1
FIRST DIVISION involve transfer of funds from abroad are not subject to DST. BIR
G.R. No. 166018 June 4, 2014
THE HONGKONG AND SHANGHAI BANKING CORPORATION
LIMITED-PHILIPPINE BRANCHES, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent;
DECISION
LEONARDO-DE CASTRO, J.:
These petitions for review on certiorari1 assail the Decision2 and
Resolution dated July 8, 2004 and October 25, 2004, respectively, of
the Court of Appeals in CA-G.R. SP No. 77580, as well as the
Decision3 and Resolution dated September 2, 2004 and April 4,
2005, respectively, of the Court of Appeals in CA-G.R. SP No. 70814.
The respective Decisions in the said cases similarly reversed and set
aside the decisions of the Court of Tax Appeals (CTA) in CTA Case
Nos. 59514 and 6009,5 respectively, and dismissed the petitions of
petitioner Hongkong and Shanghai Banking Corporation Limited-
Philippine Branches (HSBC). The corresponding Resolutions, on the
other hand, denied the respective motions for reconsideration of
the said Decisions.
HSBC performs, among others, custodial services on behalf of its
investor-clients, corporate and individual, resident or non-resident
of the Philippines, with respect to their passive investments in the
Philippines, particularly investments in shares of stocks in domestic
corporations. As a custodian bank, HSBC serves as the
collection/payment agent with respect to dividends and other
income derived from its investor-clients’ passive investments.6
HSBC’s investor-clients maintain Philippine peso and/or foreign
currency accounts, which are managed by HSBC through instructions
given through electronic messages. The said instructions are
standard forms known in the banking industry as SWIFT, or "Society
for Worldwide Interbank Financial Telecommunication." In
purchasing shares of stock and other investment in securities, the
investor-clients would send electronic messages from abroad
instructing HSBC to debit their local or foreign currency accounts
and to pay the purchase price therefor upon receipt of the
securities.7
Pursuant to the electronic messages of its investor-clients, HSBC
purchased and paid Documentary Stamp Tax (DST) from September
to December 1997 and also from January to December 1998
amounting to P19,572,992.10 and P32,904,437.30, respectively,
broken down as follows:
A. September to December 1997
B. January to December 1998
On August 23, 1999, the Bureau of Internal Revenue (BIR), thru its
then Commissioner, Beethoven Rualo, issued BIR Ruling No. 132-99
to the effect that instructions or advises from abroad on the
management of funds located in the Philippines which do not
Ruling No. 132-99 reads:
Date: August 23, 1999
FERRY TOLEDO VICTORINO GONZAGA
& ASSOCIATES
G/F AFC Building, Alfaro St.
Salcedo Village, Makati
Metro Manila
Attn: Atty. Tomas C. Toledo
Tax Counsel
Gentlemen:
This refers to your letter dated July 26, 1999 requesting on behalf of
your clients, the CITIBANK & STANDARD CHARTERED BANK, for a
ruling as to whether or not the electronic instructions involving the
following transactions of residents and non-residents of the
Philippines with respect to their local or foreign currency accounts
are subject to documentary stamp tax under Section 181 of the 1997
Tax Code, viz:
A. Investment purchase transactions:
An overseas client sends instruction to its bank in the Philippines to
either:
(i) debit its local or foreign currency account and to pay a named
recipient in the Philippines; or
(ii) receive funds from another bank in the Philippines for deposit
into its account and to pay a named recipient in the Philippines."
The foregoing transactions are carried out under instruction from
abroad and [do] not involve actual fund transfer since the funds are
already in the Philippine accounts. The instructions are in the form
of electronic messages (i.e., SWIFT MT100 or MT 202 and/or MT
521). In both cases, the payment is against the delivery of
investments purchased. The purchase of investments and the
payment comprise one single transaction. DST has already been paid
under Section 176 for the investment purchase.
B. Other transactions:
An overseas client sends an instruction to its bank in the Philippines
to either:
(i) debit its local or foreign currency account and to pay a named
recipient, who may be another bank, a corporate entity or an
individual in the Philippines; or
(ii) receive funds from another bank in the Philippines for deposit to
its account and to pay a named recipient, who may be another bank,
a corporate entity or an individual in the Philippines."

The above instruction is in the form of an electronic message (i.e.,
SWIFT MT 100 or MT 202) or tested cable, and may not refer to any
particular transaction.
The opening and maintenance by a non-resident of local or foreign
currency accounts with a bank in the Philippines is permitted by the
Bangko Sentral ng Pilipinas, subject to certain conditions.
In reply, please be informed that pursuant to Section 181 of the
1997 Tax Code, which provides that –
SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and
Others.– Upon any acceptance or payment of any bill of exchange or
order for the payment of money purporting to be drawn in a foreign
country but payable in the Philippines, there shall be collected a
documentary stamp tax of Thirty centavos (P0.30) on each Two
hundred pesos (P200), or fractional part thereof, of the face value of
any such bill of exchange, or order, or Philippine equivalent of such
value, if expressed in foreign currency. (Underscoring supplied.)
a documentary stamp tax shall be imposed on any bill of exchange
or order for payment purporting to be drawn in a foreign country
but payable in the Philippines.
Under the foregoing provision, the documentary stamp tax shall be
levied on the instrument, i.e., a bill of exchange or order for the
payment of money, which purports to draw money from a foreign
country but payable in the Philippines. In the instant case, however,
while the payor is residing outside the Philippines, he maintains a
local and foreign currency account in the Philippines from where he
will draw the money intended to pay a named recipient. The
instruction or order to pay shall be made through an electronic
message, i.e., SWIFT MT 100 or MT 202 and/or MT 521.
Consequently, there is no negotiable instrument to be made, signed
or issued by the payee. In the meantime, such electronic instructions
by the non-resident payor cannot be considered as a transaction per
se considering that the same do not involve any transfer of funds
from abroad or from the place where the instruction originates.
Insofar as the local bank is concerned, such instruction could be
considered only as a memorandum and shall be entered as such in
its books of accounts. The actual debiting of the payor’s account,
local or foreign currency account in the Philippines, is the actual
transaction that should be properly entered as such.
Under the Documentary Stamp Tax Law, the mere withdrawal of
money from a bank deposit, local or foreign currency account, is not
subject to DST, unless the account so maintained is a current or
checking account, in which case, the issuance of the check or bank
drafts is subject to the documentary stamp tax imposed under
Section 179 of the 1997 Tax Code. In the instant case, and subject to
the physical impossibility on the part of the payor to be present and
prepare and sign an instrument purporting to pay a certain
obligation, the withdrawal and payment shall be made in cash. In
this light, the withdrawal shall not be subject to documentary stamp
tax. The case is parallel to an automatic bank transfer of local funds
from a savings account to a checking account maintained by a
depositor in one bank.
Likewise, the receipt of funds from another bank in the Philippines
for deposit to the payee’s account and thereafter upon instruction
of the non-resident depositor-payor, through an electronic message,
2
the depository bank to debit his account and pay a named recipient
shall not be subject to documentary stamp tax.
It should be noted that the receipt of funds from another local bank
in the Philippines by a local depository bank for the account of its
client residing abroad is part of its regular banking transaction which
is not subject to documentary stamp tax. Neither does the receipt of
funds makes the recipient subject to the documentary stamp tax.
The funds are deemed to be part of the deposits of the client once
credited to his account, and which, thereafter can be disposed in the
manner he wants. The payor-client’s further instruction to debit his
account and pay a named recipient in the Philippines does not
involve transfer of funds from abroad. Likewise, as stated earlier,
such debit of local or foreign currency account in the Philippines is
not subject to the documentary stamp tax under the
aforementioned Section 181 of the Tax Code.
In the light of the foregoing, this Office hereby holds that the
instruction made through an electronic message by non-resident
payor-client to debit his local or foreign currency account
maintained in the Philippines and to pay a certain named recipient
also residing in the Philippines is not the transaction contemplated
under Section 181 of the 1997 Tax Code. Such being the case, such
electronic instruction purporting to draw funds from a local account
intended to be paid to a named recipient in the Philippines is not
subject to documentary stamp tax imposed under the foregoing
Section.
This ruling is being issued on the basis of the foregoing facts as
represented. However, if upon investigation it shall be disclosed that
the facts are different, this ruling shall be considered null and void.
Very truly yours,
(Sgd.) BEETHOVEN L. RUALO
Commissioner of Internal Revenue8
With the above BIR Ruling as its basis, HSBC filed on October 8, 1999
an administrative claim for the refund of the amount of
P19,572,992.10 allegedly representing erroneously paid DST to the
BIR for the period covering September to December 1997.
Subsequently, on January 31, 2000, HSBC filed another
administrative claim for the refund of the amount of P32,904,437.30
allegedly representing erroneously paid DST to the BIR for the
period covering January to December 1998.
As its claims for refund were not acted upon by the BIR, HSBC
subsequently brought the matter to the CTA as CTA Case Nos. 5951
and 6009, respectively, in order to suspend the running of the two-
year prescriptive period.
The CTA Decisions dated May 2, 2002 in CTA Case No. 6009 and
dated December 18, 2002 in CTA Case No. 5951 favored HSBC.
Respondent Commissioner of Internal Revenue was ordered to
refund or issue a tax credit certificate in favor of HSBC in the
reduced amounts of P30,360,570.75 in CTA Case No. 6009 and
P16,436,395.83 in CTA Case No. 5951, representing erroneously paid
DST that have been sufficiently substantiated with documentary
evidence. The CTA ruled that HSBC is entitled to a tax refund or tax

credit because Sections 180 and 181 of the 1997 Tax Code do not
apply to electronic message instructions transmitted by HSBC’s non-
resident investor-clients:
The instruction made through an electronic message by a
nonresident investor-client, which is to debit his local or foreign
currency account in the Philippines and pay a certain named
recipient also residing in the Philippines is not the transaction
contemplated in Section 181 of the Code. In this case, the
withdrawal and payment shall be made in cash. It is parallel to an
automatic bank transfer of local funds from a savings account to a
checking account maintained by a depositor in one bank. The act of
debiting the account is not subject to the documentary stamp tax
under Section 181. Neither is the transaction subject to the
documentary stamp tax under Section 180 of the same Code. These
electronic message instructions cannot be considered negotiable
instruments as they lack the feature of negotiability, which, is the
ability to be transferred (Words and Phrases).
These instructions are considered as mere memoranda and entered
as such in the books of account of the local bank, and the actual
debiting of the payor’s local or foreign currency account in the
Philippines is the actual transaction that should be properly entered
as such.9
The respective dispositive portions of the Decisions dated May 2,
2002 in CTA Case No. 6009 and dated December 18, 2002 in CTA
Case No. 5951 read:
II. CTA Case No. 6009
WHEREFORE, in the light of all the foregoing, the instant Petition for
Review is PARTIALLY GRANTED. Respondent is hereby ORDERED to
REFUND or ISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner
the amount of P30,360,570.75 representing erroneous payment of
documentary stamp tax for the taxable year 1998.10
II. CTA Case No. 5951
WHEREFORE, in the light of the foregoing, the instant petition is
hereby partially granted. Accordingly, respondent is hereby
ORDERED to REFUND, or in the alternative, ISSUE A TAX CREDIT
CERTIFICATE in favor of the petitioner in the reduced amount of
P16,436,395.83 representing erroneously paid documentary stamp
tax for the months of September 1997 to December 1997.11
However, the Court of Appeals reversed both decisions of the CTA
and ruled that the electronic messages of HSBC’s investor-clients are
subject to DST. The Court of Appeals explained:
At bar, [HSBC] performs custodial services in behalf of its investor-
clients as regards their passive investments in the Philippines mainly
involving shares of stocks in domestic corporations. These investor-
clients maintain Philippine peso and/or foreign currency accounts
with [HSBC]. Should they desire to purchase shares of stock and
other investments securities in the Philippines, the investor-clients
send their instructions and advises via electronic messages from
abroad to [HSBC] in the form of SWIFT MT 100, MT 202, or MT 521
directing the latter to debit their local or foreign currency account
and to pay the purchase price upon receipt of the securities (CTA
3
Decision, pp. 1-2; Rollo, pp. 41-42). Pursuant to Section 181 of the
NIRC, [HSBC] was thus required to pay [DST] based on its acceptance
of these electronic messages – which, as [HSBC] readily admits in its
petition filed before the [CTA], were essentially orders to pay the
purchases of securities made by its client-investors (Rollo, p. 60).
Appositely, the BIR correctly and legally assessed and collected the
[DST] from [HSBC] considering that the said tax was levied against
the acceptances and payments by [HSBC] of the subject electronic
messages/orders for payment. The issue of whether such electronic
messages may be equated as a written document and thus be
subject to tax is beside the point. As We have already stressed,
Section 181 of the law cited earlier imposes the [DST] not on the bill
of exchange or order for payment of money but on the acceptance
or payment of the said bill or order. The acceptance of a bill or order
is the signification by the drawee of its assent to the order of the
drawer to pay a given sum of money while payment implies not only
the assent to the said order of the drawer and a recognition of the
drawer’s obligation to pay such aforesaid sum, but also a compliance
with such obligation (Philippine National Bank vs. Court of Appeals,
25 SCRA 693 [1968]; Prudential Bank vs. Intermediate Appellate
Court, 216 SCRA 257 [1992]). What is vital to the valid imposition of
the [DST] under Section 181 is the existence of the requirement of
acceptance or payment by the drawee (in this case, [HSBC]) of the
order for payment of money from its investor-clients and that the
said order was drawn from a foreign country and payable in the
Philippines. These requisites are surely present here.
It would serve the parties well to understand the nature of the tax
being imposed in the case at bar. In Philippine Home Assurance
Corporation vs. Court of Appeals (301 SCRA 443 [1999]), the
Supreme Court ruled that [DST is] 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, independently of the legal status of the
transactions giving rise thereto. In the same case, the High Court
also declared – citing Du Pont vs. United States (300 U.S. 150, 153
[1936])
The tax is not upon the business transacted but is an excise upon the
privilege, opportunity, or facility offered at exchanges for the
transaction of the business. It is an excise upon the facilities used in
the transaction of the business separate and apart from the business
itself. x x x.
To reiterate, the subject [DST] was levied on the acceptance and
payment made by [HSBC] pursuant to the order made by its client-
investors as embodied in the cited electronic messages, through
which the herein parties’ privilege and opportunity to transact
business respectively as drawee and drawers was exercised,
separate and apart from the circumstances and conditions related to
such acceptance and subsequent payment of the sum of money
authorized by the concerned drawers. Stated another way, the [DST]
was exacted on [HSBC’s] exercise of its privilege under its drawee-
drawer relationship with its client-investor through the execution of
a specific instrument which, in the case at bar, is the acceptance of
the order for payment of money. The acceptance of a bill or order
for payment may be done in writing by the drawee in the bill or
order itself, or in a separate instrument (Prudential Bank vs.
Intermediate Appellate Court, supra.)Here, [HSBC]’s acceptance of
the orders for the payment of money was veritably ‘done in writing

in a separate instrument’ each time it debited the local or foreign
currency accounts of its client-investors pursuant to the latter’s
instructions and advises sent by electronic messages to [HSBC]. The
[DST] therefore must be paid upon the execution of the specified
instruments or facilities covered by the tax – in this case, the
acceptance by [HSBC] of the order for payment of money sent by
the client-investors through electronic messages. x x x.12
Hence, these petitions.
HSBC asserts that the Court of Appeals committed grave error when
it disregarded the factual and legal conclusions of the CTA.
According to HSBC, in the absence of abuse or improvident exercise
of authority, the CTA’s ruling should not have been disturbed as the
CTA is a highly specialized court which performs judicial functions,
particularly for the review of tax cases. HSBC further argues that the
Commissioner of Internal Revenue had already settled the issue on
the taxability of electronic messages involved in these cases in BIR
Ruling No. 132-99 and reiterated in BIR Ruling No. DA-280-2004.13
The Commissioner of Internal Revenue, on the other hand, claims
that Section 181 of the 1997 Tax Code imposes DST on the
acceptance or payment of a bill of exchange or order for the
payment of money. The DST under Section 18 of the 1997 Tax Code
is levied on HSBC’s exercise of a privilege which is specifically taxed
by law. BIR Ruling No. 132-99 is inconsistent with prevailing law and
long standing administrative practice, respondent is not barred from
questioning his own revenue ruling. Tax refunds like tax exemptions
are strictly construed against the taxpayer.14
The Court finds for HSBC.
The Court agrees with the CTA that the DST under Section 181 of the
Tax Code is levied on the acceptance or payment of "a bill of
exchange purporting to be drawn in a foreign country but payable in
the Philippines" and that "a bill of exchange is an unconditional
order in writing addressed by one person to another, signed by the
person giving it, requiring the person to whom it is addressed to pay
on demand or at a fixed or determinable future time a sum certain
in money to order or to bearer." A bill of exchange is one of two
general forms of negotiable instruments under the Negotiable
Instruments Law.15
The Court further agrees with the CTA that the electronic messages
of HSBC’s investor-clients containing instructions to debit their
respective local or foreign currency accounts in the Philippines and
pay a certain named recipient also residing in the Philippines is not
the transaction contemplated under Section 181 of the Tax Code as
such instructions are "parallel to an automatic bank transfer of local
funds from a savings account to a checking account maintained by a
depositor in one bank." The Court favorably adopts the finding of
the CTA that the electronic messages "cannot be considered
negotiable instruments as they lack the feature of negotiability,
which, is the ability to be transferred" and that the said electronic
messages are "mere memoranda" of the transaction consisting of
the "actual debiting of the [investor-client-payor’s] local or foreign
currency account in the Philippines" and "entered as such in the
books of account of the local bank," HSBC.16
More fundamentally, the instructions given through electronic
messages that are subjected to DST in these cases are not negotiable
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instruments as they do not comply with the requisites of
negotiability under Section 1 of the Negotiable Instruments Law,
which provides:
Sec. 1. Form of negotiable instruments.– An instrument to be
negotiable must conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum
certain in money;
(c) Must be payable on demand, or at a fixed or determinable future
time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be
named or otherwise indicated therein with reasonable certainty.
The electronic messages are not signed by the investor-clients as
supposed drawers of a bill of exchange; they do not contain an
unconditional order to pay a sum certain in money as the payment is
supposed to come from a specific fund or account of the investor-
clients; and, they are not payable to order or bearer but to a
specifically designated third party. Thus, the electronic messages are
not bills of exchange. As there was no bill of exchange or order for
the payment drawn abroad and made payable here in the
Philippines, there could have been no acceptance or payment that
will trigger the imposition of the DST under Section 181 of the Tax
Code.
Section 181 of the 1997 Tax Code, which governs HSBC’s claim for
tax refund for taxable year 1998 subject of G.R. No. 167728,
provides:
SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and
Others. – Upon any acceptance or payment of any bill of exchange
or order for the payment of money purporting to be drawn in a
foreign country but payable in the Philippines, there shall be
collected a documentary stamp tax of Thirty centavos (P0.30) on
each Two hundred pesos (P200), or fractional part thereof, of the
face value of any such bill of exchange, or order, or the Philippine
equivalent of such value, if expressed in foreign currency. (Emphasis
supplied.)
Section 230 of the 1977 Tax Code, as amended, which governs
HSBC’s claim for tax refund for DST paid during the period
September to December 1997 and subject of G.R. No. 166018, is
worded exactly the same as its counterpart provision in the 1997 Tax
Code quoted above.
The origin of the above provision is Section 117 of the Tax Code of
1904,17 which provided: SECTION 117. The acceptor or acceptors of
any bill of exchange or order for the payment of any sum of money
drawn or purporting to be drawn in any foreign country but payable
in the Philippine Islands, shall, before paying or accepting the same,
place thereupon a stamp in payment of the tax upon such document
in the same manner as is required in this Act for the stamping of
inland bills of exchange or promissory notes, and no bill of exchange

shall be paid nor negotiated until such stamp shall have been affixed
thereto.18 (Emphasis supplied.)
It then became Section 30(h) of the 1914 Tax Code19:
SEC. 30. Stamp tax upon documents and papers. – Upon documents,
instruments, and papers, and upon acceptances, assignments, sales,
and transfers of the obligation, right, or property incident thereto
documentary taxes for and in respect of the transaction so had or
accomplished shall be paid as hereinafter prescribed, by the persons
making, signing, issuing, accepting, or transferring the same, and at
the time such act is done or transaction had:
(h) Upon any acceptance or payment upon acceptance of any bill of
exchange or order for the payment of money purporting to be
drawn in a foreign country but payable in the Philippine Islands, on
each two hundred pesos, or fractional part thereof, of the face value
of any such bill of exchange or order, or the Philippine equivalent of
such value, if expressed in foreign currency, two centavos[.]
(Emphasis supplied.)
It was implemented by Section 46 in relation to Section 39 of
Revenue Regulations No. 26,20 as amended:
SEC. 39. A Bill of Exchange is one that "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."
SEC. 46. Bill of Exchange, etc. – When any bill of exchange or order
for the payment of money drawn in a foreign country but payable in
this country whether at sight or on demand or after a specified
period after sight or from a stated date, is presented for acceptance
or payment, there must be affixed upon acceptance or payment of
documentary stamp equal to P0.02 for each P200 or fractional part
thereof. (Emphasis supplied.)
It took its present form in Section 218 of the Tax Code of 1939,21
which provided:
SEC. 218. Stamp Tax Upon Acceptance of Bills of Exchange and
Others. – Upon any acceptance or payment of any bill of exchange
or order for the payment of money purporting to be drawn in a
foreign country but payable in the Philippines, there shall be
collected a documentary stamp tax of four centavos on each two
hundred pesos, or fractional part thereof, of the face value of any
such bill of exchange or order, or the Philippine equivalent of such
value, if expressed in foreign currency. (Emphasis supplied.)
It then became Section 230 of the 1977 Tax Code,22 as amended by
Presidential Decree Nos. 1457 and 1959,which, as stated earlier, was
worded exactly as Section 181 of the current Tax Code:
SEC. 230. Stamp tax upon acceptance of bills of exchange and
others. – Upon any acceptance or payment of any bill of exchange or
order for the payment of money purporting to be drawn in a foreign
country but payable in the Philippines, 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 any such bill of
5
exchange, or order, or the Philippine equivalent of such value, if
expressed in foreign currency. (Emphasis supplied.)
The pertinent provision of the present Tax Code has therefore
remained substantially the same for the past one hundred
years.1âwphi1 The identical text and common history of Section 230
of the 1977 Tax Code, as amended, and the 1997 Tax Code, as
amended, show that the law imposes DST on either (a) the
acceptance or (b) the payment of a foreign bill of exchange or order
for the payment of money that was drawn abroad but payable in the
Philippines.
DST is an excise tax on the exercise of a right or privilege to transfer
obligations, rights or properties incident thereto.23 Under Section
173 of the 1997 Tax Code, the persons primarily liable for the
payment of the DST are those (1) making, (2) signing, (3) issuing, (4)
accepting, or (5) transferring the taxable documents, instruments or
papers.24
In general, DST is 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. Examples of such privileges, the exercise of which, as
effected through the issuance of particular documents, are subject
to the payment of DST are leases of lands, mortgages, pledges and
trusts, and conveyances of real property.25
As stated above, Section 230 of the 1977 Tax Code, as amended,
now Section 181 of the 1997 Tax Code, levies DST on either (a) the
acceptance or (b) the payment of a foreign bill of exchange or order
for the payment of money that was drawn abroad but payable in the
Philippines. In other words, it levies DST as an excise tax on the
privilege of the drawee to accept or pay a bill of exchange or order
for the payment of money, which has been drawn abroad but
payable in the Philippines, and on the corresponding privilege of the
drawer to have acceptance of or payment for the bill of exchange or
order for the payment of money which it has drawn abroad but
payable in the Philippines.
Acceptance applies only to bills of exchange.26 Acceptance of a bill of
exchange has a very definite meaning in law.27 In particular, Section
132 of the Negotiable Instruments Law provides:
Sec. 132. Acceptance; how made, by and so forth. – The acceptance
of a bill [of exchange28] is the signification by the drawee of his
assent to the order of the drawer. The acceptance must be in writing
and signed by the drawee. It must not express that the drawee will
perform his promise by any other means than the payment of
money.
Under the law, therefore, what is accepted is a bill of exchange, and
the acceptance of a bill of exchange is both the manifestation of the
drawee’s consent to the drawer’s order to pay money and the
expression of the drawee’s promise to pay. It is "the act by which
the drawee manifests his consent to comply with the request
contained in the bill of exchange directed to him and it
contemplates an engagement or promise to pay."29 Once the
drawee accepts, he becomes an acceptor.30 As acceptor, he engages
to pay the bill of exchange according to the tenor of his
acceptance.31
 6

Acceptance is made upon presentment of the bill of exchange, or

within 24 hours after such presentment.32 Presentment for
acceptance is the production or exhibition of the bill of exchange to
the drawee for the purpose of obtaining his acceptance.33

Presentment for acceptance is necessary only in the instances where

the law requires it.34 In the instances where presentment for
acceptance is not necessary, the holder of the bill of exchange can
proceed directly to presentment for payment.

Presentment for payment is the presentation of the instrument to

the person primarily liable for the purpose of demanding and
obtaining payment thereof.35

Thus, whether it be presentment for acceptance or presentment for

payment, the negotiable instrument has to be produced and shown
to the drawee for acceptance or to the acceptor for payment.

Revenue Regulations No. 26 recognizes that the acceptance or

payment (of bills of exchange or orders for the payment of money
that have been drawn abroad but payable in the Philippines) that is
subjected to DST under Section 181 of the 1997 Tax Code is done
after presentment for acceptance or presentment for payment,
respectively. In other words, the acceptance or payment of the
subject bill of exchange or order for the payment of money is done
when there is presentment either for acceptance or for payment of
the bill of exchange or order for the payment of money.

Applying the above concepts to the matter subjected to DST in these

cases, the electronic messages received by HSBC from its investor-
clients abroad instructing the former to debit the latter's local and
foreign currency accounts and to pay the purchase price of shares of
stock or investment in securities do not properly qualify as either
presentment for acceptance or presentment for payment. There
being neither presentment for acceptance nor presentment for
payment, then there was no acceptance or payment that could have
been subjected to DST to speak of.

Indeed, there had been no acceptance of a bill of exchange or order

for the payment of money on the part of HSBC. To reiterate, there
was no bill of exchange or order for the payment drawn abroad and
made payable here in the Philippines. Thus, there was no
acceptance as the electronic messages did not constitute the written
and signed manifestation of HSBC to a drawer's order to pay money.
As HSBC could not have been an acceptor, then it could not have
made any payment of a bill of exchange or order for the payment of
money drawn abroad but payable here in the Philippines. In other
words, HSBC could not have been held liable for DST under Section
230 of the 1977 Tax Code, as amended, and Section 181 of the 1997
Tax Code as it is not "a person making, signing, issuing, accepting, or,
transferring" the taxable instruments under the said provision. Thus,
HSBC erroneously paid DST on the said electronic messages for
which it is entitled to a tax refund.

WHEREFORE, the petitions are hereby GRANTED and the Decisions

dated May 2, 2002 in CTA Case No. 6009 and dated December 18,
2002 in CT A Case No. 5951 of the Court of Tax Appeals are
REINSTATED.

SO ORDERED.

FIRST DIVISION
G.R. No. 184458 January 14, 2015
RODRIGO RIVERA, Petitioner,
vs.
SPOUSES SALVADOR CHUA AND VIOLETA S. CHUA, Respondents.
DECISION
PEREZ, J.:
Before us are consolidated Petitions for Review on Certiorari under
Rule 45 of the Rules of Court assailing the Decision1 of the Court of
Appeals in CA-G.R. SP No. 90609 which affirmed with modification
the separate rulings of the Manila City trial courts, the Regional Trial
Court, Branch 17 in Civil Case No. 02-1052562 and the Metropolitan
Trial Court (MeTC), Branch 30, in Civil Case No. 163661,3 a case for
collection of a sum of money due a promissory note. While all three
(3) lower courts upheld the validity and authenticity of the
promissory note as duly signed by the obligor, Rodrigo Rivera
(Rivera), petitioner in G.R. No. 184458, the appellate court modified
the trial courts’ consistent awards: (1) the stipulated interest rate of
sixty percent (60%) reduced to twelve percent (12%) per
annumcomputed from the date of judicial or extrajudicial demand,
and (2) reinstatement of the award of attorney’s fees also in a
reduced amount of P50,000.00.
In G.R. No. 184458, Rivera persists in his contention that there was
no valid promissory note and questions the entire ruling of the lower
courts. On the other hand, petitioners in G.R. No. 184472, Spouses
Salvador and Violeta Chua (Spouses Chua), take exception to the
appellate court’s reduction of the stipulated interest rate of sixty
percent (60%) to twelve percent (12%) per annum.
We proceed to the facts.
The parties were friends of long standing having known each other
since 1973: Rivera and Salvador are kumpadres, the former is the
godfather of the Spouses Chua’s son.
On 24 February 1995, Rivera obtained a loan from the Spouses
Chua:
PROMISSORY NOTE
120,000.00
FOR VALUE RECEIVED, I, RODRIGO RIVERA promise to pay spouses
SALVADOR C. CHUA and VIOLETA SY CHUA, the sum of One Hundred
Twenty Thousand Philippine Currency (P120,000.00) on December
31, 1995.
It is agreed and understood that failure on my part to pay the
amount of (120,000.00) One Hundred Twenty Thousand Pesos on
December 31, 1995. (sic) I agree to pay the sum equivalent to FIVE
PERCENT (5%) interest monthly from the date of default until the
entire obligation is fully paid for.
7
Should this note be referred to a lawyer for collection, I agree to pay
the further sum equivalent to twenty percent (20%) of the total
amount due and payable as and for attorney’s fees which in no case
shall be less than P5,000.00 and to pay in addition the cost of suit
and other incidental litigation expense.
Any action which may arise in connection with this note shall be
brought in the proper Court of the City of Manila.
Manila, February 24, 1995[.]
(SGD.) RODRIGO RIVERA4
In October 1998, almost three years from the date of payment
stipulated in the promissory note, Rivera, as partial payment for the
loan, issued and delivered to the Spouses Chua, as payee, a check
numbered 012467, dated 30 December 1998, drawn against Rivera’s
current account with the Philippine Commercial International Bank
(PCIB) in the amount of P25,000.00.
On 21 December 1998, the Spouses Chua received another check
presumably issued by Rivera, likewise drawn against Rivera’s PCIB
current account, numbered 013224, duly signed and dated, but
blank as to payee and amount. Ostensibly, as per understanding by
the parties, PCIB Check No. 013224 was issued in the amount of
P133,454.00 with "cash" as payee. Purportedly, both checks were
simply partial payment for Rivera’s loan in the principal amount of
P120,000.00.
Upon presentment for payment, the two checks were dishonored
for the reason "account closed."
As of 31 May 1999, the amount due the Spouses Chua was pegged
at P366,000.00 covering the principal of P120,000.00 plus five
percent (5%) interest per month from 1 January 1996 to 31 May
1999.
The Spouses Chua alleged that they have repeatedly demanded
payment from Rivera to no avail. Because of Rivera’s unjustified
refusal to pay, the Spouses Chua were constrained to file a suit on
11 June 1999. The case was raffled before the MeTC, Branch 30,
Manila and docketed as Civil Case No. 163661.
In his Answer with Compulsory Counterclaim, Rivera countered that:
(1) he never executed the subject Promissory Note; (2) in all
instances when he obtained a loan from the Spouses Chua, the loans
were always covered by a security; (3) at the time of the filing of the
complaint, he still had an existing indebtedness to the Spouses Chua,
secured by a real estate mortgage, but not yet in default; (4) PCIB
Check No. 132224 signed by him which he delivered to the Spouses
Chua on 21 December 1998, should have been issued in the amount
of only 1,300.00, representing the amount he received from the
Spouses Chua’s saleslady; (5) contrary to the supposed agreement,
the Spouses Chua presented the check for payment in the amount of
P133,454.00; and (6) there was no demand for payment of the
amount of P120,000.00 prior to the encashment of PCIB Check No.
0132224.5
In the main, Rivera claimed forgery of the subject Promissory Note
and denied his indebtedness thereunder.

