity as administrator of the Testate Estate of one Angela
M. Butte.
The complaint alleged that on 15 June 1973, petitioner Myron C. Papa, acting as
attorney-in-fact of Angela M. Butte, sold to respondent Peñarroyo, through
respondent Valencia, a parcel of land, consisting of 286.60 square meters, located at
corner Retiro and Cadiz Streets, La Loma, Quezon City, and covered by Transfer
Certificate of Title No. 28993 of the Register of Deeds of Quezon City; that prior to
the alleged sale, the said property, together with several other parcels of land likewise
owned by Angela M. Butte, had been mortgaged by her to the Associated Banking
Corporation (now Associated Citizens Bank); that after the alleged sale, but before
the title to the subject property had been released, Angela M. Butte passed away; that
despite representations made by herein respondents to the bank to release the title to
the property sold to respondent Peñarroyo, the bank refused to release it unless and
until all the mortgaged properties of the late Angela M. Butte were also redeemed;
that in order to protect his rights and interests over the property, respondent
Peñarroyo caused the annotation on the title of an adverse claim as evidenced by
Entry No. P.E.-6118/T-28993, inscribed on 18 January 1977.
The complaint further alleged that it was only upon the release of the title to the
property, sometime in April 1977, that respondents Valencia and Peñarroyo
discovered that the mortgage rights of the bank had been assigned to one Tomas L.
Parpana (now deceased), as special administrator of the Estate of Ramon Papa, Jr.,
on 12 April 1977; that since then, herein petitioner had been collecting monthly
rentals in the
646
646 SUPREME COURT REPORTS ANNOTATED
Papa vs. A.U. Valencia and Co., Inc.
amount of P800.00 from the tenants of the property, knowing that said property had
already been sold to private respondents on 15 June 1973; that despite repeated
demands from said respondents, petitioner refused and failed to deliver the title to
the property. Thereupon, respondents Valencia and Peñarroyo filed a complaint for
specific performance, praying that petitioner be ordered to deliver to respondent
Peñarroyo the title to the subject property (TCT 28993); to turn over to the latter the
sum of P72,000.00 as accrued rentals as of April 1982, and the monthly rental of
P800.00 until the property is delivered to respondent Peñarroyo; to pay respondents
the sum of P20,000.00 as attorney’s fees; and to pay the costs of the suit.
In his Answer, petitioner admitted that the lot had been mortgaged to the
Associated Banking Corporation (now Associated Citizens Bank). He contended,
however, that the complaint did not state a cause of action; that the real property in
interest was the Testate Estate of Angela M. Butte, which should have been joined as
a party defendant; that the case amounted to a claim against the Estate of Angela M.
Butte and should have been filed in Special Proceedings No. A-17910 before the
Probate Court in Quezon City; and that, if as alleged in the complaint, the property
had been assigned to Tomas L. Parpana, as special administrator of the Estate of
Ramon Papa, Jr., said estate should be impleaded. Petitioner, likewise, claimed that
he could not recall in detail the transaction which allegedly occurred in 1973; that he
did not have TCT No. 28993 in his possession; that he could not be held personally
liable as he signed the deed merely as attorney-in-fact of said Angela M. Butte.
Finally, petitioner asseverated that as a result of the filing of the case, he was
compelled to hire the services of counsel for a fee of P20,000.00, for which
respondents should be held liable.
Upon his motion, herein private respondent Delfin Jao was allowed to intervene
in the case. Making common cause with respondents Valencia and Peñarroyo,
respondent Jao alleged that the subject lot which had been sold to respondent
Peñarroyo through respondent Valencia was in turn sold to him on
647
VOL. 284, JANUARY 23, 1998 647
Papa vs. A.U. Valencia and Co., Inc.
20 August 1973 for the sum of P71,500.00, upon his paying earnest money in the
amount of P5,000.00. He, therefore, prayed that judgment be rendered in favor of
respondents Valencia and Peñarroyo; and, that after the delivery of the title to said
respondents, the latter in turn be ordered to execute in his favor the appropriate deed
of conveyance covering the property in question and to turn over to him the rentals
which aforesaid respondents sought to collect from petitioner Myron C. Papa.
Respondent Jao, likewise, averred that as a result of petitioner’s refusal to deliver
the title to the property to respondents Valencia and Peñarroyo, who in turn failed to
deliver the said title to him, he suffered mental anguish and serious anxiety for which
he sought payment of moral damages; and, additionally, the payment of attorney’s
fees and costs.
For his part, petitioner, as administrator of the Testate Estate of Angela M. Butte,
filed a third-party complaint against herein private respondents, spouses Arsenio B.
Reyes and Amanda Santos (respondent Reyes spouses, for short). He averred, among
others, that the late Angela M. Butte was the owner of the subject property; that due
to non-payment of real estate tax said property was sold at public auction by the City
Treasurer of Quezon City to the respondent Reyes spouses on 21 January 1980 for
the sum of P14,000.00; that the one-year period of redemption had expired; that
respondents Valencia and Peñarroyo had sued petitioner Papa as administrator of
the estate of Angela M. Butte, for the delivery of the title to the property; that the
same aforenamed respondents had acknowledged that the price paid by them was
insufficient, and that they were willing to add a reasonable amount or a minimum of
P55,000.00 to the price upon delivery of the property, considering that the same was
estimated to be worth P143,000.00; that petitioner was willing to reimburse
respondent Reyes spouses whatever amount they might have paid for taxes and other
charges, since the subject property was still registered in the name of the late Angela
M. Butte; that it was inequitable to allow respondent Reyes spouses to acquire
property estimated to be worth P143,000.00, for a
648
648 SUPREME COURT REPORTS ANNOTATED
Papa vs. A.U. Valencia and Co., Inc.
measly sum of P14,000.00. Petitioner prayed that judgment be rendered cancelling
the tax sale to respondent Reyes spouses; restoring the subject property to him upon
payment by him to said respondent Reyes spouses of the amount of P14,000.00, plus
legal interest; and, ordering respondents Valencia and Peñarroyo to pay him at least
P55,000.00 plus everything they might have to pay the Reyes spouses in recovering
the property.
Respondent Reyes spouses in their Answer raised the defense of prescription of
petitioner’s right to redeem the property.
At the trial, only respondent Peñarroyo testified. All the other parties only
submitted documentary proof.
On 29 June 1987, the trial court rendered a decision, the dispositive portion of
which reads:
WHEREUPON, judgment is hereby rendered as follows:
1. 1)Allowing defendant to redeem from third-party defendants and ordering
the latter to allow the former to redeem the property in question, by paying
the sum of P14,000.00 plus legal interest of 12% thereon from January 21,
1980;
2. 2)Ordering defendant to execute a Deed of Absolute Sale in favor of plaintiff
Felix Peñarroyo covering the property in question and to deliver peaceful
possession and enjoyment of the said property to the said plaintiff, free from
any liens and encumbrances; Should this not be possible, for any reason not
attributable to defendant, said defendant is ordered to pay to plaintiff Felix
Peñarroyo the sum of P45,000.00 plus legal interest of 12% from June 15,
1973;
3. 3)Ordering plaintiff Felix Peñarroyo to execute and deliver to intervenor a
deed of absolute sale over the same property, upon the latter’s payment to
the former of the balance of the purchase price of P71,500.00;
Should this not be possible, plaintiff Felix Peñarroyo is ordered to pay
intervenor the sum of P5,000.00 plus legal interest of 12% from August 23,
1973; and
4. 4)Ordering defendant to pay plaintiffs the amount of P5,000.00 for and as
attorney’s fees and litigation expenses.
649
VOL. 284, JANUARY 23, 1998 649
Papa vs. A.U. Valencia and Co., Inc.
SO ORDERED.1
Petitioner appealed the aforesaid decision of the trial court to the Court of Appeals,
alleging among others that the sale was never “consummated” as he did not encash
the check (in the amount of P40,000.00) given by respondents Valencia and
Peñarroyo in payment of the full purchase price of the subject lot. He maintained
that what said respondents had actually paid was only the amount of P5,000.00 (in
cash) as earnest money.
Respondent Reyes spouses, likewise, appealed the above decision. However, their
appeal was dismissed because of failure to file their appellants’ brief.
On 27 January 1992, the Court of Appeals rendered a decision, affirming with
modification the trial court’s decision, thus:
WHEREFORE, the second paragraph of the dispositive portion of the appealed
decision is MODIFIED, by ordering the defendant-appellant to deliver to plaintiff-
appellees the owner’s duplicate of TCT No. 28993 of Angela M. Butte and the
peaceful possession and enjoyment of the lot in question or, if the owner’s duplicate
certificate cannot be produced, to authorize the Register of Deeds to cancel it and
issue a certificate of title in the name of Felix Peñarroyo. In all other respects, the
decision appealed from is AFFIRMED. Costs against defendant-appellant Myron C.
Papa.
SO ORDERED.2
In affirming the trial court’s decision, respondent court held that contrary to
petitioner’s claim that he did not encash the aforesaid check, and therefore, the sale
was not consummated, there was no evidence at all that petitioner did not, in fact,
encash said check. On the other hand, respondent Peñarroyo testified in court that
petitioner Papa had received the amount of P45,000.00 and issued receipts therefor.
According to respondent court, the presumption is that the check was
____________________
1Rollo, pp. 70-71.
2 Rollo, pp. 41-42.
650
650 SUPREME COURT REPORTS ANNOTATED
Papa vs. A.U. Valencia and Co., Inc.
encashed, especially since the payment by check was not denied by defendant-
appellant (herein petitioner) who, in his Answer, merely alleged that he “can no
longer recall the transaction which is supposed to have happened 10 years ago.”3
On petitioner’s claim that he cannot be held personally liable as he had acted
merely as attorney-in-fact of the owner, Angela M. Butte, respondent court held that
such contention is without merit. This action was not brought against him in his
personal capacity, but in his capacity as the administrator of the Testate Estate of
Angela M. Butte.4
On petitioner’s contention that the estate of Angela M. Butte should have been
joined in the action as the real party in interest, respondent court held that pursuant
to Rule 3, Section 3 of the Rules of Court, the estate of Angela M. Butte does not have
to be joined in the action. Likewise, the estate of Ramon Papa, Jr., is not an
indispensable party under Rule 3, Section 7 of the same Rules. For the fact is that
Ramon Papa, Jr., or his estate, was not a party to the Deed of Absolute Sale, and it is
basic law that contracts bind only those who are parties thereto.5
 Respondent court observed that the conditions under which the mortgage rights
of the bank were assigned are not clear. In any case, any obligation which the estate
of Angela M. Butte might have to the estate of Ramon Papa, Jr. is strictly between
them. Respondents Valencia and Peñarroyo are not bound by any such obligation.
Petitioner filed a motion for reconsideration of the above decision, which motion
was denied by respondent Court of Appeals.
Hence, this petition wherein petitioner raises the following issues:
___________________
3 Id., at 40.
4 Id., at 41.
5 Id., at 40-41.
651
VOL. 284, JANUARY 23, 1998 651
Papa vs. A.U. Valencia and Co., Inc.
1. I.THE CONCLUSION OR FINDING OF THE COURT OF APPEALS THAT
THE SALE IN QUESTION WAS CONSUMMATED IS GROUNDED ON
SPECULATION OR CONJECTURE, AND IS CONTRARY TO THE
APPLICABLE LEGAL PRINCIPLE.
2. II.THE COURT OF APPEALS, IN MODIFYING THE DECISION OF THE
TRIAL COURT, ERRED BECAUSE IT, IN EFFECT, CANCELLED OR
NULLIFIED AN ASSIGNMENT OF THE SUBJECT PROPERTY IN FAVOR
OF THE ESTATE OF RAMON PAPA, JR. WHICH IS NOT A PARTY IN
THIS CASE.
3. III.THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE
ESTATE OF ANGELA M. BUTTE AND THE ESTATE OF RAMON PAPA,
JR. ARE INDISPENSABLE PARTIES IN THIS CASE.6
Petitioner argues that respondent Court of Appeals erred in concluding that the
alleged sale of the subject property had been consummated. He contends that such a
conclusion is based on the erroneous presumption that the check (in the amount of
P40,000.00) had been cashed, citing Art. 1249 of the Civil Code, which provides, in
part, that payment by checks shall produce the effect of payment only when they
have been cashed or when through the fault of the creditor they have been
impaired.7 Petitioner insists that he never cashed said check; and, such being the
case, its delivery never produced the effect of payment. Petitioner, while admitting
that he had issued receipts for the payments, asserts that said
______________
6 Id., at 23-24.
7 Art. 1249. The payment of debts in money shall be made in the currency
stipulated, and if it is not possible to deliver such currency, then in the currency
which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other
mercantile documents shall produce the effect of payment only when they have been
cashed, or when through the fault of the creditor they have been impaired. In the
meantime, the action derived from the original obligation shall be held in abeyance.
652
652 SUPREME COURT REPORTS ANNOTATED
Papa vs. A.U. Valencia and Co., Inc.
receipts, particularly the receipt of PCIB Check No. 761025 in the amount of
P40,000.00, do not prove payment. He avers that there must be a showing that said
check had been encashed. If, according to petitioner, the check had been encashed,
respondent Peñarroyo should have presented PCIB Check No. 761025 duly stamped
received by the payee, or at least its microfilm copy.
Petitioner finally avers that, in fact, the consideration for the sale was still in the
hands of respondents Valencia and Peñarroyo, as evidenced by a letter addressed to
him in which said respondents wrote, in part:
x x x. Please be informed that I had been authorized by Dr. Ramon Papa, Jr., heir of
Mrs. Angela M. Butte to pay you the aforementioned amount of P75,000.00 for the
release and cancellation of subject property’s mortgage. The money is with me and if
it is alright with you, I would like to tender the payment as soon as possible. x x x.8
We find no merit in petitioner’s arguments.
It is an undisputed fact that respondents Valencia and Peñarroyo had given
petitioner Myron C. Papa the amounts of Five Thousand Pesos (P5,000.00) in cash
on 24 May 1973, and Forty Thousand Pesos (P40,000.00) in check on 15 June 1973,
in payment of the purchase price of the subject lot. Petitioner himself admits having
received said amounts,9 and having issued receipts therefor.10 Petitioner’s assertion
that he never encashed the aforesaid check is not substantiated and is at odds with
his statement in his answer that “he can no longer recall the transaction which is
supposed to have happened 10 years ago.” After more than ten (10) years from the
payment in part by cash and in part by check, the presumption is that the check had
been encashed. As already stated, he even waived the presentation of oral evidence.
__________________
8 Rollo, p. 26.
9 Id., at 132.
10 Id., at 25.
653
VOL. 284, JANUARY 23, 1998 653
 Papa vs. A.U. Valencia and Co., Inc.
Granting that petitioner had never encashed the check, his failure to do so for more
than ten (10) years undoubtedly resulted in the impairment of the check through his
unreasonable and unexplained delay.
While it is true that the delivery of a check produces the effect of payment only
when it is cashed, pursuant to Art. 1249 of the Civil Code, the rule is otherwise if the
debtor is prejudiced by the creditor’s unreasonable delay in presentment. The
acceptance of a check implies an undertaking of due diligence in presenting it for
payment, and if he from whom it is received sustains loss by want of such diligence, it
will be held to operate as actual payment of the debt or obligation for which it was
given.11 It has, likewise, been held that if no presentment is made at all, the drawer
cannot be held liable irrespective of loss or injury12 unless presentment is otherwise
excused. This is in harmony with Article 1249 of the Civil Code under which payment
by way of check or other negotiable instrument is conditioned on its being cashed,
except when through the fault of the creditor, the instrument is impaired. The payee
of a check would be a creditor under this provision and if its non-payment is caused
by his negligence, payment will be deemed effected and the obligation for which the
check was given as conditional payment will be discharged.13
Considering that respondents Valencia and Peñarroyo had fulfilled their part of
the contract of sale by delivering the payment of the purchase price, said
respondents, therefore, had the right to compel petitioner to deliver to them the
owner’s duplicate of TCT No. 28993 of Angela M. Butte and the peaceful possession
and enjoyment of the lot in question.
With regard to the alleged assignment of mortgage rights, respondent Court of
Appeals has found that the conditions under which said mortgage rights of the bank
were assigned
__________________
11 60 AM. JUR. 2d, Sec. 59.
12 Campos and Lopez-Campos, Negotiable Instruments Law, 4th Edition (1990),
p. 561 citing Rodriguez vs. Hardouin, 15 La. App. 112, 131 So. 593.
13 Id., at 560 citing Gabon vs. Balagot, 53 O.G. No. 11, 3504.
654
654 SUPREME COURT REPORTS ANNOTATED
Papa vs. A.U. Valencia and Co., Inc.
are not clear. Indeed, a perusal of the original records of the case would show that
there is nothing there that could shed light on the transactions leading to the said
assignment of rights; nor is there any evidence on record of the conditions under
which said mortgage rights were assigned. What is certain is that despite the said
assignment of mortgage rights, the title to the subject property has remained in the
name of the late Angela M. Butte.14 This much is admitted by petitioner himself in his
answer to respondents’ complaint as well as in the third-party complaint that
petitioner filed against respondent-spouses Arsenio B. Reyes and Amanda
Santos.15 Assuming arguendo that the mortgage rights of the Associated Citizens
Bank had been assigned to the estate of Ramon Papa, Jr., and granting that the
assigned mortgage rights validly exist and constitute a lien on the property, the estate
may file the appropriate action to enforce such lien. The cause of action for specific
performance which respondents Valencia and Peñarroyo have against petitioner is
different from the cause of action which the estate of Ramon Papa, Jr. may have to
enforce whatever rights or liens it has on the property by reason of its being an
alleged assignee of the bank’s rights of mortgage.
Finally, the estate of Angela M. Butte is not an indispensable party. Under Section
3 of Rule 3 of the Rules of Court, an executor or administrator may sue or be sued
without joining the party for whose benefit the action is presented or defended, thus:
Sec. 3. Representative parties.—A trustee of an express trust, a guardian, executor or
administrator, or a party authorized by statute, may sue or be sued without joining
the party for whose benefit the action is presented or defended; but the court may, at
any stage of the proceedings, order such beneficiary to be made a party. An agent
acting in his own name and for the benefit of an undisclosed principal may sue or be
sued without joining the princi-
__________________
14 Rollo, p. 41.
15 Original Records, p. 162.
655
VOL. 284, JANUARY 23, 1998 655
Papa vs. A.U. Valencia and Co., Inc.
pal except when the contract involves things belonging to the principal.16
Neither is the estate of Ramon Papa, Jr. an indispensable party without whom, no
final determination of the action can be had. Whatever prior and subsisting mortgage
rights the estate of Ramon Papa, Jr. has over the property may still be enforced
regardless of the change in ownership thereof.
WHEREFORE, the petition for review is hereby DENIED and the Decision of the
Court of Appeals, dated 27 January 1992 is AFFIRMED.
SO ORDERED.
Davide, Jr. (Chairman), Bellosillo and Vitug, JJ.,concur.
Petition denied; Decision affirmed.
Notes.—Foreign checks, provided they are either drawn and issued in the
Philippines though payable outside thereof, are within the coverage of the Bouncing
Checks Law. (De Villa v. Court of Appeals, 195 SCRA 722 [1991])
 A check, as distinguished from an ordinary bill of exchange, is supposed to be
drawn against a previous deposit of funds for it is ordinarily intended for immediate
payment. (Moran v. Court of Appeals, 230 SCRA 799[1994])

_________________
16 This section has been amended by the 1997 Rules of Civil Procedure to read as
follows:
Sec. 3. Representatives as parties.—Where the action is allowed to be prosecuted
or defended by a representative or someone acting in a fiduciary capacity, the
beneficiary shall be included in the title of the case and shall be deemed to be the real
party in interest. A representative may be a trustee of an express trust, a guardian, an
executor or administrator, or a party authorized by law or these Rules. An agent
acting in his own name and for the benefit of an undisclosed principal may sue or be
sued without joining the principal except when the contract involves things
belonging to the principal.
656
656 SUPREME COURT REPORTS ANNOTATED
Vinta Maritime Co., Inc. vs. NLRC
There is an element of certainty or assurance in an ordinary check that it will be paid
upon presentation that is why it is perceived as a convenient substitute for currency
in commercial and financial transactions. (Tan v. Court of Appeals, 239 SCRA
310 [1994])

——o0o——
 No. L-41764. December 19, 1980.*
NEW PACIFIC TIMBER & SUPPLY COMPANY, INC., petitioner, vs. HON.
ALBERTO V. SENERIS, RICARDO A. TONG and EX-OFFICIO SHERIFF HAKIM S.
ABDULWAHID, respondents.
Mercantile Law; Negotiable Instruments; Checks; Cashier’s check deemed as
cash.—It is to be emphasized in this connection that the check deposited by the
petitioner in the amount of P50,000.00 is not an ordinary check but a Cashier’s
Check of the Equitable Bank-
_______________
*SECOND DIVISION
687
VOL. 101, DECEMBER 19, 1980 68
7 corresponding amount of P50,000.00 on January 27, 1975 pursuant to an
New Pacific Timber & Supply Co., Inc. vs. Seneris
ing Corporation, a bank of good standing and reputation. As testified to by
the Ex-Oficio Sheriff with whom it has been deposited, it is a certified crossed
checked. It is a well-known and accepted practice in the business sector that a
Cashier’s Check is deemed as cash.
Same; Same; Same; Same; Certification of check by drawee bank equivalent to
acceptance; Certification, meaning and object of; Certification of check an
exception to rule under Sec. 63 of the Central Bank Act.—Moreover, since 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 it notes in circulation, a certificate of deposit
payable to the order of the depositor, or any other obligation it can assume. The
object of certifying a check, as regards both parties, is to enable the holder to use it as
money.” When the holder procures the check to be certified, “the check operates as
an assignment of a part of the fluids 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.
Remedial Law; Judgments; Writ of Execution; Issuance of certificate of
satisfaction of judgment proper even if payment of judgment obligation was in cash
and in check; Auction Sale Valid; Refusal of respondent judge to issue the certificate
constitutes grave abuse of discretion.—Considering that the whole amount deposited
by the petitioner consisting of Cashier’s Check of P50,000.00 and P13,130.00 in cash
covers the judgment obligation of P63,000.00 as mentioned in the writ of execution,
then, We see no valid reason for the private respondent to have refused acceptance of
the payment of the obligation in his favor. The auction sale, therefore, was uncalled
for. Furthermore, it appears that on January 17, 1975, the Cashier’s Check was even
withdrawn by the petitioner and replaced with cash in the
688
6 SUPREME COURT REPORTS ANNOTATED
88
New Pacific Timber & Supply Co., Inc. vs. Seneris
agreement entered into by the parties at the instance of the respondent judge.
However, the private respondent still refused to receive the same. Obviously, the
private respondent is more interested in the levied properties than in the mere
satisfaction of the judgment obligation. Thus, petitioner’s motion for the issuance of
a certificate of satisfaction of judgment is clearly meritorious and the respondent
Judge gravely abused his discretion in not granting the same under the
circumstances.
Same; Same; Same; Remedies; Special civil action is a proper and adequate
remedy in a case where a writ of execution of the decision had been issued.—It is
also contended by the private respondent that appeal and not a special civil action for
certiorari is the proper remedy in this case, and that since the period to appeal from
the decision of the respondent judge has already expired, then, the present petition
has been filed out of time. The contention is untenable. The decision of the
respondent judge in Civil Case No. 250 (166) has long been become final and
executory and so, the same is not being questioned herein. The subject of the petition
at bar as having been issued in grave abuse of discretion is the order dated August
28, 1975 of the respondent Judge which was merely issued in execution of the said
decision. Thus, even granting that appeal is open to the petitioner, the same is not an
adequate and speedy remedy for the respondent judge had already issued a writ of
execution.
PETITION for certiorari with preliminary injunction from the order of the Court of
First Instance of Zamboanga, Branch II.
The facts are stated in the opinion of the court.
CONCEPCION JR., J.:
A petition for certiorari with preliminary injunction to annul and/or modify the order
of the Court of First Instance of Zamboanga City (Branch II) dated August 28, 1976
denying petitioner’s Ex-Parte Motion for Issuance of Certificate Of Satisfaction Of
Judgment.
Herein petitioner is the defendant in a complaint for collection of a sum of money
filed by the private respondent.1 On Ju-
________________
1Civil Case No. 250 (1669), Court of First Instance, Zamboanga City, entitled
“Ricardo A. Tong, Plaintiff, versus New Pacific Timber and Supply, Co., Inc.,
Defendant.”
689
VOL. 101, DECEMBER 19, 1980 689
New Pacific Timber & Supply Co., Inc. vs. Seneris
ly 19, 1974, a compromise judgment was rendered by the respondent Judge in
accordance with an amicable settlement entered into by the parties the terms and
conditions of which, are as follows:
1. “(1)That defendant will pay to the plaintiff the amount of Fifty Four Thousand
Five Hundred Pesos (P54,500.00) at 6% interest per annum to be reckoned
from August 25, 1972;
2. “(2)That defendant will pay to the plaintiff the amount of Six Thousand Pesos
(P6,000.00) as attorney’s fees for which P5,000.00 had been acknowledged
received by the plaintiff under Consolidated Bank and Trust Corporation
Check No. 16-135022 amounting to P5,000.00 leaving a balance of One
Thousand Pesos (P1,000.00);
3. “(3)That the entire amount of P54,500.00 plus interest, plus the balance of
P1,000.00 for attorney’s fees will be paid by defendant to the plaintiff within
five months from today, July 19, 1974; and
4. “(4)Failure on the part of the defendant to comply with any of the above-
conditions, a writ of execution may be issued by this Court for the
satisfaction of the obligation.”2
For failure of the petitioner to comply with his judgment obligation, the respondent
Judge, upon motion of the private respondent, issued an order for the issuance of a
writ of execution on December 21, 1974. Accordingly, writ of execution was issued for
the amount of P63,130.00 pursuant to which, the ExOfficio Sheriff levied upon the
following personal properties of the petitioner, to wit:
(1) Unit American Lathe 24”
(1) Unit American Lathe 18” Cracker Wheeler
(1) Unit Rockford Shaper 24”
and set the auction sale thereof on January 15, 1975. However, prior to January 15,
1975, petitioner deposited with the Clerk of Court, Court of First Instance,
Zamboanga City, in his capacity as Ex-Officio Sheriff of Zamboanga City, the sum of
P63,130.00 for the payment of the judgment obligation, consisting of the following:
_______________
2pp. 14-15, rollo.
690
690 SUPREME COURT REPORTS ANNOTATED
New Pacific Timber & Supply Co., Inc. vs. Seneris
1. 1.P50,000.00 in Cashier’s Check No. S-314361 dated January 3, 1975 of the
Equitable Banking Corporation; and
2. 2.P13,130.00 in cash.3
In a letter dated January 14, 1975, to the Ex-OfficioSheriff,4 private respondent
through counsel, refused to accept the check as well as the cash deposit. In the same
letter, private respondent requested the scheduled auction sale on January 15, 1975
to proceed if the petitioner cannot produce the cash. However, the scheduled auction
sale at 10:00 a.m. on January 15, 1975 was postponed to 3:00 o’clock p.m. of the
same day due to further attempts to settle the case. Again, the scheduled auction sale
that afternoon did not push through because of a last ditch attempt to convince the
private respondent to accept the check. The auction sale was then postponed on the
following day, January 16, 1975 at 10:00 o’clock a.m.5 At about 9:15 a.m., on January
16, 1975, a certain Mr. Tañedo representing the petitioner appeared in the office of
the Ex-Officio Sheriff and the latter reminded Mr. Tañedo that the auction sale would
proceed at 10:00 o’clock. At 10:00 a.m., Mr. Tañedo and Mr. Librado, both
representing the petitioner requested the Ex-Officio Sheriff to give them fifteen
minutes within which to contract their lawyer which request was granted. After Mr.
Tañedo and Mr. Librado failed to return, counsel for private respondent insisted that
the sale must proceed and the ExOfficio Sheriff proceeded with the auction sale.6 In
the course of the proceedings, Deputy Sheriff Castro sold the levied properties item
by item to the private respondent as the highest bidder in the amount of P50,000.00.
As a result thereof, the Ex-Officio Sheriff declared a deficiency of
P13,130.00.7 Thereafter, on January 16, 1975, the Ex-Officio Sheriff issued a “Sheriff’s
Certificate of Sale” in favor of the private respondent, Ricardo Tong, married to
Pascuala Tong
_______________
3 p. 16, rollo.
 4 Exhibit “D”.
5 p. 4, rollo.
6 pp. 5-6, rollo.
7 p. 6, rollo.
691
VOL. 101, DECEMBER 19, 1980 691
New Pacific Timber & Supply Co., Inc. vs. Seneris
for the total amount of P50,000.00 only.8 Subsequently, on January 17, 1975,
petitioner filed an ex-parte motion for issuance of certificate of satisfaction of
judgment. This motion was denied by the respondent Judge in his order dated
August 28, 1975. In view thereof, petitioner now questions said order by way of the
present petition alleging in the main that said respondent Judge capriciously and
whimsically abused his discretion in not granting the motion for issuance of
certificate of satisfaction of judgment for the following reasons: (1) that there was
already a full satisfaction of the judgment before the auction sale was conducted with
the deposit made to the Ex-Officio Sheriff in the amount of P63,000.00 consisting of
P50,000.00 in Cashier’s Check and P13,130.00 in cash; and (2) that the auction sale
was invalid for lack of proper notice to the petitioner and its counsel when the Ex-
Officio Sheriff postponed the sale from June 15, 1975 to January 16, 1976 contrary to
Section 24, Rule 39 of the Rules of Court. On November 10, 1975, the Court issued a
temporary restraining order enjoining the respondent Ex-OfficioSheriff from
delivering the personal properties subject of the petition to Ricardo A. Tong in view
of the issuance of the “Sheriff Certificate of Sale.”
We find the petition to be impressed with merit.
The main issue to be resolved in this instance is as to whether or not the private
respondent can validly refuse acceptance of the payment of the judgment obligation
made by the petitioner consisting of P50,000.00 in Cashier’s Check and P13,130.00
in cash which it deposited, with the Ex-Officio Sheriff before the date of the
scheduled auction sale. In upholding private respondent’s claim that he has the right
to refuse payment by means of a check, the respondent Judge cited the following:
Section 63 of the Central Bank Act:
“Sec. 63. Legal Character.—Checks representing deposit money do not have legal
tender power and their acceptance in payment of debts, both public and private, is at
the option of the
_______________
8Exhibit “C”, see Decision, p. 19, rollo.
692
692 SUPREME COURT REPORTS ANNOTATED
New Pacific Timber & Supply Co., Inc. vs. Seneris
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 in cash in an
amount equal to the amount credited to his account.”
Article 1249 of the New Civil Code:
“Art. 1249.—The payment of debts in money shall be made in the currency stipulated,
and if it is not possible to deliver such currency, then in the currency which is legal
tender in the Philippines.
“The delivery of promissory notes payable to order, or bills of exchange or other
mercantile documents shall produce the effect of payment only when they have been
cashed, or when through the fault of the creditor they have been impaired.
“In the meantime, the action derived from the original obligation shall be held in
abeyance.”
Likewise, the respondent Judge sustained the contention of the private respondent
that he has the right to refuse payment of the amount of P13,130.00 in cash because
the said amount is less than the judgment obligation, citing the following Article of
the New Civil Code:
“Art. 1248. Unless there is an express stipulation to that effect, the creditor cannot be
compelled partially to receive the presentations in which the obligation consists.
Neither may the debtor be required to make partial payment.
“However, when the debt is in part liquidated and in part unliquidated, the
creditor may demand and the debtor may effect the payment of the former without
waiting for the liquidation of the latter.”
It is to be emphasized in this connection that the check deposited by the petitioner in
the amount of P50,000.00 is not an ordinary check but a Cashier’s Check of the
Equitable Banking Corporation, a bank of good standing and reputation. As testified
to by the Ex-Officio Sheriff with whom it has been deposited, it is a certified crossed
check.9 It is a well-known
_______________
9 p. 35, t.s.n., May 24, 1975.
693
VOL. 101, DECEMBER 19, 1980 693
New Pacific Timber & Supply Co., Inc. vs. Seneris
and accepted practice in the business sector that a Cashier’s Check is deemed as cash.
Moreover, since 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.10 Where a check is certified by the bank on which it is drawn, the
certification is equivalent to acceptance.11 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 in circulation, a
certificate of deposit payable to the order of the depositor, or any other obligation it
can assume. The object of certifying a check, as regards both parties, is to enable the
holder to use it as money.”12 When the holder procures the check to be certified, “the
check operates as an assignment of a part of the funds to the creditors”.13 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. Considering that the whole
amount deposited by the petitioner consisting of
_______________
10 Gregorio Araneta, Inc. vs. Paz Tuazon de Paterno and Jose Vidal, L-2886,
August 22, 1952, 49 O.G. No. 1, p. 59.
11 Section 187. Certification of check; effect of.—Where a check is certified by the
bank on which it is drawn, the certification is equivalent to acceptance. (Negotiable
Instruments Law)
12 PNB vs. Nat. City Bank of New York, 63 Phil. 711, 718-719.
13 PNB vs. Nat. City Bank of New York, supra, 711-717; 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 it. (Negotiable Instruments
Law) [Italics supplied]
694
694 SUPREME COURT REPORTS ANNOTATED
New Pacific Timber & Supply Co., Inc. vs. Seneris
Cashier’s Check of P50,000.00 and P13,130.00 in cash covers the judgment
obligation of P63,000.00 as mentioned in the writ of execution, then. We see no
valid reason for the private respondent to have refused acceptance of the payment of
the obligation in his favor. The auction sale, therefore, was uncalled for.
Furthermore, it appears that on January 17, 1975, the Cashier’s Check was even
withdrawn by the petitioner and replaced with cash in the corresponding amount of
P50,000.00 on January 27, 1975 pursuant to an agreement entered into by the
parties at the instance of the respondent Judge. However, the private respondent still
refused to receive the same. Obviously, the private respondent is more interested in
the levied properties than in the mere satisfaction of the judgment obligation. Thus,
petitioner’s motion for the issuance of a certificate of satisfaction of judgment is
clearly meritorious and the respondent Judge gravely abused his discretion in not
granting the same under the circumstances.
In view of the conclusion reached in this instance, We find no more need to
discuss the ground relied in the petition.
It is also contended by the private respondent that Appeal and not a special civil
action for certiorari is the proper remedy in this case, and that since the period to
appeal from the decision of the respondent Judge has already expired, then, the
present petition has been filed out of time. The contention is untenable. The decision
of the respondent Judge in Civil Case No. 250 (166) has long become final and
executory and so, the same is not being questioned herein. The subject of the petition
at bar as having been issued in grave abuse of discretion is the order dated August
28, 1975 of the respondent Judge which was merely issued in execution of the said
decision. Thus, even granting that appeal is open to the petitioner, the same is not an
adequate and speedy remedy for the respondent Judge had already issued a writ of
execution.14
_______________
14 Matute vs. Court of Appeals, 26 SCRA 799, citing Vda. de Saludes vs.
Pajarillo, 78 Phil. 754, Woodcraft Works, Ltd. vs. Moacoso, 92 Phil. 1021and Liwanag
vs. Castillo, 106 Phil. 375.
695
VOL. 101, DECEMBER 19, 1980 695
New Pacific Timber & Supply Co., Inc. vs. Seneris
WHEREFORE, in view of all the foregoing, judgment is hereby rendered:
1. 1.Declaring as null and void the order of the respondent Judge dated August
28, 1975;
2. 2.Declaring as null and void the auction sale conducted on January 16, 1975
and the certificate of sale issued pursuant thereto;
3. 3.Ordering the private respondent to accept the sum of P63,130.00 under
deposit as payment of the judgment obligation in his favor;
4. 4.Ordering the respondent Judge and respondent Ex-Officio Sheriff to release
the levied properties to the herein petitioner.
The temporary restraining order issued is hereby made permanent.
Costs against the private respondent.
SO ORDERED.
Barredo (Chairman), Aquino, Abad Santos and De Castro, JJ., concur.
Petition granted.
Notes.—In a proceeding supplemental to execution a trial court cannot
summarily make a finding that a third person has in his possession property of the
judgment debtor. The trial court can only make an order authorizing the creditor to
sue in the proper court. (Economic Insurance Co., Inc. vs. Torres, 79 SCRA 519).
 Where the mortgagee in installment sales of personal property chose the remedy
of specific performance in a replevin suit with damages, it is entitled to an alias writ
of execution for the portion of the judgment that has not been satisfied. (Industrial
Finance Corporation vs. Ramirez, 77 SCRA 152).
The appointment of a special sheriff in execution of judgment is, as a rule,
unauthorized by law. (Policarpio vs. Fajardo, 78 SCRA 210).
696
696 SUPREME COURT REPORTS ANNOTATED
Nautica Shipping Agency and Management Co., Inc. vs. NSB
The courts should dismiss a suit which has all the earmarks of a subterfuge that was
resorted to for the purpose of frustrating the execution of a judgment in an unfair
labor controversy. (Cosmos Foundry Shop Workers Union vs. Lo Bu, 63 SCRA 313).
A trial court should give reasonable time for defendant to make deposit to stay
execution pending appeal of ejectment case. (Sanchez vs. Zosa, 68 SCRA 171).
Redemption of property extra-judicially foreclosed by the Development Bank of
the Philippines starts from the registration of the sale not from the date of the
auction sale. (General vs. Barrameda, 69 SCRA 182).
A bank is a moneyed institute founded to facilitate the borrowing, lending, and
safekeeping of money and to deal in notes, bills of exchange and credits. (Republic
vs. Security Credit and Acceptance Corporation, 19 SCRA 68).