The MeTC summarized the testimonies of both parties’ respective
witnesses:
[The spouses Chua’s] evidence include[s] documentary evidence and
oral evidence (consisting of the testimonies of [the spouses] Chua
and NBI Senior Documents Examiner Antonio Magbojos). x x x
Witness Magbojos enumerated his credentials as follows: joined the
NBI (1987); NBI document examiner (1989); NBI Senior Document
Examiner (1994 to the date he testified); registered criminologist;
graduate of 18th Basic Training Course [i]n Questioned Document
Examination conducted by the NBI; twice attended a seminar on US
Dollar Counterfeit Detection conducted by the US Embassy in
Manila; attended a seminar on Effective Methodology in Teaching
and Instructional design conducted by the NBI Academy; seminar
lecturer on Questioned Documents, Signature Verification and/or
Detection; had examined more than a hundred thousand questioned
documents at the time he testified.
Upon [order of the MeTC], Mr. Magbojos examined the purported
signature of [Rivera] appearing in the Promissory Note and
compared the signature thereon with the specimen signatures of
[Rivera] appearing on several documents. After a thorough study,
examination, and comparison of the signature on the questioned
document (Promissory Note) and the specimen signatures on the
documents submitted to him, he concluded that the questioned
signature appearing in the Promissory Note and the specimen
signatures of [Rivera] appearing on the other documents submitted
were written by one and the same person. In connection with his
findings, Magbojos prepared Questioned Documents Report No.
712-1000 dated 8 January 2001, with the following conclusion: "The
questioned and the standard specimen signatures RODGRIGO
RIVERA were written by one and the same person."
[Rivera] testified as follows: he and [respondent] Salvador are
"kumpadres;" in May 1998, he obtained a loan from [respondent]
Salvador and executed a real estate mortgage over a parcel of land
in favor of [respondent Salvador] as collateral; aside from this loan,
in October, 1998 he borrowed P25,000.00 from Salvador and issued
PCIB Check No. 126407 dated 30 December 1998; he expressly
denied execution of the Promissory Note dated 24 February 1995
and alleged that the signature appearing thereon was not his
signature; [respondent Salvador’s] claim that PCIB Check No.
0132224 was partial payment for the Promissory Note was not true,
the truth being that he delivered the check to [respondent Salvador]
with the space for amount left blank as he and [respondent]
Salvador had agreed that the latter was to fill it in with the amount
of P1,300.00 which amount he owed [the spouses Chua]; however,
on 29 December 1998 [respondent] Salvador called him and told
him that he had written P133,454.00 instead of P1,300.00; x x x. To
rebut the testimony of NBI Senior Document Examiner Magbojos,
[Rivera] reiterated his averment that the signature appearing on the
Promissory Note was not his signature and that he did not execute
the Promissory Note.6
After trial, the MeTC ruled in favor of the Spouses Chua:
WHEREFORE, [Rivera] is required to pay [the spouses Chua]:
P120,000.00 plus stipulated interest at the rate of 5% per month
from 1 January 1996, and legal interest at the rate of 12% percent
8
per annum from 11 June 1999, as actual and compensatory
damages; 20% of the whole amount due as attorney’s fees.7
On appeal, the Regional Trial Court, Branch 17, Manila affirmed the
Decision of the MeTC, but deleted the award of attorney’s fees to
the Spouses Chua:
WHEREFORE, except as to the amount of attorney’s fees which is
hereby deleted, the rest of the Decision dated October 21, 2002 is
hereby AFFIRMED.8
Both trial courts found the Promissory Note as authentic and validly
bore the signature of Rivera. Undaunted, Rivera appealed to the
Court of Appeals which affirmed Rivera’s liability under the
Promissory Note, reduced the imposition of interest on the loan
from 60% to 12% per annum, and reinstated the award of attorney’s
fees in favor of the Spouses Chua:
WHEREFORE, the judgment appealed from is hereby AFFIRMED,
subject to the MODIFICATION that the interest rate of 60% per
annum is hereby reduced to12% per annum and the award of
attorney’s fees is reinstated atthe reduced amount of P50,000.00
Costs against [Rivera].9
Hence, these consolidated petitions for review on certiorariof Rivera
in G.R. No. 184458 and the Spouses Chua in G.R. No. 184472,
respectively raising the following issues:
A. In G.R. No. 184458
1. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED
IN UPHOLDING THE RULING OF THE RTC AND M[e]TC THAT THERE
WAS A VALID PROMISSORY NOTE EXECUTED BY [RIVERA].
2. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED
IN HOLDING THAT DEMAND IS NO LONGER NECESSARY AND IN
APPLYING THE PROVISIONS OF THE NEGOTIABLE INSTRUMENTS
LAW.
3. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED
IN AWARDING ATTORNEY’S FEES DESPITE THE FACT THAT THE SAME
HAS NO BASIS IN FACT AND IN LAW AND DESPITE THE FACT THAT
[THE SPOUSES CHUA] DID NOT APPEAL FROM THE DECISION OF THE
RTC DELETING THE AWARD OF ATTORNEY’S FEES.10
B. In G.R. No. 184472
[WHETHER OR NOT] THE HONORABLE COURT OF APPEALS
COMMITTED GROSS LEGAL ERROR WHEN IT MODIFIED THE
APPEALED JUDGMENT BY REDUCING THE INTEREST RATE FROM 60%
PER ANNUM TO 12% PER ANNUM IN SPITE OF THE FACT THAT
RIVERA NEVER RAISED IN HIS ANSWER THE DEFENSE THAT THE SAID
STIPULATED RATE OF INTEREST IS EXORBITANT, UNCONSCIONABLE,
UNREASONABLE, INEQUITABLE, ILLEGAL, IMMORAL OR VOID.11
As early as 15 December 2008, wealready disposed of G.R. No.
184472 and denied the petition, via a Minute Resolution, for failure
to sufficiently show any reversible error in the ruling of the appellate

court specifically concerning the correct rate of interest on Rivera’s
indebtedness under the Promissory Note.12
On 26 February 2009, Entry of Judgment was made in G.R. No.
184472.
Thus, what remains for our disposition is G.R. No. 184458, the
appeal of Rivera questioning the entire ruling of the Court of
Appeals in CA-G.R. SP No. 90609.
Rivera continues to deny that heexecuted the Promissory Note; he
claims that given his friendship withthe Spouses Chua who were
money lenders, he has been able to maintain a loan account with
them. However, each of these loan transactions was respectively
"secured by checks or sufficient collateral."
Rivera points out that the Spouses Chua "never demanded payment
for the loan nor interest thereof (sic) from [Rivera] for almost four
(4) years from the time of the alleged default in payment [i.e., after
December 31, 1995]."13
On the issue of the supposed forgery of the promissory note, we are
not inclined to depart from the lower courts’ uniform rulings that
Rivera indeed signed it.
Rivera offers no evidence for his asseveration that his signature on
the promissory note was forged, only that the signature is not his
and varies from his usual signature. He likewise makes a confusing
defense of having previously obtained loans from the Spouses Chua
who were money lenders and who had allowed him a period of
"almost four (4) years" before demanding payment of the loan
under the Promissory Note.
First, we cannot give credence to such a naked claim of forgery over
the testimony of the National Bureau of Investigation (NBI)
handwriting expert on the integrity of the promissory note. On that
score, the appellate court aptly disabled Rivera’s contention:
[Rivera] failed to adduce clear and convincing evidence that the
signature on the promissory note is a forgery. The fact of forgery
cannot be presumed but must be proved by clear, positive and
convincing evidence. Mere variance of signatures cannot be
considered as conclusive proof that the same was forged. Save for
the denial of Rivera that the signature on the note was not his, there
is nothing in the records to support his claim of forgery. And while it
is true that resort to experts is not mandatory or indispensable to
the examination of alleged forged documents, the opinions of
handwriting experts are nevertheless helpful in the court’s
determination of a document’s authenticity.
To be sure, a bare denial will not suffice to overcome the positive
value of the promissory note and the testimony of the NBI witness.
In fact, even a perfunctory comparison of the signatures offered in
evidence would lead to the conclusion that the signatures were
made by one and the same person.
It is a basic rule in civil cases that the party having the burden of
proof must establish his case by preponderance of evidence, which
simply means "evidence which is of greater weight, or more
convincing than that which is offered in opposition to it."
9
Evaluating the evidence on record, we are convinced that [the
Spouses Chua] have established a prima faciecase in their favor,
hence, the burden of evidence has shifted to [Rivera] to prove his
allegation of forgery. Unfortunately for [Rivera], he failed to
substantiate his defense.14 Well-entrenched in jurisprudence is the
rule that factual findings of the trial court, especially when affirmed
by the appellate court, are accorded the highest degree of respect
and are considered conclusive between the parties.15 A review of
such findings by this Court is not warranted except upon a showing
of highly meritorious circumstances, such as: (1) when the findings
of a trial court are grounded entirely on speculation, surmises or
conjectures; (2) when a lower court's inference from its factual
findings is manifestly mistaken, absurd or impossible; (3) when there
is grave abuse of discretion in the appreciation of facts; (4) when the
findings of the appellate court go beyond the issues of the case, or
fail to notice certain relevant facts which, if properly considered, will
justify a different conclusion; (5) when there is a misappreciation of
facts; (6) when the findings of fact are conclusions without mention
of the specific evidence on which they are based, are premised on
the absence of evidence, or are contradicted by evidence on
record.16 None of these exceptions obtains in this instance. There is
no reason to depart from the separate factual findings of the three
(3) lower courts on the validity of Rivera’s signature reflected in the
Promissory Note.
Indeed, Rivera had the burden ofproving the material allegations
which he sets up in his Answer to the plaintiff’s claim or cause of
action, upon which issue is joined, whether they relate to the whole
case or only to certain issues in the case.17
In this case, Rivera’s bare assertion is unsubstantiated and directly
disputed by the testimony of a handwriting expert from the NBI.
While it is true that resort to experts is not mandatory or
indispensable to the examination or the comparison of handwriting,
the trial courts in this case, on its own, using the handwriting expert
testimony only as an aid, found the disputed document valid.18
Hence, the MeTC ruled that:
[Rivera] executed the Promissory Note after consideration of the
following: categorical statement of [respondent] Salvador that
[Rivera] signed the Promissory Note before him, in his ([Rivera’s])
house; the conclusion of NBI Senior Documents Examiner that the
questioned signature (appearing on the Promissory Note) and
standard specimen signatures "Rodrigo Rivera" "were written by one
and the same person"; actual view at the hearing of the enlarged
photographs of the questioned signature and the standard specimen
signatures.19
Specifically, Rivera insists that: "[i]f that promissory note indeed
exists, it is beyond logic for a money lender to extend another loan
on May 4, 1998 secured by a real estate mortgage, when he was
already in default and has not been paying any interest for a loan
incurred in February 1995."20
We disagree.
It is likewise likely that precisely because of the long standing
friendship of the parties as "kumpadres," Rivera was allowed
another loan, albeit this time secured by a real estate mortgage,
which will cover Rivera’s loan should Rivera fail to pay. There is

nothing inconsistent with the Spouses Chua’s two (2) and successive
loan accommodations to Rivera: one, secured by a real estate
mortgage and the other, secured by only a Promissory Note.
Also completely plausible is thatgiven the relationship between the
parties, Rivera was allowed a substantial amount of time before the
Spouses Chua demanded payment of the obligation due under the
Promissory Note.
In all, Rivera’s evidence or lack thereof consisted only of a barefaced
claim of forgery and a discordant defense to assail the authenticity
and validity of the Promissory Note. Although the burden of proof
rested on the Spouses Chua having instituted the civil case and after
they established a prima facie case against Rivera, the burden of
evidence shifted to the latter to establish his defense.21
Consequently, Rivera failed to discharge the burden of evidence,
refute the existence of the Promissory Note duly signed by him and
subsequently, that he did not fail to pay his obligation thereunder.
On the whole, there was no question left on where the respective
evidence of the parties preponderated—in favor of plaintiffs, the
Spouses Chua. Rivera next argues that even assuming the validity of
the Promissory Note, demand was still necessary in order to charge
him liable thereunder. Rivera argues that it was grave error on the
part of the appellate court to apply Section 70 of the Negotiable
Instruments Law (NIL).22
We agree that the subject promissory note is not a negotiable
instrument and the provisions of the NIL do not apply to this case.
Section 1 of the NIL requires the concurrence of the following
elements to be a negotiable instrument:
(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.
On the other hand, Section 184 of the NIL defines what negotiable
promissory note is: SECTION 184. Promissory Note, Defined. – A
negotiable promissory note within the meaning of this Act is an
unconditional promise in writing made by one person to another,
signed by the maker, engaging to pay on demand, or at a fixed or
determinable future time, a sum certain in money to order or to
bearer. Where a note is drawn to the maker’s own order, it is not
complete until indorsed by him.
The Promissory Note in this case is made out to specific persons,
herein respondents, the Spouses Chua, and not to order or to
bearer, or to the order of the Spouses Chua as payees. However,
even if Rivera’s Promissory Note is not a negotiable instrument and
therefore outside the coverage of Section 70 of the NIL which
10
provides that presentment for payment is not necessary to charge
the person liable on the instrument, Rivera is still liable under the
terms of the Promissory Note that he issued.
The Promissory Note is unequivocal about the date when the
obligation falls due and becomes demandable—31 December 1995.
As of 1 January 1996, Rivera had already incurred in delay when he
failed to pay the amount of P120,000.00 due to the Spouses Chua on
31 December 1995 under the Promissory Note.
Article 1169 of the Civil Code explicitly provides:
Art. 1169. Those obliged to deliver or to do something incur in delay
from the time the obligee judicially or extrajudicially demands from
them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order
that delay may exist:
(1) When the obligation or the law expressly so declare; or
(2) When from the nature and the circumstances of the
obligation it appears that the designation of the time
when the thing is to be delivered or the service is to be
rendered was a controlling motive for the establishment of
the contract; or
(3) When demand would be useless, as when the obligor
has rendered it beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the other
does not comply or is not ready to comply in a proper manner with
what is incumbent upon him. From the moment one of the parties
fulfills his obligation, delay by the other begins. (Emphasis supplied)
There are four instances when demand is not necessary to
constitute the debtor in default: (1) when there is an express
stipulation to that effect; (2) where the law so provides; (3) when
the period is the controlling motive or the principal inducement for
the creation of the obligation; and (4) where demand would be
useless. In the first two paragraphs, it is not sufficient that the law or
obligation fixes a date for performance; it must further state
expressly that after the period lapses, default will commence.
We refer to the clause in the Promissory Note containing the
stipulation of interest:
It is agreed and understood that failure on my part to pay the
amount of (P120,000.00) One Hundred Twenty Thousand Pesos on
December 31, 1995. (sic) I agree to pay the sum equivalent to FIVE
PERCENT (5%) interest monthly from the date of default until the
entire obligation is fully paid for.23
which expressly requires the debtor (Rivera) to pay a 5% monthly
interest from the "date of default" until the entire obligation is fully
paid for. The parties evidently agreed that the maturity of the
obligation at a date certain, 31 December 1995, will give rise to the
obligation to pay interest. The Promissory Note expressly provided

that after 31 December 1995, default commences and the
stipulation on payment of interest starts.
The date of default under the Promissory Note is 1 January 1996, the
day following 31 December 1995, the due date of the obligation. On
that date, Rivera became liable for the stipulated interest which the
Promissory Note says is equivalent to 5% a month. In sum, until 31
December 1995, demand was not necessary before Rivera could be
held liable for the principal amount of P120,000.00. Thereafter, on 1
January 1996, upon default, Rivera became liable to pay the Spouses
Chua damages, in the form of stipulated interest.
The liability for damages of those who default, including those who
are guilty of delay, in the performance of their obligations is laid
down on Article 117024 of the Civil Code.
Corollary thereto, Article 2209 solidifies the consequence of
payment of interest as an indemnity for damages when the obligor
incurs in delay:
Art. 2209. If the obligation consists inthe 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. (Emphasis supplied)
Article 2209 is specifically applicable in this instance where: (1) the
obligation is for a sum of money; (2) the debtor, Rivera, incurred in
delay when he failed to pay on or before 31 December 1995; and (3)
the Promissory Note provides for an indemnity for damages upon
default of Rivera which is the payment of a 5%monthly interest from
the date of default.
We do not consider the stipulation on payment of interest in this
case as a penal clause although Rivera, as obligor, assumed to pay
additional 5% monthly interest on the principal amount of
P120,000.00 upon default.
Article 1226 of the Civil Code provides:
Art. 1226. In obligations with a penal clause, the penalty shall
substitute the indemnity for damages and the payment of interests
in case of noncompliance, if there isno stipulation to the contrary.
Nevertheless, damages shall be paid if the obligor refuses to pay the
penalty or is guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in
accordance with the provisions of this Code.
The penal clause is generally undertaken to insure performance and
works as either, or both, punishment and reparation. It is an
exception to the general rules on recovery of losses and damages. As
an exception to the general rule, a penal clause must be specifically
set forth in the obligation.25
In high relief, the stipulation in the Promissory Note is designated as
payment of interest, not as a penal clause, and is simply an
indemnity for damages incurred by the Spouses Chua because
Rivera defaulted in the payment of the amount of P120,000.00. The
measure of damages for the Rivera’s delay is limited to the interest
11
stipulated in the Promissory Note. In apt instances, in default of
stipulation, the interest is that provided by law.26
In this instance, the parties stipulated that in case of default, Rivera
will pay interest at the rate of 5% a month or 60% per annum. On
this score, the appellate court ruled:
It bears emphasizing that the undertaking based on the note clearly
states the date of payment tobe 31 December 1995. Given this
circumstance, demand by the creditor isno longer necessary in order
that delay may exist since the contract itself already expressly so
declares. The mere failure of [Spouses Chua] to immediately
demand or collect payment of the value of the note does not
exonerate [Rivera] from his liability therefrom. Verily, the trial court
committed no reversible error when it imposed interest from 1
January 1996 on the ratiocination that [Spouses Chua] were relieved
from making demand under Article 1169 of the Civil Code.
As observed by [Rivera], the stipulated interest of 5% per month or
60% per annum in addition to legal interests and attorney’s fees is,
indeed, highly iniquitous and unreasonable. Stipulated interest rates
are illegal if they are unconscionable and the Court is allowed to
temper interest rates when necessary. Since the interest rate agreed
upon is void, the parties are considered to have no stipulation
regarding the interest rate, thus, the rate of interest should be 12%
per annum computed from the date of judicial or extrajudicial
demand.27
The appellate court found the 5% a month or 60% per annum
interest rate, on top of the legal interest and attorney’s fees, steep,
tantamount to it being illegal, iniquitous and unconscionable.
Significantly, the issue on payment of interest has been squarely
disposed of in G.R. No. 184472 denying the petition of the Spouses
Chua for failure to sufficiently showany reversible error in the ruling
of the appellate court, specifically the reduction of the interest rate
imposed on Rivera’s indebtedness under the Promissory Note.
Ultimately, the denial of the petition in G.R. No. 184472 is res
judicata in its concept of "bar by prior judgment" on whether the
Court of Appeals correctly reduced the interest rate stipulated in the
Promissory Note.
Res judicata applies in the concept of "bar by prior judgment" if the
following requisites concur: (1) the former judgment or order must
be final; (2) the judgment or order must be on the merits; (3) the
decision must have been rendered by a court having jurisdiction
over the subject matter and the parties; and (4) there must be,
between the first and the second action, identity of parties, of
subject matter and of causes of action.28
In this case, the petitions in G.R. Nos. 184458 and 184472 involve an
identity of parties and subject matter raising specifically errors in the
Decision of the Court of Appeals. Where the Court of Appeals’
disposition on the propriety of the reduction of the interest rate was
raised by the Spouses Chua in G.R. No. 184472, our ruling thereon
affirming the Court of Appeals is a "bar by prior judgment."
At the time interest accrued from 1 January 1996, the date of
default under the Promissory Note, the then prevailing rate of legal
interest was 12% per annum under Central Bank (CB) Circular No.
416 in cases involving the loan or for bearance of money.29 Thus, the
legal interest accruing from the Promissory Note is 12% per annum

from the date of default on 1 January 1996. However, the 12% per
annumrate of legal interest is only applicable until 30 June 2013,
before the advent and effectivity of Bangko Sentral ng Pilipinas (BSP)
Circular No. 799, Series of 2013 reducing the rate of legal interest to
6% per annum. Pursuant to our ruling in Nacar v. Gallery Frames,30
BSP Circular No. 799 is prospectively applied from 1 July 2013. In
short, the applicable rate of legal interest from 1 January 1996, the
date when Rivera defaulted, to date when this Decision becomes
final and executor is divided into two periods reflecting two rates of
legal interest: (1) 12% per annum from 1 January 1996 to 30 June
2013; and (2) 6% per annum FROM 1 July 2013 to date when this
Decision becomes final and executory.
As for the legal interest accruing from 11 June 1999, when judicial
demand was made, to the date when this Decision becomes final
and executory, such is likewise divided into two periods: (1) 12% per
annum from 11 June 1999, the date of judicial demand to 30 June
2013; and (2) 6% per annum from 1 July 2013 to date when this
Decision becomes final and executor.31 We base this imposition of
interest on interest due earning legal interest on Article 2212 of the
Civil Code which provides that "interest due shall earn legal interest
from the time it is judicially demanded, although the obligation may
be silent on this point."
From the time of judicial demand, 11 June 1999, the actual amount
owed by Rivera to the Spouses Chua could already be determined
with reasonable certainty given the wording of the Promissory
Note.32
We cite our recent ruling in Nacar v. Gallery Frames:33
I. When an obligation, regardless of its source, i.e., law, contracts,
quasicontracts, delicts or quasi-delicts is breached, the contravenor
can be held liable for damages. The provisions under Title XVIII on
"Damages" of the Civil Code govern in determining the measure of
recoverable damages.
II. With regard particularly to an award of interest in the concept of
actual and compensatory damages, the rate of interest, as well as
the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or for bearance of
money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of
interest shall be 6% per annum to be computed from
default, i.e., from judicial or extra judicial demand under
and subject to the provisions ofArticle 1169 of the Civil
Code.
2. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the
discretion of the court at the rate of 6% per
annum.1âwphi1 No interest, however, shall be adjudged
on unliquidated claims or damages, except when or until
the demand can be established with reasonable certainty.
Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from
12
the time the claim is made judicially or extrajudicially (Art.
1169, Civil Code), but when such certainty cannot be so
reasonably established at the time the demand is made,
the interest shall begin to run only from the date the
judgment of the court is made (at which time the
quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the
amount finally adjudged. 3. When the judgment of the
court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls
under paragraph 1 or paragraph 2, above, shall be 6% per
annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a for
bearance of credit. And, in addition to the above,
judgments that have become final and executory prior to
July 1, 2013, shall not be disturbed and shall continue to
be implemented applying the rate of interest fixed therein.
(Emphasis supplied)
On the reinstatement of the award of attorney’s fees based on the
stipulation in the Promissory Note, weagree with the reduction
thereof but not the ratiocination of the appellate court that the
attorney’s fees are in the nature of liquidated damages or penalty.
The interest imposed in the Promissory Note already answers as
liquidated damages for Rivera’s default in paying his obligation. We
award attorney’s fees, albeit in a reduced amount, in recognition
that the Spouses Chua were compelled to litigate and incurred
expenses to protect their interests.34 Thus, the award of P50,000.00
as attorney’s fees is proper.
For clarity and to obviate confusion, we chart the breakdown of the
total amount owed by Rivera to the Spouses Chua:
The total amount owing to the Spouses Chua set forth in this
Decision shall further earn legal interest at the rate of 6% per annum
computed from its finality until full payment thereof, the interim
period being deemed to be a forbearance of credit.
WHEREFORE, the petition in G.R. No. 184458 is DENIED. The
Decision of the Court of Appeals in CA-G.R. SP No. 90609 is
MODIFIED. Petitioner Rodrigo Rivera is ordered to pay respondents
Spouse Salvador and Violeta Chua the following:
(1) the principal amount of P120,000.00;
(2) legal interest of 12% per annumof the principal amount of
P120,000.00 reckoned from 1 January 1996 until 30 June 2013;
(3) legal interest of 6% per annumof the principal amount of
P120,000.00 form 1 July 2013 to date when this Decision becomes
final and executory;
(4) 12% per annumapplied to the total of paragraphs 2 and 3 from
11 June 1999, date of judicial demand, to 30 June 2013, as interest
due earning legal interest;
(5) 6% per annumapplied to the total amount of paragraphs 2 and 3
from 1 July 2013 to date when this Decision becomes final and
executor, asinterest due earning legal interest;
 13

(6) Attorney’s fees in the amount of P50,000.00; and

(7) 6% per annum interest on the total of the monetary awards from
the finality of this Decision until full payment thereof.

Costs against petitioner Rodrigo Rivera.

SO ORDERED.

SECOND DIVISION
G.R. No. 158262 July 21, 2008
SPS. PEDRO AND FLORENCIA VIOLAGO, Petitioners,
vs.
BA FINANCE CORPORATION and AVELINO VIOLAGO, Respondents.
DECISION
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
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
14
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 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, 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.1awphil
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;
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 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
15
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:
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:
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:
209,601.00 Makati, Metro Manila, Philippines, August 4, 1983
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 to be paid on 9-16-83, and the succeeding monthly
installments on the 16th day of 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.
Notice of demand, presentment, dishonor and protest are hereby
waived.
(Sgd.)
PEDRO F. VIOLAGO
763 Constancia St., Sampaloc, Manila
(Address)
(Sgd.)
Marivic Avaria
(WITNESS)
PAY TO THE ORDER OF BA FINANCE CORPORATION
WITHOUT RECOURSE
VIOLAGO MOTOR SALES CORPORATION
16
By: (Sgd.)
AVELINO A. VIOLAGO, Pres. 15
The promissory note clearly satisfies the requirements of a
negotiable instrument under the NIL. It is in writing; signed by the
Violago spouses; has an unconditional promise to pay a certain
amount, i.e., PhP 209,601, on specific dates in the future which
could be determined from the terms of the note; made payable to
the order of 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 course. The resolution of this issue will determine
whether petitioners’ defense of fraud and nullity of the sale could
validly be raised against respondent corporation. Sec. 52 of the NIL
provides:
Section 52. What constitutes a holder in due course.––A holder in
due course is a holder who has taken the instrument under the
following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue,
and without notice that it had been previously dishonored,
if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no
notice of any infirmity in the instrument or defect in the
title of the person negotiating it.
The law presumes that a holder of a negotiable instrument is a
holder thereof in due course. 16 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
(Sgd.)informed, before and at the time the
"Promissory
FLORENCIA R.was
Note" endorsed to the Appellee, that the vehicle
VIOLAGO
sold to the Defendants-Appellants was not delivered to the latter
and that VMSC hadsamealready previously sold the vehicle to Esmeraldo
Violago. Although Jose Olvido mortgaged the vehicle to Generoso
(Address)
Lopez, who assigned his rights to the BA Finance Corporation (Cebu
Branch), the same(Sgd.)
occurred only on May 8, 1987, much later than
Jesuswhen
August 4, 1983, TuazonVMSC assigned its rights over the "Chattel
Mortgage" by the Defendants-Appellants to the Appellee. Hence,
Appellee was(WITNESS)
a holder in due course.17
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.18 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.19 Since BA
Finance is a holder in due course, petitioners cannot raise the
 17

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.21
Thus, 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.
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
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
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.

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
 18

SECOND DIVISION Immediately thereafter, the seller-assignor delivered said two (2)
units of "Used" tractors to the petitioner-corporation's job site and
G.R. No. 72593 April 30, 1987 as agreed, the seller-assignor stationed its own mechanics to
supervise the operations of the machines.
CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and
RODOLFO T. VERGARA, petitioners, Barely fourteen (14) days had elapsed after their delivery when one
vs. of the tractors broke down and after another nine (9) days, the
IFC LEASING AND ACCEPTANCE CORPORATION, respondent. other tractor likewise broke down (t.s.n., May 28, 1980, pp. 68-69).

GUTIERREZ, JR., J.: 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
This is a petition for certiorari under Rule 45 of the Rules of Court
warranty (E exh. " 5 ").
which assails on questions of law a decision of the Intermediate
Appellate Court in AC-G.R. CV No. 68609 dated July 17, 1985, as well
as its resolution dated October 17, 1985, denying the motion for In response to the formal advice by petitioner Rodolfo T. Vergara,
reconsideration. Exhibit "5," the seller-assignor sent to the job site its mechanics to
conduct the necessary repairs (Exhs. "6," "6-A," "6-B," 16 C," "16-C-
1," "6-D," and "6-E"), but the tractors did not come out to be what
The antecedent facts culled from the petition are as follows:
they should be after the repairs were undertaken because the units
were no longer serviceable (t. s. n., May 28, 1980, p. 78).
The petitioner is a corporation engaged in the logging business. It
had for its program of logging activities for the year 1978 the
Because of the breaking down of the tractors, the road building and
opening of additional roads, and simultaneous logging operations
simultaneous logging operations of petitioner-corporation were
along the route of said roads, in its logging concession area at
delayed and petitioner Vergara advised the seller-assignor that the
Baganga, Manay, and Caraga, Davao Oriental. For this purpose, it
payments of the installments as listed in the promissory note would
needed two (2) additional units of tractors.
likewise be delayed until the seller-assignor completely fulfills its
obligation under its warranty (t.s.n, May 28, 1980, p. 79).
Cognizant of petitioner-corporation's need and purpose, Atlantic
Gulf & Pacific Company of Manila, through its sister company and
Since the tractors were no longer serviceable, on April 7, 1979,
marketing arm, Industrial Products Marketing (the "seller-assignor"),
petitioner Wee asked the seller-assignor to pull out the units and
a corporation dealing in tractors and other heavy equipment
have them reconditioned, and thereafter to offer them for sale. The
business, offered to sell to petitioner-corporation two (2) "Used"
proceeds were to be given to the respondent and the excess, if any,
Allis Crawler Tractors, one (1) an HDD-21-B and the other an HDD-
to be divided between the seller-assignor and petitioner-corporation
16-B.
which offered to bear one-half (1/2) of the reconditioning cost (E
exh. " 7 ").
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
No response to this letter, Exhibit "7," was received by the
capability of the "Used" tractors being offered, petitioner-
petitioner-corporation and despite several follow-up calls, the seller-
corporation requested the seller-assignor to inspect the job site.
assignor did nothing with regard to the request, until the complaint
After conducting said inspection, the seller-assignor assured
in this case was filed by the respondent against the petitioners, the
petitioner-corporation that the "Used" Allis Crawler Tractors which
corporation, Wee, and Vergara.
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). 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
With said assurance and warranty, and relying on the seller-
(P1,093,789.71), accrued interest of One Hundred Fifty One
assignor's skill and judgment, petitioner-corporation through
Thousand Six Hundred Eighteen Pesos & 86/100 (P151,618.86) as of
petitioners Wee and Vergara, president and vice- president,
August 15, 1979, accruing interest thereafter at the rate of twelve
respectively, agreed to purchase on installment said two (2) units of
(12%) percent per annum, attorney's fees of Two Hundred Forty
"Used" Allis Crawler Tractors. It also paid the down payment of Two
Nine Thousand Eighty One Pesos & 71/100 (P249,081.7 1) and costs
Hundred Ten Thousand Pesos (P210,000.00).
of suit.