——o0o——
 No. L-41764. December 19, 1980.*
NEW PACIFIC TIMBER & SUPPLY COMPANY, INC., petitioner, vs. HON.
ALBERTO V. SENERIS, RICARDO A. TONG and EX-OFFICIO SHERIFF HAKIM S.
ABDULWAHID, respondents.
Mercantile Law; Negotiable Instruments; Checks; Cashier’s check deemed as
cash.—It is to be emphasized in this connection that the check deposited by the
petitioner in the amount of P50,000.00 is not an ordinary check but a Cashier’s
Check of the Equitable Bank-
_______________
*SECOND DIVISION
687
VOL. 101, DECEMBER 19, 1980 68
7 corresponding amount of P50,000.00 on January 27, 1975 pursuant to an
New Pacific Timber & Supply Co., Inc. vs. Seneris
ing Corporation, a bank of good standing and reputation. As testified to by
the Ex-Oficio Sheriff with whom it has been deposited, it is a certified crossed
checked. It is a well-known and accepted practice in the business sector that a
Cashier’s Check is deemed as cash.
Same; Same; Same; Same; Certification of check by drawee bank equivalent to
acceptance; Certification, meaning and object of; Certification of check an
exception to rule under Sec. 63 of the Central Bank Act.—Moreover, since 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 it notes in circulation, a certificate of deposit
payable to the order of the depositor, or any other obligation it can assume. The
object of certifying a check, as regards both parties, is to enable the holder to use it as
money.” When the holder procures the check to be certified, “the check operates as
an assignment of a part of the fluids 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.
Remedial Law; Judgments; Writ of Execution; Issuance of certificate of
satisfaction of judgment proper even if payment of judgment obligation was in cash
and in check; Auction Sale Valid; Refusal of respondent judge to issue the certificate
constitutes grave abuse of discretion.—Considering that the whole amount deposited
by the petitioner consisting of Cashier’s Check of P50,000.00 and P13,130.00 in cash
covers the judgment obligation of P63,000.00 as mentioned in the writ of execution,
then, We see no valid reason for the private respondent to have refused acceptance of
the payment of the obligation in his favor. The auction sale, therefore, was uncalled
for. Furthermore, it appears that on January 17, 1975, the Cashier’s Check was even
withdrawn by the petitioner and replaced with cash in the
688
6 SUPREME COURT REPORTS ANNOTATED
88
New Pacific Timber & Supply Co., Inc. vs. Seneris
agreement entered into by the parties at the instance of the respondent judge.
However, the private respondent still refused to receive the same. Obviously, the
private respondent is more interested in the levied properties than in the mere
satisfaction of the judgment obligation. Thus, petitioner’s motion for the issuance of
a certificate of satisfaction of judgment is clearly meritorious and the respondent
Judge gravely abused his discretion in not granting the same under the
circumstances.
Same; Same; Same; Remedies; Special civil action is a proper and adequate
remedy in a case where a writ of execution of the decision had been issued.—It is
also contended by the private respondent that appeal and not a special civil action for
certiorari is the proper remedy in this case, and that since the period to appeal from
the decision of the respondent judge has already expired, then, the present petition
has been filed out of time. The contention is untenable. The decision of the
respondent judge in Civil Case No. 250 (166) has long been become final and
executory and so, the same is not being questioned herein. The subject of the petition
at bar as having been issued in grave abuse of discretion is the order dated August
28, 1975 of the respondent Judge which was merely issued in execution of the said
decision. Thus, even granting that appeal is open to the petitioner, the same is not an
adequate and speedy remedy for the respondent judge had already issued a writ of
execution.
PETITION for certiorari with preliminary injunction from the order of the Court of
First Instance of Zamboanga, Branch II.
The facts are stated in the opinion of the court.
CONCEPCION JR., J.:
A petition for certiorari with preliminary injunction to annul and/or modify the order
of the Court of First Instance of Zamboanga City (Branch II) dated August 28, 1976
denying petitioner’s Ex-Parte Motion for Issuance of Certificate Of Satisfaction Of
Judgment.
Herein petitioner is the defendant in a complaint for collection of a sum of money
filed by the private respondent.1 On Ju-
________________
1Civil Case No. 250 (1669), Court of First Instance, Zamboanga City, entitled
“Ricardo A. Tong, Plaintiff, versus New Pacific Timber and Supply, Co., Inc.,
Defendant.”
689
VOL. 101, DECEMBER 19, 1980 689
New Pacific Timber & Supply Co., Inc. vs. Seneris
ly 19, 1974, a compromise judgment was rendered by the respondent Judge in
accordance with an amicable settlement entered into by the parties the terms and
conditions of which, are as follows:
1. “(1)That defendant will pay to the plaintiff the amount of Fifty Four Thousand
Five Hundred Pesos (P54,500.00) at 6% interest per annum to be reckoned
from August 25, 1972;
2. “(2)That defendant will pay to the plaintiff the amount of Six Thousand Pesos
(P6,000.00) as attorney’s fees for which P5,000.00 had been acknowledged
received by the plaintiff under Consolidated Bank and Trust Corporation
Check No. 16-135022 amounting to P5,000.00 leaving a balance of One
Thousand Pesos (P1,000.00);
3. “(3)That the entire amount of P54,500.00 plus interest, plus the balance of
P1,000.00 for attorney’s fees will be paid by defendant to the plaintiff within
five months from today, July 19, 1974; and
4. “(4)Failure on the part of the defendant to comply with any of the above-
conditions, a writ of execution may be issued by this Court for the
satisfaction of the obligation.”2
For failure of the petitioner to comply with his judgment obligation, the respondent
Judge, upon motion of the private respondent, issued an order for the issuance of a
writ of execution on December 21, 1974. Accordingly, writ of execution was issued for
the amount of P63,130.00 pursuant to which, the ExOfficio Sheriff levied upon the
following personal properties of the petitioner, to wit:
(1) Unit American Lathe 24”
(1) Unit American Lathe 18” Cracker Wheeler
(1) Unit Rockford Shaper 24”
and set the auction sale thereof on January 15, 1975. However, prior to January 15,
1975, petitioner deposited with the Clerk of Court, Court of First Instance,
Zamboanga City, in his capacity as Ex-Officio Sheriff of Zamboanga City, the sum of
P63,130.00 for the payment of the judgment obligation, consisting of the following:
_______________
2pp. 14-15, rollo.
690
690 SUPREME COURT REPORTS ANNOTATED
New Pacific Timber & Supply Co., Inc. vs. Seneris
1. 1.P50,000.00 in Cashier’s Check No. S-314361 dated January 3, 1975 of the
Equitable Banking Corporation; and
2. 2.P13,130.00 in cash.3
In a letter dated January 14, 1975, to the Ex-OfficioSheriff,4 private respondent
through counsel, refused to accept the check as well as the cash deposit. In the same
letter, private respondent requested the scheduled auction sale on January 15, 1975
to proceed if the petitioner cannot produce the cash. However, the scheduled auction
sale at 10:00 a.m. on January 15, 1975 was postponed to 3:00 o’clock p.m. of the
same day due to further attempts to settle the case. Again, the scheduled auction sale
that afternoon did not push through because of a last ditch attempt to convince the
private respondent to accept the check. The auction sale was then postponed on the
following day, January 16, 1975 at 10:00 o’clock a.m.5 At about 9:15 a.m., on January
16, 1975, a certain Mr. Tañedo representing the petitioner appeared in the office of
the Ex-Officio Sheriff and the latter reminded Mr. Tañedo that the auction sale would
proceed at 10:00 o’clock. At 10:00 a.m., Mr. Tañedo and Mr. Librado, both
representing the petitioner requested the Ex-Officio Sheriff to give them fifteen
minutes within which to contract their lawyer which request was granted. After Mr.
Tañedo and Mr. Librado failed to return, counsel for private respondent insisted that
the sale must proceed and the ExOfficio Sheriff proceeded with the auction sale.6 In
the course of the proceedings, Deputy Sheriff Castro sold the levied properties item
by item to the private respondent as the highest bidder in the amount of P50,000.00.
As a result thereof, the Ex-Officio Sheriff declared a deficiency of
P13,130.00.7 Thereafter, on January 16, 1975, the Ex-Officio Sheriff issued a “Sheriff’s
Certificate of Sale” in favor of the private respondent, Ricardo Tong, married to
Pascuala Tong
_______________
3 p. 16, rollo.
 4 Exhibit “D”.
5 p. 4, rollo.
6 pp. 5-6, rollo.
7 p. 6, rollo.
691
VOL. 101, DECEMBER 19, 1980 691
New Pacific Timber & Supply Co., Inc. vs. Seneris
for the total amount of P50,000.00 only.8 Subsequently, on January 17, 1975,
petitioner filed an ex-parte motion for issuance of certificate of satisfaction of
judgment. This motion was denied by the respondent Judge in his order dated
August 28, 1975. In view thereof, petitioner now questions said order by way of the
present petition alleging in the main that said respondent Judge capriciously and
whimsically abused his discretion in not granting the motion for issuance of
certificate of satisfaction of judgment for the following reasons: (1) that there was
already a full satisfaction of the judgment before the auction sale was conducted with
the deposit made to the Ex-Officio Sheriff in the amount of P63,000.00 consisting of
P50,000.00 in Cashier’s Check and P13,130.00 in cash; and (2) that the auction sale
was invalid for lack of proper notice to the petitioner and its counsel when the Ex-
Officio Sheriff postponed the sale from June 15, 1975 to January 16, 1976 contrary to
Section 24, Rule 39 of the Rules of Court. On November 10, 1975, the Court issued a
temporary restraining order enjoining the respondent Ex-OfficioSheriff from
delivering the personal properties subject of the petition to Ricardo A. Tong in view
of the issuance of the “Sheriff Certificate of Sale.”
We find the petition to be impressed with merit.
The main issue to be resolved in this instance is as to whether or not the private
respondent can validly refuse acceptance of the payment of the judgment obligation
made by the petitioner consisting of P50,000.00 in Cashier’s Check and P13,130.00
in cash which it deposited, with the Ex-Officio Sheriff before the date of the
scheduled auction sale. In upholding private respondent’s claim that he has the right
to refuse payment by means of a check, the respondent Judge cited the following:
Section 63 of the Central Bank Act:
“Sec. 63. Legal Character.—Checks representing deposit money do not have legal
tender power and their acceptance in payment of debts, both public and private, is at
the option of the
_______________
8Exhibit “C”, see Decision, p. 19, rollo.
692
692 SUPREME COURT REPORTS ANNOTATED
New Pacific Timber & Supply Co., Inc. vs. Seneris
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 in cash in an
amount equal to the amount credited to his account.”
Article 1249 of the New Civil Code:
“Art. 1249.—The payment of debts in money shall be made in the currency stipulated,
and if it is not possible to deliver such currency, then in the currency which is legal
tender in the Philippines.
“The delivery of promissory notes payable to order, or bills of exchange or other
mercantile documents shall produce the effect of payment only when they have been
cashed, or when through the fault of the creditor they have been impaired.
“In the meantime, the action derived from the original obligation shall be held in
abeyance.”
Likewise, the respondent Judge sustained the contention of the private respondent
that he has the right to refuse payment of the amount of P13,130.00 in cash because
the said amount is less than the judgment obligation, citing the following Article of
the New Civil Code:
“Art. 1248. Unless there is an express stipulation to that effect, the creditor cannot be
compelled partially to receive the presentations in which the obligation consists.
Neither may the debtor be required to make partial payment.
“However, when the debt is in part liquidated and in part unliquidated, the
creditor may demand and the debtor may effect the payment of the former without
waiting for the liquidation of the latter.”
It is to be emphasized in this connection that the check deposited by the petitioner in
the amount of P50,000.00 is not an ordinary check but a Cashier’s Check of the
Equitable Banking Corporation, a bank of good standing and reputation. As testified
to by the Ex-Officio Sheriff with whom it has been deposited, it is a certified crossed
check.9 It is a well-known
_______________
9 p. 35, t.s.n., May 24, 1975.
693
VOL. 101, DECEMBER 19, 1980 693
New Pacific Timber & Supply Co., Inc. vs. Seneris
and accepted practice in the business sector that a Cashier’s Check is deemed as cash.
Moreover, since 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.10 Where a check is certified by the bank on which it is drawn, the
certification is equivalent to acceptance.11 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 in circulation, a
certificate of deposit payable to the order of the depositor, or any other obligation it
can assume. The object of certifying a check, as regards both parties, is to enable the
holder to use it as money.”12 When the holder procures the check to be certified, “the
check operates as an assignment of a part of the funds to the creditors”.13 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. Considering that the whole
amount deposited by the petitioner consisting of
_______________
10 Gregorio Araneta, Inc. vs. Paz Tuazon de Paterno and Jose Vidal, L-2886,
August 22, 1952, 49 O.G. No. 1, p. 59.
11 Section 187. Certification of check; effect of.—Where a check is certified by the
bank on which it is drawn, the certification is equivalent to acceptance. (Negotiable
Instruments Law)
12 PNB vs. Nat. City Bank of New York, 63 Phil. 711, 718-719.
13 PNB vs. Nat. City Bank of New York, supra, 711-717; 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 it. (Negotiable Instruments
Law) [Italics supplied]
694
694 SUPREME COURT REPORTS ANNOTATED
New Pacific Timber & Supply Co., Inc. vs. Seneris
Cashier’s Check of P50,000.00 and P13,130.00 in cash covers the judgment
obligation of P63,000.00 as mentioned in the writ of execution, then. We see no
valid reason for the private respondent to have refused acceptance of the payment of
the obligation in his favor. The auction sale, therefore, was uncalled for.
Furthermore, it appears that on January 17, 1975, the Cashier’s Check was even
withdrawn by the petitioner and replaced with cash in the corresponding amount of
P50,000.00 on January 27, 1975 pursuant to an agreement entered into by the
parties at the instance of the respondent Judge. However, the private respondent still
refused to receive the same. Obviously, the private respondent is more interested in
the levied properties than in the mere satisfaction of the judgment obligation. Thus,
petitioner’s motion for the issuance of a certificate of satisfaction of judgment is
clearly meritorious and the respondent Judge gravely abused his discretion in not
granting the same under the circumstances.
In view of the conclusion reached in this instance, We find no more need to
discuss the ground relied in the petition.
It is also contended by the private respondent that Appeal and not a special civil
action for certiorari is the proper remedy in this case, and that since the period to
appeal from the decision of the respondent Judge has already expired, then, the
present petition has been filed out of time. The contention is untenable. The decision
of the respondent Judge in Civil Case No. 250 (166) has long become final and
executory and so, the same is not being questioned herein. The subject of the petition
at bar as having been issued in grave abuse of discretion is the order dated August
28, 1975 of the respondent Judge which was merely issued in execution of the said
decision. Thus, even granting that appeal is open to the petitioner, the same is not an
adequate and speedy remedy for the respondent Judge had already issued a writ of
execution.14
_______________
14 Matute vs. Court of Appeals, 26 SCRA 799, citing Vda. de Saludes vs.
Pajarillo, 78 Phil. 754, Woodcraft Works, Ltd. vs. Moacoso, 92 Phil. 1021and Liwanag
vs. Castillo, 106 Phil. 375.
695
VOL. 101, DECEMBER 19, 1980 695
New Pacific Timber & Supply Co., Inc. vs. Seneris
WHEREFORE, in view of all the foregoing, judgment is hereby rendered:
1. 1.Declaring as null and void the order of the respondent Judge dated August
28, 1975;
2. 2.Declaring as null and void the auction sale conducted on January 16, 1975
and the certificate of sale issued pursuant thereto;
3. 3.Ordering the private respondent to accept the sum of P63,130.00 under
deposit as payment of the judgment obligation in his favor;
4. 4.Ordering the respondent Judge and respondent Ex-Officio Sheriff to release
the levied properties to the herein petitioner.
The temporary restraining order issued is hereby made permanent.
Costs against the private respondent.
SO ORDERED.
Barredo (Chairman), Aquino, Abad Santos and De Castro, JJ., concur.
Petition granted.
Notes.—In a proceeding supplemental to execution a trial court cannot
summarily make a finding that a third person has in his possession property of the
judgment debtor. The trial court can only make an order authorizing the creditor to
sue in the proper court. (Economic Insurance Co., Inc. vs. Torres, 79 SCRA 519).
 Where the mortgagee in installment sales of personal property chose the remedy
of specific performance in a replevin suit with damages, it is entitled to an alias writ
of execution for the portion of the judgment that has not been satisfied. (Industrial
Finance Corporation vs. Ramirez, 77 SCRA 152).
The appointment of a special sheriff in execution of judgment is, as a rule,
unauthorized by law. (Policarpio vs. Fajardo, 78 SCRA 210).
696
696 SUPREME COURT REPORTS ANNOTATED
Nautica Shipping Agency and Management Co., Inc. vs. NSB
The courts should dismiss a suit which has all the earmarks of a subterfuge that was
resorted to for the purpose of frustrating the execution of a judgment in an unfair
labor controversy. (Cosmos Foundry Shop Workers Union vs. Lo Bu, 63 SCRA 313).
A trial court should give reasonable time for defendant to make deposit to stay
execution pending appeal of ejectment case. (Sanchez vs. Zosa, 68 SCRA 171).
Redemption of property extra-judicially foreclosed by the Development Bank of
the Philippines starts from the registration of the sale not from the date of the
auction sale. (General vs. Barrameda, 69 SCRA 182).
A bank is a moneyed institute founded to facilitate the borrowing, lending, and
safekeeping of money and to deal in notes, bills of exchange and credits. (Republic
vs. Security Credit and Acceptance Corporation, 19 SCRA 68).

——o0o——
 G.R. No. 170984. January 30, 2009.*
SECURITY BANK AND TRUST COMPANY, petitioner, vs. RIZAL COMMERCIAL
BANKING CORPORATION, respondent.
G.R. No. 170987. January 30, 2009.*
RIZAL COMMERCIAL BANKING CORPORATION, petitioner, vs. SECURITY BANK
AND TRUST COMPANY, respondent.
Banks and Banking; Checks; Words and Phrases; A manager’s check is one
drawn by a bank’s manager upon the bank itself—it stands on the same footing as a
certified check, which is deemed to have been accepted by the bank that certified
it.—It must be noted
_______________
** Additional member per Special Order No. 558 dated January 15, 2009 in lieu
of Justice Presbitero J. Velasco, Jr. who is on official leave.
*** Additional member per Special Order No. 562 dated January 21, 2009 in
lieu of Justice Arturo D. Brion who is on leave.
* SECOND DIVISION.
408
4 SUPREME COURT REPORTS ANNOTATED
08
Security Bank and Trust Company vs. Rizal Commercial
Banking Corporation
that the questioned check issued by SBTC is not just an ordinary check but a
manager’s check. A manager’s check is one drawn by a bank’s manager upon the
bank itself. It stands on the same footing as a certified check, which is deemed to
have been accepted by the bank that certified it. As the bank’s own check, a
manager’s check becomes the primary obligation of the bank and is accepted in
advance by the act of its issuance. In this case, RCBC, in immediately crediting the
amount of P8 million to CMC’s account, relied on the integrity and honor of the
check as it is regarded in commercial transactions. Where the questioned check,
which was payable to “Cash,” appeared regular on its face, and the bank found
nothing unusual in the transaction, as the drawer usually issued checks in big
amounts made payable to cash, RCBC cannot be faulted in paying the value of the
questioned check.
Same; Same; 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—it is important that banks should guard against injury attributable to
negligence or bad faith on its part; The highest degree of diligence is expected, and
high standards of integrity and performance are required of banks.—In addition to
the above-mentioned award of compensatory damages, we also find merit in the need
to award exemplary damages in order 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, above
all, trust and confidence. In this connection, it is important that banks should guard
against injury attributable to negligence or bad faith on its part. As repeatedly
emphasized, since the banking business is impressed with public interest, the trust
and confidence of the public in it is of paramount importance. Consequently, the
highest degree of diligence is expected, and high standards of integrity and
performance are required of it. SBTC having failed in this respect, the award of
exemplary damages to RCBC in the amount of P50,000.00 is warranted.
409
VOL. 577, JANUARY 30, 2009 409
Security Bank and Trust Company vs. Rizal Commercial Banking
Corporation
PETITIONS for review on certiorari of the decision and resolution of the Court of
Appeals.
The facts are stated in the opinion of the Court.
Pacis & Reyes for SBTC.
Siguion Reyna, Montecillo & Ongsiako for RCBC.
QUISUMBING, Acting C.J.:
Before us are opposing parties’ petitions for review of the Decision1 dated March
29, 2005 and Resolution2 dated December 12, 2005 of the Court of Appeals in CA-
G.R. CV No. 67387. The two petitions are herein consolidated as they stem from the
same set of factual circumstances.
The facts, as found by the trial and appellate courts, are as follows:
On January 9, 1981, Security Bank and Trust Company (SBTC) issued a manager’s
check for P8 million, payable to “CASH,” as proceeds of the loan granted to Guidon
Construction and Development Corporation (GCDC). On the same day, the P8-
million check, along with other checks, was deposited by Continental Manufacturing
Corporation (CMC) in its Current Account No. 0109-022888 with Rizal Commercial
Banking Corporation (RCBC). Immediately, RCBC honored the P8-million check and
allowed CMC to withdraw the same.3
On the next banking day, January 12, 1981, GCDC issued a “Stop Payment Order”
to SBTC, claiming that the P8-million check was released to a third party by mistake.
Consequently, SBTC dishonored and returned the manager’s
_______________
 1 Rollo (G.R. No. 170987), pp. 36-48. Penned by Associate Justice Magdangal M.
De Leon, with Associate Justices Salvador J. Valdez, Jr. and Mariano C. Del Castillo
concurring.
2 Id., at pp. 49-50. Penned by Associate Justice Magdangal M. De Leon, with
Associate Justices Juan Q. Enriquez, Jr. and Mariano C. Del Castillo concurring.
3 Id., at p. 37.
410
410 SUPREME COURT REPORTS ANNOTATED
Security Bank and Trust Company vs. Rizal Commercial Banking
Corporation
check to RCBC. Thereafter, the check was returned back and forth between the two
banks, resulting in automatic debits and credits in each bank’s clearing balance.4
On February 13, 1981, RCBC filed a complaint5 for damages against SBTC with the
then Court of First Instance of Rizal, Branch XXII. Said case was docketed as Civil
Case No. 1081 and later transferred to the Regional Trial Court (RTC) of Makati City,
Branch 143.
Meanwhile, following the rules of the Philippine Clearing House, RCBC and SBTC
stopped returning the checks to each other. By way of a temporary arrangement
pending resolution of the case, the P8-million check was equally divided between,
and credited to, RCBC and SBTC.6
On May 9, 2000, the RTC of Makati City, Branch 143, rendered a Decision7 in
favor of RCBC. The dispositive portion of the decision reads:
“PREMISES CONSIDERED, the Court renders judgment in favor of plaintiff
[RCBC] and finds defendant SBTC justly liable to [RCBC] and sentences [SBTC] to
pay [RCBC] the amount of:
1. PhP4,000,000.00 as and for actual damages;
2. PhP100,000.00 as and for attorney’s fees; and,
3. the costs.
SO ORDERED.”8
On appeal, the Court of Appeals affirmed with modification the above Decision, to
wit:
“WHEREFORE, the appealed Decision
is AFFIRMED with MODIFICATION. Appellant Security Bank and Trust Co.
shall pay
_______________
4 Id.
5 Records, pp. 1-5.
6 Rollo (G.R. No. 170987), p. 38.
7 CA Rollo, pp. 93-96. Penned by Acting Presiding Judge Salvador S. Abad
Santos.
8 Id., at p. 96.
411
VOL. 577, JANUARY 30, 2009 411
Security Bank and Trust Company vs. Rizal Commercial Banking
Corporation
appellee Rizal Commercial Banking Corporation not only the principal amount of
P4,000,000.00 but also interest thereon at (6%) per annum covering appellee’s
unearned income on interest computed from the time of filing of the complaint on
February 13, 1981 to the date of finality of this Decision. For lack of factual and legal
basis, the award of attorney’s fees is DELETED.
SO ORDERED.”9
Now for our resolution are the opposing parties’ petitions for review
on certiorari of the abovecited decision. On its part, SBTC alleges the following to
support its petition:
I.
THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN REFUSING TO
APPLY THE LAW BECAUSE, IN ITS OPINION, TO DO SO WOULD “RESULT IN
AN INJUSTICE.”
II.
THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT
TO DETERMINE WHETHER OR NOT A BANK IS A HOLDER IN DUE COURSE,
ONLY THE NEGOTIABLE INSTRUMENTS LAW NEED BE APPLIED TO THE
EXCLUSION OF CENTRAL BANK RULES AND REGULATIONS.
III.
THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN FAILING TO NOTE
THAT THE MANAGER’S CHECK IN QUESTION WAS ACCEPTED FOR DEPOSIT
BY THE RCBC AND WAS NOT ENCASHED BY THE PAYEE.
IV.
THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN FAILING TO
CONSIDER THAT PRIOR TO THE DEPOSIT OF THE CHECKS WORTH PhP53
MILLION, RCBC WAS HOLDING 43 CHECKS TOTALING P49,017,669.66 DRAWN
BY CONTINENTAL MANUFACTURING CORPORATION AGAINST ITS CURRENT
ACCOUNT WHEN THE BALANCE OF THAT ACCOUNT WAS A MERE P573.62.
_______________
9 Rollo (G.R. No. 170984), p. 88.
412
412 SUPREME COURT REPORTS ANNOTATED
Security Bank and Trust Company vs. Rizal Commercial Banking
Corporation
V.
THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN FAILING TO
CONSIDER THAT THE CHECKS DEPOSITED WITH RCBC THE PROCEEDS OF
WHICH WERE IMMEDIATELY WITHDRAWN TO HONOR THE 43 CHECKS
TOTALING P49,017,669.66 DRAWN BY CONTINENTAL MANUFACTURING
CORPORATION ON ITS CURRENT ACCOUNT WERE NOT ALL MANAGER’S
CHECK[S] BUT INCLUDED ORDINARY CHECKS IN THE TOTAL AMOUNT OF
PhP15,436,140.81.
VI.
THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN FAILING TO
CONSIDER THAT EACH OF THE 43 CHECKS DRAWN BY THE CONTINENTAL
MANUFACTURING CORPORATION WERE ALL HONORED BY RCBC ON THE
BASIS OF A MIXTURE OF ALL THE MANAGER’S AND ORDINARY CHECKS
DEPOSITED ON THAT DAY OF 9 JANUARY 1981.
VII.
THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT
THE RCBC IS A HOLDER IN DUE COURSE.
VIII.
THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT
SBTC WAITED FOR THREE (3) DAYS TO NOTIFY THE RCBC OF THE STOP
PAYMENT ORDER.
IX.
THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT
SBTC SHOULD HAVE FIRST ACQUIRED PERSONAL KNOWLEDGE OF THE
FACTS WHICH GAVE RISE TO THE REQUEST FOR THE STOP PAYMENT ORDER
BEFORE HONORING SUCH REQUEST.
X.
THE HONORABLE COURT OF APPEALS RULED CORRECTLY IN REFUSING TO
HOLD SBTC LIABLE FOR DAMAGE CLAIMS BASED SOLELY ON SPECULATION,
CONJECTURE AND GUESSWORK.413
VOL. 577, JANUARY 30, 2009 413
Security Bank and Trust Company vs. Rizal Commercial Banking
Corporation
XI.
THE HONORABLE COURT OF APPEALS RULED CORRECTLY IN HOLDING
THAT RCBC IS NOT ENTITLED TO EXEMPLARY DAMAGES.
XII.
THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN HOLDING SBTC
LIABLE FOR THE ATTORNEY’S FEES OF RCBC [SIC].10
On RCBC’s part, the following issues are submitted for resolution:
I.
WHETHER OR NOT SBTC IS LIABLE FOR THE MANAGER’S CHECK IT ISSUED.
II.
WHETHER OR NOT RCBC IS ENTITLED TO COMPENSATORY DAMAGES
EQUIVALENT TO THE INTEREST INCOME LOST AS A RESULT OF THE
ILLEGAL REFUSAL OF SBTC TO HONOR ITS OWN MANAGER’S CHECK, AS
WELL AS FOR EXEMPLARY DAMAGES AND ATTORNEY’S FEES.11
Simply stated, we find that in these consolidated petitions, the legal issues for our
resolution are: (1) Is SBTC liable to RCBC for the remaining P4 million? and (2) Is
SBTC liable to pay for lost interest income on the remaining P4 million, exemplary
damages and attorney’s fees?
RCBC avers that the manager’s check issued by SBTC is substantially as good as
the money it represents because by its peculiar character, its issuance has the effect
of an advance acceptance. RCBC claims that it is a holder in due course when it
credited the P8-million manager’s check to CMC’s account. Accordingly, RCBC
asserts that SBTC’s re-
_______________
10 Id., at pp. 256-258.
11 Id., at p. 178.
414
414 SUPREME COURT REPORTS ANNOTATED
Security Bank and Trust Company vs. Rizal Commercial Banking
Corporation
fusal to honor its obligation justifies RCBC claim for lost interest income, exemplary
damages and attorney’s fees.
On the other hand, SBTC contends that RCBC violated Monetary Board
Resolution No. 2202 of the Central Bank of the Philippines mandating all banks to
verify the genuineness and validity of all checks before allowing drawings of the
same. SBTC insists that RCBC should bear the consequences of allowing CMC to
withdraw the amount of the check before it was cleared.12
We shall rule on the issues seriatim.
At the outset, it must be noted that the questioned check issued by SBTC is not
just an ordinary check but a manager’s check. A manager’s check is one drawn by a
bank’s manager upon the bank itself. It stands on the same footing as a certified
check,13 which is deemed to have been accepted by the bank that certified it. 14 As the
bank’s own check, a manager’s check becomes the primary obligation of the bank and
is accepted in advance by the act of its issuance.15
In this case, RCBC, in immediately crediting the amount of P8 million to CMC’s
account, relied on the integrity and honor of the check as it is regarded in commercial
transactions. Where the questioned check, which was payable to “Cash,” appeared
regular on its face, and the bank found nothing unusual in the transaction, as the
drawer usually issued
_______________
12 Id., at pp. 264-269.
13 Equitable PCI Bank v. Ong, G.R. No. 156207, September 15, 2006, 502 SCRA
119, 132.
14 The Negotiable Instruments Law (Act No. 2031),
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.
15 International Corporate Bank v. Gueco, G.R. No. 141968, February 12, 2001,
351 SCRA 516, 528.
415
VOL. 577, JANUARY 30, 2009 415
Security Bank and Trust Company vs. Rizal Commercial Banking
Corporation
checks in big amounts made payable to cash, RCBC cannot be faulted in paying the
value of the questioned check.16
In our considered view, SBTC cannot escape liability by invoking Monetary Board
Resolution No. 2202 dated December 21, 1979, prohibiting drawings against
uncollected deposits. For we must point out that the Central Bank at that time issued
a Memorandum dated July 9, 1980, which interpreted said Monetary Board
Resolution No. 2202. In its pertinent portion, said Memorandum reads:
“MEMORANDUM TO ALL BANKS
July 9, 1980
“For the guidance of all concerned, Monetary Board Resolution No. 2202 dated
December 31, 1979 prohibiting, as a matter of policy, drawing against uncollected
deposit effective July 1, 1980, uncollected deposits representing manager’s cashier’s/
treasurer’s checks, treasury warrants, postal money orders and duly funded “on us”
checks which may be permitted at the discretion of each bank, covers drawings
against demand deposits as well as withdrawals from savings deposits.”17
Thus, it is clear from the July 9, 1980 Memorandum that banks were given the
discretion to allow immediate drawings on uncollected deposits of manager’s checks,
among others. Consequently, RCBC, in allowing the immediate withdrawal against
the subject manager’s check, only exercised a prerogative expressly granted to it by
the Monetary Board.
Moreover, neither Monetary Board Resolution No. 2202 nor the July 9, 1980
Memorandum alters the extraordinary nature of the manager’s check and the relative
rights of the parties thereto. SBTC’s liability as drawer remains the same − by
drawing the instrument, it admits the existence of the payee and his then capacity to
indorse; and engages that on
_______________
16 Security Bank & Trust Company v. Triumph Lumber and Construction
Corporation, G.R. No. 126696, January 21, 1999, 301 SCRA 537, 557.
17 Rollo (G.R. No. 170984), p. 218.
416
416 SUPREME COURT REPORTS ANNOTATED
Security Bank and Trust Company vs. Rizal Commercial Banking
Corporation
due presentment, the instrument will be accepted, or paid, or both, according to its
tenor.18
Concerning RCBC’s claim for lost interest income on the remaining P4 million,
this is already covered by the amount of damages in the form of legal interest of 6%,
based on Article 220019 and 220920 of the Civil Code of the Philippines, as awarded
by the Court of Appeals in its decision.
In addition to the above-mentioned award of compensatory damages, we also find
merit in the need to award exemplary damages in order 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, above all, trust and confidence. In this connection, it is important that
banks should guard against injury attributable to negligence or bad faith on its part.
As repeatedly emphasized, since the banking business is impressed with public
interest, the trust and confidence of the public in it is of paramount importance.
Consequently, the highest degree of diligence is expected, and high standards of
integrity and performance are required of
_______________
18 The Negotiable Instruments Law (Act No. 2031),
Sec. 61. Liability of drawer.—The drawer by drawing the instrument
admits the existence of the payee and his then capacity to indorse; and engages
that, on due presentment, the instrument will be accepted, or paid, or both,
according to its tenor….
19 ART. 2200. Indemnification for damages shall comprehend not only the
value of the loss suffered, but also that of the profits which the obligee failed to
obtain.
20 ART. 2209. If the obligation consists in the payment of a sum of money, and
the debtor incurs in delay, the indemnity for damages, there being no stipulation to
the contrary, shall be the payment of the interest agreed upon, and in the absence of
stipulation, the legal interest, which is six percent per annum.
417
 VOL. 577, JANUARY 30, 2009 417
Security Bank and Trust Company vs. Rizal Commercial Banking
Corporation
it. SBTC having failed in this respect, the award of exemplary damages to RCBC in
the amount of P50,000.00 is warranted.21
Pursuant to current jurisprudence, with the finding of liability for exemplary
damages, attorney’s fees in the amount of P25,000.0022 must also be awarded
against SBTC and in favor of RCBC.
WHEREFORE, the assailed Decision dated March 29, 2005 and Resolution dated
December 12, 2005 of the Court of Appeals in CA-G.R. CV No. 67387 is hereby
AFFIRMED with MODIFICATION. Security Bank and Trust Company is ordered to
pay Rizal Commercial Banking Corporation: (1) the remaining P4,000,000.00, with
legal interest thereon at six percent (6%) per annum from the time of filing of the
complaint on February 13, 1981 to the date of finality of this Decision; (2) exemplary
damages of P50,000.00; and (3) attorney’s fees of P25,000.00.
No pronouncement as to costs.
SO ORDERED.
Corona,** Carpio-Morales, Tinga and Leonardo-De Castro,*** JJ., concur.

_______________

21 See Bank of the Philippine Islands v. Roxas, G.R. 16783, October 15, 2007, 536
SCRA 168, 172.
22 Civil Code, Art. 2208. In the absence of stipulation, attorney’s fees and
expenses of litigation, other than judicial costs, cannot be recovered, except:
(1) When exemplary damages are awarded;
xxxx
In all cases, the attorney’s fees and expenses of litigation must be reasonable.
Bank of the Philippine Islands v. Roxas, supra.
** Additional member in lieu of Associate Justice Presbitero J. Velasco, Jr. who is
abroad on official business.
*** Additional member in lieu of Associate Justice Arturo D. Brion who took no
part due to his being a former partner of one of the parties’ counsel.
 G.R. No. 117857. February 2, 2001.*
LUIS S. WONG, petitioner, vs. COURT OF APPEALS and PEOPLE OF THE
PHILIPPINES, respondents.
Criminal Law; Batas Pambansa Blg. 22; Evidence; Findings of fact of the
Court of Appeals are generally conclusive.—Although Manuel Limtong was the sole
witness for the prosecution, his testimony was found sufficient to prove all the
elements of the offense charged. 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 alleged 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.
_______________
*SECOND DIVISION.
101
VOL. 351, FEBRUARY 2, 2001 10
1 Same; Same; Same; Same; By current banking practice a check becomes stale
Wong vs. Court of Appeals
Same; Same; Same; 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.—
In Llamado v. Court of Appeals, 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.
Same; Same; Same; Two (2) ways of violating Batas Pambansa 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.
Same; Same; Same; Same; The maker’s knowledge is presumed from the
dishonor of the check for insufficiency of funds.—As to the second element, B.P. Blg.
22 creates a presumption juris tantum that the second element prima facie exists
when the first and third elements of the offense are present. Thus, the maker’s
knowledge is presumed from the dishonor of the check for insufficiency of funds.
Same; Same; Same; Same; Nowhere in Section 2 of the law does it require a
maker to maintain funds in his bank account for only 90 days; 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.—Contrary to petitioner’s
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 the 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.
102
1 SUPREME COURT REPORTS ANNOTATED
02
Wong vs. Court of Appeals
after more than six (6) months or 180 days.—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, 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.
Same; Same; Penalty; Pursuant to the policy guidelines in Administrative
Circular No. 12-2000, 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.—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.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Agapito P. Pagayanan, Jr. and Tañada, Vivo and Tan for petitioner.
The Solicitor General for the People.
QUISUMBING, J.:
For review on certiorari is the decision dated October 28, 1994 of the Court of
Appeals in CA. G.R. CR 118561 which 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
________________
1 Penned by Associate Justice Alfredo L. Benipayo, concurred in by Justices
Ricardo P. Galvez and Eugenio S. Labitoria.
103
VOL. 351, FEBRUARY 2, 2001 103
Wong vs. Court of Appeals
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.
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,
petitioner’s 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. (1)Allied Banking Corporation (ABC) Check No. 660143464-C for P6,410.00
(Exh. “B”);
2. (2)ABC Check No. 660143460-C for P540.00 (Exh. “C”);
3. (3)ABC Check No. PA660143451-C for P5,500.00 (Exh. “D”);
4. (4)ABC Check No. PA660143465-C for P1,100.00 (Exh. “E”);
5. (5)ABC Check No. PA660143463-C for P3,375.00 (Exh. “F”);
6. (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 petitioner’s unremitted collections for 1984 amounting to
P18,077.07.3LPI waived the P52.07 difference.
_______________
2 Records, p. 119.
3 Id. at 130.
104
104 SUPREME COURT REPORTS ANNOTATED
Wong vs. Court of Appeals
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
_______________
4 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.
105
VOL. 351, FEBRUARY 2, 2001 105
Wong vs. Court of Appeals
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 petitioner’s 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
_______________
7Rollo, pp. 185-199.
106
106 SUPREME COURT REPORTS ANNOTATED
Wong vs. Court of Appeals
“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 court’s decision in toto.9
Hence, the present petition.10 Petitioner raises the following questions of law11—
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 (PO’s) 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?
_______________
8 Id. at 198-199.
9 Id. at 88-108.
10 Id. at 11-86.
11 Id. at 17.
107
VOL. 351, FEBRUARY 2, 2001 107
Wong vs. Court of Appeals
Petitioner insists that the checks were issued as guarantees for the 1985 purchase
orders (PO’s) 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 petitioner’s unremitted collections.
Petitioner’s contention that he did not demand the return of the checks because he
trusted LPI’s good faith is contrary to human nature and sound business practice,
according to the Solicitor General.
The issue as to whatever the checks were issued merely as guarantee or for
payment of petitioner’s 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 alleged 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 ac-
_______________
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).
108
108 SUPREME COURT REPORTS ANNOTATED
Wong vs. Court of Appeals
counting between the parties is not the issue in this case. As repeatedly held, this
Court is not a trier of facts.15Moreover, 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. “(1)The making, drawing and issuance of any check to apply for account or for
value;
2. (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
________________
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, 340 SCRA 497.
109
VOL. 351, FEBRUARY 2, 2001 109
Wong vs. Court of Appeals
1. (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 facie exists when the first and third elements of the offense
are present.20 Thus, the maker’s 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
______________
19 Dichaves v. Apalit, A.M. No. MTJ-00-1274, June 8, 2000, p. 6, 333 SCRA 54.
20 Sycip, Jr. v. Court of Appeals, G.R. No. 125059, March 17, 2000, p. 8, 328
SCRA 447.
21 Vaca v. Court of Appeals, 298 SCRA 657, 661 (1998).
110
110 SUPREME COURT REPORTS ANNOTATED
Wong vs. Court of Appeals
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 petitioner’s 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 the 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
_______________
22 Lozano v. Martinez, 146 SCRA 323, 330-331 (1986).
111
VOL. 351, FEBRUARY 2, 2001 111
Wong vs. Court of Appeals
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 petitioner’s insistent
plea of innocence, we find no error in the respondent court’s 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. CBU-
12055, with subsidiary imprisonment24 in case of insolvency to pay the aforesaid
fines. Finally, as civil indemnity, petitioner is also ordered to pay to LPI

_______________
23 Pacheco v. Court of Appeals, G.R. No. 126670, December 2, 1999, p. 9, 319
SCRA 595.
24 Lim v. People, G.R. No. 130038, September 18, 2000, p. 11, 340 SCRA 497.

112
112 SUPREME COURT REPORTS ANNOTATED
Seville vs. National Development Company
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.
SO ORDERED.
Bellosillo (Chairman), Mendoza, Buena and De Leon, Jr., JJ., concur.
Petition denied but judgment modified.
Note.—The gravamen of the offense of violating Batas Pambansa Blg. 22 is the
issuance of worthless checks. (Diongzon vs. Court of Appeals, 321 SCRA 477 [1999])

——o0o——
 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.
Actions; Judgments; Words and Phrases; A genuine issue is an issue of fact
which calls for the presentation of evidence, as distinguished from an issue which is
sham, fictitious, contrived and pat-ently unsubstantiated so as not to constitute a
genuine issue of fact.—
_____________
* FIRST DIVISION.
120
1 SUPREME COURT REPORTS ANNOTATED
20
Equitable PCI Bank vs. Ong
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. 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. 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.
Banks and Banking; Checks; Doctrine of Unjust Enrichment;The fundamental
doctrine of unjust enrichment is the transfer of value without just cause or
consideration, the main objective being to prevent one to enrich himself at the
expense of another; 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.—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. It is
based on the equitable postulate that it is unjust for a person to retain benefit
without paying for it. 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.
Same; Same; Manager’s Checks; Words and Phrases; 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
121
VOL. 502, SEPTEMBER 15, 2006 1
21
Equitable PCI Bank vs. Ong
issuance, and 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.—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. A
manager’s check stands on the same footing as a certified check. 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.
Same; Same; 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.—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, 446 SCRA 282 (2004), 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.”
Damages; The requisites for an award of moral damages are well-defined,
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 Articles 2219
and 2220 of the Civil Code.—Moral damages
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1 SUPREME COURT REPORTS ANNOTATED
22
Equitable PCI Bank vs. Ong
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. The
requisites for an award of moral damages are well-defined, 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 2219 and Article 2220 of the Civil
Code. All these elements are present in the instant case.
Proximate Cause; Words and Phrases; 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.—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.
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. 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.
Banks and Banking; 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.—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,
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23
Equitable PCI Bank vs. Ong
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. 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. Having failed in this respect, the award of exemplary damages is
warranted.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Jowel T. Cloma for petitioner.
Roberto T. Sencio for respondent.
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
_______________
1 The Consolidated Bank and Trust Corporation.
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124 SUPREME COURT REPORTS ANNOTATED
Equitable PCI Bank vs. Ong
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.5 Neither did they file any written comment or opposition thereto. The
_______________
2 Docketed as Civil Case No. 21458-92 filed before the Regional Trial Court of
Davao City Branch 14.
3 Records, p. 25.
4 Id. at p. 54.
5 Id., at p. 60.
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Equitable PCI Bank vs. Ong
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 FOREGOING 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. 1.To pay the plaintiff the sum of FIFTY THOUSAND PESOS (P50,000.00) in
the concept of moral damages;
2. 2.To pay the plaintiff the sum of TWENTY THOUSAND PESOS (P20,000.00)
as exemplary damages;
_______________
6 Id.
7 Id., at p. 72.
8 Rollo, p. 268.
9 Records, p. 106.
10 Penned by Judge William M. Layague.
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126 SUPREME COURT REPORTS ANNOTATED
Equitable PCI Bank vs. Ong
1. 3.To pay the plaintiff the sum of THREE THOUSAND FIVE HUNDRED
PESOS (P3,500.00) representing actual expenses;
2. 4.To pay the plaintiff the sum of TWENTY THOUSAND PESOS (P20,000.00)
as and for attorney’s fee’s; and
3. 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. 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. 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. 3.WHETHER OR NOT THE COURT OF APPEALS COMMITTED
REVERSIBLE ERRORS WHEN IT AFFIRMED THE COURT A QUO’S
DECISION DATED 3 MAY 1999 AWARDING DAMAGES TO
RESPONDENT ONG AND HOLDING THAT RESPONDENT ONG HAD
PREPONDERANTLY ESTABLISHED BY
_______________
Records, pp. 192-198.
11
Penned by Associate Justice Elvi John S. Asuncion with Associate Justice
12
Conrado M. Vasquez, Jr. and Sergio L. Pestaño, concurring; Rollo, pp. 255-262.
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Equitable PCI Bank vs. Ong
1. COMPETENT EVIDENCE HER CLAIMS IN THE COMPLAINT INSPITE OF
THE FACT THAT THE EVIDENCE ON RECORD DOES NOT JUSTIFY THE
AWARD OF DAMAGES.
2. 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.
3. 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
_______________
13 Id., at pp. 471-472.
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128 SUPREME COURT REPORTS ANNOTATED
Equitable PCI Bank vs. Ong
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
_______________
14 Ley Construction and Development Corporation v. Union Bank of the
Philippines, 389 Phil. 788, 798; 334 SCRA 443 (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; 379 SCRA 159 (2002).
17 Evadel Realty and Development Corporation v. Soriano,G.R. No. 144291, 20
April 2001, 357 SCRA 395, 401.
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Equitable PCI Bank vs. Ong
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
_______________
18Records, p. 77.
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130 SUPREME COURT REPORTS ANNOTATED
Equitable PCI Bank vs. Ong
as a superfluity. It is not, and the Court has plenary discretion to determine the
necessity therefor.”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
_______________
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. Santiago 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:
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Equitable PCI Bank vs. Ong
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:
1. (a)That it is complete and regular upon its face;
2. (b)That he became the holder of it before it was overdue, and without notice it
had been previously dishonored, if such was the fact;
3. (c)That he took it in good faith and for value;
4. (d)That at the time it was negotiated to him, he had no notice of any infirmity
in the instrument or defect in the title of the person negotiating it.
The same law provides further:
_______________
“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).
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132 SUPREME COURT REPORTS ANNOTATED
Equitable PCI Bank vs. Ong
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:
_______________
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
641.
25 Supra note 21 at p. 411.
26 Id.
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Equitable PCI Bank vs. Ong
“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. Seneris:28
“[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.”
_______________
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.
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134 SUPREME COURT REPORTS ANNOTATED
Equitable PCI Bank vs. Ong
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—
1. (a)The existence of the drawer, the genuineness of his signature, and his
capacity and authority to draw the instrument; and
2. (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
_______________
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; 269 SCRA 695, 708
(1997).
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Equitable PCI Bank vs. Ong
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. 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 at0
TCBT-General Santos City.
2. 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:
_______________
30 Records, p. 24.
31 Philippine Bank of Commerce v. Court of Appeals, supra note 27.
32 326 Phil. 326, 347; 256 SCRA 309, 323 (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.
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Equitable PCI Bank vs. Ong
“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 safekeeping 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 well-defined,
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
_______________
33 Article 2217, Civil Code.
34 Art. 2219. Moral damages may be recovered in the following and analogous
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;
137
VOL. 502, SEPTEMBER 15, 2006 137
Equitable PCI Bank vs. Ong
2220 of the Civil Code. All these elements are present in the instant case.36
35
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.
_______________
(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.
138
138 SUPREME COURT REPORTS ANNOTATED
Equitable PCI Bank vs. Ong
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

_______________
39 Cagungun v. Planters Development Bank, supra note 36 at pp. 273-274.
40 Bank of the Philippine Islands v. Casa Montessori Internationale, supra note
38.
41 Simex International (Manila), Inc. v. Court of Appeals, supra note 32.
139
VOL. 502, SEPTEMBER 15, 2006 139
Equitable PCI Bank vs. Ong
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 and Callejo, Sr., JJ., concur.
Petition denied, judgment affirmed.
Notes.—The rule on summary judgment does not vest in the court summary
jurisdiction to try issues on pleadings and affidavits but gives the court limited
authority to enter summary judgment only if it clearly appears that there is no
genuine issue of material fact. (Velasco vs. Court of Appeals, 329 SCRA 392 [2000])
Upon a motion for summary judgment, the sole function of the court is to
determine whether or not there is an issue of fact to be tried, and any doubt as to the
existence of an issue of fact must be resolved against the movant—courts are quite
critical of the papers presented by the moving party but not of the papers in
opposition thereto. If the defense relied upon by the defendant is legally sufficient
and does not appear patently sham, the motion for summary judgment should be
denied. (Garcia vs. Court of Appeals, 336 SCRA 475 [2000])

——o0o——
 G.R. No. 148211. July 25, 2006.*
SINCERE Z. VILLANUEVA, petitioner, vs. MARLYN P. NITE,** respondent.
Actions; Annulment of Judgment; Parties; An action for annulment of
judgment can be filed by one who was not a party to the case in which the assailed
judgment was rendered.—Annulment of
_______________
*SECOND DIVISION.
**Some parts of the records refer to respondent as “Marilyn Nite.”
460
4 SUPREME COURT REPORTS ANNOTATED
60
Villanueva vs. Nite
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.
Same; Annulment of judgment may be based only on extrinsic fraud and lack
of jurisdiction.—Annulment of judgment may be based only on extrinsic fraud and
lack of jurisdiction. 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. 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.
Banks and Banking; Negotiable Instruments Law; Checks; Parties; If a bank
refuses to pay a check (notwithstanding sufficiency of funds), the payee-holder
cannot sue the bank—the payee should instead sue the drawer who might in turn
sue the bank.—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. None of the foregoing
exceptions to the relativity of contracts applies in this case.
461
VOL. 496, JULY 25, 2006 461
Villanueva vs. Nite
Parties; Words and Phrases; An indispensable party is one whose interest in
the controversy is such that a final decree will necessarily affect his rights; If an
indispensable party is not impleaded, any judgment is ineffective.—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. If an indispensable party
is not impleaded, any judgment is ineffective.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Victoria Timbancaya, E.D. Salonga, Jr. and R.A. V. Saguisag for respondent.
Laarni P. Bernabe for Asian Bank Corporation.
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.
_______________
1CA Decision in CA-G.R. SP No. 44971, Rollo, pp. 29-30.
462
462 SUPREME COURT REPORTS ANNOTATED
Villanueva vs. Nite
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 respondent’s
ABC check.
On August 25, 1997, ABC remitted to the sheriff a manager’s check amounting to
P325,500 drawn on respondent’s 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
court’s 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. 1)the sum of [P146,500] as actual damages plus interest at 12% per
annum from August 25, 1997 until full payment;
2. 2)the sum of [P75,000] as moral damages;
3. 3)the sum of [P50,000] as exemplary damages; and
_______________
2 Penned by Judge Pedro T. Santiago.
3 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.
463
VOL. 496, JULY 25, 2006 463
Villanueva vs. Nite
1. 4)the sum of [P50,000] as attorney’s 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 unsuc-
_______________
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.
6 Regalado, REMEDIAL LAW COMPENDIUM (1999), National Bookstore, Inc.,
Manila, pp. 380 and 557.
464
464 SUPREME COURT REPORTS ANNOTATED
Villanueva vs. Nite
cessful 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 court’s 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:
_______________
7 Id., pp. 380-381.
8 Rollo, pp. 32-33.
465
VOL. 496, JULY 25, 2006 465
Villanueva vs. Nite
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.
_______________
9 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.
466
466 SUPREME COURT REPORTS ANNOTATED
Villanueva vs. Nite
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, Arcelona 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 is AFFIRMED in toto.
Costs against petitioner.
_______________
12 Id.
11 Regalado, supra note 6, at p. 83.
13 345 Phil. 250, 267; 280 SCRA 20, 37-38 (1997).
 467
VOL. 496, JULY 25, 2006 467
Villanueva vs. Nite
SO ORDERED.
Puno (Chairman), Sandoval-Gutierrez, Azcuna and Garcia, JJ., concur.
Petition denied, judgment affirmed in toto.
Notes.—The 1997 Rules of Civil Procedure provides only two remedies for
aggrieved parties to annul a final and executory judgment—the first, by filing a
verified petition for relief from judgment under Rule 38, and the other is for a party
to file a verified petition for annulment of judgment under Rule 47, though in
addition to these, jurisprudence has likewise recognized an additional relief through
a direct action, as certiorari, or by a collateral attack against a judgment that is void
on its face. (Escareal vs. Philippine Airlines, Inc., 455 SCRA 119 [2005])
The Sandiganbayan has jurisdiction to annul a Regional Trial Court ruling in a
partition case where a sequestered corporation is a party. (Del Moral vs.
Republic, 457 SCRA 188 [2005])
It is the height of sophistry to argue that res judicatawould bar a petition for
annulment of judgment whose prior judgment happens to be that which is sought to
be annulled—the action for annulment of judgment precludes the defense of res
judicata. (Orbeta vs. Sendiong, 463 SCRA 180 [2005])