On April 5, 1978, the seller-assignor issued the sales invoice for the
The petitioners filed their amended answer praying for the dismissal
two 2) units of tractors (Exh. "3-A"). At the same time, the deed of
of the complaint and asking the trial court to order the respondent
sale with chattel mortgage with promissory note was executed (Exh.
to pay the petitioners damages in an amount at the sound discretion
"2").
of the court, Twenty Thousand Pesos (P20,000.00) as and for
attorney's fees, and Five Thousand Pesos (P5,000.00) for expenses
Simultaneously with the execution of the deed of sale with chattel of litigation. The petitioners likewise prayed for such other and
mortgage with promissory note, the seller-assignor, by means of a further relief as would be just under the premises.
deed of assignment (E exh. " 1 "), assigned its rights and interest in
the chattel mortgage in favor of the respondent.

In a decision dated April 20, 1981, the trial court rendered the
following judgment:
WHEREFORE, judgment is hereby rendered:
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. 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
for reconsideration filed by the petitioners.
Thus, the petitioners appealed to the Intermediate Appellate Court
and assigned therein the following errors:
I and Acceptance Corporation held the instrument free from any
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 trial court.
The pertinent portions of the decision are as follows:
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 plaintiff-
appellant herein upon application by appellant
corporation granted financing for the purchase of the
questioned units of Fiat-Allis Crawler,Tractors.
19
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 plaintiff-appellee 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 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
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. 50-55, 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 NON-
NEGOTIABLE INSTRUMENT AND THE TRANSFER OF
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.
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- formal.
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
20
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 are acquired, and it
appears that the buyer relies on the sellers skill or judge judgment
(whether he be the grower or manufacturer or not), there is an
implied warranty that the goods shall be reasonably fit for such
purpose;
ART. 1564. An implied warranty or condition as to the quality or
fitness for a particular purpose may be annexed by the usage of
trade.
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. (Emphasis 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 for 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.

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. (Emphasis 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
adjudgement 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). (Emphasis
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 follows:
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 (P
1,093,789.71), 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. ...
Considering that paragraph (d), Section 1 of the Negotiable
Instruments Law requires that a promissory note "must be 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 negotiablility-i.e. must
contain the so-called 'words of negotiable, 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. ...
When instrument is payable to order.
21
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. . . .
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). (Emphasis 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 seller-assignor Industrial
Products Marketing.
This being so, there was no need for the petitioner to implied the
seller-assignor when it was sued by the respondent-assignee
because the petitioner's defenses apply to both or either of either of
them. 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 Marketing, and the
respondent whereby the latter would pay the seller-assignor the
entire purchase price and the seller-assignor, 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 seller-assignor 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:
negotiating it.
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:
(c) That he took it in good faith and for value
22
(d) That the time it was negotiated by him he had no
notice of any infirmity in the instrument of deffect in the
title of the person negotiating it
SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. — 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.
(Emphasis supplied)
We subscribe to the view of Campos and Campos that a financing
company is not a holder in good faith as to the buyer, to wit:
In installment sales, the buyer usually issues a note
payable to the seller to cover the purchase price. Many
times, in pursuance of a previous arrangement with the
seller, a finance company pays the full price and the note
is indorsed to it, subrogating it to the right to collect the
price from the buyer, with interest. With the increasing
frequency of installment buying in this country, it is most
probable that the tendency of the courts in the United
States to protect the buyer against the finance company
will , the finance company will be subject to the defense of
failure of consideration and cannot recover the purchase
price from the buyer. As against the argument that such a
rule would seriously affect "a certain mode of transacting
business adopted throughout the State," a court in one
case stated:
It may be that our holding here will require some changes
in business methods and will impose a greater burden on
the finance companies. We think the buyer-Mr. & Mrs.
General Public-should have some protection somewhere
along the line. We believe the finance company is better
able to bear the risk of the dealer's insolvency than the
buyer and in a far better position to protect his interests
against unscrupulous and insolvent dealers. . . .
If this opinion imposes great burdens on finance
companies it is a potent argument in favor of a rule which
win 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
 23

promissory note involved in this case are subject to all defenses that
the petitioners have against the seller-assignor, Industrial Products
Marketing. For Section 58 of the Negotiable Instruments Law
provides that "in the hands of any holder other than a holder in due
course, a negotiable instrument is subject to the same defenses as if
it were non-negotiable. ... "

Prescinding from the foregoing and setting aside other peripheral

issues, we find that both the trial and respondent appellate court
erred in holding the promissory note in question to be negotiable.
Such a ruling does not only violate the law and applicable
jurisprudence, but would result in unjust enrichment on the part of
both the assigner- assignor and respondent assignee at the expense
of the petitioner-corporation which rightfully rescinded an
inequitable contract. We note, however, that since the seller-
assignor has not been impleaded herein, there is no obstacle for the
respondent to file a civil Suit and litigate its claims against the seller-
assignor in the rather unlikely possibility that it so desires,

WHEREFORE, in view of the foregoing, the decision of the

respondent appellate court dated July 17, 1985, as well as its
resolution dated October 17, 1986, are hereby ANNULLED and SET
ASIDE. The complaint against the petitioner before the trial court is
DISMISSED.

SO ORDERED.

FIRST DIVISION
G.R. No. 154127 December 8, 2003
ROMEO C. GARCIA, petitioner,
vs.
DIONISIO V. LLAMAS, respondent.
DECISION
PANGANIBAN, J.:
Novation cannot be presumed. It must be clearly shown either by
the express assent of the parties or by the complete incompatibility
between the old and the new agreements. Petitioner herein fails to
show either requirement convincingly; hence, the summary
judgment holding him liable as a joint and solidary debtor stands.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of
Court, seeking to nullify the November 26, 2001 Decision2 and the
June 26, 2002 Resolution3 of the Court of Appeals (CA) in CA-GR CV
No. 60521. The appellate court disposed as follows:
"UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment
appealed from, insofar as it pertains to [Petitioner] Romeo Garcia,
must be, as it hereby is, AFFIRMED, subject to the modification that
the award for attorney’s fees and cost of suit is DELETED. The
portion of the judgment that pertains to x x x Eduardo de Jesus is
SET ASIDE and VACATED. Accordingly, the case against x x x Eduardo
de Jesus is REMANDED to the court of origin for purposes of
receiving ex parte [Respondent] Dionisio Llamas’ evidence against x
x x Eduardo de Jesus."4
The challenged Resolution, on the other hand, denied petitioner’s
Motion for Reconsideration.
The Antecedents
The antecedents of the case are narrated by the CA as follows:
"This case started out as a complaint for sum of money and damages
by x x x [Respondent] Dionisio Llamas against x x x [Petitioner]
Romeo Garcia and Eduardo de Jesus. Docketed as Civil Case No.
Q97-32-873, the complaint alleged that on 23 December 1996[,]
[petitioner and de Jesus] borrowed P400,000.00 from [respondent];
that, on the same day, [they] executed a promissory note wherein
they bound themselves jointly and severally to pay the loan on or
before 23 January 1997 with a 5% interest per month; that the loan
has long been overdue and, despite repeated demands, [petitioner
and de Jesus] have failed and refused to pay it; and that, by reason
of the[ir] unjustified refusal, [respondent] was compelled to engage
the services of counsel to whom he agreed to pay 25% of the sum to
be recovered from [petitioner and de Jesus], plus P2,000.00 for
every appearance in court. Annexed to the complaint were the
promissory note above-mentioned and a demand letter, dated 02
May 1997, by [respondent] addressed to [petitioner and de Jesus].
24
"Resisting the complaint, [Petitioner Garcia,] in his [Answer,] averred
that he assumed no liability under the promissory note because he
signed it merely as an accommodation party for x x x de Jesus; and,
alternatively, that he is relieved from any liability arising from the
note inasmuch as the loan had been paid by x x x de Jesus by means
of a check dated 17 April 1997; and that, in any event, the issuance
of the check and [respondent’s] acceptance thereof novated or
superseded the note.
"[Respondent] tendered a reply to [Petitioner] Garcia’s answer,
thereunder asserting that the loan remained unpaid for the reason
that the check issued by x x x de Jesus bounced, and that [Petitioner]
Garcia’s answer was not even accompanied by a certificate of non-
forum shopping. Annexed to the reply were the face of the check
and the reverse side thereof.
"For his part, x x x de Jesus asserted in his [A]nswer with
[C]ounterclaim that out of the supposed P400,000.00 loan, he
received only P360,000.00, the P40,000.00 having been advance
interest thereon for two months, that is, for January and February
1997; that[,] in fact[,] he paid the sum of P120,000.00 by way of
interests; that this was made when [respondent’s] daughter, one
Nits Llamas-Quijencio, received from the Central Police District
Command at Bicutan, Taguig, Metro Manila (where x x x de Jesus
worked), the sum of P40,000.00, representing the peso equivalent of
his accumulated leave credits, another P40,000.00 as advance
interest, and still another P40,000.00 as interest for the months of
March and April 1997; that he had difficulty in paying the loan and
had asked [respondent] for an extension of time; that [respondent]
acted in bad faith in instituting the case, [respondent] having agreed
to accept the benefits he (de Jesus) would receive for his retirement,
but [respondent] nonetheless filed the instant case while his
retirement was being processed; and that, in defense of his rights,
he agreed to pay his counsel P20,000.00 [as] attorney’s fees, plus
P1,000.00 for every court appearance.
"During the pre-trial conference, x x x de Jesus and his lawyer did
not appear, nor did they file any pre-trial brief. Neither did
[Petitioner] Garcia file a pre-trial brief, and his counsel even
manifested that he would no [longer] present evidence. Given this
development, the trial court gave [respondent] permission to
present his evidence ex parte against x x x de Jesus; and, as regards
[Petitioner] Garcia, the trial court directed [respondent] to file a
motion for judgment on the pleadings, and for [Petitioner] Garcia to
file his comment or opposition thereto.
"Instead, [respondent] filed a [M]otion to declare [Petitioner] Garcia
in default and to allow him to present his evidence ex parte.
Meanwhile, [Petitioner] Garcia filed a [M]anifestation submitting his
defense to a judgment on the pleadings. Subsequently, [respondent]
filed a [M]anifestation/[M]otion to submit the case for judgement
on the pleadings, withdrawing in the process his previous motion.
Thereunder, he asserted that [petitioner’s and de Jesus’] solidary
liability under the promissory note cannot be any clearer, and that
the check issued by de Jesus did not discharge the loan since the
check bounced."5
On July 7, 1998, the Regional Trial Court (RTC) of Quezon City
(Branch 222) disposed of the case as follows:

"WHEREFORE, premises considered, judgment on the pleadings is
hereby rendered in favor of [respondent] and against [petitioner and
De Jesus], who are hereby ordered to pay, jointly and severally, the
[respondent] the following sums, to wit:
1) P400,000.00 representing the principal amount plus 5% interest
thereon per month from January 23, 1997 until the same shall have
been fully paid, less the amount of P120,000.00 representing
interests already paid by x x x de Jesus;
2) P100,000.00 as attorney’s fees plus appearance fee of P2,000.00
for each day of [c]ourt appearance, and;
3) Cost of this suit.’"6
Ruling of the Court of Appeals
The CA ruled that the trial court had erred when it rendered a
judgment on the pleadings against De Jesus. According to the
appellate court, his Answer raised genuinely contentious issues.
Moreover, he was still required to present his evidence ex parte.
Thus, respondent was not ipso facto entitled to the RTC judgment,
even though De Jesus had been declared in default. The case against
the latter was therefore remanded by the CA to the trial court for
the ex parte reception of the former’s evidence.
As to petitioner, the CA treated his case as a summary judgment,
because his Answer had failed to raise even a single genuine issue
regarding any material fact.
The appellate court ruled that no novation -- express or implied --
had taken place when respondent accepted the check from De
Jesus. According to the CA, the check was issued precisely to pay for
the loan that was covered by the promissory note jointly and
severally undertaken by petitioner and De Jesus. Respondent’s
acceptance of the check did not serve to make De Jesus the sole
debtor because, first, the obligation incurred by him and petitioner
was joint and several; and, second, the check -- which had been
intended to extinguish the obligation -- bounced upon its
presentment.
Hence, this Petition.7
Issues
Petitioner submits the following issues for our consideration:
"I
Whether or not the Honorable Court of Appeals gravely erred in not
holding that novation applies in the instant case as x x x Eduardo de
Jesus had expressly assumed sole and exclusive liability for the loan
obligation he obtained from x x x Respondent Dionisio Llamas, as
clearly evidenced by:
a) Issuance by x x x de Jesus of a check in payment of the full amount
of the loan of P400,000.00 in favor of Respondent Llamas, although
the check subsequently bounced[;]
25
b) Acceptance of the check by the x x x respondent x x x which
resulted in [the] substitution by x x x de Jesus or [the superseding of]
the promissory note;
c) x x x de Jesus having paid interests on the loan in the total amount
of P120,000.00;
d) The fact that Respondent Llamas agreed to the proposal of x x x
de Jesus that due to financial difficulties, he be given an extension of
time to pay his loan obligation and that his retirement benefits from
the Philippine National Police will answer for said obligation.
"II
Whether or not the Honorable Court of Appeals seriously erred in
not holding that the defense of petitioner that he was merely an
accommodation party, despite the fact that the promissory note
provided for a joint and solidary liability, should have been given
weight and credence considering that subsequent events showed
that the principal obligor was in truth and in fact x x x de Jesus, as
evidenced by the foregoing circumstances showing his assumption
of sole liability over the loan obligation.
"III
Whether or not judgment on the pleadings or summary judgment
was properly availed of by Respondent Llamas, despite the fact that
there are genuine issues of fact, which the Honorable Court of
Appeals itself admitted in its Decision, which call for the
presentation of evidence in a full-blown trial."8
Simply put, the issues are the following: 1) whether there was
novation of the obligation; 2) whether the defense that petitioner
was only an accommodation party had any basis; and 3) whether the
judgment against him -- be it a judgment on the pleadings or a
summary judgment -- was proper.
The Court’s Ruling
The Petition has no merit.
First Issue:
Novation
Petitioner seeks to extricate himself from his obligation as joint and
solidary debtor by insisting that novation took place, either through
the substitution of De Jesus as sole debtor or the replacement of the
promissory note by the check. Alternatively, the former argues that
the original obligation was extinguished when the latter, who was
his co-obligor, "paid" the loan with the check.
The fallacy of the second (alternative) argument is all too apparent.
The check could not have extinguished the obligation, because it
bounced upon presentment. By law,9 the delivery of a check
produces the effect of payment only when it is encashed.
We now come to the main issue of whether novation took place.

Novation is a mode of extinguishing an obligation by changing its
objects or principal obligations, by substituting a new debtor in place
of the old one, or by subrogating a third person to the rights of the
creditor.10 Article 1293 of the Civil Code defines novation as follows:
"Art. 1293. Novation which consists in substituting a new debtor in
the place of the original one, may be made even without the
knowledge or against the will of the latter, but not without the
consent of the creditor. Payment by the new debtor gives him rights
mentioned in articles 1236 and 1237."
In general, there are two modes of substituting the person of the
debtor: (1) expromision and (2) delegacion. In expromision, the
initiative for the change does not come from -- and may even be
made without the knowledge of -- the debtor, since it consists of a
third person’s assumption of the obligation. As such, it logically
requires the consent of the third person and the creditor. In
delegacion, the debtor offers, and the creditor accepts, a third
person who consents to the substitution and assumes the
obligation; thus, the consent of these three persons are necessary.11
Both modes of substitution by the debtor require the consent of the
creditor.12
Novation may also be extinctive or modificatory. It is extinctive
when an old obligation is terminated by the creation of a new one
that takes the place of the former. It is merely modificatory when
the old obligation subsists to the extent that it remains compatible
with the amendatory agreement.13 Whether extinctive or
modificatory, novation is made either by changing the object or the
principal conditions, referred to as objective or real novation; or by
substituting the person of the debtor or subrogating a third person
to the rights of the creditor, an act known as subjective or personal
novation.14 For novation to take place, the following requisites must
concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.15
Novation may also be express or implied. It is express when the new
obligation declares in unequivocal terms that the old obligation is
extinguished. It is implied when the new obligation is incompatible
with the old one on every point.16 The test of incompatibility is
whether the two obligations can stand together, each one with its
own independent existence.17
Applying the foregoing to the instant case, we hold that no novation
took place.
The parties did not unequivocally declare that the old obligation had
been extinguished by the issuance and the acceptance of the check,
or that the check would take the place of the note. There is no
incompatibility between the promissory note and the check. As the
CA correctly observed, the check had been issued precisely to
answer for the obligation. On the one hand, the note evidences the
26
loan obligation; and on the other, the check answers for it. Verily,
the two can stand together.
Neither could the payment of interests -- which, in petitioner’s view,
also constitutes novation18 -- change the terms and conditions of the
obligation. Such payment was already provided for in the promissory
note and, like the check, was totally in accord with the terms
thereof.
Also unmeritorious is petitioner’s argument that the obligation was
novated by the substitution of debtors. In order to change the
person of the debtor, the old one must be expressly released from
the obligation, and the third person or new debtor must assume the
former’s place in the relation.19 Well-settled is the rule that novation
is never presumed.20 Consequently, that which arises from a
purported change in the person of the debtor must be clear and
express.21 It is thus incumbent on petitioner to show clearly and
unequivocally that novation has indeed taken place.
In the present case, petitioner has not shown that he was expressly
released from the obligation, that a third person was substituted in
his place, or that the joint and solidary obligation was cancelled and
substituted by the solitary undertaking of De Jesus. The CA aptly
held:
"x x x. Plaintiff’s acceptance of the bum check did not result in
substitution by de Jesus either, the nature of the obligation being
solidary due to the fact that the promissory note expressly declared
that the liability of appellants thereunder is joint and [solidary.]
Reason: under the law, a creditor may demand payment or
performance from one of the solidary debtors or some or all of them
simultaneously, and payment made by one of them extinguishes the
obligation. It therefore follows that in case the creditor fails to
collect from one of the solidary debtors, he may still proceed against
the other or others. x x x "22
Moreover, it must be noted that for novation to be valid and legal,
the law requires that the creditor expressly consent to the
substitution of a new debtor.23 Since novation implies a waiver of
the right the creditor had before the novation, such waiver must be
express.24 It cannot be supposed, without clear proof, that the
present respondent has done away with his right to exact fulfillment
from either of the solidary debtors.25
More important, De Jesus was not a third person to the obligation.
From the beginning, he was a joint and solidary obligor of the
P400,000 loan; thus, he can be released from it only upon its
extinguishment. Respondent’s acceptance of his check did not
change the person of the debtor, because a joint and solidary
obligor is required to pay the entirety of the obligation.
It must be noted that in a solidary obligation, the creditor is entitled
to demand the satisfaction of the whole obligation from any or all of
the debtors.26 It is up to the former to determine against whom to
enforce collection.27 Having made himself jointly and severally liable
with De Jesus, petitioner is therefore liable28 for the entire
obligation.29
Second Issue:

Accommodation Party
Petitioner avers that he signed the promissory note merely as an
accommodation party; and that, as such, he was released as obligor
when respondent agreed to extend the term of the obligation.
This reasoning is misplaced, because the note herein is not a
negotiable instrument. The note reads:
"PROMISSORY NOTE
"P400,000.00
"RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of FOUR
HUNDRED THOUSAND PESOS, Philippine Currency payable on or
before January 23, 1997 at No. 144 K-10 St. Kamias, Quezon City,
with interest at the rate of 5% per month or fraction thereof.
"It is understood that our liability under this loan is jointly and
severally [sic].
"Done at Quezon City, Metro Manila this 23rd day of December,
1996."30
By its terms, the note was made payable to a specific person rather
than to bearer or to order31 -- a requisite for negotiability under Act
2031, the Negotiable Instruments Law (NIL). Hence, petitioner
cannot avail himself of the NIL’s provisions on the liabilities and
defenses of an accommodation party. Besides, a non-negotiable
note is merely a simple contract in writing and is evidence of such
intangible rights as may have been created by the assent of the
parties.32 The promissory note is thus covered by the general
provisions of the Civil Code, not by the NIL.
Even granting arguendo that the NIL was applicable, still, petitioner
would be liable for the promissory note. Under Article 29 of Act
2031, an accommodation party is liable for the instrument to a
holder for value even if, at the time of its taking, the latter knew the
former to be only an accommodation party. The relation between an
accommodation party and the party accommodated is, in effect, one
of principal and surety -- the accommodation party being the
surety.33 It is a settled rule that a surety is bound equally and
absolutely with the principal and is deemed an original promissor
and debtor from the beginning. The liability is immediate and
direct.34
Third Issue:
Propriety of Summary Judgment
or Judgment on the Pleadings
The next issue illustrates the usual confusion between a judgment
on the pleadings and a summary judgment. Under Section 3 of Rule
35 of the Rules of Court, a summary judgment may be rendered
after a summary hearing if the pleadings, supporting affidavits,
depositions and admissions on file show that (1) except as to the
amount of damages, there is no genuine issue regarding any
material fact; and (2) the moving party is entitled to a judgment as a
matter of law.
27
A summary judgment is a procedural device designed for the prompt
disposition of actions in which the pleadings raise only a legal, not a
genuine, issue regarding any material fact.35 Consequently, facts are
asserted in the complaint regarding which there is yet no admission,
disavowal or qualification; or specific denials or affirmative defenses
are set forth in the answer, but the issues are fictitious as shown by
the pleadings, depositions or admissions.36 A summary judgment
may be applied for by either a claimant or a defending party.37
On the other hand, under Section 1 of Rule 34 of the Rules of Court,
a judgment on the pleadings is proper when an answer fails to
render an issue or otherwise admits the material allegations of the
adverse party’s pleading. The essential question is whether there are
issues generated by the pleadings.38 A judgment on the pleadings
may be sought only by a claimant, who is the party seeking to
recover upon a claim, counterclaim or cross-claim; or to obtain a
declaratory relief. 39
Apropos thereto, it must be stressed that the trial court’s judgment
against petitioner was correctly treated by the appellate court as a
summary judgment, rather than as a judgment on the pleadings. His
Answer40 apparently raised several issues -- that he signed the
promissory note allegedly as a mere accommodation party, and that
the obligation was extinguished by either payment or novation.
However, these are not factual issues requiring trial. We quote with
approval the CA’s observations:
"Although Garcia’s [A]nswer tendered some issues, by way of
affirmative defenses, the documents submitted by [respondent]
nevertheless clearly showed that the issues so tendered were not
valid issues. Firstly, Garcia’s claim that he was merely an
accommodation party is belied by the promissory note that he
signed. Nothing in the note indicates that he was only an
accommodation party as he claimed to be. Quite the contrary, the
promissory note bears the statement: ‘It is understood that our
liability under this loan is jointly and severally [sic].’ Secondly, his
claim that his co-defendant de Jesus already paid the loan by means
of a check collapses in view of the dishonor thereof as shown at the
dorsal side of said check."41
From the records, it also appears that petitioner himself moved to
submit the case for judgment on the basis of the pleadings and
documents.1âwphi1 In a written Manifestation,42 he stated that
"judgment on the pleadings may now be rendered without further
evidence, considering the allegations and admissions of the
parties."43
In view of the foregoing, the CA correctly considered as a summary
judgment that which the trial court had issued against petitioner.
WHEREFORE, this Petition is hereby DENIED and the assailed
Decision AFFIRMED. Costs against petitioner.
SO ORDERED.

SECOND DIVISION
G.R. No. 113236 March 5, 2001
FIRESTONE TIRE & RUBBER COMPANY OF THE PHILIPPINES,
petitioner,
vs.
COURT OF APPEALS and LUZON DEVELOPMENT BANK,
respondents.
QUISUMBING, J.:
This petition assails the decision 1 dated December 29, 1993 of the
Court of Appeals in CA-G.R. CV No. 29546, which affirmed the
judgment 2 of the Regional Trial Court of Pasay City, Branch 113 in
Civil Case No. PQ-7854-P, dismissing Firestone's complaint for
damages.
The facts of this case, adopted by the CA and based on findings by
the trial court, are as follows:
. . [D]efendant is a banking corporation. It operates under a
certificate of authority issued by the Central Bank of the Philippines,
and among its activities, accepts savings and time deposits. Said
defendant had as one of its client-depositors the Fojas-Arca
Enterprises Company ("Fojas-Arca" for brevity). Fojas-Arca
maintaining a special savings account with the defendant, the latter
authorized and allowed withdrawals of funds therefrom through the
medium of special withdrawal slips. These are supplied by the
defendant to Fojas-Arca.
In January 1978, plaintiff and Fojas-Arca entered into a "Franchised
Dealership Agreement" (Exh. B) whereby Fojas-Arca has the privilege
to purchase on credit and sell plaintiff's products.
On January 14, 1978 up to May 15, 1978. Pursuant to the aforesaid
Agreement, Fojas-Arca purchased on credit Firestone products from
plaintiff with a total amount of P4,896,000.00. In payment of these
purchases, Fojas-Arca delivered to plaintiff six (6) special withdrawal
slips drawn upon the defendant. In turn, these were deposited by
the plaintiff with its current account with the Citibank. All of them
were honored and paid by the defendant. This singular circumstance
made plaintiff believe [sic] and relied [sic] on the fact that the
succeeding special withdrawal slips drawn upon the defendant
would be equally sufficiently funded. Relying on such confidence and
belief and as a direct consequence thereof, plaintiff extended to
Fojas-Arca other purchases on credit of its products.
On the following dates Fojas-Arca purchased Firestone products on
credit (Exh. M, I, J, K) and delivered to plaintiff the corresponding
special withdrawal slips in payment thereof drawn upon the
defendant, to wit:
These were likewise deposited by plaintiff in its current account with
Citibank and in turn the Citibank forwarded it [sic] to the defendant
for payment and collection, as it had done in respect of the previous
special withdrawal slips. Out of these four (4) withdrawal slips only
withdrawal slip No. 42130 in the amount of P981,500.00 was
honored and paid by the defendant in October 1978. Because of the
absence for a long period coupled with the fact that defendant
28
honored and paid withdrawal slips No. 42128 dated July 15, 1978, in
the amount of P981,500.00 plaintiff's belief was all the more
strengthened that the other withdrawal slips were likewise
sufficiently funded, and that it had received full value and payment
of Fojas-Arca's credit purchased then outstanding at the time. On
this basis, plaintiff was induced to continue extending to Fojas-Arca
further purchase on credit of its products as per agreement (Exh.
"B").
However, on December 14, 1978, plaintiff was informed by Citibank
that special withdrawal slips No. 42127 dated June 15, 1978 for
P1,198,092.80 and No. 42129 dated August 15, 1978 for
P880,000.00 were dishonored and not paid for the reason 'NO
ARRANGEMENT.' As a consequence, the Citibank debited plaintiff's
account for the total sum of P2,078,092.80 representing the
aggregate amount of the above-two special withdrawal slips. Under
such situation, plaintiff averred that the pecuniary losses it suffered
is caused by and directly attributable to defendant's gross
negligence.
On September 25, 1979, counsel of plaintiff served a written
demand upon the defendant for the satisfaction of the damages
suffered by it. And due to defendant's refusal to pay plaintiff's claim,
plaintiff has been constrained to file this complaint, thereby
compelling plaintiff to incur litigation expenses and attorney's fees
which amount are recoverable from the defendant.
Controverting the foregoing asseverations of plaintiff, defendant
asserted, inter alia that the transactions mentioned by plaintiff are
that of plaintiff and Fojas-Arca only, [in] which defendant is not
involved; Vehemently, it was denied by defendant that the special
withdrawal slips were honored and treated as if it were checks, the
truth being that when the special withdrawal slips were received by
defendant, it only verified whether or not the signatures therein
were authentic, and whether or not the deposit level in the
passbook concurred with the savings ledger, and whether or not the
deposit is sufficient to cover the withdrawal; if plaintiff treated the
special withdrawal slips paid by Fojas-Arca as checks then plaintiff
has to blame itself for being grossly negligent in treating the
withdrawal slips as check when it is clearly stated therein that the
withdrawal slips are non-negotiable; that defendant is not a privy to
any of the transactions between Fojas-Arca and plaintiff for which
reason defendant is not duty bound to notify nor give notice of
anything to plaintiff. If at first defendant had given notice to plaintiff
it is merely an extension of usual bank courtesy to a prospective
client; that defendant is only dealing with its depositor Fojas-Arca
and not the plaintiff. In summation, defendant categorically stated
that plaintiff has no cause of action against it (pp. 1-3, Dec.; pp. 368-
370, id).3
Petitioner's complaint4 for a sum of money and damages with the
Regional Trial Court of Pasay City, Branch 113, docketed as Civil Case
No. 29546, was dismissed together with the counterclaim of
defendant.
Petitioner appealed the decision to the Court of Appeals. It averred
that respondent Luzon Development Bank was liable for damages
under Article 21765 in relation to Articles 196 and 207 of the Civil
Code. As noted by the CA, petitioner alleged the following tortious
acts on the part of private respondent: 1) the acceptance and
payment of the special withdrawal slips without the presentation of

the depositor's passbook thereby giving the impression that the
withdrawal slips are instruments payable upon presentment; 2)
giving the special withdrawal slips the general appearance of checks;
and 3) the failure of respondent bank to seasonably warn petitioner
that it would not honor two of the four special withdrawal slips.
On December 29, 1993, the Court of Appeals promulgated its
assailed decision. It denied the appeal and affirmed the judgment of
the trial court. According to the appellate court, respondent bank
notified the depositor to present the passbook whenever it received
a collection note from another bank, belying petitioner's claim that
respondent bank was negligent in not requiring a passbook under
the subject transaction. The appellate court also found that the
special withdrawal slips in question were not purposely given the
appearance of checks, contrary to petitioner's assertions, and thus
should not have been mistaken for checks. Lastly, the appellate
court ruled that the respondent bank was under no obligation to
inform petitioner of the dishonor of the special withdrawal slips, for
to do so would have been a violation of the law on the secrecy of
bank deposits.
Hence, the instant petition, alleging the following assignment of
error:
25. The CA grievously erred in holding that the [Luzon Development]
Bank was free from any fault or negligence regarding the dishonor,
or in failing to give fair and timely advice of the dishonor, of the two
intermediate LDB Slips and in failing to award damages to Firestone
pursuant to Article 2176 of the New Civil Code.8
The issue for our consideration is whether or not respondent bank
should be held liable for damages suffered by petitioner, due to its
allegedly belated notice of non-payment of the subject withdrawal
slips.
The initial transaction in this case was between petitioner and Fojas-
Arca, whereby the latter purchased tires from the former with
special withdrawal slips drawn upon Fojas-Arca's special savings
account with respondent bank. Petitioner in turn deposited these
withdrawal slips with Citibank. The latter credited the same to
petitioner's current account, then presented the slips for payment to
respondent bank. It was at this point that the bone of contention
arose.
On December 14, 1978, Citibank informed petitioner that special
withdrawal slips Nos. 42127 and 42129 dated June 15, 1978 and
August 15, 1978, respectively, were refused payment by respondent
bank due to insufficiency of Fojas-Arca's funds on deposit. That
information came about six months from the time Fojas-Arca
purchased tires from petitioner using the subject withdrawal slips.
Citibank then debited the amount of these withdrawal slips from
petitioner's account, causing the alleged pecuniary damage subject
of petitioner's cause of action.
At the outset, we note that petitioner admits that the withdrawal
slips in question were non-negotiable.9 Hence, the rules governing
the giving of immediate notice of dishonor of negotiable
instruments do not apply in this case.10 Petitioner itself concedes
this point.11 Thus, respondent bank was under no obligation to give
immediate notice that it would not make payment on the subject
withdrawal slips. Citibank should have known that withdrawal slips
29
were not negotiable instruments. It could not expect these slips to
be treated as checks by other entities. Payment or notice of
dishonor from respondent bank could not be expected immediately,
in contrast to the situation involving checks.
In the case at bar, it appears that Citibank, with the knowledge that
respondent Luzon Development Bank, had honored and paid the
previous withdrawal slips, automatically credited petitioner's
current account with the amount of the subject withdrawal slips,
then merely waited for the same to be honored and paid by
respondent bank. It presumed that the withdrawal slips were
"good."
It bears stressing that Citibank could not have missed the non-
negotiable nature of the withdrawal slips. The essence of
negotiability which characterizes a negotiable paper as a credit
instrument lies in its freedom to circulate freely as a substitute for
money.12 The withdrawal slips in question lacked this character.
A bank is under obligation to treat the accounts of its depositors
with meticulous care, whether such account consists only of a few
hundred pesos or of millions of pesos.13 The fact that the other
withdrawal slips were honored and paid by respondent bank was no
license for Citibank to presume that subsequent slips would be
honored and paid immediately. By doing so, it failed in its fiduciary
duty to treat the accounts of its clients with the highest degree of
care.14
In the ordinary and usual course of banking operations, current
account deposits are accepted by the bank on the basis of deposit
slips prepared and signed by the depositor, or the latter's agent or
representative, who indicates therein the current account number
to which the deposit is to be credited, the name of the depositor or
current account holder, the date of the deposit, and the amount of
the deposit either in cash or in check.15
The withdrawal slips deposited with petitioner's current account
with Citibank were not checks, as petitioner admits. Citibank was
not bound to accept the withdrawal slips as a valid mode of deposit.
But having erroneously accepted them as such, Citibank — and
petitioner as account-holder — must bear the risks attendant to the
acceptance of these instruments. Petitioner and Citibank could not
now shift the risk and hold private respondent liable for their
admitted mistake.
WHEREFORE, the petition is DENIED and the decision of the Court of
Appeals in CA-G.R. CV No. 29546 is AFFIRMED. Costs against
petitioner. SO ORDERED.