——o0o——
 G.R. No. 107898. December 19, 1995.*
MANUEL LIM and ROSITA LIM, petitioners, vs. COURT OF APPEALS and PEOPLE
OF THE PHILIPPINES, respondents.
Criminal Law; B.P. 22; Bouncing Checks; The gravamen of the offense defined
by B.P. 22 is knowingly issuing a worthless check.—The gravamen of the offense is
knowingly issuing a worthless check. Thus, a fundamental element is knowledge on
the part of the drawer of the insufficiency of his funds in or credit with the drawee
bank for the payment of such check in full upon presentment. Another essential
element is subsequent dishonor of the check 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.
Same; Same; Criminal Procedure; Venue; Jurisdiction; It is settled that venue
in criminal cases is a vital ingredient of jurisdiction.—It is settled that venue in
criminal cases is a vital ingredient of jurisdiction. Section 14, par. (a), Rule 110, of the
Revised Rules of Court, which has been carried over in Sec. 15, par. (a), Rule 110 of
the 1985 Rules on Criminal Procedure, specifically provides: Sec. 14. Place where
action is to be instituted.—(a) In all criminal prosecutions the action shall be
instituted and tried in the court of the municipality or province wherein the offense
was committed or any one of the essential ingredients thereof took place.
Same; Same; Same; Words and Phrases; “Transitory or Continuing Crimes,”
Explained; Violations of B.P. Blg. 22 are categorized as transitory or continuing
crimes.—If all the acts material and essential to the crime and requisite of its
consummation occurred in one municipality or territory, the court therein has the
sole jurisdiction to try the case. There are certain crimes in which some acts material
and essential to the crimes and requisite to their consummation occur in one
municipality or territory and some in another, in which event, the court of either has
jurisdiction to try the cases, it being understood that the first court taking cognizance
of the case excludes the other. These are the so-called transitory or continuing crimes
under which violation of B.P. Blg. 22 is categorized. In other words, a person charged
with a transitory crime may be validly tried in any municipality or territory
_______________
*FIRST DIVISION.
409
VOL. 251, DECEMBER 19, 1995 40
9 the maker or drawer of the check of the insufficiency of his funds is by itself a
Lim vs. Court of Appeals
where the offense was in part committed.
Same; Same; Same; Same; Negotiable Instruments Law; “Issue” and “Holder,”
Defined; The delivery of the instrument is the final act essential to its
consummation as an obligation.—Under Sec. 191 of the Negotiable Instruments Law
the term “issue” means the first delivery of the instrument complete in form to a
person who takes it as a holder. On the other hand, the term “holder” refers to the
payee or indorsee of a bill or note who is in possession of it or the bearer thereof.
In People v. Yabut this Court explained—x x x x The place where the bills were
written, signed, or dated does not necessarily fix or determine the place where they
were executed. What is of decisive importance is the delivery thereof. The delivery of
the instrument is the final act essential to its consummation as an obligation. An
undelivered bill or note is inoperative. Until delivery, the contract is revocable. And
the issuance as well as the delivery of the check must be to a person who takes it as
a holder, which means (t)he payee or indorsee of a bill or note, who is in possession
of it, or the bearer thereof.’ Delivery of the check signifies transfer of possession,
whether actual or constructive, from one person to another with intent to transfer
title thereto x x x x
Same; Same; Same; Same; Same; The receipt of the checks by a collector is not
the issuance and delivery to the payee in contemplation of law since the collector is
not the person who could take the checks as a holder, i.e., as a payee or indorsee
thereof, with the intent to transfer title thereto.—Although LINTON sent a collector
who received the checks from petitioners at their place of business in Kalookan City,
they were actually issued and delivered to LINTON at its place of business in Balut,
Navotas. The receipt of the checks by the collector of LINTON is not the issuance and
delivery to the payee in contemplation of law. The collector was not the person who
could take the checks as a holder, i.e., as a payee or indorsee thereof, with the intent
to transfer title thereto. Neither could the collector be deemed an agent of LINTON
with respect to the checks because he was a mere employee.
Same; Same; Same; Knowledge on the part of the maker or drawer of the
check of the insufficiency of his funds is by itself a continuing eventuality, whether
the accused be within one territory or another.—The prima facie evidence has not
been overcome by petitioners in the cases before us because they did not pay
LINTON the amounts due on the checks; neither did they make arrangements for
payment in full by the drawee bank within five (5) banking days after receiving
notices that the checks had not been paid by the drawee bank. In People v.
Grospe citing People v. Manzanilla we held that “x x x knowledge on the part of
410
4 SUPREME COURT REPORTS ANNOTATED
10
Lim vs. Court of Appeals
continuing eventuality, whether the accused be within one territory or another.”
Consequently, venue or jurisdiction lies either in the Regional Trial Court of
Kalookan City or Malabon.
Same; Same; Same; Venue; Pleadings and Practice; Venue or jurisdiction is
determined by the allegations in the Information.—Moreover, we ruled in the same
Grospe and Manzanilla cases as reiterated in Lim v. Rodrigo that venue or officers of RIGI the Lim spouses were allowed 30, 60 and sometimes even up to 90
jurisdiction is determined by the allegations in the Information. The Informations in days credit.
the cases under consideration allege that the offenses were committed in the On 27 May 1983 the Lims ordered 100 pieces of mild steel plates worth
Municipality of Navotas which is controlling and sufficient to vest jurisdiction upon P51,815.00 from LINTON which were delivered on the same day at their place of
the Regional Trial Court of Malabon. business at 666 7th Avenue, 8th Street, Kalookan City. To pay LINTON for the
delivery the Lims issued SOLIDBANK Check No. 027700 postdated 3 September
PETITION for review of a decision of the Court of Appeals. 1983 in the amount of P51,000.00.1
On 30 May 1983 the Lims ordered another 65 pieces of mild steel plates worth
The facts are stated in the opinion of the Court. P63,455.00 from LINTON which were delivered at their place of business on the
Pantaleon, Mendoza & Associates for petitioners. same day. They issued as payment SOLIDBANK Check No. 027699 in the amount of
P63,455.00 postdated 20 August 1983.2
BELLOSILLO, J.: The Lim spouses also ordered 2,600 “Z” purlins worth P241,800.00 which were
delivered to them on various dates, to wit: 15 and 22 April 1983; 11, 14, 20, 23, 25, 28
MANUEL LIM and ROSITA LIM, spouses, were charged before the Regional Trial and 30 May 1983; and, 2 and 9 June 1983. To pay for the deliveries, they issued
Court of Malabon with estafa on three (3) counts under Art. 315, par. 2 (d), of The seven SOLIDBANK checks, five of which were—
Revised Penal Code, docketed as Crim. Cases Nos. 1696-MN to 1698-MN. The Check No. Date of Issue Amount
Informations substantially alleged that Manuel and Rosita, conspiring together,
027683 16 July 1983 P27,900.003
purchased goods from Linton Commercial Company, Inc. (LINTON), and with deceit
issued seven Consolidated Bank and Trust Company (SOLIDBANK) checks 027684 23 July 1983 P27,900.004
simultaneously with the delivery as payment therefor. When presented to the drawee
bank for payment the checks were dishonored as payment on the checks had been _____________
stopped and/or for insufficiency of funds to cover the amounts. Despite repeated 1 Exh. “C.”
notice and demand the Lim spouses failed and refused to pay the checks or the value 2 Exh. “G.”
of the goods. 3 Exh. “L.”
On the basis of the same checks, Manuel and Rosita Lim were also charged with 4 Exh. “N.”
seven (7) counts of violation of B.P. Blg. 22, otherwise known as the Bouncing Checks
412
Law,docketed as Crim. Cases Nos. 1699-MN to 1705-MN. In substance, the
Informations alleged that the Lims issued the checks with knowledge that they did 412 SUPREME COURT REPORTS ANNOTATED
not have sufficient funds or credit with the drawee Lim vs. Court of Appeals
411 027719 6 Aug. 1983 P32,550.005
VOL. 251, DECEMBER 19, 1995 411 027720 13 Aug. P27,900.006
Lim vs. Court of Appeals 1983
bank for payment in full of such checks upon presentment. When presented for 027721 27 Aug. P37,200.007
payment within ninety (90) days from date thereof the checks were dishonored by 1983
the drawee bank for insufficiency of funds. Despite receipt of notices of such William Yu Bin, Vice President and Sales Manager of LINTON, testified that when
dishonor the Lims failed to pay the amounts of the checks or to make arrangements those seven (7) checks were deposited with the Rizal Commercial Banking
for full payment within five (5) banking days. Corporation they were dishonored for “insufficiency of funds” with the additional
Manuel Lim and Rosita Lim are the president and treasurer, respectively, of Rigi notation “payment stopped” stamped thereon. Despite demand Manuel and Rosita
Bilt Industries, Inc. (RIGI). RIGI had been transacting business with LINTON for refused to make good the checks or pay the value of the deliveries.
years, the latter supplying the former with steel plates, steel bars, flat bars and purlin Salvador Alfonso, signature verifier of SOLIDBANK, Grace Park Branch,
sticks which it uses in the fabrication, installation and building of steel structures. As Kalookan City, where the Lim spouses maintained an account, testified on the
following transactions with respect to the seven (7) checks:
Check No. Date Presented Reason for Similarly sentences were imposed in Crim. Cases Nos. 1697-MN and 1698-MN except
Dishonor as to the indemnities awarded, which were P63,455.00 and P51,800.00, respectively.
In Crim. Case No. 1699-MN the trial court sentenced both accused to a straight
027683 22 July 1983 Payment Stopped (PS)8
penalty of one (1) year imprisonment with all the accessory penalties provided for by
027684 23 July 1983 PS and Drawn Against law and to pay the costs. In addition, they were ordered to indemnify LINTON in the
Insufficient Fund (DAIF)9 amount of P27,900.00. Again, similar sentences were imposed in Crim. Cases Nos.
027699 24 Aug. 1983 PS and DAIF10 1700-MN to 1705-MN except for the indemnities awarded, which were P32,550.00,
027700 5 Sept. 1983 PS and DAIF11 P27,900.00, P27,900.00, P63,455.00, P51,800.00 and P37,200.00 respectively.15
027719 9 Aug. 1983 DAIF12 On appeal, the accused assailed the decision as they imputed error to the trial
027720 16 Aug. 1983 PS and DAIF13 court as follows: (a) the Regional Trial Court of Malabon had no jurisdiction over the
cases because the offenses charged are committed outside its territory; (b) they could
027721 30 Aug. 1983 PS and DAIF14
not be held liable for estafa because the seven (7) checks were issued by them several
Manuel Lim admitted having issued the seven (7) checks in question to pay for
weeks after the deliveries of the goods; and, (c) neither could they be held liable for
deliveries made by LINTON but denied that
violating B.P. Blg. 22 as they ordered payment of the checks to be stopped because
the goods delivered were not those specified by them, besides they had
_______________
_____________
5 Exh. “P.”
6 Exh. “S.”
7 Exh. “V.”
15 Rollo, pp. 79-80.
8 Exh. “M.”
414
9 Exhs. “O,” “O-1” and “O-2.” 414 SUPREME COURT REPORTS ANNOTATED
10 Exhs. “H” and “H-1.” Lim vs. Court of Appeals
11 Exhs. “D,” “D-1” and “D-2.” sufficient funds to pay the checks.
12 Exhs. “Q” and “Q-1.” In the decision of 18 September 199216 respondent Court of Appeals acquitted
13 Exhs. “T,” “U” and “U-1.” accused-appellants of estafa on the ground that indeed the checks were not made in
14 Exhs. “W,” “W-1” and “W-2.” payment of an obligation contracted at the time of their issuance. However it
413 affirmed the finding of the trial court that they were guilty of having violated B.P. Blg.
VOL. 251, DECEMBER 19, 1995 413 22.17 On 6 November 1992 their motion for reconsideration was denied.18
In the case at bench petitioners maintain that the prosecution failed to prove that
Lim vs. Court of Appeals
any of the essential elements of the crime punishable under B.P. Blg. 22 was
his company’s account had insufficient funds to cover the amounts of the checks. He
committed within the jurisdiction of the Regional Trial Court of Malabon. They claim
presented the bank ledger showing a balance of P65,752.75. Also, he claimed that he
that what was proved was that all the elements of the offense were committed in
ordered SOLIDBANK to stop payment because the supplies delivered by LINTON
Kalookan City. The checks were issued at their place of business, received by a
were not in accordance with the specifications in the purchase orders.
collector of LINTON, and dishonored by the drawee bank, all in Kalookan City.
Rosita Lim was not presented to testify because her statements would only be
Furthermore, no evidence whatsoever supports the proposition that they knew that
corroborative.
their checks were insufficiently funded. In fact, some of the checks were funded at
On the basis of the evidence thus presented the trial court held both accused
the time of presentment but dishonored nonetheless upon their instruction to the
guilty of estafa and violation of B.P. Blg. 22 in its decision dated 25 January 1989. In
bank to stop payment. In fine, considering that the checks were all issued, delivered,
Crim. Case No. 1696-MN they were sentenced to an indeterminate penalty of six (6)
and dishonored in Kalookan City, the trial court of Malabon exceeded its jurisdiction
years and one (1) day of prision mayor as minimum to twelve (12) years and one (1)
when it tried the case and rendered judgment thereon.
day of reclusion temporal as maximum plus one (1) year for each additional
The petition has no merit. Section 1, par. 1, of B.P. Blg. 22 punishes “[a]ny person
P10,000.00 with all the accessory penalties provided for by law, and to pay the costs.
who makes or draws and issues any check to apply on account or for value, knowing
They were also ordered to indemnify LINTON in the amount of P241,800.00.
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
_____________
16 Penned by Justice Vicente V. Mendoza (now a Member of this Court) as
Chairman, with Justices Jaime M. Lantin and Consuelo Y. Santiago concurring.
17 Id., pp. 56-58.
18 Id., p. 61.
415
VOL. 251, DECEMBER 19, 1995 415
Lim vs. Court of Appeals
any valid reason, ordered the bank to stop payment x x x x” The gravamen of the
offense is knowingly issuing a worthless check.19 Thus, a fundamental element
is knowledge on the part of the drawer of the insufficiency of his funds in20 or credit
with the drawee bank for the payment of such check in full upon presentment.
Another essential element is subsequent dishonor of the check 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.21
It is settled that venue in criminal cases is a vital ingredient of
jurisdiction.22 Section 14, par. (a), Rule 110, of the Revised Rules of Court, which has
been carried over in Sec. 15, par. (a), Rule 110 of the 1985 Rules on Criminal
Procedure, specifically provides:
Sec. 14. Place where action is to be instituted.—(a) In all criminal prosecutions the
action shall be instituted and tried in the court of the municipality or province
wherein the offense was committed or any one of the essential ingredients thereof
took place.
If all the acts material and essential to the crime and requisite of its consummation
occurred in one municipality or territory, the court therein has the sole jurisdiction to
try the case.23 There are certain crimes in which some acts material and essential to
the crimes and requisite to their consummation occur in one municipality or territory
and some in another, in which event, the court of either has jurisdiction to try the
cases, it being
_____________
19 Cruz v. IAC, G.R. No. 66327, 28 May 1984, 129 SCRA 490.
20 Lozano v. Martinez, G.R. No. 63419, 18 December 1986, 146 SCRA 323; Dingle
v. IAC, G.R. No. 75243, 16 March 1987, 148 SCRA 595.
21 People v. Manzanilla, G.R. Nos. 66003-04, 11 December 1987, 156 SCRA 279.
22 Lopez v. City Judge, No. L-25795, 29 October 1966, 18 SCRA 616; U.S. v.
Pagdayuman, 5 Phil. 265 (1905); U.S. v. Reyes, 1 Phil. 249 (1902); Ragpala v. J.P. of
Tubod, Lanao, 109 Phil. 265 (1960); Agbayani v. Sayo,No. L-47880, 30 April
1979, 89 SCRA 699.
23 People v. Yabut, No. L-42902, 29 April 1977, 76 SCRA 624.
416
416 SUPREME COURT REPORTS ANNOTATED
Lim vs. Court of Appeals
understood that the first court taking cognizance of the case excludes the
other.24 These are the so-called transitory or continuing crimes under which violation
of B.P. Blg. 22 is categorized. In other words, a person charged with a transitory
crime may be validly tried in any municipality or territory where the offense was in
part committed.25
In determining proper venue in these cases, the following acts material and
essential to each crime and requisite to its consummation must be considered: (a) the
seven (7) checks were issued to LINTON at its place of business in Balut, Navotas; (b)
they were delivered to LINTON at the same place; (c) they were dishonored in
Kalookan City; and, (d) petitioners had knowledge of the insufficiency of their funds
in SOLIDBANK at the time the checks were issued. Since there is no dispute that the
checks were dishonored in Kaloocan City, it is no longer necessary to discuss where
the checks were dishonored.
Under Sec. 191 of the Negotiable Instruments Law the term “issue” means the first
delivery of the instrument complete in form to a person who takes it as a holder. On
the other hand, the term “holder” refers to the payee or indorsee of a bill or note who
is in possession of it or the bearer thereof. In People v. Yabut26 this Court explained—
x x x x The place where the bills were written, signed, or dated does not necessarily
fix or determine the place where they were executed. What is of decisive importance
is the delivery thereof. The delivery of the instrument is the final act essential to
its consummation as an obligation. An undelivered bill or note is inoperative. Until
delivery, the contract is revocable. And the issuance as well as the delivery of the
check must be to a person who takes it as a holder, which means ‘(t)he payee or
indorsee of a bill or note, who is in possession of it, or the bearer thereof.’ Delivery of
the check signifies transfer of possession, whether actual or constructive, from one
person to another with intent to transfer title thereto x x x x
_____________
24 Tuazon v. Cruz, No. L-27410, 28 August 1975, 66 SCRA 235.
25 People v. Grospe, G.R. Nos. 74053-54, 20 January 1988, 157 SCRA 154.
26 See Note 23, p. 629.
417
 VOL. 251, DECEMBER 19, 1995 417
Lim vs. Court of Appeals
Although LINTON sent a collector who received the checks from petitioners at their
place of business in Kalookan City, they were actually issued and delivered to
LINTON at its place of business in Balut, Navotas. The receipt of the checks by the
collector of LINTON is not the issuance and delivery to the payee in contemplation of
law. The collector was not the person who could take the checks as a holder, i.e., as a
payee or indorsee thereof, with the intent to transfer title thereto. Neither could the
collector be deemed an agent of LINTON with respect to the checks because he was a
mere employee. As this Court further explained in People v. Yabut27—
Modesto Yambao’s receipt of the bad checks from Cecilia Que Yabut or Geminiano
Yabut, Jr., in Caloocan City cannot, contrary to the holding of the respondent Judges,
be licitly taken as delivery of the checks to the complainant Alicia P. Andan at
Caloocan City to fix the venue there. He did not take delivery of the checks as holder,
i.e., as ‘payee’ or ‘indorsee.’ And there appears to be no contract of agency between
Yambao and Andan so as to bind the latter for the acts of the former. Alicia P. Andan
declared in that sworn testimony before the investigating fiscal that Yambao is but
her ‘messenger’ or ‘part-time employee.’ There was no special fiduciary relationship
that permeated their dealings. For a contract of agency to exist, the consent of both
parties is essential. The principal consents that, the other party, the agent, shall act
on his behalf, and the agent consents so as to act. It must exist as a fact. The law
makes no presumption thereof. The person alleging it has the burden of proof to
show, not only the fact of its existence, but also its nature and extent x x x x
Section 2 of B.P. Blg. 22 establishes a prima facie evidence of knowledge of
insufficient funds as follows—
The making, drawing and issuance of a check payment of which is refused by the
bank 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 arrangement for payment in
full by the drawee of such check within five (5) banking days after receiving
____________
27Id., p. 630.
418
418 SUPREME COURT REPORTS ANNOTATED
Lim vs. Court of Appeals
notice that such check has not been paid by the drawee.
The prima facie evidence has not been overcome by petitioners in the cases before us
because they did not pay LINTON the amounts due on the checks; neither did they
make arrangements for payment in full by the drawee bank within five (5) banking
days after receiving notices that the checks had not been paid by the drawee bank.
In People v. Grospe28 citing People v. Manzanilla29 we held that “x x x knowledge on
the part of the maker or drawer of the check of the insufficiency of his funds is by
itself a continuing eventuality, whether the accused be within one territory or
another.”
Consequently, venue or jurisdiction lies either in the Regional Trial Court of
Kalookan City or Malabon. Moreover, we ruled in the
same Grospe and Manzanillacases as reiterated in Lim v. Rodrigo30 that venue or
jurisdiction is determined by the allegations in the Information. The Informations in
the cases under consideration allege that the offenses were committed in the
Municipality of Navotas which is controlling and sufficient to vest jurisdiction upon
the Regional Trial Court of Malabon.31
We therefore sustain likewise the conviction of petitioners by the Regional Trial
Court of Malabon for violation of B.P. Blg. 22 thus—
Accused-appellants claim that they ordered payment of the checks to be stopped
because the goods delivered were not those specified by them. They maintain that
they had sufficient funds to cover the amount of the checks. The records of the bank,
however, reveal otherwise. The two letters (Exhs. 21 and 22) dated July 23, and
August 10, 1983 which they claim they sent to Linton Commercial, complaining
against the quality of the goods delivered by the latter, did not refer to the delivery
_____________
28 See Note 25.
29 See Note. 21
30 G.R. No. 76974, 18 November 1988, 167 SCRA 487.
31 Adm. Order No. 3 defines the territorial jurisdiction of Regional Trial Courts in
the National Capital Judicial Region by, inter alia, establishing two branches over
the municipalities of Malabon and Navotas with seats in Malabon.
419
VOL. 251, DECEMBER 19, 1995 419
Lim vs. Court of Appeals
of mild steel plates (6mm x 4 x 8) and “Z” purlins (16 x 7 x 2-1/2 mts) for which the
checks in question were issued Rather, the letters referred to B.1. Lally columns (Sch.
#20), which were the subject of other purchase orders.
It is true, as accused-appellants point out, that in a case brought by them against
the complainant in the Regional Trial Court of Kalookan City (Civil Case No. C-
10921) the complainant was held liable for actual damages because of the delivery of
goods of inferior quality (Exh. 23) But the supplies involved in that case were those of
B.I. pipes, while the purchases made by accused-appellants, for which they issued the
checks in question, were purchases of mild steel plates and “Z” purlins.
 Indeed, the only question here is whether accused-appellants maintained funds
sufficient to cover the amounts of their checks at the time of issuance and
presentment of such checks Section 3 of B.P. Blg. 22 provides that ‘notwithstanding
receipt of an order to stop payment, the drawee bank shall state in the notice of
dishonor that there were no sufficient funds in or credit with such bank for the
payment in full of the check, if such be the fact.’
The purpose of this provision is precisely to preclude the maker or drawer of a
worthless check from ordering the payment of the check to be stopped as a pretext
for the lack of sufficient funds to cover the check.
In the case at bar, the notice of dishonor issued by the drawee bank, indicates not
only that payment of the check was stopped but also that the reason for such order
was that the maker or drawer did not have sufficient funds with which to cover the
checks x x x x Moreover, the bank ledger of accused-appellants’ account in
Consolidated Bank shows that at the time the checks were presented for encashment,
the balance of accused-appellants’ account was inadequate to cover the amounts of
the checks.32x x x x
WHEREFORE, the decision of the Court of Appeals dated 18 September 1992
affirming the conviction of petitioners Manuel Lim and Rosita Lim—
In CA-G.R. CR No. 07277 (RTC Crim. Case No. 1699-MN); CA-G.R. CR No.
07278 (RTC Crim. Case No. 1700-MN); CA-G.R. CR No. 07279 (RTC Crim. Case No.
1701-MN), CA-G.R. CR No. 07280(RTC
______________
32Court of Appeals Decision, pp. 16-17; Rollo, pp. 54-55.
420
420 SUPREME COURT REPORTS ANNOTATED
Lim vs. Court of Appeals
Crim. Case No. 1702-MN); CA-G.R. CR No. 07281 (RTC Crim. Case No. 1703-
MN); CA-G.R. CR No. 07282 (RTC Crim. Case No. 1704-MN); and CA-G.R. CR No.
07283 (RTC Crim. Case No. 1705-MN), the Court finds the accused-appellants
MANUEL LIM and ROSITA LIM guilty beyond reasonable doubt of violation of
Batas Pambansa Bilang 22 and are hereby sentenced to suffer a STRAIGHT
PENALTY OF ONE (1) YEAR IMPRISONMENT in each case, together with all the
accessory penalties provided by law, and to pay the costs.
In CA-G.R. CR No. 07277 (RTC Crim. Case No. 1699-MN), both accused-
appellants are hereby ordered to indemnify the offended party in the sum of
P27,900.00.
In CA-G.R. CR No. 07278 (RTC Crim. Case No. 1700-MN) both accused-
appellants are hereby ordered to indemnify the offended party in the sum of
P32,550.00.
In CA-G.R. CR No. 07279 (RTC Crim. Case No. 1701-MN) both accused-
appellants are hereby ordered to indemnify the offended party in the sum of
P27,900.00.
In CA-G.R. CR No. 07280 (RTC Crim. Case No. 1702-MN) both accused-
appellants are hereby ordered to indemnify the offended party in the sum of
P27,900.00.
In CA-G.R. CR No. 07281 (RTC Crim. Case No. 1703-MN) both accused are
hereby ordered to indemnify the offended party in the sum of P63,455.00.
In CA-G.R. CR No. 07282 (RTC Crim. Case No. 1704-MN) both accused-
appellants are hereby ordered to indemnify the offended party in the sum of
P51,800.00, and
In CA-G.R. CR No. 07283 (RTC Crim. Case No. 1705-MN) both accused-
appellants are hereby ordered to indemnify the offended party in the sum of
P37,200.0033—
as well as its resolution of 6 November 1992 denying reconsideration thereof, is
AFFIRMED. Costs against petitioners.
SO ORDERED.
Padilla (Chairman), Davide, Jr., Kapunan and Hermosisima, Jr., JJ.,
concur.
_____________
33 Id., pp. 56-58.
421
VOL. 251, DECEMBER 19, 1995 421
Prudential Bank vs. National Labor Relations Commission
Petition denied. Judgment affirmed.
Notes.—Foreign checks, provided they are either drawn and issued in the
Philippines though payable outside thereof, are within the coverage of the Bouncing
Checks Law. (De Villa vs. Court of Appeals, 195 SCRA 722 [1991])
Concept of Delito Continuado applicable to crimes penalized under special laws.
(Santiago vs. Garchitorena,228 SCRA 214 [1993])
——o0o——
 G.R. No. 129910. September 5, 2006.*
THE INTERNATIONAL CORPORATE BANK, INC., petitioner, vs. COURT OF
APPEALS and PHILIPPINE NATIONAL BANK, respondents.
Appeals; Petitioners may not delegate upon the court the task of determining
under which rule the petition should fall; A petition cannot be subsumed
simultaneously under Rule 45 and Rule 65 of the Rules of Court, and neither may
petitioners delegate upon the court the task of determining under which rule the
petition should fall.—Respondent asserts that the petition should be dismissed
outright since petitioner availed of a wrong mode of appeal. Respondent cites Ybañez
v. Court of Appeals, 253 SCRA 540 (1996), where the Court ruled that “a petition
cannot be subsumed simultaneously under Rule 45 and Rule 65 of the Rules of
Court, and neither may petitioners delegate upon the court the task of determining
under which rule the petition should fall.”
Same; Certiorari; The remedies of appeal and certiorari are mutually
exclusive and not alternative or successive; However, this Court may set aside
technicality for justifiable reasons and in the interest of justice, we will treat the
petition as having been filed under Rule 45.—The remedies of appeal and certiorari
are mutually exclusive and not alternative or successive. However, this Court may set
aside technicality for justifiable reasons. The petition before the Court is clearly
meritorious. Further, the petition was filed on time both under Rules 45 and 65.
Hence, in accordance with the liberal spirit which pervades the Rules of Court and in
the interest of justice, we will treat the petition as having been filed under Rule 45.
Negotiable Instruments Law; Material Alterations; The alteration on the serial
number of a check is not a material alteration.—The question on whether an
alteration of the serial number of a check is a material alteration under the
Negotiable Instruments Law is already a settled matter. In Philippine National Bank
v. Court of Appeals, 256 SCRA 491 (1996), this Court ruled that the alteration on the
serial number of a check is not a material alteration. Thus:
_______________
*THIRD DIVISION.
21
VOL. 501, SEPTEMBER 5, 2006 2 CARPIO, J.:
1
International Corporate Bank, Inc. vs. Court of Appeals
An alteration is said to be material if it alters the effect of the instrument. It
means an unauthorized change in an instrument that purports to modify in any
respect the obligation of a party or an unauthorized addition of words or numbers or
other change to an incomplete instrument relating to the obligation of a party. In
other words, a material alteration is one which changes the items which are required
to be stated under Section 1 of the Negotiable Instrument[s] Law.
Appeals; There are instances when rules of procedure are relaxed in the
interest of justice, however, in this case, respondent did not proffer any explanation
for the late filing of the motion of reconsideration.—There are instances when rules
of procedure are relaxed in the interest of justice. However, in this case, respondent
did not proffer any explanation for the late filing of the motion for reconsideration.
Instead, there was a deliberate attempt to deceive the Court of Appeals by claiming
that the copy of the 10 October 1991 Decision was received on 22 October 1991
instead of on 16 October 1991. We find no justification for the posture taken by the
Court of Appeals in admitting the motion for reconsideration. Thus, the late filing of
the motion for reconsideration rendered the 10 October 1991 Decision final and
executory.
Banks and Banking; Material Alterations; Since there were no material
alterations on the checks, respondent as drawee bank has no right to dishonor them
and return them to petitioner, the collecting bank.—The Court will not rule on the
proper application of Central Bank Circular No. 580 in this case. Since there were no
material alterations on the checks, respondent as drawee bank has no right to
dishonor them and return them to petitioner, the collecting bank. Thus, respondent
is liable to petitioner for the value of the checks, with legal interest from the time of
filing of the complaint on 16 March 1982 until full payment. Further, considering
that respondent’s motion for reconsideration was filed late, the 10 October 1991
Decision, which held respondent liable for the value of the checks amounting to
P1,447,920, had become final and executory.
PETITION for review on certiorari of the amended decision and resolution of the
Court of Appeals.
The facts are stated in the opinion of the Court.
22
22 SUPREME COURT REPORTS ANNOTATED
International Corporate Bank, Inc. vs. Court of Appeals
Macalino & Associates for petitioner.
Salvador A. Uy for respondent.
The Case
Before the Court is a petition for review1 assailing the 9 August 1994 Amended
Decision2 and the 16 July 1997 Resolution3 of the Court of Appeals in CA-G.R. CV No.
25209.
The Antecedent Facts
The case originated from an action for collection of sum of money filed on 16 March
1982 by the International Corporate Bank, Inc.4 (“petitioner”) against the Philippine
National Bank (“respondent”). The case was raffled to the then Court of First Check Number Date Deposited Account Deposited
Instance (CFI) of Manila, Branch 6. The complaint was amended on 19 March 1982. 7-3694621-4 7-23-81 CA 0060 02360 3
The case was eventually reraffled to the Regional Trial Court of Manila, Branch 52
7-3694609-6 7-28-81 CA 0060 02360 3
(“trial court”).
The Ministry of Education and Culture issued 15 checks5drawn against 7-3666224-4 8-4-81 CA 0060 02360 3
respondent which petitioner accepted for deposit on various dates. The checks are as 7-3528348-4 8-11-81 CA 0060 02360 3
follows: 7-3666225-5 8-11-81 SA 0061 32331 7
7-3688945-6 8-17-81 CA 0060 30982 5
_______________ 7-4535674-1 8-26-81 CA 0060 02360 3
7-4535675-2 8-27-81 CA 0060 02360 3
1 Petitioner denominated the petition as filed under both Rule 45 and Rule 65 of
the 1997 Rules of Civil Procedure. 7-4535699-5 8-31-81 CA 0060 30982 5
2 Penned by Associate Justice Serafin V.C. Guingona with Associate Justices Jorge 7-4535700-6 8-24-81 SA 0061 32331 7
S. Imperial and Justo P. Torres, Jr., concurring. Rollo, pp. 25-34. 7-4697902-2 9-23-81 CA 0060 02360 3
3 Penned by Associate Justice Jorge S. Imperial with Associate Justices Ramon U.
7-4697925-6 9-23-81 CA 0060 30982 5
Mabutas, Jr. and Hilarion L. Aquino, concurring. Rollo, p. 23. 7-4697011-6 10-7-81 CA 0060 02360 3
4 Now the Union Bank of the Philippines.
5 The first 14 checks were the subject of the complaint while the last check was
7-4697909-4 10-7-81 CA 0060 30982 56
included in the amended complaint. _______________
23
VOL. 501, SEPTEMBER 5, 2006 23 6 The deposit slip of Check No. 7-4697922-3 was not presented before the trial
International Corporate Bank, Inc. vs. Court of Appeals court.
Check Number Date Payee Amount 24
7-3694621-4 7-20-81 Trade Factors, Inc. P 97,500.00 24 SUPREME COURT REPORTS ANNOTATED
7-3694609-6 7-27-81 Romero D. Palmares 98,500.50 International Corporate Bank, Inc. vs. Court of Appeals
7-3666224-4 8-03-81 Trade Factors, Inc. 99,800.00 After 24 hours from submission of the checks to respondent for clearing, petitioner
paid the value of the checks and allowed the withdrawals of the deposits. However,
7-3528348-4 8-07-81 Trade Factors, Inc. 98,600.00
on 14 October 1981, respondent returned all the checks to petitioner without clearing
7-3666225-5 8-10-81 Antonio Lisan 98,900.00 them on the ground that they were materially altered. Thus, petitioner instituted an
7-3688945-6 8-10-81 Antonio Lisan 97,700.00 action for collection of sums of money against respondent to recover the value of the
7-4535674-1 8-21-81 Golden City Trading 95,300.00 checks.
7-4535675-2 8-21-81 Red Arrow Trading 96,400.00 The Ruling of the Trial Court
7-4535699-5 8-24-81 Antonio Lisan 94,200.00 The trial court ruled that respondent is expected to use reasonable business practices
7-4535700-6 8-24-81 Antonio Lisan 95,100.00 in accepting and paying the checks presented to it. Thus, respondent cannot be
7-4697902-2 9-18-81 Ace Enterprises, Inc. 96,000.00 faulted for the delay in clearing the checks considering the ingenuity in which the
alterations were effected. The trial court observed that there was no attempt from
7-4697925-6 9-18-81 Golden City Trading 93,030.00
petitioner to verify the status of the checks before petitioner paid the value of the
7-4697011-6 10-02-81 Wintrade Marketing 90,960.00 checks or allowed withdrawal of the deposits. According to the trial court, petitioner,
7-4697909-4 10-02-81 ABC Trading, Inc. 99,300.00 as collecting bank, could have inquired by telephone from respondent, as drawee
7-4697922-3 10-05-81 Golden Enterprises 96,630.00 bank, about the status of the checks before paying their value. Since the immediate
The checks were deposited on the following dates for the following accounts: cause of petitioner’s loss was the lack of caution of its personnel, the trial court held
Check Number Date Deposited Account Deposited that petitioner is not entitled to recover the value of the checks from respondent.
 The dispositive portion of the trial court’s Decision reads:
“WHEREFORE, judgment is hereby rendered dismissing both the complaint and the
counterclaim. Costs shall, however be assessed against the plaintiff.
SO ORDERED.”7
Petitioner appealed the trial court’s Decision before the Court of Appeals.
_______________
7 Rollo, p. 295.
25
VOL. 501, SEPTEMBER 5, 2006 25
International Corporate Bank, Inc. vs. Court of Appeals
The Ruling of the Court of Appeals
In its 10 October 1991 Decision,8 the Court of Appeals reversed the trial court’s
Decision. Applying Section 4(c) of Central Bank Circular No. 580, series of 1977, 9 the
Court of Ap-peals held that checks that have been materially altered shall be returned
within 24 hours after discovery of the alteration. However, the Court of Appeals ruled
that even if the drawee bank returns a check with material alterations after discovery
of the alteration, the return would not relieve the drawee bank from any liability for
its failure to return the checks within the 24-hour clearing period. The Court of
Appeals explained:
_______________
8 Penned by Associate Justice Serafin V.C. Guingona with Associate Justices Luis
A. Javellana and Jorge S. Imperial, concurring. Rollo, pp. 47-58.
9 Section 4(c) provides:
SECTION 4. Clearing Procedures.—
xxxx
(c) Procedure for Returned Items
Items which should be returned for any reason whatsoever shall be presented not
later than the next regular clearing for local exchanges. Out-of-town exchanges shall
be returned within the period specified in the Memorandum to Authorized Agent
Banks announcing the opening of clearing facilities in each of the authorized regional
clearing centers. x x x
Items which have been the subject of a material alteration or items bearing a
forged endorsement when such endorsement is necessary for negotiation shall be
returned within twenty-four (24) hours after discovery of the alteration or the forgery
but in no event beyond the period fixed or provided by law for filing of a legal action
by the returning bank/branch, institution or entity against the bank/branch,
institution or entity sending the same.
xxxx
26
26 SUPREME COURT REPORTS ANNOTATED
International Corporate Bank, Inc. vs. Court of Appeals
“Does this mean that, as long as the drawee bank returns a check with material
alteration within 24 hour[s] after discovery of such alteration, such return would
have the effect of relieving the bank of any liability whatsoever despite its failure to
return the check within the 24-hour clearing house rule?
We do not think so.
Obviously, such bank cannot be held liable for its failure to return the check in
question not later than the next regular clearing. However, this Court is of the
opinion and so holds that it could still be held liable if it fails to exercise due diligence
in verifying the alterations made. In other words, such bank would still be expected,
nay required, to make the proper verification before the 24-hour regular clearing
period lapses, or in cases where such lapses may be deemed inevitable, that the
required verification should be made within a reasonable time.
The implication of the rule that a check shall be returned within the 24-hour
clearing period is that if the collecting bank paid the check before the end of the
aforesaid 24-hour clearing period, it would be responsible therefor such that if the
said check is dishonored and returned within the 24-hour clearing period, the drawee
bank cannot be held liable. Would such an implication apply in the case of materially
altered checks returned within 24 hours after discovery? This Court finds nothing in
the letter of the above-cited C.B. Circular that would justify a negative answer.
Nonetheless, the drawee bank could still be held liable in certain instances. Even if
the return of the check/s in question is done within 24 hours after discovery, if it can
be shown that the drawee bank had been patently negligent in the performance of its
verification function, this Court finds no reason why the said bank should be relieved
of liability.
Although banking practice has it that the presumption of clearance is conclusive
when it comes to the application of the 24-hour clearing period, the same principle
may not be applied to the 24-hour period vis-à-vis material alterations in the sense
that the drawee bank which returns materially altered checks within 24 hours after
discovery would be conclusively relieved of any liability thereon. This is because
there could well be various intervening events or factors that could affect the rights
and obligations of the parties in cases such as the instant one including patent
negligence on the part of the drawee bank resulting in an unreasonable delay in
detecting the alterations. While it is true that the pertinent proviso
27
VOL. 501, SEPTEMBER 5, 2006 27
International Corporate Bank, Inc. vs. Court of Appeals
in C.B. Circular No. 580 allows the drawee bank to return the altered check within
the period “provided by law for filing a legal action,” this does not mean that this
would entitle or allow the drawee bank to be grossly negligent and, in spite thereof,
avail itself of the maximum period allowed by the above-cited Circular. The discovery
must be made within a reasonable time taking into consideration the facts and
circumstances of the case. In other words, the aforementioned C.B. Circular does not
provide the drawee bank the license to be grossly negligent on the one hand nor does
it preclude the collecting bank from raising available defenses even if the check is
properly returned within the 24-hour period after discovery of the material
alteration.”10
The Court of Appeals rejected the trial court’s opinion that petitioner could have
verified the status of the checks by telephone call since such imposition is not
required under Central Bank rules. The dispositive portion of the 10 October 1991
Decision reads:
“PREMISES CONSIDERED, the decision appealed from is hereby REVERSED and
the defendant-appellee Philippine National Bank is declared liable for the value of
the fifteen checks specified and enumerated in the decision of the trial court (page 3)
in the amount of P1,447,920.00.
SO ORDERED.”11
Respondent filed a motion for reconsideration of the 10 October 1991 Decision. In its
9 August 1994 Amended Decision, the Court of Appeals reversed itself and affirmed
the Decision of the trial court dismissing the complaint.
In reversing itself, the Court of Appeals held that its 10 October 1991 Decision
failed to appreciate that the rule on the return of altered checks within 24 hours from
the discovery of the alteration had been duly passed by the Central Bank and
accepted by the members of the banking system. Until the rule is repealed or
amended, the rule has to be applied.
_______________
10 Rollo, pp. 53-54.
11Id., at p. 58.
28
28 SUPREME COURT REPORTS ANNOTATED
International Corporate Bank, Inc. vs. Court of Appeals
Petitioner moved for the reconsideration of the Amended Decision. In its 16 July
1997 Resolution, the Court of Appeals denied the motion for lack of merit.
Hence, the recourse to this Court.
The Issues
Petitioner raises the following issues in its Memorandum:
1. 1.Whether the checks were materially altered;
2. 2.Whether respondent was negligent in failing to recognize within a
reasonable period the altered checks and in not returning the checks within
the period; and
3. 3.Whether the motion for reconsideration filed by respondent was out of time
thus making the 10 October 1991 Decision final and executory.12
The Ruling of This CourtFiling of the Petition under both Rules 45 and
65
Respondent asserts that the petition should be dismissed outright since petitioner
availed of a wrong mode of appeal. Respondent cites Ybañez v. Court of
Appeals,13 where the Court ruled that “a petition cannot be subsumed simultaneously
under Rule 45 and Rule 65 of the Rules of Court, and neither may petitioners
delegate upon the court the task of determining under which rule the petition should
fall.”
The remedies of appeal and certiorari are mutually exclusive and not alternative
or successive.14 However, this Court may set aside technicality for justifiable reasons.
The petition before the Court is clearly meritorious. Further, the petition
_______________
12 Id., at pp. 251-252.
13 323 Phil. 643; 253 SCRA 540 (1996).
14 Ligon v. Court of Appeals, 355 Phil. 503; 294 SCRA 73 (1998).
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VOL. 501, SEPTEMBER 5, 2006 29
International Corporate Bank, Inc. vs. Court of Appeals
was filed on time both under Rules 45 and 65.15 Hence, in accordance with the liberal
spirit which pervades the Rules of Court and in the interest of justice, 16 we will treat
the petition as having been filed under Rule 45.
Alteration of Serial Number Not Material
The alterations in the checks were made on their serial numbers.
Sections 124 and 125 of Act No. 2031, otherwise known as the Negotiable
Instruments Law, provide:
SEC. 124. Alteration of instrument; effect of.—Where a negotiable instrument is
materially altered without the assent of all parties liable thereon, it is avoided, except
as against a party who has himself made, authorized, or assented to the alteration
and subsequent indorsers.
But when an instrument has been materially altered and is in the hands of a
holder in due course, not a party to the alteration, he may enforce payment thereof
according to its original tenor.
SEC. 125. What constitutes a material alteration.—Any alteration which changes:
1. (a)The date;
2. (b)The sum payable, either for principal or interest;
3. (c)The time or place of payment;
 4. (d)The number or the relations of the parties;
5. (e)The medium or currency in which payment is to be made; or which adds a
place of payment where no place of payment is specified, or any other
change or addition which alters the effect of the instrument in any respect, is
a material alteration.
The question on whether an alteration of the serial number of a check is a material
alteration under the Negotiable In-
_______________
15 Nuñez v. GSIS Family Bank, G.R. No. 163988, 17 November 2005, 475 SCRA
305.
16Id.
30
30 SUPREME COURT REPORTS ANNOTATED
International Corporate Bank, Inc. vs. Court of Appeals
struments Law is already a settled matter. In Philippine National Bank v. Court of
Appeals, this Court ruled that the alteration on the serial number of a check is not a
material alteration. Thus:
“An alteration is said to be material if it alters the effect of the instrument. It means
an unauthorized change in an instrument that purports to modify in any respect the
obligation of a party or an unauthorized addition of words or numbers or other
change to an incomplete instrument relating to the obligation of a party. In other
words, a material alteration is one which changes the items which are required to be
stated under Section 1 of the Negotiable Instrument[s] Law.”
Section 1 of the Negotiable Instruments Law provides:
“Section 1. Form of negotiable instruments.—An instrument to be negotiable must
conform to the following requirements:
1. (a)It must be in writing and signed by the maker or drawer;
2. (b)Must contain an unconditional promise or order to pay a sum certain in
money;
3. (c)Must be payable on demand, or at a fixed or determinable future time;
4. (d)Must be payable to order or to bearer; and
5. (e)Where the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty.
In his book entitled “Pandect of Commercial Law and Jurisprudence,” Justice
Jose C. Vitug opines that “an innocent alteration (generally, changes on items other
than those required to be stated under Sec. 1, N.I.L.) and spoliation (alterations done
by a stranger) will not avoid the instrument, but the holder may enforce it only
according to its original tenor.
xxxx
The case at the bench is unique in the sense that what was altered is the serial
number of the check in question, an item which, it can readily be observed, is not an
essential requisite for negotiability under Section 1 of the Negotiable Instruments
Law. The aforementioned alteration did not change the relations between the parties.
The name of the drawer and the drawee were not altered. The in-
31
VOL. 501, SEPTEMBER 5, 2006 31
International Corporate Bank, Inc. vs. Court of Appeals
tended payee was the same. The sum of money due to the payee remained the same.
xxx
xxxx
The check’s serial number is not the sole indication of its origin. As succinctly
found by the Court of Appeals, the name of the government agency which issued the
subject check was prominently printed therein. The check’s issuer was therefore
sufficiently identified, rendering the referral to the serial number redundant and
inconsequential. x x x
xxxx
Petitioner, thus cannot refuse to accept the check in question on the ground that
the serial number was altered, the same being an immaterial or innocent one.”17
Likewise, in the present case the alterations of the serial numbers do not constitute
material alterations on the checks.
Incidentally, we agree with the petitioner’s observation that the check in
the PNB case appears to belong to the same batch of checks as in the present case.
The check in the PNB case was also issued by the Ministry of Education and Culture.
It was also drawn against PNB, respondent in this case. The serial number of the
check in the PNB case is 7-3666-223-3 and it was issued on 7 August 1981.
Timeliness of Filing of Respondent’s Motion for Reconsideration
Respondent filed its motion for reconsideration of the 10 October 1991 Decision on 6
November 1991. Respondent’s motion for reconsideration states that it received a
copy of the 10 October 1991 Decision on 22 October 1991.18 Thus, it appears that the
motion for reconsideration was filed on time. However, the Registry Return Receipt
shows that counsel for respondent or his agent received a copy of the 10 October
_______________
326 Phil. 504; 256 SCRA 491 (1996), 511-516; pp. 497-501.
17
18CA Rollo, p. 86.
32
32 SUPREME COURT REPORTS ANNOTATED
 International Corporate Bank, Inc. vs. Court of Appeals Notes.—The petitioners are mandated to state categorically in their petition the
1991 Decision on 16 October 1991,19 not on 22 October 1991 as respondent claimed. rule under which the same is filed, and not merely leave the matter for the Court’s
Hence, the Court of Appeals is correct when it noted that the motion for determination. (Morato vs. Court of Appeals, 436 SCRA 438 [2004])
reconsideration was filed late. Despite its late filing, the Court of Appeals resolved to In determining whether the proper remedy is a special civil action for certiorari or
admit the motion for reconsideration “in the interest of substantial justice.”20 a petition for review, the nature of the questions intended to be raised on appeal is of
There are instances when rules of procedure are relaxed in the interest of justice. no consequence. (Heirs of Lourdes Potenciano Padilla vs. Court of Appeals, 425
However, in this case, respondent did not proffer any explanation for the late filing of SCRA 236 [2004])
the motion for reconsideration. Instead, there was a deliberate attempt to deceive the
Court of Appeals by claiming that the copy of the 10 October 1991 Decision was ——o0o——
received on 22 October 1991 instead of on 16 October 1991. We find no justification
for the posture taken by the Court of Appeals in admitting the motion for
reconsideration. Thus, the late filing of the motion for reconsideration rendered the
10 October 1991 Decision final and executory.
The 24-Hour Clearing Time
The Court will not rule on the proper application of Central Bank Circular No. 580 in
this case. Since there were no material alterations on the checks, respondent as
drawee bank has no right to dishonor them and return them to petitioner, the
collecting bank.21 Thus, respondent is liable to petitioner for the value of the checks,
with legal interest from the time of filing of the complaint on 16 March 1982 until full
payment.22 Further, considering that respondent’s motion for reconsideration was
filed late, the 10 October 1991 Decision, which held respondent liable for the value of
the checks amounting to P1,447,920, had become final and executory.