FIRST DIVISION
G.R. No. 157943 September 4, 2013
PEOPLE OF THE PHILIPPINES, PLAINTIFF-APPELLEE,
vs.
GILBERT REYES WAGAS, ACCUSED-APPELLANT.
DECISION
BERSAMIN, J.:
The Bill of Rights guarantees the right of an accused to be presumed
innocent until the contrary is proved. In order to overcome the
presumption of innocence, the Prosecution is required to adduce
against him nothing less than proof beyond reasonable doubt. Such
proof is not only in relation to the elements of the offense, but also
in relation to the identity of the offender. If the Prosecution fails to
discharge its heavy burden, then it is not only the right of the
accused to be freed, it becomes the Court’s constitutional duty to
acquit him.
The Case
Gilbert R. Wagas appeals his conviction for estafa under the decision
rendered on July 11, 2002 by the Regional Trial Court, Branch 58, in
Cebu City (RTC), meting on him the indeterminate penalty of 12
years of prision mayor, as minimum, to 30 years of reclusion
perpetua, as maximum.
Antecedents
Wagas was charged with estafa under the information that reads:
That on or about the 30th day of April, 1997, and for sometime prior
and subsequent thereto, in the City of Cebu, Philippines, and within
the jurisdiction of this Honorable Court, the said accused, with
deliberate intent, with intent to gain and by means of false
pretenses or fraudulent acts executed prior to or simultaneously
with the commission of the fraud, to wit: knowing that he did not
have sufficient funds deposited with the Bank of Philippine Islands,
and without informing Alberto Ligaray of that circumstance, with
intent to defraud the latter, did then and there issue Bank of the
Philippine Islands Check No. 0011003, dated May 08, 1997 in the
amount of P200,000.00, which check was issued in payment of an
obligation, but which check when presented for encashment with
the bank, was dishonored for the reason "drawn against insufficient
funds" and inspite of notice and several demands made upon said
accused to make good said check or replace the same with cash, he
had failed and refused and up to the present time still fails and
refuses to do so, to the damage and prejudice of Alberto Ligaray in
the amount aforestated.
CONTRARY TO LAW.1
After Wagas entered a plea of not guilty,2 the pre-trial was held,
during which the Defense admitted that the check alleged in the
information had been dishonored due to insufficient funds.3 On its
part, the Prosecution made no admission.4
30
At the trial, the Prosecution presented complainant Alberto Ligaray
as its lone witness. Ligaray testified that on April 30, 1997, Wagas
placed an order for 200 bags of rice over the telephone; that he and
his wife would not agree at first to the proposed payment of the
order by postdated check, but because of Wagas’ assurance that he
would not disappoint them and that he had the means to pay them
because he had a lending business and money in the bank, they
relented and accepted the order; that he released the goods to
Wagas on April 30, 1997 and at the same time received Bank of the
Philippine Islands (BPI) Check No. 0011003 for P200,000.00 payable
to cash and postdated May 8, 1997; that he later deposited the
check with Solid Bank, his depository bank, but the check was
dishonored due to insufficiency of funds;5 that he called Wagas
about the matter, and the latter told him that he would pay upon his
return to Cebu; and that despite repeated demands, Wagas did not
pay him.6
On cross-examination, Ligaray admitted that he did not personally
meet Wagas because they transacted through telephone only; that
he released the 200 bags of rice directly to Robert Cañada, the
brother-in-law of Wagas, who signed the delivery receipt upon
receiving the rice.7
After Ligaray testified, the Prosecution formally offered the
following: (a) BPI Check No. 0011003 in the amount of P200,000.00
payable to "cash;" (b) the return slip dated May 13, 1997 issued by
Solid Bank; (c) Ligaray’s affidavit; and (d) the delivery receipt signed
by Cañada. After the RTC admitted the exhibits, the Prosecution
then rested its case.8
In his defense, Wagas himself testified. He admitted having issued
BPI Check No. 0011003 to Cañada, his brother-in-law, not to Ligaray.
He denied having any telephone conversation or any dealings with
Ligaray. He explained that the check was intended as payment for a
portion of Cañada’s property that he wanted to buy, but when the
sale did not push through, he did not anymore fund the check.9
On cross-examination, the Prosecution confronted Wagas with a
letter dated July 3, 1997 apparently signed by him and addressed to
Ligaray’s counsel, wherein he admitted owing Ligaray P200,000.00
for goods received, to wit:
This is to acknowledge receipt of your letter dated June 23, 1997
which is self-explanatory. It is worthy also to discuss with you the
environmental facts of the case for your consideration, to wit:
It is true that I obtained goods from your client worth P200,000.00
and I promised to settle the same last May 10, 1997, but to no avail.
On this point, let me inform you that I sold my real property to a
buyer in Manila, and promised to pay the consideration on the same
date as I promised with your client. Unfortunately, said buyer
likewise failed to make good with such obligation. Hence, I failed to
fulfill my promise resultant thereof. (sic)
Again, I made another promise to settle said obligation on or before
June 15, 1997, but still to no avail attributable to the same reason as
aforementioned. (sic)
To arrest this problem, we decided to source some funds using the
subject property as collateral. This other means is resorted to for the

purpose of settling the herein obligation. And as to its status, said
funds will be rele[a]sed within thirty (30) days from today.
In view of the foregoing, it is my sincere request and promise to
settle said obligation on or before August 15, 1997.
Lastly, I would like to manifest that it is not my intention to shy away
from any financial obligation.
Respectfully yours,
(SGD.)
GILBERT R. WAGAS10
Wagas admitted the letter, but insisted that it was Cañada who had
transacted with Ligaray, and that he had signed the letter only
because his sister and her husband (Cañada) had begged him to
assume the responsibility.11 On redirect examination, Wagas
declared that Cañada, a seafarer, was then out of the country; that
he signed the letter only to accommodate the pleas of his sister and
Cañada, and to avoid jeopardizing Cañada’s application for overseas
employment.12 The Prosecution subsequently offered and the RTC
admitted the letter as rebuttal evidence.13
Decision of the RTC
As stated, the RTC convicted Wagas of estafa on July 11, 2002, viz:
WHEREFORE, premises considered, the Court finds the accused
GUILTY beyond reasonable doubt as charged and he is hereby
sentenced as follows:
To suffer an indeterminate penalty of from twelve (12) years of
pris[i]on mayor, as minimum, to thirty (30) years of reclusion
perpetua as maximum;
To indemnify the complainant, Albert[o] Ligaray in the sum of
P200,000.00;
To pay said complainant the sum of P30,000.00 by way of attorney’s
fees; and the costs of suit.
SO ORDERED.14
The RTC held that the Prosecution had proved beyond reasonable
doubt all the elements constituting the crime of estafa, namely: (a)
that Wagas issued the postdated check as payment for an obligation
contracted at the time the check was issued; (b) that he failed to
deposit an amount sufficient to cover the check despite having been
informed that the check had been dishonored; and (c) that Ligaray
released the goods upon receipt of the postdated check and upon
Wagas’ assurance that the check would be funded on its date.
Wagas filed a motion for new trial and/or reconsideration,15 arguing
that the Prosecution did not establish that it was he who had
transacted with Ligaray and who had negotiated the check to the
latter; that the records showed that Ligaray did not meet him at any
time; and that Ligaray’s testimony on their alleged telephone
conversation was not reliable because it was not shown that Ligaray
31
had been familiar with his voice. Wagas also sought the reopening of
the case based on newly discovered evidence, specifically: (a) the
testimony of Cañada who could not testify during the trial because
he was then out of the country, and (b) Ligaray’s testimony given
against Wagas in another criminal case for violation of Batas
Pambansa Blg. 22.
On October 21, 2002, the RTC denied the motion for new trial
and/or reconsideration, opining that the evidence Wagas desired to
present at a new trial did not qualify as newly discovered, and that
there was no compelling ground to reverse its decision.16
Wagas appealed directly to this Court by notice of appeal.17
Prior to the elevation of the records to the Court, Wagas filed a
petition for admission to bail pending appeal. The RTC granted the
petition and fixed Wagas’ bond at P40,000.00.18 Wagas then posted
bail for his provisional liberty pending appeal.19
The resolution of this appeal was delayed by incidents bearing on
the grant of Wagas’ application for bail. On November 17, 2003, the
Court required the RTC Judge to explain why Wagas was out on
bail.20 On January 15, 2004, the RTC Judge submitted to the Court a
so-called manifestation and compliance which the Court referred to
the Office of the Court Administrator (OCA) for evaluation, report,
and recommendation.21 On July 5, 2005, the Court, upon the OCA’s
recommendation, directed the filing of an administrative complaint
for simple ignorance of the law against the RTC Judge.22 On
September 12, 2006, the Court directed the OCA to comply with its
July 5, 2005 directive, and to cause the filing of the administrative
complaint against the RTC Judge. The Court also directed Wagas to
explain why his bail should not be cancelled for having been
erroneously granted.23 Finally, in its memorandum dated September
27, 2006, the OCA manifested to the Court that it had meanwhile
filed the administrative complaint against the RTC Judge.24
Issues
In this appeal, Wagas insists that he and Ligaray were neither friends
nor personally known to one other; that it was highly incredible that
Ligaray, a businessman, would have entered into a transaction with
him involving a huge amount of money only over the telephone;
that on the contrary, the evidence pointed to Cañada as the person
with whom Ligaray had transacted, considering that the delivery
receipt, which had been signed by Cañada, indicated that the goods
had been "Ordered by ROBERT CAÑADA," that the goods had been
received by Cañada in good order and condition, and that there was
no showing that Cañada had been acting on behalf of Wagas; that
he had issued the check to Cañada upon a different transaction; that
Cañada had negotiated the check to Ligaray; and that the element of
deceit had not been established because it had not been proved
with certainty that it was him who had transacted with Ligaray over
the telephone.
The circumstances beg the question: did the Prosecution establish
beyond reasonable doubt the existence of all the elements of the
crime of estafa as charged, as well as the identity of the perpetrator
of the crime?

Ruling
The appeal is meritorious.
Article 315, paragraph 2(d) of the Revised Penal Code, as amended,
provides:
Article 315. Swindling (estafa). — Any person who shall defraud
another by any of the means mentioned hereinbelow shall be
punished by:
2. By means of any of the following false pretenses or fraudulent
acts executed prior to or simultaneously with the commission of the
fraud:
(d) By postdating a check, or issuing a check in payment of an
obligation when the offender had no funds in the bank, or his funds
deposited therein were not sufficient to cover the amount of the
check. The failure of the drawer of the check to deposit the amount
necessary to cover his check within three (3) days from receipt of
notice from the bank and/or the payee or holder that said check has
been dishonored for lack or insufficiency of funds shall be prima
facie evidence of deceit constituting false pretense or fraudulent act.
In order to constitute estafa under this statutory provision, the act
of postdating or issuing a check in payment of an obligation must be
the efficient cause of the defraudation. This means that the offender
must be able to obtain money or property from the offended party
by reason of the issuance of the check, whether dated or postdated.
In other words, the Prosecution must show that the person to whom
the check was delivered would not have parted with his money or
property were it not for the issuance of the check by the offender. 25
The essential elements of the crime charged are that: (a) a check is
postdated or issued in payment of an obligation contracted at the
time the check is issued; (b) lack or insufficiency of funds to cover
the check; and (c) damage to the payee thereof.26 It is the criminal
fraud or deceit in the issuance of a check that is punishable, not the
non-payment of a debt.27 Prima facie evidence of deceit exists by
law upon proof that the drawer of the check failed to deposit the
amount necessary to cover his check within three days from receipt
of the notice of dishonor.
The Prosecution established that Ligaray had released the goods to
Cañada because of the postdated check the latter had given to him;
and that the check was dishonored when presented for payment
because of the insufficiency of funds.
In every criminal prosecution, however, the identity of the offender,
like the crime itself, must be established by proof beyond
reasonable doubt.28 In that regard, the Prosecution did not establish
beyond reasonable doubt that it was Wagas who had defrauded
Ligaray by issuing the check.
Firstly, Ligaray expressly admitted that he did not personally meet
the person with whom he was transacting over the telephone, thus:
Q: On April 30, 1997, do you remember having a transaction with
the accused in this case?
32
A: Yes, sir. He purchased two hundred bags of rice from me.
Q: How did this purchase of rice transaction started? (sic)
A: He talked with me over the phone and told me that he would like
to purchase two hundred bags of rice and he will just issue a check.29
Even after the dishonor of the check, Ligaray did not personally see
and meet whoever he had dealt with and to whom he had made the
demand for payment, and that he had talked with him only over the
telephone, to wit:
Q: After the check was (sic) bounced, what did you do next?
A: I made a demand on them.
Q: How did you make a demand?
A: I called him over the phone.
Q: Who is that "him" that you are referring to?
A: Gilbert Wagas.30
Secondly, the check delivered to Ligaray was made payable to cash.
Under the Negotiable Instruments Law, this type of check was
payable to the bearer and could be negotiated by mere delivery
without the need of an indorsement.31 This rendered it highly
probable that Wagas had issued the check not to Ligaray, but to
somebody else like Cañada, his brother-in-law, who then negotiated
it to Ligaray.1âwphi1 Relevantly, Ligaray confirmed that he did not
himself see or meet Wagas at the time of the transaction and
thereafter, and expressly stated that the person who signed for and
received the stocks of rice was Cañada.
It bears stressing that the accused, to be guilty of estafa as charged,
must have used the check in order to defraud the complainant.
What the law punishes is the fraud or deceit, not the mere issuance
of the worthless check. Wagas could not be held guilty of estafa
simply because he had issued the check used to defraud Ligaray. The
proof of guilt must still clearly show that it had been Wagas as the
drawer who had defrauded Ligaray by means of the check.
Thirdly, Ligaray admitted that it was Cañada who received the rice
from him and who delivered the check to him. Considering that the
records are bereft of any showing that Cañada was then acting on
behalf of Wagas, the RTC had no factual and legal bases to conclude
and find that Cañada had been acting for Wagas. This lack of factual
and legal bases for the RTC to infer so obtained despite Wagas being
Cañada’s brother-in-law.
Finally, Ligaray’s declaration that it was Wagas who had transacted
with him over the telephone was not reliable because he did not
explain how he determined that the person with whom he had the
telephone conversation was really Wagas whom he had not yet met
or known before then. We deem it essential for purposes of
reliability and trustworthiness that a telephone conversation like
that one Ligaray supposedly had with the buyer of rice to be first
authenticated before it could be received in evidence. Among

others, the person with whom the witness conversed by telephone
should be first satisfactorily identified by voice recognition or any
other means.32 Without the authentication, incriminating another
person just by adverting to the telephone conversation with him
would be all too easy. In this respect, an identification based on
familiarity with the voice of the caller, or because of clearly
recognizable peculiarities of the caller would have sufficed.33 The
identity of the caller could also be established by the caller’s self-
identification, coupled with additional evidence, like the context and
timing of the telephone call, the contents of the statement
challenged, internal patterns, and other distinctive characteristics,
and disclosure of knowledge of facts known peculiarly to the caller.34
Verily, it is only fair that the caller be reliably identified first before a
telephone communication is accorded probative weight. The
identity of the caller may be established by direct or circumstantial
evidence. According to one ruling of the Kansas Supreme Court:
Communications by telephone are admissible in evidence where
they are relevant to the fact or facts in issue, and admissibility is
governed by the same rules of evidence concerning face-to-face
conversations except the party against whom the conversations are
sought to be used must ordinarily be identified. It is not necessary
that the witness be able, at the time of the conversation, to identify
the person with whom the conversation was had, provided
subsequent identification is proved by direct or circumstantial
evidence somewhere in the development of the case. The mere
statement of his identity by the party calling is not in itself sufficient
proof of such identity, in the absence of corroborating
circumstances so as to render the conversation admissible.
However, circumstances preceding or following the conversation
may serve to sufficiently identify the caller. The completeness of the
identification goes to the weight of the evidence rather than its
admissibility, and the responsibility lies in the first instance with the
district court to determine within its sound discretion whether the
threshold of admissibility has been met.35 (Bold emphasis supplied)
Yet, the Prosecution did not tender any plausible explanation or
offer any proof to definitely establish that it had been Wagas whom
Ligaray had conversed with on the telephone. The Prosecution did
not show through Ligaray during the trial as to how he had
determined that his caller was Wagas. All that the Prosecution
sought to elicit from him was whether he had known and why he
had known Wagas, and he answered as follows:
Q: Do you know the accused in this case?
A: Yes, sir.
Q: If he is present inside the courtroom […]
A: No, sir. He is not around.
Q: Why do you know him?
A: I know him as a resident of Compostela because he is an ex-
mayor of Compostela.36
33
During cross-examination, Ligaray was allowed another opportunity
to show how he had determined that his caller was Wagas, but he
still failed to provide a satisfactory showing, to wit:
Q: Mr. Witness, you mentioned that you and the accused entered
into [a] transaction of rice selling, particularly with these 200 sacks
of rice subject of this case, through telephone conversation?
A: Yes, sir.
Q: But you cannot really ascertain that it was the accused whom you
are talking with?
A: I know it was him because I know him.
Q: Am I right to say [that] that was the first time that you had a
transaction with the accused through telephone conversation, and
as a consequence of that alleged conversation with the accused
through telephone he issued a check in your favor?
A: No. Before that call I had a talk[ ] with the accused.
Q: But still through the telephone?
A: Yes, sir.
Q: There was no instant (sic) that the accused went to see you
personally regarding the 200 bags rice transaction?
A: No. It was through telephone only.
Q: In fact[,] you did not cause the delivery of these 200 bags of rice
through the accused himself?
A: Yes. It was through Robert.
Q: So, after that phone call[,] you deliver[ed] th[ose] 200 sacks of
rice through somebody other than the accused?
A: Yes, sir.37
Ligaray’s statement that he could tell that it was Wagas who had
ordered the rice because he "know[s]" him was still vague and
unreliable for not assuring the certainty of the identification, and
should not support a finding of Ligaray’s familiarity with Wagas as
the caller by his voice. It was evident from Ligaray’s answers that
Wagas was not even an acquaintance of Ligaray’s prior to the
transaction. Thus, the RTC’s conclusion that Ligaray had transacted
with Wagas had no factual basis. Without that factual basis, the RTC
was speculating on a matter as decisive as the identification of the
buyer to be Wagas.
The letter of Wagas did not competently establish that he was the
person who had conversed with Ligaray by telephone to place the
order for the rice. The letter was admitted exclusively as the State’s
rebuttal evidence to controvert or impeach the denial of Wagas of
entering into any transaction with Ligaray on the rice; hence, it could
be considered and appreciated only for that purpose. Under the law
 34

of evidence, the court shall consider evidence solely for the purpose
for which it is offered,38 not for any other purpose.39 Fairness to the
adverse party demands such exclusivity. Moreover, the high
plausibility of the explanation of Wagas that he had signed the letter
only because his sister and her husband had pleaded with him to do
so could not be taken for granted.

It is a fundamental rule in criminal procedure that the State carries

the onus probandi in establishing the guilt of the accused beyond a
reasonable doubt, as a consequence of the tenet ei incumbit
probation, qui dicit, non qui negat, which means that he who
asserts, not he who denies, must prove,40 and as a means of
respecting the presumption of innocence in favor of the man or
woman on the dock for a crime. Accordingly, the State has the
burden of proof to show: (1) the correct identification of the author
of a crime, and (2) the actuality of the commission of the offense
with the participation of the accused. All these facts must be proved
by the State beyond reasonable doubt on the strength of its
evidence and without solace from the weakness of the defense. That
the defense the accused puts up may be weak is inconsequential if,
in the first place, the State has failed to discharge the onus of his
identity and culpability. The presumption of innocence dictates that
it is for the Prosecution to demonstrate the guilt and not for the
accused to establish innocence.41 Indeed, the accused, being
presumed innocent, carries no burden of proof on his or her
shoulders. For this reason, the first duty of the Prosecution is not to
prove the crime but to prove the identity of the criminal. For even if
the commission of the crime can be established, without competent
proof of the identity of the accused beyond reasonable doubt, there
can be no conviction.42

There is no question that an identification that does not preclude a

reasonable possibility of mistake cannot be accorded any
evidentiary force.43 Thus, considering that the circumstances of the
identification of Wagas as the person who transacted on the rice did
not preclude a reasonable possibility of mistake, the proof of guilt
did not measure up to the standard of proof beyond reasonable
doubt demanded in criminal cases. Perforce, the accused’s
constitutional right of presumption of innocence until the contrary is
proved is not overcome, and he is entitled to an acquittal,44 even
though his innocence may be doubted.45

Nevertheless, an accused, though acquitted of estafa, may still be

held civilly liable where the preponderance of the established facts
so warrants.46 Wagas as the admitted drawer of the check was
legally liable to pay the amount of it to Ligaray, a holder in due
course.47 Consequently, we pronounce and hold him fully liable to
pay the amount of the dishonored check, plus legal interest of 6%
per annum from the finality of this decision.

WHEREFORE, the Court REVERSES and SETS ASIDE the decision

rendered on July 11, 2002 by the Regional Trial Court, Branch 58, in
Cebu City; and ACQUITS Gilbert R. Wagas of the crime of estafa on
the ground of reasonable doubt, but ORDERS him to pay Alberto
Ligaray the amount of P200,000.00 as actual damages, plus interest
of 6% per annum from the finality of this decision.

No pronouncement on costs of suit.

SO ORDERED.

THIRD DIVISION
G.R. No. 170325 September 26, 2008
PHILIPPINE NATIONAL BANK, Petitioner,
vs.
ERLANDO T. RODRIGUEZ and NORMA RODRIGUEZ, Respondents.
DECISION
REYES, R.T., J.:
WHEN the payee of the check is not intended to be the true
recipient of its proceeds, is it payable to order or bearer? What is
the fictitious-payee rule and who is liable under it? Is there any
exception?
These questions seek answers in this petition for review on certiorari
of the Amended Decision1 of the Court of Appeals (CA) which
affirmed with modification that of the Regional Trial Court (RTC).2
The Facts
The facts as borne by the records are as follows:
Respondents-Spouses Erlando and Norma Rodriguez were clients of
petitioner Philippine National Bank (PNB), Amelia Avenue Branch,
Cebu City. They maintained savings and demand/checking accounts,
namely, PNBig Demand Deposits (Checking/Current Account No.
810624-6 under the account name Erlando and/or Norma
Rodriguez), and PNBig Demand Deposit (Checking/Current Account
No. 810480-4 under the account name Erlando T. Rodriguez).
The spouses were engaged in the informal lending business. In line
with their business, they had a discounting3 arrangement with the
Philnabank Employees Savings and Loan Association (PEMSLA), an
association of PNB employees. Naturally, PEMSLA was likewise a
client of PNB Amelia Avenue Branch. The association maintained
current and savings accounts with petitioner bank.
PEMSLA regularly granted loans to its members. Spouses Rodriguez
would rediscount the postdated checks issued to members
whenever the association was short of funds. As was customary, the
spouses would replace the postdated checks with their own checks
issued in the name of the members.
It was PEMSLA’s policy not to approve applications for loans of
members with outstanding debts. To subvert this policy, some
PEMSLA officers devised a scheme to obtain additional loans despite
their outstanding loan accounts. They took out loans in the names of
unknowing members, without the knowledge or consent of the
latter. The PEMSLA checks issued for these loans were then given to
the spouses for rediscounting. The officers carried this out by forging
the indorsement of the named payees in the checks.
In return, the spouses issued their personal checks (Rodriguez
checks) in the name of the members and delivered the checks to an
officer of PEMSLA. The PEMSLA checks, on the other hand, were
deposited by the spouses to their account.
35
Meanwhile, the Rodriguez checks were deposited directly by
PEMSLA to its savings account without any indorsement from the
named payees. This was an irregular procedure made possible
through the facilitation of Edmundo Palermo, Jr., treasurer of
PEMSLA and bank teller in the PNB Branch. It appears that this
became the usual practice for the parties.
For the period November 1998 to February 1999, the spouses issued
sixty nine (69) checks, in the total amount of P2,345,804.00. These
were payable to forty seven (47) individual payees who were all
members of PEMSLA.4
Petitioner PNB eventually found out about these fraudulent acts. To
put a stop to this scheme, PNB closed the current account of
PEMSLA. As a result, the PEMSLA checks deposited by the spouses
were returned or dishonored for the reason "Account Closed." The
corresponding Rodriguez checks, however, were deposited as usual
to the PEMSLA savings account. The amounts were duly debited
from the Rodriguez account. Thus, because the PEMSLA checks
given as payment were returned, spouses Rodriguez incurred losses
from the rediscounting transactions.
RTC Disposition
Alarmed over the unexpected turn of events, the spouses Rodriguez
filed a civil complaint for damages against PEMSLA, the Multi-
Purpose Cooperative of Philnabankers (MCP), and petitioner PNB.
They sought to recover the value of their checks that were deposited
to the PEMSLA savings account amounting to P2,345,804.00. The
spouses contended that because PNB credited the checks to the
PEMSLA account even without indorsements, PNB violated its
contractual obligation to them as depositors. PNB paid the wrong
payees, hence, it should bear the loss.
PNB moved to dismiss the complaint on the ground of lack of cause
of action. PNB argued that the claim for damages should come from
the payees of the checks, and not from spouses Rodriguez. Since
there was no demand from the said payees, the obligation should be
considered as discharged.
In an Order dated January 12, 2000, the RTC denied PNB’s motion to
dismiss.
In its Answer,5 PNB claimed it is not liable for the checks which it
paid to the PEMSLA account without any indorsement from the
payees. The bank contended that spouses Rodriguez, the makers,
actually did not intend for the named payees to receive the
proceeds of the checks. Consequently, the payees were considered
as "fictitious payees" as defined under the Negotiable Instruments
Law (NIL). Being checks made to fictitious payees which are bearer
instruments, the checks were negotiable by mere delivery. PNB’s
Answer included its cross-claim against its co-defendants PEMSLA
and the MCP, praying that in the event that judgment is rendered
against the bank, the cross-defendants should be ordered to
reimburse PNB the amount it shall pay.
After trial, the RTC rendered judgment in favor of spouses Rodriguez
(plaintiffs). It ruled that PNB (defendant) is liable to return the value
of the checks. All counterclaims and cross-claims were dismissed.
The dispositive portion of the RTC decision reads:

WHEREFORE, in view of the foregoing, the Court hereby renders
judgment, as follows:
1. Defendant is hereby ordered to pay the plaintiffs the
total amount of P2,345,804.00 or reinstate or restore the
amount of P775,337.00 in the PNBig Demand Deposit
Checking/Current Account No. 810480-4 of Erlando T.
Rodriguez, and the amount of P1,570,467.00 in the PNBig
Demand Deposit, Checking/Current Account No. 810624-6
of Erlando T. Rodriguez and/or Norma Rodriguez, plus
legal rate of interest thereon to be computed from the
filing of this complaint until fully paid;
2. The defendant PNB is hereby ordered to pay the
plaintiffs the following reasonable amount of damages
suffered by them taking into consideration the standing of
the plaintiffs being sugarcane planters, realtors, residential
subdivision owners, and other businesses:
(a) Consequential damages, unearned income in the amount of
P4,000,000.00, as a result of their having incurred great dificulty (sic)
especially in the residential subdivision business, which was not
pushed through and the contractor even threatened to file a case
against the plaintiffs;
(b) Moral damages in the amount of P1,000,000.00;
(c) Exemplary damages in the amount of P500,000.00;
(d) Attorney’s fees in the amount of P150,000.00 considering that
this case does not involve very complicated issues; and for the
(e) Costs of suit.
3. Other claims and counterclaims are hereby dismissed.6
CA Disposition
PNB appealed the decision of the trial court to the CA on the
principal ground that the disputed checks should be considered as
payable to bearer and not to order.
In a Decision7 dated July 22, 2004, the CA reversed and set aside the
RTC disposition. The CA concluded that the checks were obviously
meant by the spouses to be really paid to PEMSLA. The court a quo
declared:
We are not swayed by the contention of the plaintiffs-appellees
(Spouses Rodriguez) that their cause of action arose from the
alleged breach of contract by the defendant-appellant (PNB) when it
paid the value of the checks to PEMSLA despite the checks being
payable to order. Rather, we are more convinced by the strong and
credible evidence for the defendant-appellant with regard to the
plaintiffs-appellees’ and PEMSLA’s business arrangement – that the
value of the rediscounted checks of the plaintiffs-appellees would be
deposited in PEMSLA’s account for payment of the loans it has
approved in exchange for PEMSLA’s checks with the full value of the
said loans. This is the only obvious explanation as to why all the
disputed sixty-nine (69) checks were in the possession of PEMSLA’s
36
errand boy for presentment to the defendant-appellant that led to
this present controversy. It also appears that the teller who
accepted the said checks was PEMSLA’s officer, and that such was a
regular practice by the parties until the defendant-appellant
discovered the scam. The logical conclusion, therefore, is that the
checks were never meant to be paid to order, but instead, to
PEMSLA. We thus find no breach of contract on the part of the
defendant-appellant.
According to plaintiff-appellee Erlando Rodriguez’ testimony,
PEMSLA allegedly issued post-dated checks to its qualified members
who had applied for loans. However, because of PEMSLA’s
insufficiency of funds, PEMSLA approached the plaintiffs-appellees
for the latter to issue rediscounted checks in favor of said applicant
members. Based on the investigation of the defendant-appellant,
meanwhile, this arrangement allowed the plaintiffs-appellees to
make a profit by issuing rediscounted checks, while the officers of
PEMSLA and other members would be able to claim their loans,
despite the fact that they were disqualified for one reason or
another. They were able to achieve this conspiracy by using other
members who had loaned lesser amounts of money or had not
applied at all. x x x.8 (Emphasis added)
The CA found that the checks were bearer instruments, thus they do
not require indorsement for negotiation; and that spouses
Rodriguez and PEMSLA conspired with each other to accomplish this
money-making scheme. The payees in the checks were "fictitious
payees" because they were not the intended payees at all.
The spouses Rodriguez moved for reconsideration. They argued,
inter alia, that the checks on their faces were unquestionably
payable to order; and that PNB committed a breach of contract
when it paid the value of the checks to PEMSLA without
indorsement from the payees. They also argued that their cause of
action is not only against PEMSLA but also against PNB to recover
the value of the checks.
On October 11, 2005, the CA reversed itself via an Amended
Decision, the last paragraph and fallo of which read:
In sum, we rule that the defendant-appellant PNB is liable to the
plaintiffs-appellees Sps. Rodriguez for the following:
1. Actual damages in the amount of P2,345,804 with interest at 6%
per annum from 14 May 1999 until fully paid;
2. Moral damages in the amount of P200,000;
3. Attorney’s fees in the amount of P100,000; and
4. Costs of suit.
WHEREFORE, in view of the foregoing premises, judgment is hereby
rendered by Us AFFIRMING WITH MODIFICATION the assailed
decision rendered in Civil Case No. 99-10892, as set forth in the
immediately next preceding paragraph hereof, and SETTING ASIDE
Our original decision promulgated in this case on 22 July 2004.
SO ORDERED.9

The CA ruled that the checks were payable to order. According to
the appellate court, PNB failed to present sufficient proof to defeat
the claim of the spouses Rodriguez that they really intended the
checks to be received by the specified payees. Thus, PNB is liable for
the value of the checks which it paid to PEMSLA without
indorsements from the named payees. The award for damages was
deemed appropriate in view of the failure of PNB to treat the
Rodriguez account with the highest degree of care considering the
fiduciary nature of their relationship, which constrained respondents
to seek legal action.
Hence, the present recourse under Rule 45.
Issues
The issues may be compressed to whether the subject checks are
payable to order or to bearer and who bears the loss?
PNB argues anew that when the spouses Rodriguez issued the
disputed checks, they did not intend for the named payees to
receive the proceeds. Thus, they are bearer instruments that could
be validly negotiated by mere delivery. Further, testimonial and
documentary evidence presented during trial amply proved that
spouses Rodriguez and the officers of PEMSLA conspired with each
other to defraud the bank.
Our Ruling
Prefatorily, amendment of decisions is more acceptable than an
erroneous judgment attaining finality to the prejudice of innocent
parties. A court discovering an erroneous judgment before it
becomes final may, motu proprio or upon motion of the parties,
correct its judgment with the singular objective of achieving justice
for the litigants.10
However, a word of caution to lower courts, the CA in Cebu in this
particular case, is in order. The Court does not sanction careless
disposition of cases by courts of justice. The highest degree of
diligence must go into the study of every controversy submitted for
decision by litigants. Every issue and factual detail must be closely
scrutinized and analyzed, and all the applicable laws judiciously
studied, before the promulgation of every judgment by the court.
Only in this manner will errors in judgments be avoided.
Now to the core of the petition.
As a rule, when the payee is fictitious or not intended to be the true
recipient of the proceeds, the check is considered as a bearer
instrument. A check is "a bill of exchange drawn on a bank payable
on demand."11 It is either an order or a bearer instrument. Sections
8 and 9 of the NIL states:
SEC. 8. When payable to order. – The instrument is payable to order
where it is drawn payable to the order of a specified person or to
him or his order. It may be drawn payable to the order of –
(a) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
37
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.
Where the instrument is payable to order, the payee must be named
or otherwise indicated therein with reasonable certainty.
SEC. 9. When payable to bearer. – The instrument is payable to
bearer –
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or
bearer; or
(c) When it is payable to the order of a fictitious or non-
existing person, and such fact is known to the person
making it so payable; or
(d) When the name of the payee does not purport to be
the name of any person; or
(e) Where the only or last indorsement is an indorsement
in blank.12 (Underscoring supplied)
The distinction between bearer and order instruments lies in their
manner of negotiation. Under Section 30 of the NIL, an order
instrument requires an indorsement from the payee or holder
before it may be validly negotiated. A bearer instrument, on the
other hand, does not require an indorsement to be validly
negotiated. It is negotiable by mere delivery. The provision reads:
SEC. 30. What constitutes negotiation. – An instrument is negotiated
when it is transferred from one person to another in such manner as
to constitute the transferee the holder thereof. If payable to bearer,
it is negotiated by delivery; if payable to order, it is negotiated by
the indorsement of the holder completed by delivery.
A check that is payable to a specified payee is an order instrument.
However, under Section 9(c) of the NIL, a check payable to a
specified payee may nevertheless be considered as a bearer
instrument if it is payable to the order of a fictitious or non-existing
person, and such fact is known to the person making it so payable.
Thus, checks issued to "Prinsipe Abante" or "Si Malakas at si
Maganda," who are well-known characters in Philippine mythology,
are bearer instruments because the named payees are fictitious and
non-existent.
We have yet to discuss a broader meaning of the term "fictitious" as
used in the NIL. It is for this reason that We look elsewhere for
guidance. Court rulings in the United States are a logical starting
point since our law on negotiable instruments was directly lifted
from the Uniform Negotiable Instruments Law of the United
States.13

A review of US jurisprudence yields that an actual, existing, and
living payee may also be "fictitious" if the maker of the check did not
intend for the payee to in fact receive the proceeds of the check.
This usually occurs when the maker places a name of an existing
payee on the check for convenience or to cover up an illegal
activity.14 Thus, a check made expressly payable to a non-fictitious
and existing person is not necessarily an order instrument. If the
payee is not the intended recipient of the proceeds of the check, the
payee is considered a "fictitious" payee and the check is a bearer
instrument.
In a fictitious-payee situation, the drawee bank is absolved from
liability and the drawer bears the loss. When faced with a check
payable to a fictitious payee, it is treated as a bearer instrument that
can be negotiated by delivery. The underlying theory is that one
cannot expect a fictitious payee to negotiate the check by placing his
indorsement thereon. And since the maker knew this limitation, he
must have intended for the instrument to be negotiated by mere
delivery. Thus, in case of controversy, the drawer of the check will
bear the loss. This rule is justified for otherwise, it will be most
convenient for the maker who desires to escape payment of the
check to always deny the validity of the indorsement. This despite
the fact that the fictitious payee was purposely named without any
intention that the payee should receive the proceeds of the check. 15
The fictitious-payee rule is best illustrated in Mueller & Martin v.
Liberty Insurance Bank.16 In the said case, the corporation Mueller &
Martin was defrauded by George L. Martin, one of its authorized
signatories. Martin drew seven checks payable to the German
Savings Fund Company Building Association (GSFCBA) amounting to
$2,972.50 against the account of the corporation without authority
from the latter. Martin was also an officer of the GSFCBA but did not
have signing authority. At the back of the checks, Martin placed the
rubber stamp of the GSFCBA and signed his own name as
indorsement. He then successfully drew the funds from Liberty
Insurance Bank for his own personal profit. When the corporation
filed an action against the bank to recover the amount of the checks,
the claim was denied.
The US Supreme Court held in Mueller that when the person making
the check so payable did not intend for the specified payee to have
any part in the transactions, the payee is considered as a fictitious
payee. The check is then considered as a bearer instrument to be
validly negotiated by mere delivery. Thus, the US Supreme Court
held that Liberty Insurance Bank, as drawee, was authorized to make
payment to the bearer of the check, regardless of whether prior
indorsements were genuine or not.17
The more recent Getty Petroleum Corp. v. American Express Travel
Related Services Company, Inc.18 upheld the fictitious-payee rule.
The rule protects the depositary bank and assigns the loss to the
drawer of the check who was in a better position to prevent the loss
in the first place. Due care is not even required from the drawee or
depositary bank in accepting and paying the checks. The effect is
that a showing of negligence on the part of the depositary bank will
not defeat the protection that is derived from this rule.
However, there is a commercial bad faith exception to the fictitious-
payee rule. A showing of commercial bad faith on the part of the
drawee bank, or any transferee of the check for that matter, will
work to strip it of this defense. The exception will cause it to bear
38
the loss. Commercial bad faith is present if the transferee of the
check acts dishonestly, and is a party to the fraudulent scheme. Said
the US Supreme Court in Getty:
Consequently, a transferee’s lapse of wary vigilance, disregard of
suspicious circumstances which might have well induced a prudent
banker to investigate and other permutations of negligence are not
relevant considerations under Section 3-405 x x x. Rather, there is a
"commercial bad faith" exception to UCC 3-405, applicable when the
transferee "acts dishonestly – where it has actual knowledge of facts
and circumstances that amount to bad faith, thus itself becoming a
participant in a fraudulent scheme. x x x Such a test finds support in
the text of the Code, which omits a standard of care requirement
from UCC 3-405 but imposes on all parties an obligation to act with
"honesty in fact." x x x19 (Emphasis added)
Getty also laid the principle that the fictitious-payee rule extends
protection even to non-bank transferees of the checks.
In the case under review, the Rodriguez checks were payable to
specified payees. It is unrefuted that the 69 checks were payable to
specific persons. Likewise, it is uncontroverted that the payees were
actual, existing, and living persons who were members of PEMSLA
that had a rediscounting arrangement with spouses Rodriguez.
What remains to be determined is if the payees, though existing
persons, were "fictitious" in its broader context.
For the fictitious-payee rule to be available as a defense, PNB must
show that the makers did not intend for the named payees to be
part of the transaction involving the checks. At most, the bank’s
thesis shows that the payees did not have knowledge of the
existence of the checks. This lack of knowledge on the part of the
payees, however, was not tantamount to a lack of intention on the
part of respondents-spouses that the payees would not receive the
checks’ proceeds. Considering that respondents-spouses were
transacting with PEMSLA and not the individual payees, it is
understandable that they relied on the information given by the
officers of PEMSLA that the payees would be receiving the checks.
Verily, the subject checks are presumed order instruments. This is
because, as found by both lower courts, PNB failed to present
sufficient evidence to defeat the claim of respondents-spouses that
the named payees were the intended recipients of the checks’
proceeds. The bank failed to satisfy a requisite condition of a
fictitious-payee situation – that the maker of the check intended for
the payee to have no interest in the transaction.
Because of a failure to show that the payees were "fictitious" in its
broader sense, the fictitious-payee rule does not apply. Thus, the
checks are to be deemed payable to order. Consequently, the
drawee bank bears the loss.20
PNB was remiss in its duty as the drawee bank. It does not dispute
the fact that its teller or tellers accepted the 69 checks for deposit to
the PEMSLA account even without any indorsement from the named
payees. It bears stressing that order instruments can only be
negotiated with a valid indorsement.
 39

A bank that regularly processes checks that are neither payable to
the customer nor duly indorsed by the payee is apparently grossly
negligent in its operations.21 This Court has recognized the unique
public interest possessed by the banking industry and the need for
the people to have full trust and confidence in their banks.22 For this
reason, banks are minded to treat their customer’s accounts with
utmost care, confidence, and honesty.23
In a checking transaction, the drawee bank has the duty to verify the
genuineness of the signature of the drawer and to pay the check
strictly in accordance with the drawer’s instructions, i.e., to the
named payee in the check. It should charge to the drawer’s accounts
only the payables authorized by the latter. Otherwise, the drawee
will be violating the instructions of the drawer and it shall be liable
for the amount charged to the drawer’s account.24
In the case at bar, respondents-spouses were the bank’s depositors.
The checks were drawn against respondents-spouses’ accounts.
PNB, as the drawee bank, had the responsibility to ascertain the
regularity of the indorsements, and the genuineness of the
signatures on the checks before accepting them for deposit. Lastly,
PNB was obligated to pay the checks in strict accordance with the
instructions of the drawers. Petitioner miserably failed to discharge
this burden.
The checks were presented to PNB for deposit by a representative of
PEMSLA absent any type of indorsement, forged or otherwise. The
facts clearly show that the bank did not pay the checks in strict
accordance with the instructions of the drawers, respondents-
spouses. Instead, it paid the values of the checks not to the named
payees or their order, but to PEMSLA, a third party to the
transaction between the drawers and the payees.alf-ITC
Moreover, PNB was negligent in the selection and supervision of its
employees. The trustworthiness of bank employees is indispensable
to maintain the stability of the banking industry. Thus, banks are
enjoined to be extra vigilant in the management and supervision of
their employees. In Bank of the Philippine Islands v. Court of
Appeals,25 this Court cautioned thus:
A bank that has been remiss in its duty must suffer the
consequences of its negligence. Being issued to named payees, PNB
was duty-bound by law and by banking rules and procedure to
require that the checks be properly indorsed before accepting them
for deposit and payment. In fine, PNB should be held liable for the
amounts of the checks.
One Last Note
We note that the RTC failed to thresh out the merits of PNB’s cross-
claim against its co-defendants PEMSLA and MPC. The records are
bereft of any pleading filed by these two defendants in answer to
the complaint of respondents-spouses and cross-claim of PNB. The
Rules expressly provide that failure to file an answer is a ground for
a declaration that defendant is in default.28 Yet, the RTC failed to
sanction the failure of both PEMSLA and MPC to file responsive
pleadings. Verily, the RTC dismissal of PNB’s cross-claim has no basis.
Thus, this judgment shall be without prejudice to whatever action
the bank might take against its co-defendants in the trial court.
To PNB’s credit, it became involved in the controversial transaction
not of its own volition but due to the actions of some of its
employees. Considering that moral damages must be understood to
be in concept of grants, not punitive or corrective in nature, We
resolve to reduce the award of moral damages to P50,000.00.29
WHEREFORE, the appealed Amended Decision is AFFIRMED with the
MODIFICATION that the award for moral damages is reduced to
P50,000.00, and that this is without prejudice to whatever civil,
criminal, or administrative action PNB might take against PEMSLA,
MPC, and the employees involved.
SO ORDERED.

Banks handle daily transactions involving millions of pesos. By the

very nature of their work the degree of responsibility, care and
trustworthiness expected of their employees and officials is far
greater than those of ordinary clerks and employees. For obvious
reasons, the banks are expected to exercise the highest degree of
diligence in the selection and supervision of their employees.26

PNB’s tellers and officers, in violation of banking rules of procedure,

permitted the invalid deposits of checks to the PEMSLA account.
Indeed, when it is the gross negligence of the bank employees that
caused the loss, the bank should be held liable. 27

PNB’s argument that there is no loss to compensate since no

demand for payment has been made by the payees must also fail.
Damage was caused to respondents-spouses when the PEMSLA
checks they deposited were returned for the reason "Account
Closed." These PEMSLA checks were the corresponding payments to
the Rodriguez checks. Since they could not encash the PEMSLA
checks, respondents-spouses were unable to collect payments for
the amounts they had advanced.

SECOND DIVISION
G.R. No. 158312 November 14, 2008
JOHN DY, petitioner,
vs.
PEOPLE OF THE PHILIPPINES and The HONORABLE COURT OF
APPEALS, respondents.
DECISION
QUISUMBING, Acting C.J.:
This appeal prays for the reversal of the Decision1 dated January 23,
2003 and the Resolution2 dated May 14, 2003 of the Court of
Appeals in CA-G.R. CR No. 23802. The appellate court affirmed with
modification the Decision3 dated November 17, 1999 of the Regional
Trial Court (RTC), Branch 82 of Quezon City, which had convicted
petitioner John Dy of two counts of estafa in Criminal Cases Nos. Q-
93-46711 and Q-93-46713, and two counts of violation of Batas
Pambansa Bilang 224 (B.P. Blg. 22) in Criminal Cases Nos. Q-93-
46712 and Q-93-46714.
The facts are undisputed:
Since 1990, John Dy has been the distributor of W.L. Food Products
(W.L. Foods) in Naga City, Bicol, under the business name Dyna
Marketing. Dy would pay W.L. Foods in either cash or check upon
pick up of stocks of snack foods at the latter's branch or main office
in Quezon City. At times, he would entrust the payment to one of his
drivers.
On June 24, 1992, Dy's driver went to the branch office of W.L.
Foods to pick up stocks of snack foods. He introduced himself to the
checker, Mary Jane D. Maraca, who upon confirming Dy's credit with
the main office, gave him merchandise worth P106,579.60. In
return, the driver handed her a blank Far East Bank and Trust
Company (FEBTC) Check with Check No. 553602 postdated July 22,
1992. The check was signed by Dy though it did not indicate a
specific amount.
Yet again, on July 1, 1992, the same driver obtained snack foods
from Maraca in the amount of P226,794.36 in exchange for a blank
FEBTC Check with Check No. 553615 postdated July 31, 1992.
In both instances, the driver was issued an unsigned delivery receipt.
The amounts for the purchases were filled in later by Evelyn Ong,
accountant of W.L. Foods, based on the value of the goods
delivered.
When presented for payment, FEBTC dishonored the checks for
insufficiency of funds. Raul D. Gonzales, manager of FEBTC-Naga
Branch, notified Atty. Rita Linda Jimeno, counsel of W.L. Foods, of
the dishonor. Apparently, Dy only had an available balance of P2,000
as of July 22, 1992 and July 31, 1992.
Later, Gonzales sent Atty. Jimeno another letter5 advising her that
FEBTC Check No. 553602 for P106,579.60 was returned to the
drawee bank for the reasons stop payment order and drawn against
40
uncollected deposit (DAUD), and not because it was drawn against
insufficient funds as stated in the first letter. Dy's savings deposit
account ledger reflected a balance of P160,659.39 as of July 22,
1992. This, however, included a regional clearing check for P55,000
which he deposited on July 20, 1992, and which took five (5) banking
days to clear. Hence, the inward check was drawn against the yet
uncollected deposit.
When William Lim, owner of W.L. Foods, phoned Dy about the
matter, the latter explained that he could not pay since he had no
funds yet. This prompted the former to send petitioner a demand
letter, which the latter ignored.
On July 16, 1993, Lim charged Dy with two counts of estafa under
Article 315, paragraph 2(d)6 of the Revised Penal Code in two
Informations, which except for the dates and amounts involved,
similarly read as follows:
That on or about the 24th day of June, 1992, in Quezon
City, Philippines, the said accused, did then and there
[willfully] and feloniously defraud W.L. PRODUCTS, a
corporation duly organized and existing under the laws of
the Republic of the Philippines with business address at
No. 531 Gen. Luis St., Novaliches, this City, in the following
manner, to wit: the said accused, by means of false
manifestations and fraudulent representation which he
made to complainant to the effect that Far East Bank and
Trust Co. check No. 553602 dated July 22, 1992 in the
amount of P106,579.60, payable to W.L. Products is a good
check and will be honored by the bank on its maturity
date, and by means of other deceit of similar import,
induced and succeeded in inducing the said complainant
to receive and accept the aforesaid check in payment of
snack foods, the said accused knowing fully well that all his
manifestations and representations were false and untrue
and were made solely for the purpose of obtaining, as in
fact he did obtain the aforesaid snack foods valued at
P106,579.60 from said complainant as upon presentation
of said check to the bank for payment, the same was
dishonored and payment thereof refused for the reason
stop payment and the said accused, once in possession of
the aforesaid snack foods, with intent to defraud,
[willfully], unlawfully and feloniously misapplied,
misappropriated and converted the same or the value
thereof to his own personal use and benefit, to the
damage and prejudice of said W.L. Products, herein
represented by RODOLFO BORJAL, in the aforementioned
amount of P106,579.60, Philippine Currency.
Contrary to law.7
On even date, Lim also charged Dy with two counts of violation of
B.P. Blg. 22 in two Informations which likewise save for the dates
and amounts involved similarly read as follows:
That on or about the 24th day of June, 1992, the said
accused, did then and there [willfully], unlawfully and
feloniously make or draw and issue to W.L. FOOD
PRODUCTS to apply on account or for value a Far East
Bank and Trust Co. Check no. 553602 dated July 22, 1992
payable to W.L. FOOD PRODUCTS in the amount of

P106,579.60 Philippine Currency, said accused knowing
fully well that at the time of issue he/she/they did not
have sufficient funds in or credit with the drawee bank for
payment of such check in full upon its presentment, which
check when presented 90 days from the date thereof was
subsequently dishonored by the drawee bank for the
reason "Payment stopped" but the same would have been
dishonored for insufficient funds had not the accused
without any valid reason, ordered the bank to stop
payment, the said accused despite receipt of notice of
such dishonor, failed to pay said W.L. Food Products the
amount of said check or to make arrangement for
payment in full of the same within five (5) banking days
after receiving said notice.
CONTRARY TO LAW.8
On November 23, 1994, Dy was arrested in Naga City. On
arraignment, he pleaded not guilty to all charges. Thereafter, the
cases against him were tried jointly.
On November 17, 1999 the RTC convicted Dy on two counts each of
estafa and violation of B.P. Blg. 22. The trial court disposed of the
case as follows:
WHEREFORE, accused JOHN JERRY DY ALDEN (JOHN DY) is hereby
found GUILTY beyond reasonable doubt of swindling (ESTAFA) as
charged in the Informations in Criminal Case No. 93-46711 and in
Criminal Case No. Q-93-46713, respectively. Accordingly, after
applying the provisions of the Indeterminate Sentence Law and P.D.
No. 818, said accused is hereby sentenced to suffer the
indeterminate penalty of ten (10) years and one (1) day to twelve
(12) years of prision mayor, as minimum, to twenty (20) years of
reclusion temporal, as maximum, in Criminal Case No. Q-93-46711
and of ten (10) years and one (1) day to twelve (12) years of prision
mayor, as minimum, to thirty (30) years of reclusion perpetua, as
maximum, in Criminal Case No. Q-93-46713.
Likewise, said accused is hereby found GUILTY beyond reasonable
doubt of Violation of B.P. 22 as charged in the Informations in
Criminal Case No. Q-93-46712 and in Criminal Case No. Q-93-46714
and is accordingly sentenced to imprisonment of one (1) year for
each of the said offense and to pay a fine in the total amount of
P333,373.96, with subsidiary imprisonment in case of insolvency.
FINALLY, judgment is hereby rendered in favor of private
complainant, W. L. Food Products, herein represented by Rodolfo
Borjal, and against herein accused JOHN JERRY DY ALDEN (JOHN DY),
ordering the latter to pay to the former the total sum of
P333,373.96 plus interest thereon at the rate of 12% per annum
from September 28, 1992 until fully paid; and, (2) the costs of this
suit.
SO ORDERED.9
Dy brought the case to the Court of Appeals. In the assailed Decision
of January 23, 2003, the appellate court affirmed the RTC. It,
however, modified the sentence and deleted the payment of
interests in this wise:
41
WHEREFORE, in view of the foregoing, the decision
appealed from is hereby AFFIRMED with MODIFICATION.
In Criminal Case No. Q-93-46711 (for estafa), the accused-
appellant JOHN JERRY DY ALDEN (JOHN DY) is hereby
sentenced to suffer an indeterminate penalty of
imprisonment ranging from six (6) years and one (1) day of
prision mayor as minimum to twenty (20) years of
reclusion temporal as maximum plus eight (8) years in
excess of [P]22,000.00. In Criminal Case No. Q-93-46712
(for violation of BP 22), accused-appellant is sentenced to
suffer an imprisonment of one (1) year and to indemnify
W.L. Food Products, represented by Rodolfo Borjal, the
amount of ONE HUNDRED SIX THOUSAND FIVE HUNDRED
SEVENTY NINE PESOS and 60/100 ([P]106,579.60). In
Criminal Case No. Q-93-46713 (for estafa), accused-
appellant is hereby sentenced to suffer an indeterminate
penalty of imprisonment ranging from eight (8) years and
one (1) day of prision mayor as minimum to thirty (30)
years as maximum. Finally, in Criminal Case No. Q-93-
46714 (for violation of BP 22), accused-appellant is
sentenced to suffer an imprisonment of one (1) year and
to indemnify W.L. Food Products, represented by Rodolfo
Borjal, the amount of TWO HUNDRED TWENTY SIX
THOUSAND SEVEN HUNDRED NINETY FOUR PESOS AND
36/100 ([P]226,794.36).
SO ORDERED.10
Dy moved for reconsideration, but his motion was denied in the
Resolution dated May 14, 2003.
Hence, this petition which raises the following issues:
I.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS
GRAVELY ERRED IN FINDING THAT THE PROSECUTION HAS
PROVEN THE GUILT OF ACCUSED BEYOND REASONABLE
DOUBT OF ESTAFA ON TWO (2) COUNTS?
II.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS
GRAVELY ERRED IN FINDING THAT THE PROSECUTION HAS
PROVEN THE GUILT OF ACCUSED BEYOND REASONABLE
DOUBT OF VIOLATION OF BP 22 ON TWO (2) COUNTS?
III.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS
GRAVELY ERRED IN AWARDING DAMAGES TO PRIVATE
COMPLAINANT, W.L. FOOD PRODUCTS, THE TOTAL SUM
OF [P]333,373.96?11
Essentially, the issue is whether John Dy is liable for estafa and for
violation of B.P. Blg. 22.
First, is petitioner guilty of estafa?