_______________
19 Id., at p. 73.
20 Id., at p. 90.
21 Philippine National Bank v. Court of Appeals, supra note 17.
22 Article 2209, Civil Code.

33
VOL. 501, SEPTEMBER 5, 2006 33
International Corporate Bank, Inc. vs. Court of Appeals
WHEREFORE, we SET ASIDE the 9 August 1994 Amended Decision and the 16 July
1997 Resolution of the Court of Appeals. We rule that respondent Philippine National
Bank is liable to petitioner International Corporate Bank, Inc. for the value of the
checks amounting to P1,447,920, with legal interest from 16 March 1982 until full
payment. Costs against respondent.
SO ORDERED.
Quisumbing (Chairperson), Carpio-Morales, Tingaand Velasco, Jr., JJ.,
concur.
Amended decision and resolution set aside.
 G.R. No. 137002. July 27, 2006.*
BANK OF THE PHILIPPINE ISLANDS, petitioner, vs.COMMISSIONER OF
INTERNAL REVENUE, respondent.
Documentary Stamp Tax; Section 195 (now Section 182) of the National
Internal Revenue Code (NIRC) imposes a documentary stamp tax on (1) foreign
bills of exchange, (2) letters of credit, and (3) orders, by telegraph or otherwise, for
the payment of money issued by express or steamship companies or by any person
or persons.—The first issue raised by the petitioner is whether BPI is liable for
documentary stamp taxes in connection with its sale of foreign exchange to the
Central Bank in 1986 under Section 195 (now Section 182) of the NIRC, quoted
hereunder: Sec. 182. Stamp tax on foreign bills of exchange and letters of credit. On
all foreign bills of exchange and letters of credit (including orders, by telegraph or
otherwise, for the payment of money issued by express or steamship companies or by
any person or persons) drawn in but payable out of the Philippines in a set of three or
more according to the custom of merchants and bankers, there shall be collected a
documentary stamp tax of thirty centavos on each two hundred pesos, or fractional
part thereof, of the face value of such bill of exchange or letter of credit, or the
Philippine equivalent of such face value, if expressed in foreign country. To
determine what is being taxed under this section, a discussion on the nature of the
acts covered by Section 195 (now Section 182) of the NIRC is indispensable. This
section imposes a documentary stamp tax on (1) foreign bills of exchange, (2) letters
of credit, and (3) orders, by telegraph or otherwise, for the payment of money issued
by express or steamship companies or by any person or persons. This enumeration is
further limited by the qualification that they should be drawn in the Philippines and
payable outside of the Philippines.
Bills of Exchange; Negotiable Instruments Law (Act No. 2031); Words and
Phrases; “Bills of Exchange,” Defined.—A definition of a “bill of exchange” is
provided by Section 39 of Regulations No. 26, the rules governing documentary taxes
promulgated by the Bureau of Internal Revenue (BIR) in 1924: Sec. 39. Definition of
“bill of exchange.” The term bill of exchange denotes checks, drafts, and all
_______________
*FIRST DIVISION.
602
6 SUPREME COURT REPORTS ANNOTATED
02
Bank of the Philippine Islands vs. Commissioner of Internal
Revenue
other kinds of orders for the payment of money, payable at sight, or on demand
or after a specific period after sight or from a stated date. Section 126 of The
Negotiable Instruments Law (Act No. 2031) reiterates that it is an “order for the
payment of money” and specifies the particular requisites that make it negotiable.
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 fixed or determinable
future time a sum certain in money to order or to bearer.
Same; A “foreign bill of exchange” may be drawn outside the Philippines,
payable outside the Philippines, or both drawn and payable outside of the
Philippines.—Section 129 of the same law classifies bills of exchange as inland and
foreign, the distinction is laid down by where the bills are drawn and paid. Thus, a
“foreign bill of exchange” may be drawn outside the Philippines, payable outside the
Philippines, or both drawn and payable outside of the Philippines. Sec. 129. Inland
and foreign bills of exchange.—An inland bill of exchange is a bill which is, or on its
face purports to be, both drawn and payable within the Philippines. Any other bill is
a foreign bill. x x x
Letters of Credit; Word and Phrases; A letter of credit is one whereby one
person requests some other person to advance money or give credit to a third
person, and promises that he will repay the same to the person making the
advancement, or accept the bill drawn upon himself for the like amount.—The Code
of Commerce loosely defines a “letter of credit” and provides for its essential
conditions, thus: Art. 567. Letters of credit are those issued by one merchant to
another or for the purpose of attending to a commercial transaction. Art. 568. The
essential conditions of letters of credit shall be: 1. To be issued in favor of a definite
person and not to order. 2. To be limited to a fixed and specified amount, or to one or
more undetermined amounts, but within a maximum the limits of which has to be
stated exactly. A more explicit definition of a letter of credit can be found in the
commentaries: A letter of credit is one whereby one person requests some other
person to advance money or give credit to a third person, and promises that he will
repay the same to the person making the advancement, or accept the bills drawn
upon himself for the like amount. A bill of exchange and a letter of credit may differ
603
VOL. 496, JULY 27, 2006 603
Bank of the Philippine Islands vs. Commissioner of Internal
Revenue
as to their negotiability, and as to who owns the funds used for the payment at
the time payment is made. However, in both bills of exchange and letters of credit, a
person orders another to pay money to a third person.
Taxation; Documentary Stamp Tax; The phrase “orders, by telegraph or
otherwise, for the payment of money” used in reference to documentary stamp
taxes may be found in an earlier documentary tax provision, Section 1449(i) of the
Administrative Code of 1917, which was substantially reproduced in Section 195
(now Section 182) of the NIRC.—The phrase “orders, by telegraph or otherwise, for
the payment of money” used in reference to documentary stamp taxes may be found
in an earlier documentary tax provision, Section 1449(i) of the Administrative Code
of 1917, which was substantially reproduced in Section 195 (now Section 182) of the
NIRC. Regulations No. 26, which provided the rules and guidelines for the
documentary stamp tax imposed under the Administrative Code of 1917, contains an
explanation for the phrase “orders, by telegraph or otherwise, for the payment of
money”: What may be regarded as telegraphic transfer.—A local bank cables to a
certain bank in a foreign country with which bank said local bank has a credit, and
directs that foreign bank to pay to another bank or person in the same locality a
certain sum of money, the document for and in respect such transaction will be
regarded as a telegraphic transfer, taxable under the provisions of Section 1449(i) of
the Administrative Code.
Same; What is being taxed is the facility that allows a party to draw the draft
or make the order to pay within the Philippines and have the payment made in
another country.—BPI alleges that the assailed decision must be reversed since the
sale between BPI and the Central Bank of foreign exchange, as distinguished from
foreign bills of exchange, is not subject to the documentary stamp taxes prescribed in
Section 195 (now Section 182) of the NIRC. This argument leaves much to be desired.
In this case, it is not the sale of foreign exchange per se that is being taxed under
Section 195 of the NIRC. This section refers to a documentary stamp tax, which is an
excise upon the facilities used in the transaction of the business separate and apart
from the business itself. It is not a tax upon the business itself which is so transacted,
but it is a duty upon the facilities made use of and actually employed in the
transaction of the business, and separate and apart from the business itself. Section
604
6 SUPREME COURT REPORTS ANNOTATED
04
Bank of the Philippine Islands vs. Commissioner of Internal
Revenue
195 (now Section 182) of the NIRC covers foreign bills of exchange, letters of
credit, and orders of payment for money, drawn in Philippines, but payable outside
the Philippines. From this enumeration, two common elements need to be present:
(1) drawing the instrument or ordering a drawee, within the Philippines; and (2)
ordering that drawee to pay another person a specified amount of money outside the
Philippines. What is being taxed is the facility that allows a party to draw the draft or
make the order to pay within the Philippines and have the payment made in another
country.
Same; Same; “Credit” and “Deposit,” Defined; Words and Phrases; By the
definition of “credit” being equated with the term “deposits,” BPI’s deposit account
with its correspondent bank is much the same as the “credit” referred to in Section
51 of Regulations No. 26—the fact that the funds transferred to the Central Bank’s
account with the Federal Reserve Bank are from BPI’s deposit account with the
correspondent bank can only underline that the present case is the same situation
described under Section 51 of Regulations No. 26.—BPI further alleges that since the
funds transferred to the Federal Reserve Bank were taken from BPI’s account with
the correspondent bank, this is not the transaction contemplated under Section 51 of
Regulations No. 26. BPI argues that Section 51 of Regulations No. 26, in using the
phrase “with which local bank has credit,” involves transactions wherein the drawee
bank pays with its own funds and excludes from the coverage of the law situations
wherein the funds paid out by the correspondent bank are owned by the drawer. In
the case of Republic of the Philippines v. Philippine National Bank, 3 SCRA 851
(1961), the Court equated “credit” with the term “deposits,” and identified the
depositor as the creditor and the bank as the debtor. And as correctly stated by the
trial court, the term “credit” in its usual meaning is a sum credited on the books of a
company to a person who appears to be entitled to it. It presupposes a creditordebtor
relationship, and may be said to imply ability, by reason of property or estates, to
make a promised payment. It is the correlative to debt or indebtedness, and that
which is due to any person, as distinguished from that which he owes. The same is
true with the term “deposits” in banks where the relationship created between the
depositor and the bank is that of creditor and debtor. By this definition of “credit,”
BPI’s deposit account with its correspondent bank is much the same as the “credit”
referred to in Section 51 of Regulations No. 26. Thus, the fact that the funds
transferred to the Central
605
VOL. 496, JULY 27, 2006 605
Bank of the Philippine Islands vs. Commissioner of Internal
Revenue
Bank’s account with the Federal Reserve Bank are from BPI’s deposit account
with the correspondent bank can only underline that the present case is the same
situation described under Section 51 of Regulations No. 26.
Bills of Exchange; “Draft” and “Bank Draft,” Explained; Words and
Phrases; In the case of a bill of exchange, the funds may belong to the drawer and
need not be advanced by the drawee, as in the case of a check or a draft; A draft is a
form of a bill of exchange used mainly in transactions between persons physically
remote from each other, an order made by one person, say the buyer of goods,
addressed to a person having in his possession funds of such buyer ordering the
addressee to pay the purchase price to the seller of the goods, and where the order
is made by one bank to another, it is referred to as a bank draft.—The fact that the
funds belong to BPI and were not advanced by the correspondent bank will not
remove the transaction from the coverage of Section 195 (now Section 182) of the
NIRC. There are transactions covered by this section wherein funds belonging to the
drawer are used for payment. A bill of exchange, when drawn in the Philippines but
payable in another country, would surely be covered by this section. And in the case
of a bill of exchange, the funds may belong to the drawer and need not be advanced
by the drawee, as in the case of a check or a draft. In the description of a draft
provided hereunder, the drawee is in possession of funds belonging to the drawer of
the bill: A draft is a form of a bill of exchange used mainly in transactions between
persons physically remote from each other. It is an order made by one person, say the
buyer of goods, addressed to a person having in his possession funds of such buyer
ordering the addressee to pay the purchase price to the seller of the goods. Where the
order is made by one bank to another, it is referred to as a bank draft.
Excise Tax; The power to levy an excise upon the performance of an act or the
engaging in an occupation does not depend upon the domicile of the person subject
to the excise, nor upon the physical location of the property and in connection with
the act or occupation taxed, but depends upon the place in which the act is
performed or occupation engaged in; Section 195 (now Section 182) of the NIRC
would be rendered invalid if the fact that the payment was made outside of the
country can be used as a basis for nonpayment of the tax.—BPI argues that the
foreign exchange sold was deposited and
606
6 SUPREME COURT REPORTS ANNOTATED
06
Bank of the Philippine Islands vs. Commissioner of Internal
Revenue
transferred within the U.S. and is therefore outside Philippine territory. This
argument is unsubstantial. The documentary stamp tax is not imposed on the sale of
foreign exchange, rather it is an excise tax on the privilege or facility which the
parties used in their transaction. In the case of Allied Thread Co., Inc. v. City Mayor
of Manila, 133 SCRA 338 (1984), the Court explained the scope encompassed by the
power to levy an excise tax: The tax imposition here is upon the performance of an
act, enjoyment of a privilege, or the engaging in an occupation, and hence is in the
nature of an excise tax. The power to levy an excise upon the performance of an act or
the engaging in an occupation does not depend upon the domicile of the person
subject to the excise, nor upon the physical location of the property and in
connection with the act or occupation taxed, but depends upon the place in
which the act is performed or occasion engaged in(Emphasis supplied). In
this case, the act of BPI instructing the correspondent bank to transfer the funds to
the Federal Reserve Bank was performed in the Philippines. Therefore, the excise tax
may be levied by the Philippine government. Section 195 (now Section 182) of the
NIRC would be rendered invalid if the fact that the payment was made outside of the
country can be used as a basis for nonpayment of the tax.
Taxation; Interests; Even if an assessment is later reduced by the courts, a
delinquency interest should still be imposed from the time demand was made by the
Commissioner of Internal Revenue; The intention of the law is precisely to
discourage delay in the payment of taxes due to the State and, in this sense, the
surcharge and interest charged are not penal but compensatory in nature—they are
compensation to the State for the delay in payment, or for the concomitant use of
the funds by the taxpayer beyond the date he is supposed to have paid them to the
State.—In the case of Philippine Refining Company v. Court of Appeals, 256 SCRA
667 (1996), this Court categorically ruled that even if an assessment was later
reduced by the courts, a delinquency interest should still be imposed from the time
demand was made by the CIR. As correctly pointed out by the Solicitor General, the
deficiency tax assessment in this case, which was the subject of the demand letter of
respondent Commissioner dated April 11, 1989, should have been paid within thirty
(30) days from receipt thereof. By reason of petitioner’s default thereon, the
delinquency penalties of 25% surcharge and interest of 20% accrued from April 11,
1989. The fact that petitioner appealed
607
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Bank of the Philippine Islands vs. Commissioner of Internal
Revenue
the assessment to the CTA and that the same was modified does not relieve
petitioner of the penalties incident to delinquency. The reduced amount of
P237,381.25 is but a part of the original assessment of P1,892,584.00. This doctrine
is consistent with the earlier decisions of this Court justifying the imposition of
additional charges and interests incident to delinquency by explaining that the
nature of additional charges is compensatory and not a penalty. The above legal
provision makes no distinctions nor does it establish exceptions. It directs the
collection of the surcharge and interest at the stated rate upon any sum or sums due
and unpaid after the dates prescribed in subsections (b), (c), and (d) of the Act for the
payment of the amounts due. The provision therefore is mandatory in case of
delinquency. This is justified because the intention of the law is precisely to
discourage delay in the payment of taxes due to the State and, in this sense, the
surcharge and interest charged are not penal but compensatory in nature—they are
compensation to the State for the delay in payment, or for the concomitant use of the
funds by the taxpayer beyond the date he is supposed to have paid them to the State.
Same; Collecting charges incident to tax delinquency is mandatory.—Based on
established doctrine, these charges incident to delinquency are compensatory in
nature and are imposed for the taxpayers’ use of the funds at the time when the State
should have control of said funds. Collecting such charges is mandatory. Therefore,
the Decision of the Court of Appeals imposing a 20% delinquency interest over the
assessment reduced by the CTA was justified and in accordance with Section
249(c)(3) of the NIRC.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Padilla Law Office for petitioner.
The Solicitor General for respondent.
CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Court,
as amended, seeking to set aside a
608
608 SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Commissioner of Internal
Revenue
Decision of the Court of Appeals dated 14 August 2004 ordering the petitioner to pay
1
respondent Commissioner of Internal Revenue (CIR) deficiency documentary stamp
tax of P690,030 for the year 1986, inclusive of surcharge and compromise penalty,
plus 20% annual interest until fully paid. The Court of Appeals in its assailed
Decision affirmed the Decision2 of the Court of Tax Appeals (CTA) dated 31 May
1994.
From 28 February 1986 to 8 October 1986, petitioner Bank of the Philippine
Islands (BPI) sold to the Central Bank of the Philippines (now Bangko Sentral ng
Pilipinas) U.S. dollars for P1,608,541,900.00. BPI instructed, by cable, its
correspondent bank in New York to transfer U.S. dollars deposited in BPI’s account
therein to the Federal Reserve Bank in New York for credit to the Central Bank’s
account therein. Thereafter, the Federal Reserve Bank sent to the Central Bank
confirmation that such funds had been credited to its account and the Central Bank
promptly transferred to the petitioner’s account in the Philippines the corresponding
amount in Philippine pesos.3
During the period starting 11 June 1985 until 9 March 1987, the Central Bank
enjoyed tax exemption privileges pursuant to Resolution No. 35-85 dated 3 May 1985
of the Fiscal Incentive Review Board. However, in 1985, Presidential Decree No.
1994—An Act Further Amending Certain Provisions of the National Internal Revenue
Code was enacted. This law amended Section 222 (now 173) of the National Internal
Revenue Code (NIRC), by adding the foregoing:
_______________
1Penned by Associate Justice Arturo B. Buena with Associate Justice Ramon
Mabutas, Jr. and Associate Justice Hilarion L. Aquino, concurring; Rollo, pp. 42-51.
2 CA Rollo, pp. 52-64.
3 Rollo, p. 42
609
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Bank of the Philippine Islands vs. Commissioner of Internal
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[W]henever one party to the taxable document enjoys exemption from the tax herein
imposed, the other party thereto who is not exempt shall be the one directly liable for
the tax.
In 1988, respondent CIR ordered an investigation to be made on BPI’s sale of
foreign currency. As a result thereof, the CIR issued a pre-assessment notice
informing BPI that in accordance with Section 195 (now Section 182) 4 of the NIRC,
BPI was liable for documentary stamp tax at the rate of P0.30 per P200.00 on all
foreign exchange sold to the Central Bank. Total tax liability was assessed at
P3,016,316.06, which consists of a documentary stamp tax liability of P2,412,812.85,
a 25% surcharge of P603,203.21, and a compromise penalty of P300.00.5
BPI disputed the findings contained in the pre-assessment notice. Nevertheless,
the CIR issued Assessment No. FAS-5-86-88-003022, dated 30 September 1988,
which BPI received on 11 October 1988. BPI formally protested the assessment, but
the protest was denied. On 10 July 1990, BPI received the final notice and demand
for payment of its 1986 assessment for deficiency documentary stamp tax in the
amount of P3,016,316.06. Consequently, a petition for review was filed with the CTA
on 9 August 1990.6
On 31 May 1994, the CTA rendered the Decision holding BPI liable for
documentary stamp tax in connection with the
_______________
4 Sec. 182. Stamp tax on foreign bills of exchange and letters of credit.On all
foreign bills of exchange and letters of credit (including orders, by telegraph or
otherwise, for the payment of money issued by express or steamship companies or by
any person or persons) drawn in but payable out of the Philippines in a set of three or
more according to the custom of merchants and bankers, there shall be collected a
documentary stamp tax of thirty centavos on each two hundred pesos, or fractional
part thereof, of the face value of such bill of exchange or letter of credit, or the
Philippine equivalent of such face value, if expressed in foreign country.
5 CA Rollo, p. 53.
6 Id.
610
610 SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Commissioner of Internal
Revenue
sale of foreign exchange to the Central Bank from the period 29 July 1986 to 8
October 1986 only, thus substantially reducing the CIR’s original assessment. The
dispositive portion of the said Decision reads:
“WHEREFORE, premises considered, petitioner is hereby ordered to pay respondent
Commissioner of Internal Revenue, the amount of P690,030 inclusive of surcharge
and compromise penalty, plus 20% annual interest until fully paid pursuant to
Section 249 (cc) (sic) (3) of the Tax Code.”7
The CTA ruled that BPI’s instructions to its correspondent bank in the U.S. to pay to
the Federal Reserve Bank in New York, for the account of the Central Bank, a sum of
money falls squarely within the scope of Section 51 of The Revised Documentary
Stamp Tax Regulations (Regulations No. 26), dated 26 March 1924, the
implementing rules to the earlier provisions on documentary stamp tax, which
provides that: 8
What may be regarded as telegraphic transfer.—A local bank cables to a certain
bank in a foreign country with which bank said local bank has a credit, and directs
that foreign bank to pay to another bank or person in the same locality a certain sum
of money, the document for and in respect such transaction will be regarded as a
telegraphic transfer, taxable under the provisions of Section 1449(i) of the
Administrative Code.
Nevertheless, the CTA also noted that although Presidential Decree No. 1994, the law
which passes the liability on to the non-exempt party, was published in the Official
Gazette issue of 2 December 1985, the same was released to the public only on 18
June 1986, as certified by the National Printing Office. Therefore, Presidential
Decree No. 1994 took effect only in July 1986 or 15 days after the issue of Official
Gazette where the law was actually published, that is, circulated to the public. As a
result of the delay, BPI’s transactions prior to
_______________
7 Id., at pp. 63-64.
8 Id., at pp. 54-55.
611
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Bank of the Philippine Islands vs. Commissioner of Internal
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the effectivity of Presidential Decree No. 1994 were not subject to documentary
stamp tax. Hence, the CTA reduced the assessment from P3,016,316.06 to
P690,030.00, plus 20% annual interest until fully paid pursuant to Section 249(c) of
the NIRC.9
Both parties filed their respective Motions for Reconsideration, which the CTA
denied in a Resolution dated 26 September 1994. BPI filed a Petition for Review with
the Court of Appeals on 11 November 1994. On 14 August 1998, the Court of Appeals
affirmed the Decision of the CTA. The Court of Appeals ruled that the documentary
stamp tax imposed under Section 195 (now Section 182) is not limited only to foreign
bills of exchange and letters of credit but also includes the orders made by telegraph
or by any other means for the payment of money made by any person drawn in but
payable out of the Philippines. The Court of Appeals also maintained that telegraphic
transfers, such as the one BPI sent to its correspondent bank in the U.S., are proper
subjects for the imposition of documentary stamp tax under Section 195 (now
Section 182) and Section 51 of Revenue Regulation No. 26. The Court of Appeals
likewise affirmed the CTA’s Decision imposing a 20% delinquency on the reduced
assessment, in accordance with Section 24(c)(3) of the NIRC and the case
of Philippine Refining Company v. Court of Appeals.10
Petitioner filed a Partial Motion for Reconsideration on 9 September 1998, which
the Court of Appeals denied on 29 December 1998.11
Hence this petition, wherein the petitioner raised the following issues:
I
_______________
9 Id., at pp. 60-63.
10 326 Phil. 680; 256 SCRA 676 (1996).
11 Rollo, p. 54.
612
612 SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Commissioner of Internal
Revenue
WHETHER OR NOT, THE COURT OF APPEALS GRIEVOUSLY ERRED IN
HOLDING THAT SALES OF FOREIGN EXCHANGE (SPOT CASH), AS
DISTINGUISHED FROM SALES OF FOREIGN BILLS OF EXCHANGE, ARE
SUBJECT TO DOCUMENTARY STAMP TAX UNDER SECTION 182 OF THE TAX
CODE.
II
WHETHER OR NOT, THE COURT OF APPEALS GRIEVOUSLY ERRED IN
AFFIRMING THE IMPOSITION OF A DELINQUENCY INTEREST OF 20% ON
THE REVISED DEFICIENCY STAMP ASSESSMENT DESPITE A REDUCTION
THEREOF BY THE COURT OF TAX APPEALS WHICH ERRED IN ITS ORIGINAL
ASSESSMENT.12
The first issue raised by the petitioner is whether BPI is liable for documentary stamp
taxes in connection with its sale of foreign exchange to the Central Bank in 1986
under Section 195 (now Section 182) of the NIRC, quoted hereunder:
Sec. 182. Stamp tax on foreign bills of exchange and letters of credit. On all foreign
bills of exchange and letters of credit (including orders, by telegraph or otherwise, for
the payment of money issued by express or steamship companies or by any person or
persons) drawn in but payable out of the Philippines in a set of three or more
according to the custom of merchants and bankers, there shall be collected a
documentary stamp tax of thirty centavos on each two hundred pesos, or fractional
part thereof, of the face value of such bill of exchange or letter of credit, or the
Philippine equivalent of such face value, if expressed in foreign country.
To determine what is being taxed under this section, a discussion on the nature of the
acts covered by Section 195 (now Section 182) of the NIRC is indispensable. This
section imposes a documentary stamp tax on (1) foreign bills of exchange, (2) letters
of credit, and (3) orders, by telegraph or otherwise, for the payment of money issued
by express or steamship companies or by any person or persons. This enumeration is
further limited by the qualification that they
_______________
12 Id., at p. 5.
613
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Bank of the Philippine Islands vs. Commissioner of Internal
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should be drawn in the Philippines and payable outside of the Philippines.
A definition of a “bill of exchange” is provided by Section 39 of Regulations No.
26, the rules governing documentary taxes promulgated by the Bureau of Internal
Revenue (BIR) in 1924:
Sec. 39. Definition of “bill of exchange.”—The term bill of exchange denotes checks,
drafts, and all other kinds of orders for the payment of money, payable at sight, or on
demand or after a specific period after sight or from a stated date.
Section 126 of The Negotiable Instruments Law (Act No. 2031) reiterates that it is an
“order for the payment of money” and specifies the particular requisites that make it
negotiable.
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 fixed or determinable
future time a sum certain in money to order or to bearer.
Section 129 of the same law classifies bills of exchange as inland and foreign, the
distinction is laid down by where the bills are drawn and paid. Thus, a “foreign bill of
exchange” may be drawn outside the Philippines, payable outside the Philippines, or
both drawn and payable outside of the Philippines.
Sec. 129. Inland and foreign bills of exchange.—An inland bill of exchange is a bill
which is, or on its face purports to be, both drawn and payable within the
Philippines. Any other bill is a foreign bill. x x x
The Code of Commerce loosely defines a “letter of credit” and provides for its
essential conditions, thus:
614
614 SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Commissioner of Internal
Revenue
Art. 567. Letters of credit are those issued by one merchant to another or for the
purpose of attending to a commercial transaction.
Art. 568. The essential conditions of letters of credit shall be:
1. 1.To be issued in favor of a definite person and not to order.
2. 2.To be limited to a fixed and specified amount, or to one or more
undetermined amounts, but within a maximum the limits of which has to be
stated exactly.
A more explicit definition of a letter of credit can be found in the commentaries:
A letter of credit is one whereby one person requests some other person to
advance money or give credit to a third person, and promises that he will repay the
same to the person making the advancement, or accept the bills drawn upon himself
for the like amount.13
A bill of exchange and a letter of credit may differ as to their negotiability, and as
to who owns the funds used for the payment at the time payment is made. However,
in both bills of exchange and letters of credit, a person orders another to pay money
to a third person.
The phrase “orders, by telegraph or otherwise, for the payment of money” used in
reference to documentary stamp taxes may be found in an earlier documentary tax
provision, Section 1449(i) of the Administrative Code of 1917, which was
substantially reproduced in Section 195 (now Section 182) of the NIRC. Regulations
No. 26, which provided the rules and guidelines for the documentary stamp tax
imposed under the Administrative Code of 1917, contains an explanation for the
phrase “orders, by telegraph or otherwise, for the payment of money:”
_______________
13 Jose Campos, Jr. and Maria Clara Lopez-Campos, Notes and Selected Cases on
Negotiable Instruments Law, Fifth Edition. Que-zon City: Central Professional
Books, Inc., 1994, p. 878.
615
VOL. 496, JULY 27, 2006 615
Bank of the Philippine Islands vs. Commissioner
of Internal Revenue
What may be regarded as telegraphic transfer.—A local bank cables to a certain
bank in a foreign country with which bank said local bank has a credit, and directs
that foreign bank to pay to another bank or person in the same locality a certain sum
of money, the document for and in respect such transaction will be regarded as a
telegraphic transfer, taxable under the provisions of Section 1449(i) of the
Administrative Code.
In this case, BPI ordered its correspondent bank in the U.S. to pay the Federal
Reserve Bank in New York a sum of money, which is to be credited to the account of
the Central Bank. These are the same acts described under Section 51 of Regulations
No. 26, interpreting the documentary stamp tax provision in the Administrative Code
of 1917, which is substantially identical to Section 195 (now Section 182) of the NIRC.
These acts performed by BPI incidental to its sale of foreign exchange to the Central
Bank are included among those taxed under Section 195 (now Section 182) of the
NIRC.
BPI alleges that the assailed decision must be reversed since the sale between BPI
and the Central Bank of foreign exchange, as distinguished from foreign bills of
exchange, is not subject to the documentary stamp taxes prescribed in Section 195
(now Section 182) of the NIRC. This argument leaves much to be desired. In this
case, it is not the sale of foreign exchange per se that is being taxed under Section 195
of the NIRC. This section refers to a documentary stamp tax, which is an excise upon
the facilities used in the transaction of the business separate and apart from the
business itself.14 It is not a tax upon the business itself which is so transacted, but it is
a duty upon the facilities made use of and actually employed in the transaction of the
business, and separate and apart from the business itself.15
_______________
14 DuPont v. U.S., 300 U.S. 150 (1937)
15 Lincoln Philippine Life Insurance Company, Inc. v. Court of Appeals, 354 Phil.
896, 904; 293 SCRA 92, 99 (1998); Nicol v. Ames, 173 US 509(1899).
616
616 SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Commissioner
of Internal Revenue
Section 195 (now Section 182) of the NIRC covers foreign bills of exchange, letters of
credit, and orders of payment for money, drawn in Philippines, but payable outside
the Philippines. From this enumeration, two common elements need to be present:
(1) drawing the instrument or ordering a drawee, within the Philippines; and (2)
ordering that drawee to pay another person a specified amount of money outside the
Philippines. What is being taxed is the facility that allows a party to draw the draft or
make the order to pay within the Philippines and have the payment made in another
country.
A perusal of the facts contained in the record in this case shows that BPI, while in
the Philippines, ordered its correspondent bank by cable to make a payment, and
that payment is to be made to the Federal Reserve Bank in New York. Thus, BPI
made use of the aforementioned facility. As a result, BPI need not have sent a
representative to New York, nor did the Federal Reserve Bank have to go to the
Philippines to collect the funds which were to be credited to the Central Bank’s
account with them. The transaction was made at the shortest time possible and at the
greatest convenience to the parties. The tax was laid upon this privilege or facility
used by the parties in their transactions, transactions which they may effect through
our courts, and which are regulated and protected by our government.
BPI further alleges that since the funds transferred to the Federal Reserve Bank
were taken from BPI’s account with the correspondent bank, this is not the
transaction contemplated under Section 51 of Regulations No. 26. BPI argues that
Section 51 of Regulations No. 26, in using the phrase “with which local bank has
credit,” involves transactions wherein the drawee bank pays with its own funds and
excludes from the coverage of the law situations wherein the funds paid out by the
correspondent bank are owned by the drawer. In the case of Republic of the
Philippines v. Philip-
617
VOL. 496, JULY 27, 2006 617
Bank of the Philippine Islands vs. Commissioner
of Internal Revenue
pine National Bank,16 the Court equated “credit” with the term “deposits,” and
identified the depositor as the creditor and the bank as the debtor.
And as correctly stated by the trial court, the term “credit” in its usual meaning is
a sum credited on the books of a company to a person who appears to be entitled to
it. It presupposes a creditordebtor relationship, and may be said to imply ability, by
reason of property or estates, to make a promised payment. It is the correlative to
debt or indebtedness, and that which is due to any person, as distinguished from that
which he owes. The same is true with the term “deposits” in banks where the
relationship created between the depositor and the bank is that of creditor and
debtor.
By this definition of “credit,” BPI’s deposit account with its correspondent bank is
much the same as the “credit” referred to in Section 51 of Regulations No. 26. Thus,
the fact that the funds transferred to the Central Bank’s account with the Federal
Reserve Bank are from BPI’s deposit account with the correspondent bank can only
underline that the present case is the same situation described under Section 51 of
Regulations No. 26.
Moreover, the fact that the funds belong to BPI and were not advanced by the
correspondent bank will not remove the transaction from the coverage of Section 195
(now Section 182) of the NIRC. There are transactions covered by this section
wherein funds belonging to the drawer are used for payment. A bill of exchange,
when drawn in the Philippines but payable in another country, would surely be
covered by this section. And in the case of a bill of exchange, the funds may belong to
the drawer and need not be advanced by the drawee, as in the case of a check or a
draft. In the description of a draft provided hereunder, the drawee is in possession of
funds belonging to the drawer of the bill:
_______________
16 113 Phil. 828, 830-831; 3 SCRA 851, 854 (1961).
618
618 SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Commissioner
of Internal Revenue
A draft is a form of a bill of exchange used mainly in transactions between persons
physically remote from each other. It is an order made by one person, say the buyer
of goods, addressed to a person having in his possession funds of such buyer ordering
the addressee to pay the purchase price to the seller of the goods. Where the order is
made by one bank to another, it is referred to as a bank draft.17
BPI argues that the foreign exchange sold was deposited and transferred within the
U.S. and is therefore outside Philippine territory. This argument is unsubstantial.
The documentary stamp tax is not imposed on the sale of foreign exchange, rather it
is an excise tax on the privilege or facility which the parties used in their transaction.
In the case of Allied Thread Co., Inc. v. City Mayor of Manila,18 the Court explained
the scope encompassed by the power to levy an excise tax:
“The tax imposition here is upon the performance of an act, enjoyment of a privilege,
or the engaging in an occupation, and hence is in the nature of an excise tax.
The power to levy an excise upon the performance of an act or the engaging in an
occupation does not depend upon the domicile of the person subject to the excise,
nor upon the physical location of the property and in connection with the act or
occupation taxed, but depends upon the place in which the act is performed
or occasion engaged in.” (Emphasis supplied).
In this case, the act of BPI instructing the correspondent bank to transfer the funds
to the Federal Reserve Bank was performed in the Philippines. Therefore, the excise
tax may be levied by the Philippine government. Section 195 (now Section 182) of the
NIRC would be rendered invalid if the fact that the payment was made outside of the
country can be used as a basis for nonpayment of the tax.
_______________
17Supra note 13 at p. 3.
18218 Phil. 308, 313-314; 133 SCRA 338, 343 (1984).
619
VOL. 496, JULY 27, 2006 619
Bank of the Philippine Islands vs. Commissioner
of Internal Revenue
The second issue is whether the delinquency interest of 20% per annum, as provided
under Section 249(c)(3) of the NIRC, is applicable in this case.
In the case of Philippine Refining Company v. Court of Appeals,19 this Court
categorically ruled that even if an assessment was later reduced by the courts, a
delinquency interest should still be imposed from the time demand was made by the
CIR.
“As correctly pointed out by the Solicitor General, the deficiency tax assessment in
this case, which was the subject of the demand letter of respondent Commissioner
dated April 11, 1989, should have been paid within thirty (30) days from receipt
thereof. By reason of petitioner’s default thereon, the delinquency penalties of 25%
surcharge and interest of 20% accrued from April 11, 1989. The fact that petitioner
appealed the assessment to the CTA and that the same was modified does not relieve
petitioner of the penalties incident to delinquency. The reduced amount of
P237,381.25 is but a part of the original assessment of P1,892,584.00.”
This doctrine is consistent with the earlier decisions of this Court justifying the
imposition of additional charges and interests incident to delinquency by explaining
that the nature of additional charges is compensatory and not a penalty.
“The above legal provision makes no distinctions nor does it establish exceptions. It
directs the collection of the surcharge and interest at the stated rate upon any sum or
sums due and unpaid after the dates prescribed in subsections (b), (c), and (d) of the
Act for the payment of the amounts due. The provision therefore is mandatory in
case of delinquency. This is justified because the intention of the law is precisely to
discourage delay in the payment of taxes due to the State and, in this sense, the
surcharge and interest charged are not penal but compensatory in nature—they are
compensation to the State for the delay in payment, or for the concomitant use of the
_______________
19 Supra note 10 at p. 691; pp. 677-678.
620
620 SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Commissioner
of Internal Revenue
funds by the taxpayer beyond the date he is supposed to have paid them to the
State.”20
The same principle was used in Ross v. U.S.21 when the U.S. Supreme Court ruled
that it was only equitable for the government to collect interest from a taxpayer who,
by the government’s error, received a refund which was not due him.
“Even though [the] taxpayer here did not request the refund made to him, and the
situation is entirely due to an error on the part of the government, taxpayer and not
the government has had the use of the money during the period involved and it is not
unjustly penalizing taxpayer to require him to pay compensation for this use of ——o0o——
money.”
Based on established doctrine, these charges incident to delinquency are
compensatory in nature and are imposed for the taxpayers’ use of the funds at the
time when the State should have control of said funds. Collecting such charges is
mandatory. Therefore, the Decision of the Court of Appeals imposing a 20%
delinquency interest over the assessment reduced by the CTA was justified and in
accordance with Section 249(c)(3) of the NIRC.
WHEREFORE, premises considered, this Court DENIES this petition and
AFFIRMS the Decision of the Court of Appeals in CA-G.R. SP No. 57362 dated 14
August 1998, ordering that petitioner Bank of the Philippine Islands to pay
Respondent Commissioner of Internal Revenue the deficiency documentary stamp
tax in the amount of P690,030.00 inclusive of surcharge and compromise penalty,
plus 20% annual interest from 7 June 1990 until fully paid. Costs against the
petitioner.

_______________
20 Republic v. Philippine Bank of Commerce, 145 Phil. 81, 89; 34 SCRA 361, 369
(1970).
21 148 F. Supp. 330 (1957), p. 333.

621
VOL. 496, JULY 27, 2006 621
Bank of the Philippine Islands vs. Commissioner
of Internal Revenue
SO ORDERED.
Panganiban (C.J., Chairperson), Ynares-Santiago, Austria-
Martinez and Callejo, Sr., JJ., concur.
Petition denied, judgment affirmed.
Notes.—Documentary stamp taxes are levied on the exercise by persons of
certain privileges conferred by law for the creation, revision, or termination of
specific legal relationships through the execution of specific instruments. (Philippine
Home Assurance Corporation vs. Court of Appeals, 301 SCRA 443 [1999])
The payment of documentary stamp taxes is done at the time the act is done or
transaction had and the tax base for the computation of documentary stamp taxes on
life insurance policies under Section 183 of the Insurance Code is the amount fixed in
policy, unless the interest of a person insured is susceptible of exact pecuniary
measurement. The amount fixed in the policy is the figure written on its face and
whatever increases will take effect in the future by reason of any “automatic increase
clause” embodied in the policy without the need of another contract. (Commissioner
of Internal Revenue vs. Lincoln Philippine Life Insurance Company, Inc., 379 SCRA
423 [2002])
 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.
Obligations and Contracts; Obligations arising from contracts have the force
of law between the parties and should be complied with in good faith.—We must
stress that obligations arising from contracts have the force of law between the
parties and should be complied with in good faith. 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.
Laches; 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.—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. Respondents,
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.
Negotiable Instruments Law; There are well-defined distinctions between the
contract of an indorser and that of a guaran-tor/surety of a commercial paper.—
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. 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 dis-
_______________
*THIRD DIVISION.
468
4 SUPREME COURT REPORTS ANNOTATED
68
Allied Banking Corporation vs. Court of Appeals
honor given to the indorser within a reasonable time, he will be discharged from
liability thereon. 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.
PETITION for review on certiorari of the decision and resolution of the Court of
Appeals.
The facts are stated in the opinion of the Court.
Walter T. Young for petitioner.
Ernesto T. Zshornack, Jr. for respondent G.G. Sportswear and Neri Gidwani.
Valeriano Del Rosario for respondent Alcron Int’l.
Larry Gabriel Ramos for respondents Leticia and Leon de Villa.
QUISUMBING, J.:
This petition for review on certiorari assails (a) the July 31, 1996 Decision 1 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 Resolution2denying 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.
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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 p. 38. Penned by Associate Justice Romeo A. Brawner, with Associate
Justices Minerva P. Gonzaga Reyes, and Buenaventura J. Guerrero concurring.
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Allied Banking Corporation vs. Court of Appeals
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
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470 SUPREME COURT REPORTS ANNOTATED
Allied Banking Corporation vs. Court of Appeals
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 of P151,474.52 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.
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VOL. 494, JULY 11, 2006 471
Allied Banking Corporation vs. Court of Appeals
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. Previ-
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3 Rollo, p. 36.
4 Id., at p. 23.
5 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
nonpayment. 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.
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472 SUPREME COURT REPORTS ANNOTATED
Allied Banking Corporation vs. Court of Appeals
ously, 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.6However, 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
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6 Bank of America, NT & SA v. Court of Appeals, G.R. No. 105395, December 10,
1993, 228 SCRA 357, 366.
7 Id., at p. 369.
8 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
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VOL. 494, JULY 11, 2006 473
Allied Banking Corporation vs. Court of Appeals
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
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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 p. 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 p. 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 hereinbefore referred to,
...
11 NEW CIVIL CODE, Art. 1159.
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474 SUPREME COURT REPORTS ANNOTATED
Allied Banking Corporation vs. Court of Appeals
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 protest13upon 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
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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.
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VOL. 494, JULY 11, 2006 475
Allied Banking Corporation vs. Court of Appeals
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 Guar-anty executed by its
representative Hans-Joachim 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
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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.
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476 SUPREME COURT REPORTS ANNOTATED
Allied Banking Corporation vs. Court of Appeals
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
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 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 I.P.I. No. 01-1065-P, March 31, 2003

citing People v. Topaguen, G.R. Nos. 116596-98, March 31, 1997, 269 SCRA 601, 614.
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VOL. 494, JULY 11, 2006 477
Allied Banking Corporation vs. Court of Appeals
controlled by equitable considerations.23 Respondents, 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-à-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 hereby MODIFIED, 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 and Velasco, Jr., JJ., concur.
Petition granted, assailed decision modified.
Note.—A surety is bound by the same consideration that makes the contract
effective between the parties thereto. (Evangelista vs. Mercator Finance
Corporation, 409 SCRA 410 [2003])

——o0o——

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23Agra v. Philippine National Bank, G.R. No. 133317, June 29, 1999, 309 SCRA
509, 520.
24 Id.