Mainly, petitioner contends that the checks were ineffectively
issued. He stresses that not only were the checks blank, but also that
W.L. Foods' accountant had no authority to fill the amounts. Dy also
claims failure of consideration to negate any obligation to W.L.
Foods. Ultimately, petitioner denies having deceived Lim inasmuch
as only the two checks bounced since he began dealing with him. He
maintains that it was his long established business relationship with
Lim that enabled him to obtain the goods, and not the checks issued
in payment for them. Petitioner renounces personal liability on the
checks since he was absent when the goods were delivered.
The Office of the Solicitor General (OSG), for the State, avers that
the delivery of the checks by Dy's driver to Maraca, constituted valid
issuance. The OSG sustains Ong's prima facie authority to fill the
checks based on the value of goods taken. It observes that nothing
in the records showed that W.L. Foods' accountant filled up the
checks in violation of Dy's instructions or their previous agreement.
Finally, the OSG challenges the present petition as an inappropriate
remedy to review the factual findings of the trial court.
We find that the petition is partly meritorious.
Before an accused can be held liable for estafa under Article 315,
paragraph 2(d) of the Revised Penal Code, as amended by Republic
Act No. 4885,12 the following elements must concur: (1) postdating
or issuance of a check in payment of an obligation contracted at the
time the check was issued; (2) insufficiency of funds to cover the
check; and (3) damage to the payee thereof.13 These elements are
present in the instant case.
Section 191 of the Negotiable Instruments Law14 defines "issue" as
the first delivery of an instrument, complete in form, to a person
who takes it as a holder. Significantly, delivery is the final act
essential to the negotiability of an instrument. Delivery denotes
physical transfer of the instrument by the maker or drawer coupled
with an intention to convey title to the payee and recognize him as a
holder.15 It means more than handing over to another; it imports
such transfer of the instrument to another as to enable the latter to
hold it for himself.16
In this case, even if the checks were given to W.L. Foods in blank,
this alone did not make its issuance invalid. When the checks were
delivered to Lim, through his employee, he became a holder with
prima facie authority to fill the blanks. This was, in fact,
accomplished by Lim's accountant.
The pertinent provisions of Section 14 of the Negotiable Instruments
Law are instructive:
SEC. 14. Blanks; when may be filled.-Where the instrument
is wanting in any material particular, the person in
possession thereof has a prima facie authority to
complete it by filling up the blanks therein. And a
signature on a blank paper delivered by the person making
the signature in order that the paper may be converted
into a negotiable instrument operates as a prima facie
authority to fill it up as such for any amount. …. (Emphasis
supplied.)
42
Hence, the law merely requires that the instrument be in the
possession of a person other than the drawer or maker. From such
possession, together with the fact that the instrument is wanting in
a material particular, the law presumes agency to fill up the blanks.17
Because of this, the burden of proving want of authority or that the
authority granted was exceeded, is placed on the person
questioning such authority.18 Petitioner failed to fulfill this
requirement.
Next, petitioner claims failure of consideration. Nevertheless, in a
letter19 dated November 10, 1992, he expressed willingness to pay
W.L. Foods, or to replace the dishonored checks. This was a clear
acknowledgment of receipt of the goods, which gave rise to his duty
to maintain or deposit sufficient funds to cover the amount of the
checks.
More significantly, we are not swayed by petitioner's arguments
that the single incident of dishonor and his absence when the checks
were delivered belie fraud. Indeed damage and deceit are essential
elements of the offense and must be established with satisfactory
proof to warrant conviction.20 Deceit as an element of estafa is a
specie of fraud. It is actual fraud which consists in any
misrepresentation or contrivance where a person deludes another,
to his hurt. There is deceit when one is misled -- by guile, trickery or
by other means -- to believe as true what is really false.21
Prima facie evidence of deceit was established against petitioner
with regard to FEBTC Check No. 553615 which was dishonored for
insufficiency of funds. The letter22 of petitioner's counsel dated
November 10, 1992 shows beyond reasonable doubt that petitioner
received notice of the dishonor of the said check for insufficiency of
funds. Petitioner, however, failed to deposit the amounts necessary
to cover his check within three banking days from receipt of the
notice of dishonor. Hence, as provided for by law,23 the presence of
deceit was sufficiently proven.
Petitioner failed to overcome the said proof of deceit. The trial court
found no pre-existing obligation between the parties. The existence
of prior transactions between Lim and Dy alone did not rule out
deceit because each transaction was separate, and had a different
consideration from the others. Even as petitioner was absent when
the goods were delivered, by the principle of agency, delivery of the
checks by his driver was deemed as his act as the employer. The
evidence shows that as a matter of course, Dy, or his employee,
would pay W.L. Foods in either cash or check upon pick up of the
stocks of snack foods at the latter's branch or main office. Despite
their two-year standing business relations prior to the issuance of
the subject check, W.L Foods employees would not have parted with
the stocks were it not for the simultaneous delivery of the check
issued by petitioner.24 Aside from the existing business relations
between petitioner and W.L. Foods, the primary inducement for the
latter to part with its stocks of snack foods was the issuance of the
check in payment of the value of the said stocks.
In a number of cases,25 the Court has considered good faith as a
defense to a charge of estafa by postdating a check. This good faith
may be manifested by making arrangements for payment with the
creditor and exerting best efforts to make good the value of the
checks. In the instant case petitioner presented no proof of good
faith. Noticeably absent from the records is sufficient proof of
sincere and best efforts on the part of petitioner for the payment of

the value of the check that would constitute good faith and negate
deceit.
With the foregoing circumstances established, we find petitioner
guilty of estafa with regard to FEBTC Check No. 553615 for
P226,794.36.
The same, however, does not hold true with respect to FEBTC Check
No. 553602 for P106,579.60. This check was dishonored for the
reason that it was drawn against uncollected deposit. Petitioner had
P160,659.39 in his savings deposit account ledger as of July 22,
1992. We disagree with the conclusion of the RTC that since the
balance included a regional clearing check worth P55,000 deposited
on July 20, 1992, which cleared only five (5) days later, then
petitioner had inadequate funds in this instance. Since petitioner
technically and retroactively had sufficient funds at the time Check
No. 553602 was presented for payment then the second element
(insufficiency of funds to cover the check) of the crime is absent.
Also there is no prima facie evidence of deceit in this instance
because the check was not dishonored for lack or insufficiency of
funds. Uncollected deposits are not the same as insufficient funds.
The prima facie presumption of deceit arises only when a check has
been dishonored for lack or insufficiency of funds. Notably, the law
speaks of insufficiency of funds but not of uncollected deposits.
Jurisprudence teaches that criminal laws are strictly construed
against the Government and liberally in favor of the accused. 26
Hence, in the instant case, the law cannot be interpreted or applied
in such a way as to expand its provision to encompass the situation
of uncollected deposits because it would make the law more
onerous on the part of the accused.
Clearly, the estafa punished under Article 315, paragraph 2(d) of the
Revised Penal Code is committed when a check is dishonored for
being drawn against insufficient funds or closed account, and not
against uncollected deposit.27 Corollarily, the issuer of the check is
not liable for estafa if the remaining balance and the uncollected
deposit, which was duly collected, could satisfy the amount of the
check when presented for payment.
Second, did petitioner violate B.P. Blg. 22?
Petitioner argues that the blank checks were not valid orders for the
bank to pay the holder of such checks. He reiterates lack of
knowledge of the insufficiency of funds and reasons that the checks
could not have been issued to apply on account or for value as he
did not obtain delivery of the goods.
The OSG maintains that the guilt of petitioner has been proven
beyond reasonable doubt. It cites pieces of evidence that point to
Dy's culpability: Maraca's acknowledgment that the checks were
issued to W.L. Foods as consideration for the snacks; Lim's testimony
proving that Dy received a copy of the demand letter; the bank
manager's confirmation that petitioner had insufficient balance to
cover the checks; and Dy's failure to settle his obligation within five
(5) days from dishonor of the checks.
Once again, we find the petition to be meritorious in part.
The elements of the offense penalized under B.P. Blg. 22 are as
follows: (1) the making, drawing and issuance of any check to apply
43
to account or for value; (2) the knowledge of the maker, drawer or
issuer that at the time of issue he does not have sufficient funds in
or credit with the drawee bank for the payment of such check in full
upon its presentment; and (3) subsequent dishonor of the check by
the drawee bank for insufficiency of funds or credit or dishonor for
the same reason had not the drawer, without any valid cause,
ordered the bank to stop payment.28 The case at bar satisfies all
these elements.
During the joint pre-trial conference of this case, Dy admitted that
he issued the checks, and that the signatures appearing on them
were his.29 The facts reveal that the checks were issued in blank
because of the uncertainty of the volume of products to be
retrieved, the discount that can be availed of, and the deduction for
bad orders. Nevertheless, we must stress that what the law punishes
is simply the issuance of a bouncing check and not the purpose for
which it was issued nor the terms and conditions relating thereto.30
If inquiry into the reason for which the checks are issued, or the
terms and conditions of their issuance is required, the public's faith
in the stability and commercial value of checks as currency
substitutes will certainly erode.31
Moreover, the gravamen of the offense under B.P. Blg. 22 is the act
of making or issuing a worthless check or a check that is dishonored
upon presentment for payment. The act effectively declares the
offense to be one of malum prohibitum. The only valid query, then,
is whether the law has been breached, i.e., by the mere act of
issuing a bad check, without so much regard as to the criminal intent
of the issuer.32 Indeed, non-fulfillment of the obligation is
immaterial. Thus, petitioner's defense of failure of consideration
must likewise fall. This is especially so since as stated above, Dy has
acknowledged receipt of the goods.
On the second element, petitioner disputes notice of insufficiency of
funds on the basis of the check being issued in blank. He relies on
Dingle v. Intermediate Appellate Court33 and Lao v. Court of
Appeals34 as his authorities. In both actions, however, the accused
were co-signatories, who were neither apprised of the particular
transactions on which the blank checks were issued, nor given notice
of their dishonor. In the latter case, Lao signed the checks without
knowledge of the insufficiency of funds, knowledge she was not
expected or obliged to possess under the organizational structure of
the corporation.35 Lao was only a minor employee who had nothing
to do with the issuance, funding and delivery of checks.36 In
contrast, petitioner was the proprietor of Dyna Marketing and the
sole signatory of the checks who received notice of their dishonor.
Significantly, under Section 237 of B.P. Blg. 22, petitioner was prima
facie presumed to know of the inadequacy of his funds with the
bank when he did not pay the value of the goods or make
arrangements for their payment in full within five (5) banking days
upon notice. His letter dated November 10, 1992 to Lim fortified
such presumption.
Undoubtedly, Dy violated B.P. Blg. 22 for issuing FEBTC Check No.
553615. When said check was dishonored for insufficient funds and
stop payment order, petitioner did not pay or make arrangements
with the bank for its payment in full within five (5) banking days.
Petitioner should be exonerated, however, for issuing FEBTC Check
No. 553602, which was dishonored for the reason DAUD or drawn
 44

against uncollected deposit. When the check was presented for
payment, it was dishonored by the bank because the check deposit
made by petitioner, which would make petitioner's bank account
balance more than enough to cover the face value of the subject
check, had not been collected by the bank.
maximum period, adding one year for each additional P10,000 but
the total penalty shall not exceed thirty (30) years, which shall be
termed reclusión perpetua.47 Reclusión perpetua is not the
prescribed penalty for the offense, but merely describes the penalty
actually imposed on account of the amount of the fraud involved.

In Tan v. People,38 this Court acquitted the petitioner therein who
was indicted under B.P. Blg. 22, upon a check which was dishonored
for the reason DAUD, among others. We observed that:
In the second place, even without relying on the credit
line, petitioner's bank account covered the check she
issued because even though there were some deposits
that were still uncollected the deposits became "good"
and the bank certified that the check was "funded."39
To be liable under Section 140 of B.P. Blg. 22, the check must be
dishonored by the drawee bank for insufficiency of funds or credit or
dishonored for the same reason had not the drawer, without any
valid cause, ordered the bank to stop payment.
In the instant case, even though the check which petitioner
deposited on July 20, 1992 became good only five (5) days later, he
was considered by the bank to retroactively have had P160,659.39 in
his account on July 22, 1992. This was more than enough to cover
the check he issued to respondent in the amount of P106,579.60.
Under the circumstance obtaining in this case, we find the petitioner
had issued the check, with full ability to abide by his commitment41
to pay his purchases.
WHEREFORE, the petition is PARTLY GRANTED. John Dy is hereby
ACQUITTED in Criminal Case No. Q-93-46711 for estafa, and
Criminal Case No. Q-93-46712 for violation of B.P. Blg. 22, but he is
ORDERED to pay W.L. Foods the amount of P106,579.60 for goods
delivered to his company.
In Criminal Case No. Q-93-46713 for estafa, the Decision of the
Court of Appeals is AFFIRMED with MODIFICATION. Petitioner is
sentenced to suffer an indeterminate penalty of twelve (12) years of
prisión mayor, as minimum, to thirty (30) years of reclusión
perpetua, as maximum.
In Criminal Case No. Q-93-46714 for violation of B.P. Blg. 22, the
Decision of the Court of Appeals is AFFIRMED, and John Dy is hereby
sentenced to one (1) year imprisonment and ordered to indemnify
W.L. Foods in the amount of P226,794.36.
SO ORDERED.

Significantly, like Article 315 of the Revised Penal Code, B.P. Blg. 22
also speaks only of insufficiency of funds and does not treat of
uncollected deposits. To repeat, we cannot interpret the law in such
a way as to expand its provision to encompass the situation of
uncollected deposits because it would make the law more onerous
on the part of the accused. Again, criminal statutes are strictly
construed against the Government and liberally in favor of the
accused.42

As regards petitioner's civil liability, this Court has previously ruled

that an accused may be held civilly liable where the facts established
by the evidence so warrant.43 The rationale for this is simple. The
criminal and civil liabilities of an accused are separate and distinct
from each other. One is meant to punish the offender while the
other is intended to repair the damage suffered by the aggrieved
party. So, for the purpose of indemnifying the latter, the offense
need not be proved beyond reasonable doubt but only by
preponderance of evidence.44

We therefore sustain the appellate court's award of damages to

W.L. Foods in the total amount of P333,373.96, representing the
sum of the checks petitioner issued for goods admittedly delivered
to his company.

As to the appropriate penalty, petitioner was charged with estafa

under Article 315, paragraph 2(d) of the Revised Penal Code, as
amended by Presidential Decree No. 81845 (P.D. No. 818).

Under Section 146 of P.D. No. 818, if the amount of the fraud
exceeds P22,000, the penalty of reclusión temporal is imposed in its
 45

SECOND DIVISION 23, 1994" but the petitioner contended that the same was not
written by Gutierrez.
G.R. No. 187769 June 4, 2014
On May 24, 1994, Marasigan deposited the check but it was
ALVIN PATRIMONIO, Petitioner, dishonored for the reason "ACCOUNT CLOSED." It was later revealed
vs. that petitioner’s account with the bank had been closed since May
NAPOLEON GUTIERREZ and OCTAVIO MARASIGAN III, Respondents. 28, 1993.

DECISION Marasigan sought recovery from Gutierrez, to no avail. He thereafter

sent several demand letters to the petitioner asking for the payment
of P200,000.00, but his demands likewise went unheeded.
BRION, J.:
Consequently, he filed a criminal case for violation of B.P. 22 against
the petitioner, docketed as Criminal Case No. 42816.
Assailed in this petition for review on certiorari1 under Rule 45 of the
Revised Rules of Court is the decision2 dated September 24, 2008
On September 10, 1997, the petitioner filed before the Regional
and the resolution3 dated April 30, 2009 of the Court of Appeals (CA)
Trial Court (RTC) a Complaint for Declaration of Nullity of Loan and
in CA-G.R. CV No. 82301. The appellate court affirmed the decision
Recovery of Damages against Gutierrez and co-respondent
of the Regional Trial Court (RTC) of Quezon City, Branch 77,
Marasigan. He completely denied authorizing the loan or the check’s
dismissing the complaint for declaration of nullity of loan filed by
negotiation, and asserted that he was not privy to the parties’ loan
petitioner Alvin Patrimonio and ordering him to pay respondent
agreement.
Octavio Marasigan III (Marasigan) the sum of P200,000.00.

Only Marasigan filed his answer to the complaint. In the RTC’s order
The Factual Background
dated December 22, 1997,Gutierrez was declared in default.

The facts of the case, as shown by the records, are briefly

The Ruling of the RTC
summarized below.

The RTC ruled on February 3,2003 in favor of Marasigan.4 It found

The petitioner and the respondent Napoleon Gutierrez (Gutierrez)
that the petitioner, in issuing the pre-signed blank checks, had the
entered into a business venture under the name of Slam Dunk
intention of issuing a negotiable instrument, albeit with specific
Corporation (Slum Dunk), a production outfit that produced mini-
instructions to Gutierrez not to negotiate or issue the check without
concerts and shows related to basketball. Petitioner was already
his approval. While under Section 14 of the Negotiable Instruments
then a decorated professional basketball player while Gutierrez was
Law Gutierrez had the prima facie authority to complete the checks
a well-known sports columnist.
by filling up the blanks therein, the RTC ruled that he deliberately
violated petitioner’s specific instructions and took advantage of the
In the course of their business, the petitioner pre-signed several trust reposed in him by the latter.
checks to answer for the expenses of Slam Dunk. Although signed,
these checks had no payee’s name, date or amount. The blank
Nonetheless, the RTC declared Marasigan as a holder in due course
checks were entrusted to Gutierrez with the specific instruction not
and accordingly dismissed the petitioner’s complaint for declaration
to fill them out without previous notification to and approval by the
of nullity of the loan. It ordered the petitioner to pay Marasigan the
petitioner. According to petitioner, the arrangement was made so
face value of the check with a right to claim reimbursement from
that he could verify the validity of the payment and make the proper
Gutierrez.
arrangements to fund the account.

The petitioner elevated the case to the Court of Appeals (CA),

In the middle of 1993, without the petitioner’s knowledge and
insisting that Marasigan is not a holder in due course. He contended
consent, Gutierrez went to Marasigan (the petitioner’s former
that when Marasigan received the check, he knew that the same
teammate), to secure a loan in the amount of P200,000.00 on the
was without a date, and hence, incomplete. He also alleged that the
excuse that the petitioner needed the money for the construction of
loan was actually between Marasigan and Gutierrez with his check
his house. In addition to the payment of the principal, Gutierrez
being used only as a security.
assured Marasigan that he would be paid an interest of 5% per
month from March to May 1994.
The Ruling of the CA
After much contemplation and taking into account his relationship
with the petitioner and Gutierrez, Marasigan acceded to Gutierrez’ On September 24, 2008, the CA affirmed the RTC ruling, although
request and gave him P200,000.00 sometime in February 1994. premised on different factual findings. After careful analysis, the CA
Gutierrez simultaneously delivered to Marasigan one of the blank agreed with the petitioner that Marasigan is not a holder in due
checks the petitioner pre-signed with Pilipinas Bank, Greenhills course as he did not receive the check in good faith.
Branch, Check No. 21001764 with the blank portions filled out with
the words "Cash" "Two Hundred Thousand Pesos Only", and the The CA also concluded that the check had been strictly filled out by
amount of "P200,000.00". The upper right portion of the check Gutierrez in accordance with the petitioner’s authority. It held that
corresponding to the date was also filled out with the words "May the loan may not be nullified since it is grounded on an obligation

arising from law and ruled that the petitioner is still liable to pay
Marasigan the sum of P200,000.00.
After the CA denied the subsequent motion for reconsideration that
followed, the petitioner filed the present petition for review on
certiorari under Rule 45 of the Revised Rules of Court.
The Petition
The petitioner argues that: (1) there was no loan between him and
Marasigan since he never authorized the borrowing of money nor
the check’s negotiation to the latter; (2) under Article 1878 of the
Civil Code, a special power of attorney is necessary for an individual
to make a loan or borrow money in behalf of another; (3) the loan
transaction was between Gutierrez and Marasigan, with his check
being used only as a security; (4) the check had not been completely
and strictly filled out in accordance with his authority since the
condition that the subject check can only be used provided there is
prior approval from him, was not complied with; (5) even if the
check was strictly filled up as instructed by the petitioner, Marasigan
is still not entitled to claim the check’s value as he was not a holder
in due course; and (6) by reason of the bad faith in the dealings
between the respondents, he is entitled to claim for damages.
The Issues
Reduced to its basics, the case presents to us the following issues:
1. Whether the contract of loan in the amount of
P200,000.00 granted by respondent Marasigan to
petitioner, through respondent Gutierrez, may be nullified
for being void;
2. Whether there is basis to hold the petitioner liable for
the payment of the P200,000.00 loan;
3. Whether respondent Gutierrez has completely filled out
the subject check strictly under the authority given by the
petitioner; and
4. Whether Marasigan is a holder in due course.
The Court’s Ruling
The petition is impressed with merit.
We note at the outset that the issues raised in this petition are
essentially factual in nature. The main point of inquiry of whether
the contract of loan may be nullified, hinges on the very existence of
the contract of loan – a question that, as presented, is essentially,
one of fact. Whether the petitioner authorized the borrowing;
whether Gutierrez completely filled out the subject check strictly
under the petitioner’s authority; and whether Marasigan is a holder
in due course are also questions of fact, that, as a general rule, are
beyond the scope of a Rule 45 petition.
The rule that questions of fact are not the proper subject of an
appeal by certiorari, as a petition for review under Rule 45 is limited
only to questions of law, is not an absolute rule that admits of no
46
exceptions. One notable exception is when the findings off act of
both the trial court and the CA are conflicting, making their review
necessary.5 In the present case, the tribunals below arrived at two
conflicting factual findings, albeit with the same conclusion, i.e.,
dismissal of the complaint for nullity of the loan. Accordingly, we will
examine the parties’ evidence presented.
I. Liability Under the Contract of Loan
The petitioner seeks to nullify the contract of loan on the ground
that he never authorized the borrowing of money. He points to
Article 1878, paragraph 7 of the Civil Code, which explicitly requires
a written authority when the loan is contracted through an agent.
The petitioner contends that absent such authority in writing, he
should not be held liable for the face value of the check because he
was not a party or privy to the agreement.
Contracts of Agency May be Oral Unless The Law Requires a Specific
Form
Article 1868 of the Civil Code defines a contract of agency as a
contract whereby a person "binds himself to render some service or
to do something in representation or on behalf of another, with the
consent or authority of the latter." Agency may be express, or
implied from the acts of the principal, from his silence or lack of
action, or his failure to repudiate the agency, knowing that another
person is acting on his behalf without authority.
As a general rule, a contract of agency may be oral.6 However, it
must be written when the law requires a specific form, for example,
in a sale of a piece of land or any interest therein through an agent.
Article 1878 paragraph 7 of the Civil Code expressly requires a
special power of authority before an agent can loan or borrow
money in behalf of the principal, to wit:
Art. 1878. Special powers of attorney are necessary in the following
cases:
(7) To loan or borrow money, unless the latter act be urgent and
indispensable for the preservation of the things which are under
administration. (emphasis supplied)
Article 1878 does not state that the authority be in writing. As long
as the mandate is express, such authority may be either oral or
written. We unequivocably declared in Lim Pin v. Liao Tian, et al.,7
that the requirement under Article 1878 of the Civil Code refers to
the nature of the authorization and not to its form. Be that as it may,
the authority must be duly established by competent and convincing
evidence other than the self serving assertion of the party claiming
that such authority was verbally given, thus:
The requirements of a special power of attorney in Article 1878 of
the Civil Code and of a special authority in Rule 138 of the Rules of
Court refer to the nature of the authorization and not its form. The
requirements are met if there is a clear mandate from the principal
specifically authorizing the performance of the act. As early as 1906,
this Court in Strong v. Gutierrez-Repide (6 Phil. 680) stated that such
a mandate may be either oral or written, the one vital thing being
that it shall be express. And more recently, We stated that, if the

special authority is not written, then it must be duly established by
evidence:
x x x the Rules require, for attorneys to compromise the litigation of
their clients, a special authority. And while the same does not state
that the special authority be in writing the Court has every reason to
expect that, if not in writing, the same be duly established by
evidence other than the self-serving assertion of counsel himself
that such authority was verbally given him.(Home Insurance
Company vs. United States lines Company, et al., 21 SCRA 863; 866:
Vicente vs. Geraldez, 52 SCRA 210; 225). (emphasis supplied).
The Contract of Loan Entered Into by Gutierrez in Behalf of the
Petitioner Should be Nullified for Being Void; Petitioner is Not Bound
by the Contract of Loan.
A review of the records reveals that Gutierrez did not have any
authority to borrow money in behalf of the petitioner.1âwphi1
Records do not show that the petitioner executed any special power
of attorney (SPA) in favor of Gutierrez. In fact, the petitioner’s
testimony confirmed that he never authorized Gutierrez (or anyone
for that matter), whether verbally or in writing, to borrow money in
his behalf, nor was he aware of any such transaction:
ALVIN PATRIMONIO (witness)
ATTY. DE VERA: Did you give Nap Gutierrez any Special Power of
Attorney in writing authorizing him to borrow using your money?
WITNESS: No, sir. (T.S.N., Alvin Patrimonio, Nov. 11, 1999, p. 105)8
Marasigan however submits that the petitioner’s acts of pre-signing
the blank checks and releasing them to Gutierrez suffice to establish
that the petitioner had authorized Gutierrez to fill them out and
contract the loan in his behalf.
Marasigan’s submission fails to persuade us.
In the absence of any authorization, Gutierrez could not enter into a
contract of loan in behalf of the petitioner. As held in Yasuma v.
Heirs of De Villa,9 involving a loan contracted by de Villa secured by
real estate mortgages in the name of East Cordillera Mining
Corporation, in the absence of an SPA conferring authority on de
Villa, there is no basis to hold the corporation liable, to wit:
The power to borrow money is one of those cases where corporate
officers as agents of the corporation need a special power of
attorney. In the case at bar, no special power of attorney conferring
authority on de Villa was ever presented. x x x There was no showing
that respondent corporation ever authorized de Villa to obtain the
loans on its behalf.
Therefore, on the first issue, the loan was personal to de Villa. There
was no basis to hold the corporation liable since there was no
authority, express, implied or apparent, given to de Villa to borrow
money from petitioner. Neither was there any subsequent
ratification of his act.
47
The liability arising from the loan was the sole indebtedness of de
Villa (or of his estate after his death). (citations omitted; emphasis
supplied).
This principle was also reiterated in the case of Gozun v. Mercado,10
where this court held:
Petitioner submits that his following testimony suffices to establish
that respondent had authorized Lilian to obtain a loan from him.
Petitioner’s testimony failed to categorically state, however,
whether the loan was made on behalf of respondent or of his wife.
While petitioner claims that Lilian was authorized by respondent,
the statement of account marked as Exhibit "A" states that the
amount was received by Lilian "in behalf of Mrs. Annie Mercado.
It bears noting that Lilian signed in the receipt in her name alone,
without indicating therein that she was acting for and in behalf of
respondent. She thus bound herself in her personal capacity and not
as an agent of respondent or anyone for that matter.
It is a general rule in the law of agency that, in order to bind the
principal by a mortgage on real property executed by an agent, it
must upon its face purport to be made, signed and sealed in the
name of the principal, otherwise, it will bind the agent only. It is not
enough merely that the agent was in fact authorized to make the
mortgage, if he has not acted in the name of the principal. x x x
(emphasis supplied).
In the absence of any showing of any agency relations or special
authority to act for and in behalf of the petitioner, the loan
agreement Gutierrez entered into with Marasigan is null and void.
Thus, the petitioner is not bound by the parties’ loan agreement.
Furthermore, that the petitioner entrusted the blank pre-signed
checks to Gutierrez is not legally sufficient because the authority to
enter into a loan can never be presumed. The contract of agency
and the special fiduciary relationship inherent in this contract must
exist as a matter of fact. The person alleging it has the burden of
proof to show, not only the fact of agency, but also its nature and
extent.11 As we held in People v. Yabut:12
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 beno 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 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. This is more imperative when it is considered that the
transaction dealt with involves checks, which are not legal tender,

and the creditor may validly refuse the same as payment of
obligation.(at p. 630). (emphasis supplied)
The records show that Marasigan merely relied on the words of
Gutierrez without securing a copy of the SPA in favor of the latter
and without verifying from the petitioner whether he had
authorized the borrowing of money or release of the check. He was
thus bound by the risk accompanying his trust on the mere
assurances of Gutierrez.
No Contract of Loan Was Perfected Between Marasigan And
Petitioner, as The Latter’s Consent Was Not Obtained.
Another significant point that the lower courts failed to consider is
that a contract of loan, like any other contract, is subject to the rules
governing the requisites and validity of contracts in general. 13 Article
1318 of the Civil Code14 enumerates the essential requisites for a
valid contract, namely:
1. consent of the contracting parties;
2. object certain which is the subject matter of the
contract; and
3. cause of the obligation which is established.
In this case, the petitioner denied liability on the ground that the
contract lacked the essential element of consent. We agree with the
petitioner. As we explained above, Gutierrez did not have the
petitioner’s written/verbal authority to enter into a contract of loan.
While there may be a meeting of the minds between Gutierrez and
Marasigan, such agreement cannot bind the petitioner whose
consent was not obtained and who was not privy to the loan
agreement. Hence, only Gutierrez is bound by the contract of loan.
True, the petitioner had issued several pre-signed checks to
Gutierrez, one of which fell into the hands of Marasigan. This act,
however, does not constitute sufficient authority to borrow money
in his behalf and neither should it be construed as petitioner’s grant
of consent to the parties’ loan agreement. Without any evidence to
prove Gutierrez’ authority, the petitioner’s signature in the check
cannot be taken, even remotely, as sufficient authorization, much
less, consent to the contract of loan. Without the consent given by
one party in a purported contract, such contract could not have
been perfected; there simply was no contract to speak of.15
With the loan issue out of the way, we now proceed to determine
whether the petitioner can be made liable under the check he
signed.
II. Liability Under the Instrument
The answer is supplied by the applicable statutory provision found in
Section 14 of the Negotiable Instruments Law (NIL) which states:
Sec. 14. Blanks; when may be filled.- Where the instrument is
wanting in any material particular, the person in possession thereof
has a prima facie authority to complete it by filling up the blanks
therein. And a signature on a blank paper delivered by the person
48
making the signature in order that the paper may be converted into
a negotiable instrument operates as a prima facie authority to fill it
up as such for any amount. In order, however, that any such
instrument when completed may be enforced against any person
who became a party thereto prior to its completion, it must be filled
up strictly in accordance with the authority given and within a
reasonable time. But if any such instrument, after completion, is
negotiated to a holder in due course, it is valid and effectual for all
purposes in his hands, and he may enforce it as if it had been filled
up strictly in accordance with the authority given and within a
reasonable time.
This provision applies to an incomplete but delivered instrument.
Under this rule, if the maker or drawer delivers a pre-signed blank
paper to another person for the purpose of converting it into a
negotiable instrument, that person is deemed to have prima facie
authority to fill it up. It merely requires that the instrument be in the
possession of a person other than the drawer or maker and from
such possession, together with the fact that the instrument is
wanting in a material particular, the law presumes agency to fill up
the blanks.16
In order however that one who is not a holder in due course can
enforce the instrument against a party prior to the instrument’s
completion, two requisites must exist: (1) that the blank must be
filled strictly in accordance with the authority given; and (2) it must
be filled up within a reasonable time. If it was proven that the
instrument had not been filled up strictly in accordance with the
authority given and within a reasonable time, the maker can set this
up as a personal defense and avoid liability. However, if the holder is
a holder in due course, there is a conclusive presumption that
authority to fill it up had been given and that the same was not in
excess of authority.17
In the present case, the petitioner contends that there is no legal
basis to hold him liable both under the contract and loan and under
the check because: first, the subject check was not completely filled
out strictly under the authority he has given and second, Marasigan
was not a holder in due course.
Marasigan is Not a Holder in Due Course
The Negotiable Instruments Law (NIL) defines 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.(emphasis supplied)

Section 52(c) of the NIL states that a holder in due course is one who
takes the instrument "in good faith and for value." It also provides in
Section 52(d) that in order that one may be a holder in due course, it
is necessary 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.
Acquisition in good faith means taking without knowledge or notice
of equities of any sort which could beset up against a prior holder of
the instrument.18 It means that he does not have any knowledge of
fact which would render it dishonest for him to take a negotiable
paper. The absence of the defense, when the instrument was taken,
is the essential element of good faith.19
As held in De Ocampo v. Gatchalian:20
In order to show that the defendant had "knowledge of such facts
that his action in taking the instrument amounted to bad faith," it is
not necessary to prove that the defendant knew the exact fraud that
was practiced upon the plaintiff by the defendant's assignor, it being
sufficient to show that the defendant had notice that there was
something wrong about his assignor's acquisition of title, although
he did not have notice of the particular wrong that was committed.
It is sufficient that the buyer of a note had notice or knowledge that
the note was in some way tainted with fraud. It is not necessary that
he should know the particulars or even the nature of the fraud, since
all that is required is knowledge of such facts that his action in taking
the note amounted bad faith.
The term ‘bad faith’ does not necessarily involve furtive motives, but
means bad faith in a commercial sense. The manner in which the
defendants conducted their Liberty Loan department provided an
easy way for thieves to dispose of their plunder. It was a case of "no
questions asked." Although gross negligence does not of itself
constitute bad faith, it is evidence from which bad faith may be
inferred. The circumstances thrust the duty upon the defendants to
make further inquiries and they had no right to shut their eyes
deliberately to obvious facts. (emphasis supplied).
In the present case, Marasigan’s knowledge that the petitioner is not
a party or a privy to the contract of loan, and correspondingly had
no obligation or liability to him, renders him dishonest, hence, in bad
faith. The following exchange is significant on this point:
WITNESS: AMBET NABUS
Q: Now, I refer to the second call… after your birthday. Tell us what
you talked about?
A: Since I celebrated my birthday in that place where Nap and I live
together with the other crew, there were several visitors that
included Danny Espiritu. So a week after my birthday, Bong
Marasigan called me up again and he was fuming mad. Nagmumura
na siya. Hinahanap niya si… hinahanap niya si Nap, dahil
pinagtataguan na siya at sinabi na niya na kailangan I-settle na niya
yung utang ni Nap, dahil…
49
WITNESS: Yes. Sinabi niya sa akin na kailangan ayusin na bago pa
mauwi sa kung saan ang tsekeng tumalbog… (He told me that we
have to fix it up before it…) mauwi pa kung saan…
Q: What was your reply, if any?
A: I actually asked him. Kanino ba ang tseke na sinasabi mo?
(Whose check is it that you are referring to or talking about?)
Q: What was his answer?
A: It was Alvin’s check.
Q: What was your reply, if any?
A: I told him do you know that it is not really Alvin who borrowed
money from you or what you want to appear…
Q: What was his reply?
A: Yes, it was Nap, pero tseke pa rin ni Alvin ang hawak ko at si Alvin
ang maiipit dito.(T.S.N., Ambet Nabus, July 27, 2000; pp.65-71;
emphasis supplied)21
Since he knew that the underlying obligation was not actually for the
petitioner, the rule that a possessor of the instrument is prima facie
a holder in due course is inapplicable. As correctly noted by the CA,
his inaction and failure to verify, despite knowledge of that the
petitioner was not a party to the loan, may be construed as gross
negligence amounting to bad faith.
Yet, it does not follow that simply because he is not a holder in due
course, Marasigan is already totally barred from recovery. The NIL
does not provide that a holder who is not a holder in due course
may not in any case recover on the instrument.22 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.23 Among such defenses is the filling up blank not within
the authority.
On this point, the petitioner argues that the subject check was not
filled up strictly on the basis of the authority he gave. He points to
his instruction not to use the check without his prior approval and
argues that the check was filled up in violation of said instruction.
Check Was Not Completed Strictly Under The Authority Given by The
Petitioner
Our own examination of the records tells us that Gutierrez has
exceeded the authority to fill up the blanks and use the
check.1âwphi1 To repeat, petitioner gave Gutierrez pre-signed
checks to be used in their business provided that he could only use
them upon his approval. His instruction could not be any clearer as
Gutierrez’ authority was limited to the use of the checks for the
operation of their business, and on the condition that the
petitioner’s prior approval be first secured.
 50

While under the law, Gutierrez had a prima facie authority to

complete the check, such prima facie authority does not extend to
its use (i.e., subsequent transfer or negotiation)once the check is
completed. In other words, only the authority to complete the check
is presumed. Further, the law used the term "prima facie" to
underscore the fact that the authority which the law accords to a
holder is a presumption juris tantumonly; hence, subject to subject
to contrary proof. Thus, evidence that there was no authority or that
the authority granted has been exceeded may be presented by the
maker in order to avoid liability under the instrument.

In the present case, no evidence is on record that Gutierrez ever

secured prior approval from the petitioner to fill up the blank or to
use the check. In his testimony, petitioner asserted that he never
authorized nor approved the filling up of the blank checks, thus:

ATTY. DE VERA: Did you authorize anyone including Nap Gutierrez to

write the date, May 23, 1994?

WITNESS: No, sir.

Q: Did you authorize anyone including Nap Gutierrez to put the

word cash? In the check?

A: No, sir.

Q: Did you authorize anyone including Nap Gutierrez to write the

figure P200,000 in this check?

A: No, sir.

Q: And lastly, did you authorize anyone including Nap Gutierrez to

write the words P200,000 only xx in this check?

A: No, sir. (T.S.N., Alvin Patrimonio, November 11, 1999).24

Notably, Gutierrez was only authorized to use the check for business
expenses; thus, he exceeded the authority when he used the check
to pay the loan he supposedly contracted for the construction of
petitioner's house. This is a clear violation of the petitioner's
instruction to use the checks for the expenses of Slam Dunk. It
cannot therefore be validly concluded that the check was completed
strictly in accordance with the authority given by the petitioner.

Considering that Marasigan is not a holder in due course, the

petitioner can validly set up the personal defense that the blanks
were not filled up in accordance with the authority he gave.
Consequently, Marasigan has no right to enforce payment against
the petitioner and the latter cannot be obliged to pay the face value
of the check.

WHEREFORE, in view of the foregoing, judgment is hereby rendered

GRANTING the petitioner Alvin Patrimonio's petition for review on
certiorari. The appealed Decision dated September 24, 2008 and the
Resolution dated April 30, 2009 of the Court of Appeals are
consequently ANNULLED AND SET ASIDE. Costs against the
respondents.

SO ORDERED.

FIRST DIVISION
G.R. No. 150228 July 30, 2009
BANK OF AMERICA NT & SA, Petitioner,
vs.
PHILIPPINE RACING CLUB, Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
This is a petition for review on certiorari under Rule 45 of the Rules
of Court from the Decision1 promulgated on July 16, 2001 by the
former Second Division of the Court of Appeals (CA), in CA-G.R. CV
No. 45371 entitled "Philippine Racing Club, Inc. v. Bank of America
NT & SA," affirming the Decision2 dated March 17, 1994 of the
Regional Trial Court (RTC) of Makati, Branch 135 in Civil Case No. 89-
5650, in favor of the respondent. Likewise, the present petition
assails the Resolution3 promulgated on September 28, 2001, denying
the Motion for Reconsideration of the CA Decision.
The facts of this case as narrated in the assailed CA Decision are as
follows:
Plaintiff-appellee PRCI is a domestic corporation which maintains
several accounts with different banks in the Metro Manila area.
Among the accounts maintained was Current Account No. 58891-
012 with defendant-appellant BA (Paseo de Roxas Branch). The
authorized joint signatories with respect to said Current Account
were plaintiff-appellee’s President (Antonia Reyes) and Vice
President for Finance (Gregorio Reyes).
On or about the 2nd week of December 1988, the President and
Vice President of plaintiff-appellee corporation were scheduled to
go out of the country in connection with the corporation’s business.
In order not to disrupt operations in their absence, they pre-signed
several checks relating to Current Account No. 58891-012. The
intention was to insure continuity of plaintiff-appellee’s operations
by making available cash/money especially to settle obligations that
might become due. These checks were entrusted to the accountant
with instruction to make use of the same as the need arose. The
internal arrangement was, in the event there was need to make use
of the checks, the accountant would prepare the corresponding
voucher and thereafter complete the entries on the pre-signed
checks.
It turned out that on December 16, 1988, a John Doe presented to
defendant-appellant bank for encashment a couple of plaintiff-
appellee corporation’s checks (Nos. 401116 and 401117) with the
indicated value of P110,000.00 each. It is admitted that these 2
checks were among those presigned by plaintiff-appellee
corporation’s authorized signatories.
The two (2) checks had similar entries with similar infirmities and
irregularities. On the space where the name of the payee should be
indicated (Pay To The Order Of) the following 2-line entries were
instead typewritten: on the upper line was the word "CASH" while
the lower line had the following typewritten words, viz: "ONE
HUNDRED TEN THOUSAND PESOS ONLY." Despite the highly
51
irregular entries on the face of the checks, defendant-appellant
bank, without as much as verifying and/or confirming the legitimacy
of the checks considering the substantial amount involved and the
obvious infirmity/defect of the checks on their faces, encashed said
checks. A verification process, even by was of a telephone call to
PRCI office, would have taken less than ten (10) minutes. But this
was not done by BA. Investigation conducted by plaintiff-appellee
corporation yielded the fact that there was no transaction involving
PRCI that call for the payment of P220,000.00 to anyone. The checks
appeared to have come into the hands of an employee of PRCI (one
Clarita Mesina who was subsequently criminally charged for
qualified theft) who eventually completed without authority the
entries on the pre-signed checks. PRCI’s demand for defendant-
appellant to pay fell on deaf ears. Hence, the complaint.4
After due proceedings, the trial court rendered a Decision in favor of
respondent, the dispositive portion of which reads:
PREMISES CONSIDERED, judgment is hereby rendered in favor of
plaintiff and against the defendant, and the latter is ordered to pay
plaintiff:
(1) The sum of Two Hundred Twenty Thousand
(P220,000.00) Pesos, with legal interest to be computed
from date of the filing of the herein complaint;
(2) The sum of Twenty Thousand (P20,000.00) Pesos by
way of attorney’s fees;
(3) The sum of Ten Thousand (P10,000.00) Pesos for
litigation expenses, and
(4) To pay the costs of suit.
SO ORDERED.5
Petitioner appealed the aforesaid trial court Decision to the CA
which, however, affirmed said decision in toto in its July 16, 2001
Decision. Petitioner’s Motion for Reconsideration of the CA Decision
was subsequently denied on September 28, 2001.
Petitioner now comes before this Court arguing that:
I. The Court of Appeals gravely erred in holding that the proximate
cause of respondent’s loss was petitioner’s encashment of the
checks.
A. The Court of Appeals gravely erred in holding that
petitioner was liable for the amount of the checks despite
the fact that petitioner was merely fulfilling its obligation
under law and contract.
B. The Court of Appeals gravely erred in holding that
petitioner had a duty to verify the encashment, despite
the absence of any obligation to do so.
C. The Court of Appeals gravely erred in not applying
Section 14 of the Negotiable Instruments Law, despite its
clear applicability to this case;

II. The Court of Appeals gravely erred in not holding that the
proximate cause of respondent’s loss was its own grossly negligent
practice of pre-signing checks without payees and amounts and
delivering these pre-signed checks to its employees (other than their
signatories).
III. The Court of Appeals gravely erred in affirming the trial court’s
award of attorney’s fees despite the absence of any applicable
ground under Article 2208 of the Civil Code.
IV. The Court of Appeals gravely erred in not awarding attorney’s
fees, moral and exemplary damages, and costs of suit in favor of
petitioner, who clearly deserves them.6
From the discussions of both parties in their pleadings, the key issue
to be resolved in the present case is whether the proximate cause of
the wrongful encashment of the checks in question was due to (a)
petitioner’s failure to make a verification regarding the said checks
with the respondent in view of the misplacement of entries on the
face of the checks or (b) the practice of the respondent of pre-
signing blank checks and leaving the same with its employees.
Petitioner insists that it merely fulfilled its obligation under law and
contract when it encashed the aforesaid checks. Invoking Sections
1267 and 1858 of the Negotiable Instruments Law (NIL), petitioner
claims that its duty as a drawee bank to a drawer-client maintaining
a checking account with it is to pay orders for checks bearing the
drawer-client’s genuine signatures. The genuine signatures of the
client’s duly authorized signatories affixed on the checks signify the
order for payment. Thus, pursuant to the said obligation, the drawee
bank has the duty to determine whether the signatures appearing
on the check are the drawer-client’s or its duly authorized
signatories. If the signatures are genuine, the bank has the
unavoidable legal and contractual duty to pay. If the signatures are
forged and falsified, the drawee bank has the corollary, but equally
unavoidable legal and contractual, duty not to pay.9
Furthermore, petitioner maintains that there exists a duty on the
drawee bank to inquire from the drawer before encashing a check
only when the check bears a material alteration. A material
alteration is defined in Section 125 of the NIL to be one which
changes the date, the sum payable, the time or place of payment,
the number or relations of the parties, the currency in which
payment is to be made or one which adds a place of payment where
no place of payment is specified, or any other change or addition
which alters the effect of the instrument in any respect. With
respect to the checks at issue, petitioner points out that they do not
contain any material alteration.10 This is a fact which was affirmed
by the trial court itself.11
There is no dispute that the signatures appearing on the subject
checks were genuine signatures of the respondent’s authorized joint
signatories; namely, Antonia Reyes and Gregorio Reyes who were
respondent’s President and Vice-President for Finance, respectively.
Both pre-signed the said checks since they were both scheduled to
go abroad and it was apparently their practice to leave with the
company accountant checks signed in black to answer for company
obligations that might fall due during the signatories’ absence. It is
likewise admitted that neither of the subject checks contains any
material alteration or erasure.
52
However, on the blank space of each check reserved for the payee,
the following typewritten words appear: "ONE HUNDRED TEN
THOUSAND PESOS ONLY." Above the same is the typewritten word,
"CASH." On the blank reserved for the amount, the same amount of
One Hundred Ten Thousand Pesos was indicated with the use of a
check writer. The presence of these irregularities in each check
should have alerted the petitioner to be cautious before proceeding
to encash them which it did not do.
It is well-settled that banks are engaged in a business impressed
with public interest, and it is their duty to protect in return their
many clients and depositors who transact business with them. They
have the obligation to treat their client’s account meticulously and
with the highest degree of care, considering the fiduciary nature of
their relationship. The diligence required of banks, therefore, is
more than that of a good father of a family.12
Petitioner asserts that it was not duty-bound to verify with the
respondent since the amount below the typewritten word "CASH,"
expressed in words, is the very same amount indicated in figures by
means of a check writer on the amount portion of the check. The
amount stated in words is, therefore, a mere reiteration of the
amount stated in figures. Petitioner emphasizes that a reiteration of
the amount in words is merely a repetition and that a repetition is
not an alteration which if present and material would have enjoined
it to commence verification with respondent.13
We do not agree with petitioner’s myopic view and carefully crafted
defense. Although not in the strict sense "material alterations," the
misplacement of the typewritten entries for the payee and the
amount on the same blank and the repetition of the amount using a
check writer were glaringly obvious irregularities on the face of the
check. Clearly, someone made a mistake in filling up the checks and
the repetition of the entries was possibly an attempt to rectify the
mistake. Also, if the check had been filled up by the person who
customarily accomplishes the checks of respondent, it should have
occurred to petitioner’s employees that it would be unlikely such
mistakes would be made. All these circumstances should have
alerted the bank to the possibility that the holder or the person who
is attempting to encash the checks did not have proper title to the
checks or did not have authority to fill up and encash the same. As
noted by the CA, petitioner could have made a simple phone call to
its client to clarify the irregularities and the loss to respondent due
to the encashment of the stolen checks would have been prevented.
In the case at bar, extraordinary diligence demands that petitioner
should have ascertained from respondent the authenticity of the
subject checks or the accuracy of the entries therein not only
because of the presence of highly irregular entries on the face of the
checks but also of the decidedly unusual circumstances surrounding
their encashment. Respondent’s witness testified that for checks in
amounts greater than Twenty Thousand Pesos (P20,000.00) it is the
company’s practice to ensure that the payee is indicated by name in
the check.14 This was not rebutted by petitioner. Indeed, it is highly
uncommon for a corporation to make out checks payable to "CASH"
for substantial amounts such as in this case. If each irregular
circumstance in this case were taken singly or isolated, the bank’s
employees might have been justified in ignoring them. However, the
confluence of the irregularities on the face of the checks and
circumstances that depart from the usual banking practice of
respondent should have put petitioner’s employees on guard that

the checks were possibly not issued by the respondent in due course
of its business. Petitioner’s subtle sophistry cannot exculpate it from
behavior that fell extremely short of the highest degree of care and
diligence required of it as a banking institution.
Indeed, taking this with the testimony of petitioner’s operations
manager that in case of an irregularity on the face of the check (such
as when blanks were not properly filled out) the bank may or may
not call the client depending on how busy the bank is on a particular
day,15 we are even more convinced that petitioner’s safeguards to
protect clients from check fraud are arbitrary and subjective. Every
client should be treated equally by a banking institution regardless
of the amount of his deposits and each client has the right to expect
that every centavo he entrusts to a bank would be handled with the
same degree of care as the accounts of other clients. Perforce, we
find that petitioner plainly failed to adhere to the high standard of
diligence expected of it as a banking institution.
In defense of its cashier/teller’s questionable action, petitioner
insists that pursuant to Sections 1416 and 1617 of the NIL, it could
validly presume, upon presentation of the checks, that the party
who filled up the blanks had authority and that a valid and
intentional delivery to the party presenting the checks had taken
place. Thus, in petitioner’s view, the sole blame for this debacle
should be shifted to respondent for having its signatories pre-sign
and deliver the subject checks.18 Petitioner argues that there was
indeed delivery in this case because, following American
jurisprudence, the gross negligence of respondent’s accountant in
safekeeping the subject checks which resulted in their theft should
be treated as a voluntary delivery by the maker who is estopped
from claiming non-delivery of the instrument.19
Petitioner’s contention would have been correct if the subject
checks were correctly and properly filled out by the thief and
presented to the bank in good order. In that instance, there would
be nothing to give notice to the bank of any infirmity in the title of
the holder of the checks and it could validly presume that there was
proper delivery to the holder. The bank could not be faulted if it
encashed the checks under those circumstances. However, the
undisputed facts plainly show that there were circumstances that
should have alerted the bank to the likelihood that the checks were
not properly delivered to the person who encashed the same. In all,
we see no reason to depart from the finding in the assailed CA
Decision that the subject checks are properly characterized as
incomplete and undelivered instruments thus making Section 1520 of
the NIL applicable in this case.
However, we do agree with petitioner that respondent’s officers’
practice of pre-signing of blank checks should be deemed seriously
negligent behavior and a highly risky means of purportedly ensuring
the efficient operation of businesses. It should have occurred to
respondent’s officers and managers that the pre-signed blank checks
could fall into the wrong hands as they did in this case where the
said checks were stolen from the company accountant to whom the
checks were entrusted.
Nevertheless, even if we assume that both parties were guilty of
negligent acts that led to the loss, petitioner will still emerge as the
party foremost liable in this case. In instances where both parties
are at fault, this Court has consistently applied the doctrine of last
clear chance in order to assign liability.
53
In Westmont Bank v. Ong,21 we ruled:
…[I]t is petitioner [bank] which had the last clear chance to stop the
fraudulent encashment of the subject checks had it exercised due
diligence and followed the proper and regular banking procedures in
clearing checks. As we had earlier ruled, the one who had a last clear
opportunity to avoid the impending harm but failed to do so is
chargeable with the consequences thereof.22 (emphasis ours)
In the case at bar, petitioner cannot evade responsibility for the loss
by attributing negligence on the part of respondent because, even if
we concur that the latter was indeed negligent in pre-signing blank
checks, the former had the last clear chance to avoid the loss. To
reiterate, petitioner’s own operations manager admitted that they
could have called up the client for verification or confirmation
before honoring the dubious checks. Verily, petitioner had the final
opportunity to avert the injury that befell the respondent. Failing to
make the necessary verification due to the volume of banking
transactions on that particular day is a flimsy and unacceptable
excuse, considering that the "banking business is so impressed with
public interest where the trust and confidence of the public in
general is of paramount importance such that the appropriate
standard of diligence must be a high degree of diligence, if not the
utmost diligence."23 Petitioner’s negligence has been undoubtedly
established and, thus, pursuant to Art. 1170 of the NCC,24 it must
suffer the consequence of said negligence.
In the interest of fairness, however, we believe it is proper to
consider respondent’s own negligence to mitigate petitioner’s
liability. Article 2179 of the Civil Code provides:
Art. 2179. When the plaintiff’s own negligence was the immediate
and proximate cause of his injury, he cannot recover damages. But if
his negligence was only contributory, the immediate and proximate
cause of the injury being the defendant’s lack of due care, the
plaintiff may recover damages, but the courts shall mitigate the
damages to be awarded.1avvph!1
Explaining this provision in Lambert v. Heirs of Ray Castillon,25 the
Court held:
The underlying precept on contributory negligence is that a plaintiff
who is partly responsible for his own injury should not be entitled to
recover damages in full but must bear the consequences of his own
negligence. The defendant must thus be held liable only for the
damages actually caused by his negligence. xxx xxx xxx
As we previously stated, respondent’s practice of signing checks in
blank whenever its authorized bank signatories would travel abroad
was a dangerous policy, especially considering the lack of evidence
on record that respondent had appropriate safeguards or internal
controls to prevent the pre-signed blank checks from falling into the
hands of unscrupulous individuals and being used to commit a fraud
against the company. We cannot believe that there was no other
secure and reasonable way to guarantee the non-disruption of
respondent’s business. As testified to by petitioner’s expert witness,
other corporations would ordinarily have another set of authorized
bank signatories who would be able to sign checks in the absence of
the preferred signatories.26 Indeed, if not for the fortunate
happenstance that the thief failed to properly fill up the subject
checks, respondent would expectedly take the blame for the entire
 54

loss since the defense of forgery of a drawer’s signature(s) would be

unavailable to it. Considering that respondent knowingly took the
risk that the pre-signed blank checks might fall into the hands of
wrongdoers, it is but just that respondent shares in the
responsibility for the loss.

We also cannot ignore the fact that the person who stole the pre-
signed checks subject of this case from respondent’s accountant
turned out to be another employee, purportedly a clerk in
respondent’s accounting department. As the employer of the
"thief," respondent supposedly had control and supervision over its
own employee. This gives the Court more reason to allocate part of
the loss to respondent.

Following established jurisprudential precedents,27 we believe the

allocation of sixty percent (60%) of the actual damages involved in
this case (represented by the amount of the checks with legal
interest) to petitioner is proper under the premises. Respondent
should, in light of its contributory negligence, bear forty percent
(40%) of its own loss.

Finally, we find that the awards of attorney’s fees and litigation

expenses in favor of respondent are not justified under the
circumstances and, thus, must be deleted. The power of the court to
award attorney’s fees and litigation expenses under Article 2208 of
the NCC28 demands factual, legal, and equitable justification.

An adverse decision does not ipso facto justify an award of

attorney’s fees to the winning party.29 Even when a claimant is
compelled to litigate with third persons or to incur expenses to
protect his rights, still attorney’s fees may not be awarded where no
sufficient showing of bad faith could be reflected in a party’s
persistence in a case other than an erroneous conviction of the
righteousness of his cause.30

WHEREFORE, the Decision of the Court of Appeals dated July 16,

2001 and its Resolution dated September 28, 2001 are AFFIRMED
with the following MODIFICATIONS: (a) petitioner Bank of America
NT & SA shall pay to respondent Philippine Racing Club sixty percent
(60%) of the sum of Two Hundred Twenty Thousand Pesos
(P220,000.00) with legal interest as awarded by the trial court and
(b) the awards of attorney’s fees and litigation expenses in favor of
respondent are deleted.

Proportionate costs.

SO ORDERED.

Manila
SECOND DIVISION
G.R. No. 192413 June 13, 2012
Rizal Commercial Banking Corporation, Petitioner,
vs.
Hi-Tri Development Corporation and Luz R. Bakunawa,
Respondents.
DECISION
SERENO, J.:
Before the Court is a Rule 45 Petition for Review on Certiorari filed
by petitioner Rizal Commercial Banking Corporation (RCBC) against
respondents Hi-Tri Development Corporation (Hi-Tri) and Luz R.
Bakunawa (Bakunawa). Petitioner seeks to appeal from the 26
November 2009 Decision and 27 May 2010 Resolution of the Court
of Appeals (CA),1 which reversed and set aside the 19 May 2008
Decision and 3 November 2008 Order of the Makati City Regional
Trial Court (RTC) in Civil Case No. 06-244.2 The case before the RTC
involved the Complaint for Escheat filed by the Republic of the
Philippines (Republic) pursuant to Act No. 3936, as amended by
Presidential Decree No. 679 (P.D. 679), against certain deposits,
credits, and unclaimed balances held by the branches of various
banks in the Philippines. The trial court declared the amounts,
subject of the special proceedings, escheated to the Republic and
ordered them deposited with the Treasurer of the Philippines
(Treasurer) and credited in favor of the Republic.3 The assailed RTC
judgments included an unclaimed balance in the amount of P
1,019,514.29, maintained by RCBC in its Ermita Business Center
branch.
We quote the narration of facts of the CA4 as follows:
x x x Luz [R.] Bakunawa and her husband Manuel, now deceased
("Spouses Bakunawa") are registered owners of six (6) parcels of
land covered by TCT Nos. 324985 and 324986 of the Quezon City
Register of Deeds, and TCT Nos. 103724, 98827, 98828 and 98829 of
the Marikina Register of Deeds. These lots were sequestered by the
Presidential Commission on Good Government [(PCGG)].
Sometime in 1990, a certain Teresita Millan ("Millan"), through her
representative, Jerry Montemayor, offered to buy said lots for "P
6,724,085.71", with the promise that she will take care of clearing
whatever preliminary obstacles there may[]be to effect a
"completion of the sale". The Spouses Bakunawa gave to Millan the
Owner’s Copies of said TCTs and in turn, Millan made a
down[]payment of "P 1,019,514.29" for the intended purchase.
However, for one reason or another, Millan was not able to clear
said obstacles. As a result, the Spouses Bakunawa rescinded the sale
and offered to return to Millan her down[]payment of P
1,019,514.29. However, Millan refused to accept back the P
1,019,514.29 down[]payment. Consequently, the Spouses
Bakunawa, through their company, the Hi-Tri Development
Corporation ("Hi-Tri") took out on October 28, 1991, a Manager’s
Check from RCBC-Ermita in the amount of P 1,019,514.29, payable
to Millan’s company Rosmil Realty and Development Corporation
55
("Rosmil") c/o Teresita Millan and used this as one of their basis for
a complaint against Millan and Montemayor which they filed with
the Regional Trial Court of Quezon City, Branch 99, docketed as Civil
Case No. Q-91-10719 [in 1991], praying that:
1. That the defendants Teresita Mil[l]an and Jerry
Montemayor may be ordered to return to plaintiffs
spouses the Owners’ Copies of Transfer Certificates of Title
Nos. 324985, 324986, 103724, 98827, 98828 and 98829;
2. That the defendant Teresita Mil[l]an be correspondingly
ordered to receive the amount of One Million Nineteen
Thousand Five Hundred Fourteen Pesos and Twenty Nine
Centavos (P 1,019,514.29);
3. That the defendants be ordered to pay to plaintiffs
spouses moral damages in the amount of P 2,000,000.00;
and
4. That the defendants be ordered to pay plaintiffs
attorney’s fees in the amount of P 50,000.00.
Being part and parcel of said complaint, and consistent with their
prayer in Civil Case No. Q-91-10719 that "Teresita Mil[l]an be
correspondingly ordered to receive the amount of One Million
Nineteen Thousand Five Hundred Fourteen Pesos and Twenty Nine
[Centavos] ("P 1,019,514.29")["], the Spouses Bakunawa, upon
advice of their counsel, retained custody of RCBC Manager’s Check
No. ER 034469 and refrained from canceling or negotiating it.
All throughout the proceedings in Civil Case No. Q-91-10719,
especially during negotiations for a possible settlement of the case,
Millan was informed that the Manager’s Check was available for her
withdrawal, she being the payee.
On January 31, 2003, during the pendency of the abovementioned
case and without the knowledge of [Hi-Tri and Spouses Bakunawa], x
x x RCBC reported the "P 1,019,514.29-credit existing in favor of
Rosmil" to the Bureau of Treasury as among its "unclaimed
balances" as of January 31, 2003. Allegedly, a copy of the Sworn
Statement executed by Florentino N. Mendoza, Manager and Head
of RCBC’s Asset Management, Disbursement & Sundry Department
("AMDSD") was posted within the premises of RCBC-Ermita.
On December 14, 2006, x x x Republic, through the [Office of the
Solicitor General (OSG)], filed with the RTC the action below for
Escheat [(Civil Case No. 06-244)].
On April 30, 2008, [Spouses Bakunawa] settled amicably their
dispute with Rosmil and Millan. Instead of only the amount of "P
1,019,514.29", [Spouses Bakunawa] agreed to pay Rosmil and Millan
the amount of "P 3,000,000.00", [which is] inclusive [of] the amount
of ["]P 1,019,514.29". But during negotiations and evidently prior to
said settlement, [Manuel Bakunawa, through Hi-Tri] inquired from
RCBC-Ermita the availability of the P 1,019,514.29 under RCBC
Manager’s Check No. ER 034469. [Hi-Tri and Spouses Bakunawa]
were however dismayed when they were informed that the amount
was already subject of the escheat proceedings before the RTC.

On April 17, 2008, [Manuel Bakunawa, through Hi-Tri] wrote x x x
RCBC, viz:
"We understand that the deposit corresponding to the amount of
Php 1,019,514.29 stated in the Manager’s Check is currently the
subject of escheat proceedings pending before Branch 150 of the
Makati Regional Trial Court.
Please note that it was our impression that the deposit would be
taken from [Hi-Tri’s] RCBC bank account once an order to debit is
issued upon the payee’s presentation of the Manager’s Check. Since
the payee rejected the negotiated Manager’s Check, presentation of
the Manager’s Check was never made.
Consequently, the deposit that was supposed to be allocated for the
payment of the Manager’s Check was supposed to remain part of
the Corporation[’s] RCBC bank account, which, thereafter, continued
to be actively maintained and operated. For this reason, We hereby
demand your confirmation that the amount of Php 1,019,514.29
continues to form part of the funds in the Corporation’s RCBC bank
account, since pay-out of said amount was never ordered. We wish
to point out that if there was any attempt on the part of RCBC to
consider the amount indicated in the Manager’s Check separate
from the Corporation’s bank account, RCBC would have issued a
statement to that effect, and repeatedly reminded the Corporation
that the deposit would be considered dormant absent any fund
movement. Since the Corporation never received any statements of
account from RCBC to that effect, and more importantly, never
received any single letter from RCBC noting the absence of fund
movement and advising the Corporation that the deposit would be
treated as dormant."
On April 28, 2008, [Manuel Bakunawa] sent another letter to x x x
RCBC reiterating their position as above-quoted.
In a letter dated May 19, 2008, x x x RCBC replied and informed [Hi-
Tri and Spouses Bakunawa] that:
"The Bank’s Ermita BC informed Hi-Tri and/or its principals regarding
the inclusion of Manager’s Check No. ER034469 in the escheat
proceedings docketed as Civil Case No. 06-244, as well as the status
thereof, between 28 January 2008 and 1 February 2008.
Contrary to what Hi-Tri hopes for, the funds covered by the
Manager’s Check No. ER034469 does not form part of the Bank’s
own account. By simple operation of law, the funds covered by the
manager’s check in issue became a deposit/credit susceptible for
inclusion in the escheat case initiated by the OSG and/or Bureau of
Treasury.
Granting arguendo that the Bank was duty-bound to make good the
check, the Bank’s obligation to do so prescribed as early as October
2001."
(Emphases, citations, and annotations were omitted.)
The RTC Ruling
The escheat proceedings before the Makati City RTC continued. On
19 May 2008, the trial court rendered its assailed Decision declaring
56
the deposits, credits, and unclaimed balances subject of Civil Case
No. 06-244 escheated to the Republic. Among those included in the
order of forfeiture was the amount of P 1,019,514.29 held by RCBC
as allocated funds intended for the payment of the Manager’s Check
issued in favor of Rosmil. The trial court ordered the deposit of the
escheated balances with the Treasurer and credited in favor of the
Republic. Respondents claim that they were not able to participate
in the trial, as they were not informed of the ongoing escheat
proceedings.
Consequently, respondents filed an Omnibus Motion dated 11 June
2008, seeking the partial reconsideration of the RTC Decision insofar
as it escheated the fund allocated for the payment of the Manager’s
Check. They asked that they be included as party-defendants or, in
the alternative, allowed to intervene in the case and their motion
considered as an answer-in-intervention. Respondents argued that
they had meritorious grounds to ask reconsideration of the Decision
or, alternatively, to seek intervention in the case. They alleged that
the deposit was subject of an ongoing dispute (Civil Case No. Q-91-
10719) between them and Rosmil since 1991, and that they were
interested parties to that case.5
On 3 November 2008, the RTC issued an Order denying the motion
of respondents. The trial court explained that the Republic had
proven compliance with the requirements of publication and notice,
which served as notice to all those who may be affected and
prejudiced by the Complaint for Escheat. The RTC also found that
the motion failed to point out the findings and conclusions that were
not supported by the law or the evidence presented, as required by
Rule 37 of the Rules of Court. Finally, it ruled that the alternative
prayer to intervene was filed out of time.
The CA Ruling
On 26 November 2009, the CA issued its assailed Decision reversing
the 19 May 2008 Decision and 3 November 2008 Order of the RTC.
According to the appellate court,6 RCBC failed to prove that the
latter had communicated with the purchaser of the Manager’s
Check (Hi-Tri and/or Spouses Bakunawa) or the designated payee
(Rosmil) immediately before the bank filed its Sworn Statement on
the dormant accounts held therein. The CA ruled that the bank’s
failure to notify respondents deprived them of an opportunity to
intervene in the escheat proceedings and to present evidence to
substantiate their claim, in violation of their right to due process.
Furthermore, the CA pronounced that the Makati City RTC Clerk of
Court failed to issue individual notices directed to all persons
claiming interest in the unclaimed balances, as well as to require
them to appear after publication and show cause why the unclaimed
balances should not be deposited with the Treasurer of the
Philippines. It explained that the jurisdictional requirement of
individual notice by personal service was distinct from the
requirement of notice by publication. Consequently, the CA held
that the Decision and Order of the RTC were void for want of
jurisdiction.
Issue
After a perusal of the arguments presented by the parties, we cull
the main issues as follows:

I. Whether the Decision and Order of the RTC were void
for failure to send separate notices to respondents by
personal service
II. Whether petitioner had the obligation to notify
respondents immediately before it filed its Sworn
Statement with the Treasurer
III. Whether or not the allocated funds may be escheated
in favor of the Republic
Discussion
Petitioner bank assails7 the CA judgments insofar as they ruled that
notice by personal service upon respondents is a jurisdictional
requirement in escheat proceedings. Petitioner contends that
respondents were not the owners of the unclaimed balances and
were thus not entitled to notice from the RTC Clerk of Court. It
hinges its claim on the theory that the funds represented by the
Manager’s Check were deemed transferred to the credit of the
payee or holder upon its issuance.
We quote the pertinent provision of Act No. 3936, as amended, on
the rule on service of processes, to wit:
Sec. 3. Whenever the Solicitor General shall be informed of such
unclaimed balances, he shall commence an action or actions in the
name of the People of the Republic of the Philippines in the Court of
First Instance of the province or city where the bank, building and
loan association or trust corporation is located, in which shall be
joined as parties the bank, building and loan association or trust
corporation and all such creditors or depositors. All or any of such
creditors or depositors or banks, building and loan association or
trust corporations may be included in one action. Service of process
in such action or actions shall be made by delivery of a copy of the
complaint and summons to the president, cashier, or managing
officer of each defendant bank, building and loan association or
trust corporation and by publication of a copy of such summons in a
newspaper of general circulation, either in English, in Filipino, or in a
local dialect, published in the locality where the bank, building and
loan association or trust corporation is situated, if there be any, and
in case there is none, in the City of Manila, at such time as the court
may order. Upon the trial, the court must hear all parties who have
appeared therein, and if it be determined that such unclaimed
balances in any defendant bank, building and loan association or
trust corporation are unclaimed as hereinbefore stated, then the
court shall render judgment in favor of the Government of the
Republic of the Philippines, declaring that said unclaimed balances
have escheated to the Government of the Republic of the
Philippines and commanding said bank, building and loan
association or trust corporation to forthwith deposit the same with
the Treasurer of the Philippines to credit of the Government of the
Republic of the Philippines to be used as the National Assembly may
direct.
At the time of issuing summons in the action above provided for, the
clerk of court shall also issue a notice signed by him, giving the title
and number of said action, and referring to the complaint therein,
and directed to all persons, other than those named as defendants
therein, claiming any interest in any unclaimed balance mentioned
in said complaint, and requiring them to appear within sixty days
57
after the publication or first publication, if there are several, of such
summons, and show cause, if they have any, why the unclaimed
balances involved in said action should not be deposited with the
Treasurer of the Philippines as in this Act provided and notifying
them that if they do not appear and show cause, the Government of
the Republic of the Philippines will apply to the court for the relief
demanded in the complaint. A copy of said notice shall be attached
to, and published with the copy of, said summons required to be
published as above, and at the end of the copy of such notice so
published, there shall be a statement of the date of publication, or
first publication, if there are several, of said summons and notice.
Any person interested may appear in said action and become a party
thereto. Upon the publication or the completion of the publication,
if there are several, of the summons and notice, and the service of
the summons on the defendant banks, building and loan
associations or trust corporations, the court shall have full and
complete jurisdiction in the Republic of the Philippines over the said
unclaimed balances and over the persons having or claiming any
interest in the said unclaimed balances, or any of them, and shall
have full and complete jurisdiction to hear and determine the issues
herein, and render the appropriate judgment thereon. (Emphasis
supplied.)
Hence, insofar as banks are concerned, service of processes is made
by delivery of a copy of the complaint and summons upon the
president, cashier, or managing officer of the defendant bank.8 On
the other hand, as to depositors or other claimants of the unclaimed
balances, service is made by publication of a copy of the summons in
a newspaper of general circulation in the locality where the
institution is situated.9 A notice about the forthcoming escheat
proceedings must also be issued and published, directing and
requiring all persons who may claim any interest in the unclaimed
balances to appear before the court and show cause why the
dormant accounts should not be deposited with the Treasurer.
Accordingly, the CA committed reversible error when it ruled that
the issuance of individual notices upon respondents was a
jurisdictional requirement, and that failure to effect personal service
on them rendered the Decision and the Order of the RTC void for
want of jurisdiction. Escheat proceedings are actions in rem,10
whereby an action is brought against the thing itself instead of the
person.11 Thus, an action may be instituted and carried to judgment
without personal service upon the depositors or other claimants.12
Jurisdiction is secured by the power of the court over the res.13
Consequently, a judgment of escheat is conclusive upon persons
notified by advertisement, as publication is considered a general and
constructive notice to all persons interested.14
Nevertheless, we find sufficient grounds to affirm the CA on the
exclusion of the funds allocated for the payment of the Manager’s
Check in the escheat proceedings.
Escheat proceedings refer to the judicial process in which the state,
by virtue of its sovereignty, steps in and claims abandoned, left
vacant, or unclaimed property, without there being an interested
person having a legal claim thereto.15 In the case of dormant
accounts, the state inquires into the status, custody, and ownership
of the unclaimed balance to determine whether the inactivity was
brought about by the fact of death or absence of or abandonment
by the depositor.16 If after the proceedings the property remains
without a lawful owner interested to claim it, the property shall be

reverted to the state "to forestall an open invitation to self-service
by the first comers."17 However, if interested parties have come
forward and lain claim to the property, the courts shall determine
whether the credit or deposit should pass to the claimants or be
forfeited in favor of the state.18 We emphasize that escheat is not a
proceeding to penalize depositors for failing to deposit to or
withdraw from their accounts. It is a proceeding whereby the state
compels the surrender to it of unclaimed deposit balances when
there is substantial ground for a belief that they have been
abandoned, forgotten, or without an owner.19
Act No. 3936, as amended, outlines the proper procedure to be
followed by banks and other similar institutions in filing a sworn
statement with the Treasurer concerning dormant accounts:
Sec. 2. Immediately after the taking effect of this Act and within the
month of January of every odd year, all banks, building and loan
associations, and trust corporations shall forward to the Treasurer of
the Philippines a statement, under oath, of their respective
managing officers, of all credits and deposits held by them in favor
of persons known to be dead, or who have not made further
deposits or withdrawals during the preceding ten years or more,
arranged in alphabetical order according to the names of creditors
and depositors, and showing:
(a) The names and last known place of residence or post
office addresses of the persons in whose favor such
unclaimed balances stand;
(b) The amount and the date of the outstanding unclaimed
balance and whether the same is in money or in security,
and if the latter, the nature of the same;
(c) The date when the person in whose favor the
unclaimed balance stands died, if known, or the date when
he made his last deposit or withdrawal; and
(d) The interest due on such unclaimed balance, if any, and
the amount thereof.
A copy of the above sworn statement shall be posted in a
conspicuous place in the premises of the bank, building and loan
association, or trust corporation concerned for at least sixty days
from the date of filing thereof: Provided, That immediately before
filing the above sworn statement, the bank, building and loan
association, and trust corporation shall communicate with the
person in whose favor the unclaimed balance stands at his last
known place of residence or post office address.
It shall be the duty of the Treasurer of the Philippines to inform the
Solicitor General from time to time the existence of unclaimed
balances held by banks, building and loan associations, and trust
corporations. (Emphasis supplied.)
As seen in the afore-quoted provision, the law sets a detailed system
for notifying depositors of unclaimed balances. This notification is
meant to inform them that their deposit could be escheated if left
unclaimed. Accordingly, before filing a sworn statement, banks and
other similar institutions are under obligation to communicate with
owners of dormant accounts. The purpose of this initial notice is for
58
a bank to determine whether an inactive account has indeed been
unclaimed, abandoned, forgotten, or left without an owner. If the
depositor simply does not wish to touch the funds in the meantime,
but still asserts ownership and dominion over the dormant account,
then the bank is no longer obligated to include the account in its
sworn statement.20 It is not the intent of the law to force depositors
into unnecessary litigation and defense of their rights, as the state is
only interested in escheating balances that have been abandoned
and left without an owner.
In case the bank complies with the provisions of the law and the
unclaimed balances are eventually escheated to the Republic, the
bank "shall not thereafter be liable to any person for the same and
any action which may be brought by any person against in any bank
xxx for unclaimed balances so deposited xxx shall be defended by
the Solicitor General without cost to such bank."21 Otherwise, should
it fail to comply with the legally outlined procedure to the prejudice
of the depositor, the bank may not raise the defense provided under
Section 5 of Act No. 3936, as amended.
Petitioner asserts22 that the CA committed a reversible error when it
required RCBC to send prior notices to respondents about the
forthcoming escheat proceedings involving the funds allocated for
the payment of the Manager’s Check. It explains that, pursuant to
the law, only those "whose favor such unclaimed balances stand"
are entitled to receive notices. Petitioner argues that, since the
funds represented by the Manager’s Check were deemed
transferred to the credit of the payee upon issuance of the check,
the proper party entitled to the notices was the payee – Rosmil –
and not respondents. Petitioner then contends that, in any event, it
is not liable for failing to send a separate notice to the payee,
because it did not have the address of Rosmil. Petitioner avers that
it was not under any obligation to record the address of the payee of
a Manager’s Check.
In contrast, respondents Hi-Tri and Bakunawa allege23 that they have
a legal interest in the fund allocated for the payment of the
Manager’s Check. They reason that, since the funds were part of the
Compromise Agreement between respondents and Rosmil in a
separate civil case, the approval and eventual execution of the
agreement effectively reverted the fund to the credit of
respondents. Respondents further posit that their ownership of the
funds was evidenced by their continued custody of the Manager’s
Check.
An ordinary check refers to a bill of exchange drawn by a depositor
(drawer) on a bank (drawee),24 requesting the latter to pay a person
named therein (payee) or to the order of the payee or to the bearer,
a named sum of money.25 The issuance of the check does not of
itself operate as an assignment of any part of the funds in the bank
to the credit of the drawer.26 Here, the bank becomes liable only
after it accepts or certifies the check.27 After the check is accepted
for payment, the bank would then debit the amount to be paid to
the holder of the check from the account of the depositor-drawer.
There are checks of a special type called manager’s or cashier’s
checks. These are bills of exchange drawn by the bank’s manager or
cashier, in the name of the bank, against the bank itself.28 Typically,
a manager’s or a cashier’s check is procured from the bank by
allocating a particular amount of funds to be debited from the
depositor’s account or by directly paying or depositing to the bank
 59

the value of the check to be drawn. Since the bank issues the check
in its name, with itself as the drawee, the check is deemed accepted
in advance.29 Ordinarily, the check becomes the primary obligation
of the issuing bank and constitutes its written promise to pay upon
demand.30
Nevertheless, the mere issuance of a manager’s check does not ipso
facto work as an automatic transfer of funds to the account of the
payee. In case the procurer of the manager’s or cashier’s check
retains custody of the instrument, does not tender it to the intended
payee, or fails to make an effective delivery, we find the following
provision on undelivered instruments under the Negotiable
Instruments Law applicable:31
their foregoing actions that they have not abandoned their claim
over the fund, we rule that the allocated deposit, subject of the
Manager’s Check, should be excluded from the escheat proceedings.
We reiterate our pronouncement that the objective of escheat
proceedings is state forfeiture of unclaimed balances. We further
note that there is nothing in the records that would show that the
OSG appealed the assailed CA judgments. We take this failure to
appeal as an indication of disinterest in pursuing the escheat
proceedings in favor of the Republic.
WHEREFORE the Petition is DENIED. The 26 November 2009
Decision and 27 May 2010 Resolution of the Court of Appeals in CA-
G.R. SP No. 107261 are hereby AFFIRMED.

Sec. 16. Delivery; when effectual; when presumed. – Every contract SO ORDERED.
on a negotiable instrument is incomplete and revocable until
delivery of the instrument for the purpose of giving effect thereto.
As between immediate parties and as regards a remote party other
than a holder in due course, the delivery, in order to be effectual,
must be made either by or under the authority of the party making,
drawing, accepting, or indorsing, as the case may be; and, in such
case, the delivery may be shown to have been conditional, or for a
special purpose only, and not for the purpose of transferring the
property in the instrument. But where the instrument is in the hands
of a holder in due course, a valid delivery thereof by all parties prior
to him so as to make them liable to him is conclusively presumed.
And where the instrument is no longer in the possession of a party
whose signature appears thereon, a valid and intentional delivery by
him is presumed until the contrary is proved. (Emphasis supplied.)

Petitioner acknowledges that the Manager’s Check was procured by

respondents, and that the amount to be paid for the check would be
sourced from the deposit account of Hi-Tri.32 When Rosmil did not
accept the Manager’s Check offered by respondents, the latter
retained custody of the instrument instead of cancelling it. As the
Manager’s Check neither went to the hands of Rosmil nor was it
further negotiated to other persons, the instrument remained
undelivered. Petitioner does not dispute the fact that respondents
retained custody of the instrument.33

Since there was no delivery, presentment of the check to the bank

for payment did not occur. An order to debit the account of
respondents was never made. In fact, petitioner confirms that the
Manager’s Check was never negotiated or presented for payment to
its Ermita Branch, and that the allocated fund is still held by the
bank.34 As a result, the assigned fund is deemed to remain part of
the account of Hi-Tri, which procured the Manager’s Check. The
doctrine that the deposit represented by a manager’s check
automatically passes to the payee is inapplicable, because the
instrument – although accepted in advance – remains undelivered.
Hence, respondents should have been informed that the deposit
had been left inactive for more than 10 years, and that it may be
subjected to escheat proceedings if left unclaimed.1âwphi1

After a careful review of the RTC records, we find that it is no longer

necessary to remand the case for hearing to determine whether the
claim of respondents was valid. There was no contention that they
were the procurers of the Manager’s Check. It is undisputed that
there was no effective delivery of the check, rendering the
instrument incomplete. In addition, we have already settled that
respondents retained ownership of the funds. As it is obvious from

SECOND DIVISION
G.R. No. 85419 March 9, 1993
DEVELOPMENT BANK OF RIZAL, plaintiff-petitioner,
vs.
SIMA WEI and/or LEE KIAN HUAT, MARY CHENG UY, SAMSON
TUNG, ASIAN INDUSTRIAL PLASTIC CORPORATION and PRODUCERS
BANK OF THE PHILIPPINES, defendants-respondents.
CAMPOS, JR., J.:
On July 6, 1986, the Development Bank of Rizal (petitioner Bank for
brevity) filed a complaint for a sum of money against respondents
Sima Wei and/or Lee Kian Huat, Mary Cheng Uy, Samson Tung, Asian
Industrial Plastic Corporation (Plastic Corporation for short) and the
Producers Bank of the Philippines, on two causes of action:
(1) To enforce payment of the balance of P1,032,450.02 on
a promissory note executed by respondent Sima Wei on
June 9, 1983; and
(2) To enforce payment of two checks executed by Sima
Wei, payable to petitioner, and drawn against the China
Banking Corporation, to pay the balance due on the
promissory note.
Except for Lee Kian Huat, defendants filed their separate Motions to
Dismiss alleging a common ground that the complaint states no
cause of action. The trial court granted the defendants' Motions to
Dismiss. The Court of Appeals affirmed this decision, * to which the
petitioner Bank, represented by its Legal Liquidator, filed this
Petition for Review by Certiorari, assigning the following as the
alleged errors of the Court of Appeals: 1
(1) THE COURT OF APPEALS ERRED IN HOLDING THAT THE
PLAINTIFF-PETITIONER HAS NO CAUSE OF ACTION
AGAINST DEFENDANTS-RESPONDENTS HEREIN.
(2) THE COURT OF APPEALS ERRED IN HOLDING
THAT SECTION 13, RULE 3 OF THE REVISED RULES OF
COURT ON ALTERNATIVE DEFENDANTS IS NOT APPLICABLE
TO HEREIN DEFENDANTS-RESPONDENTS.
The antecedent facts of this case are as follows:
In consideration for a loan extended by petitioner Bank to
respondent Sima Wei, the latter executed and delivered to the
former a promissory note, engaging to pay the petitioner Bank or
order the amount of P1,820,000.00 on or before June 24, 1983 with
interest at 32% per annum. Sima Wei made partial payments on the
note, leaving a balance of P1,032,450.02. On November 18, 1983,
Sima Wei issued two crossed checks payable to petitioner Bank
drawn against China Banking Corporation, bearing respectively the
serial numbers 384934, for the amount of P550,000.00 and 384935,
for the amount of P500,000.00. The said checks were allegedly
issued in full settlement of the drawer's account evidenced by the
60
promissory note. These two checks were not delivered to the
petitioner-payee or to any of its authorized representatives. For
reasons not shown, these checks came into the possession of
respondent Lee Kian Huat, who deposited the checks without the
petitioner-payee's indorsement (forged or otherwise) to the account
of respondent Plastic Corporation, at the Balintawak branch,
Caloocan City, of the Producers Bank. Cheng Uy, Branch Manager of
the Balintawak branch of Producers Bank, relying on the assurance
of respondent Samson Tung, President of Plastic Corporation, that
the transaction was legal and regular, instructed the cashier of
Producers Bank to accept the checks for deposit and to credit them
to the account of said Plastic Corporation, inspite of the fact that the
checks were crossed and payable to petitioner Bank and bore no
indorsement of the latter. Hence, petitioner filed the complaint as
aforestated.
The main issue before Us is whether petitioner Bank has a cause of
action against any or all of the defendants, in the alternative or
otherwise.
A cause of action is defined as an act or omission of one party in
violation of the legal right or rights of another. The essential
elements are: (1) legal right of the plaintiff; (2) correlative obligation
of the defendant; and (3) an act or omission of the defendant in
violation of said legal right. 2
The normal parties to a check are the drawer, the payee and the
drawee bank. Courts have long recognized the business custom of
using printed checks where blanks are provided for the date of
issuance, the name of the payee, the amount payable and the
drawer's signature. All the drawer has to do when he wishes to issue
a check is to properly fill up the blanks and sign it. However, the
mere fact that he has done these does not give rise to any liability
on his part, until and unless the check is delivered to the payee or
his representative. A negotiable instrument, of which a check is, is
not only a written evidence of a contract right but is also a species of
property. Just as a deed to a piece of land must be delivered in order
to convey title to the grantee, so must a negotiable instrument be
delivered to the payee in order to evidence its existence as a binding
contract. Section 16 of the Negotiable Instruments Law, which
governs checks, provides in part:
Every contract on a negotiable instrument is incomplete
and revocable until delivery of the instrument for the
purpose of giving effect thereto. . . .
Thus, the payee of a negotiable instrument acquires no interest with
respect thereto until its delivery to him. 3 Delivery of an instrument
means transfer of possession, actual or constructive, from one
person to another. 4 Without the initial delivery of the instrument
from the drawer to the payee, there can be no liability on the
instrument. Moreover, such delivery must be intended to give effect
to the instrument.
The allegations of the petitioner in the original complaint show that
the two (2) China Bank checks, numbered 384934 and 384935, were
not delivered to the payee, the petitioner herein. Without the
delivery of said checks to petitioner-payee, the former did not
acquire any right or interest therein and cannot therefore assert any
cause of action, founded on said checks, whether against the drawer
 61

Sima Wei or against the Producers Bank or any of the other SO ORDERED.
respondents.

In the original complaint, petitioner Bank, as plaintiff, sued

respondent Sima Wei on the promissory note, and the alternative
defendants, including Sima Wei, on the two checks. On appeal from
the orders of dismissal of the Regional Trial Court, petitioner Bank
alleged that its cause of action was not based on collecting the sum
of money evidenced by the negotiable instruments stated but on
quasi-delict — a claim for damages on the ground of fraudulent acts
and evident bad faith of the alternative respondents. This was
clearly an attempt by the petitioner Bank to change not only the
theory of its case but the basis of his cause of action. It is well-
settled that a party cannot change his theory on appeal, as this
would in effect deprive the other party of his day in court. 5

Notwithstanding the above, it does not necessarily follow that the

drawer Sima Wei is freed from liability to petitioner Bank under the
loan evidenced by the promissory note agreed to by her. Her
allegation that she has paid the balance of her loan with the two
checks payable to petitioner Bank has no merit for, as We have
earlier explained, these checks were never delivered to petitioner
Bank. And even granting, without admitting, that there was delivery
to petitioner Bank, the delivery of checks in payment of an
obligation does not constitute payment unless they are cashed or
their value is impaired through the fault of the creditor. 6 None of
these exceptions were alleged by respondent Sima Wei.

Therefore, unless respondent Sima Wei proves that she has been
relieved from liability on the promissory note by some other cause,
petitioner Bank has a right of action against her for the balance due
thereon.

However, insofar as the other respondents are concerned, petitioner

Bank has no privity with them. Since petitioner Bank never received
the checks on which it based its action against said respondents, it
never owned them (the checks) nor did it acquire any interest
therein. Thus, anything which the respondents may have done with
respect to said checks could not have prejudiced petitioner Bank. It
had no right or interest in the checks which could have been violated
by said respondents. Petitioner Bank has therefore no cause of
action against said respondents, in the alternative or otherwise. If at
all, it is Sima Wei, the drawer, who would have a cause of action
against her
co-respondents, if the allegations in the complaint are found to be
true.

With respect to the second assignment of error raised by petitioner

Bank regarding the applicability of Section 13, Rule 3 of the Rules of
Court, We find it unnecessary to discuss the same in view of Our
finding that the petitioner Bank did not acquire any right or interest
in the checks due to lack of delivery. It therefore has no cause of
action against the respondents, in the alternative or otherwise.

In the light of the foregoing, the judgment of the Court of Appeals

dismissing the petitioner's complaint is AFFIRMED insofar as the
second cause of action is concerned. On the first cause of action, the
case is REMANDED to the trial court for a trial on the merits,
consistent with this decision, in order to determine whether
respondent Sima Wei is liable to the Development Bank of Rizal for
any amount under the promissory note allegedly signed by her.

EN BANC
G.R. No. L-2861 February 26, 1951
ENRIQUE P. MONTINOLA, plaintiff-appellant,
vs.
THE PHILIPPINE NATIONAL BANK, ET AL., defendants-appellees.
MONTEMAYOR, J.:
In August, 1947, Enrique P. Montinola filed a complaint in the Court
of First Instance of Manila against the Philippine National Bank and
the Provincial Treasurer of Misamis Oriental to collect the sum of
P100,000, the amount of Check No. 1382 issued on May 2, 1942 by
the Provincial Treasurer of Misamis Oriental to Mariano V. Ramos
and supposedly indorsed to Montinola. After hearing, the court
rendered a decision dismissing the complaint with costs against
plaintiff-appellant. Montinola has appealed from that decision
directly to this Court inasmuch as the amount in controversy
exceeds P50,000.
There is no dispute as to the following facts. In April and May, 1942,
Ubaldo D. Laya was the Provincial Treasurer of Misamis Oriental. As
such Provincial Treasurer he was ex officio agent of the Philippine
National Bank branch in the province. Mariano V. Ramos worked
under him as assistant agent in the bank branch aforementioned. In
April of that year 1942, the currency being used in Mindanao,
particularly Misamis Oriental and Lanao which had not yet been
occupied by the Japanese invading forces, was the emergency
currency which had been issued since January, 1942 by the
Mindanao Emergency Currency Board by authority of the late
President Quezon.
About April 26, 1942, thru the recommendation of Provincial
Treasurer Laya, his assistant agent M. V. Ramos was inducted into
the United States Armed Forces in the Far East (USAFFE) as
disbursing officer of an army division. As such disbursing officer, M.
V. Ramos on April 30, 1942, went to the neighboring Province Lanao
to procure a cash advance in the amount of P800,000 for the use of
the USAFFE in Cagayan de Misamis. Pedro Encarnacion, Provincial
Treasurer of Lanao did not have that amount in cash. So, he gave
Ramos P300,000 in emergency notes and a check for P500,000. On
May 2, 1942 Ramos went to the office of Provincial Treasurer Laya at
Misamis Oriental to encash the check for P500,000 which he had
received from the Provincial Treasurer of Lanao. Laya did not have
enough cash to cover the check so he gave Ramos P400,000 in
emergency notes and a check No. 1382 for P100,000 drawn on the
Philippine National Bank. According to Laya he had previously
deposited P500,000 emergency notes in the Philippine National
Bank branch in Cebu and he expected to have the check issued by
him cashed in Cebu against said deposit.
Ramos had no opportunity to cash the check because in the evening
of the same day the check was issued to him, the Japanese forces
entered the capital of Misamis Oriental, and on June 10, 1942, the
USAFFE forces to which he was attached surrendered. Ramos was
made a prisoner of war until February 12, 1943, after which, he was
released and he resumed his status as a civilian.
62
About the last days of December, 1944 or the first days of January,
1945, M. V. Ramos allegedly indorsed this check No. 1382 to Enrique
P. Montinola. The circumstances and conditions under which the
negotiation or transfer was made are in controversy.
According to Montinola's version, sometime in June, 1944, Ramos,
needing money with which to buy foodstuffs and medicine, offered
to sell him the check; to be sure that it was genuine and negotiable,
Montinola, accompanied by his agents and by Ramos himself, went
to see President Carmona of the Philippine National Bank in Manila
about said check; that after examining it President Carmona told him
that it was negotiable but that he should not let the Japanese catch
him with it because possession of the same would indicate that he
was still waiting for the return of the Americans to the Philippines;
that he and Ramos finally agreed to the sale of the check for
P850,000 Japanese military notes, payable in installments; that of
this amount, P450,000 was paid to Ramos in Japanese military notes
in five installments, and the balance of P400,000 was paid in kind,
namely, four bottles of sulphatia sole, each bottle containing 1,000
tablets, and each tablet valued at P100; that upon payment of the
full price, M. V. Ramos duly indorsed the check to him. This
indorsement which now appears on the back of the document is
described in detail by trial court as follows:
The endorsement now appearing at the back of the check
(see Exhibit A-1) may be described as follows: The woods,
"pay to the order of" — in rubber stamp and in violet color
are placed about one inch from the top. This is followed by
the words "Enrique P. Montinola" in typewriting which is
approximately 5/8 an inch below the stamped words "pay
to the order of". Below "Enrique P. Montinola", in
typewriting are words and figures also in typewriting, "517
Isabel Street" and about ¹/8 of an inch therefrom, the
edges of the check appear to have been burned, but there
are words stamped apparently in rubber stamp which,
according to Montinola, are a facsimile of the signature of
Ramos. There is a signature which apparently reads "M. V.
Ramos" also in green ink but made in handwriting."
To the above description we may add that the name of M. V. Ramos
is hand printed in green ink, under the signature. According to
Montinola, he asked Ramos to hand print it because Ramos'
signature was not clear.
Ramos in his turn told the court that the agreement between
himself and Montinola regarding the transfer of the check was that
he was selling only P30,000 of the check and for this reason, at the
back of the document he wrote in longhand the following:
Pay to the order of Enrique P. Montinola P30,000 only. The
balance to be deposited in the Philippine National Bank to
the credit of M. V. Ramos.
Ramos further said that in exchange for this assignment of P30,000
Montinola would pay him P90,000 in Japanese military notes but
that Montinola gave him only two checks of P20,000 and P25,000,
leaving a balance unpaid of P45,000. In this he was corroborated by
Atty. Simeon Ramos Jr. who told the court that the agreement
between Ramos and Montinola was that the latter, for the sale to
him of P30,000 of the check, was to pay Ramos P90,000 in Japanese
military notes; that when the first check for P20,000 was issued by
 63

Montinola, he (Simeon) prepared a document evidencing said appearing on the reverse side of the check, Exhibit A-1, we quote
payment of P20,000; that when the second check for P25,000 was with approval what the trial court presided over by Judge Conrado
issued by Montinola, he (Simeon) prepared another document with V. Sanchez, in its well-prepared decision, says on these points:
two copies, one for Montinola and the other for Ramos, both signed
by Montinola and M. V. Ramos, evidencing said payment, with the The allegedly indorsement: "Pay to the order of Enrique P.
understanding that the balance of P45,000 would be paid in a few Montinola the amount of P30,000 only. The balance to be deposited
days. to the credit of M. V. Ramos", signed by M. V. Ramos-according to
the latter-does not now appear at the back of the check. A different
The indorsement or writing described by M. V. Ramos which had indorsement, as aforesaid, now appears.
been written by him at the back of the check, Exhibit A, does not
now appear at the back of said check. What appears thereon is the Had Montinola really paid in full the sum of P850,000 in Japanese
indosement testified to by Montinola and described by the trial Military Notes as consideration for the check? The following
court as reproduced above. Before going into a discussion of the observations are in point:
merits of the version given by Ramos and Montinola as to the
indorsement or writing at the back of the check, it is well to give a
(a) According to plaintiff's witness Gregorio A. Cortado, the oval line
further description of it as we shall later.
in violet, enclosing "P." of the words "Enrique P. Montinola" and the
line in the form of cane handle crossing the word "street" in the
When Montinola filed his complaint in 1947 he stated therein that words and figures "517 Isabel Street" in the endorsement Exhibit A-1
the check had been lost, and so in lieu thereof he filed a supposed "unusual" to him, and that as far as he could remember this writing
photostic copy. However, at the trial, he presented the check itself did not appear on the instrument and he had no knowledge as to
and had its face marked Exhibit A and the back thereof Exhibit A-1. how it happened to be there. Obviously Cortado had no recollection
But the check is badly mutilated, bottled, torn and partly burned, as to how such marks ever were stamped at the back of the check.
and its condition can best be appreciated by seeing it. Roughly, it
may be stated that looking at the face of the check (Exhibit A) we
(b) Again Cortado, speaking of the endorsement as it now appears at
see that the left third portion of the paper has been cut off
the back of the check (Exh. A-1) stated that Ramos typewrote these
perpendicularly and severed from the remaining 2/3 portion; a
words outside of the premises of Montinola, that is, a nearby house.
triangular portion of the upper right hand corner of said remaining
Montinola, on the other hand, testified that Ramos typewrote the
2/3 portion has been similarly cut off and severed, and to keep and
words "Enrique P. Montinola 517 Isabel Street", in his own house.
attach this triangular portion and the rectangular ¹/3 portion to the
Speaking of the rubber stamp used at the back of the check and
rest of the document, the entire check is pasted on both sides with
which produced the words "pay to the order of", Cortado stated that
cellophane; the edges of the severed portions as well as of the
when he (Cortado), Atadero, Montinola and Ramos returned in
remaining major portion, where cut bear traces of burning and
group to the house of Montinola, the rubber stamp was already in
searing; there is a big blot with indelible ink about the right middle
the house of Montinola, and it was on the table of the upper floor of
portion, which seems to have penetrated to the back of the check
the house, together with the stamp pad used to stamp the same.
(Exhibit A-1), which back bears a larger smear right under the blot,
Montinola, on the other hand, testified that Ramos carried in his
but not black and sharp as the blot itself; finally, all this tearing,
pocket the said rubber stamp as well as the ink pad, and stamped it
burning, blotting and smearing and pasting of the check renders it
in his house.
difficult if not impossible to read some of the words and figures on
the check.
The unusually big space occupied by the indorsement on the back of
the check and the discrepancies in the versions of Montinola and his
In explanation of the mutilation of the check Montinola told the
witness Cortado just noted, create doubts as to whether or not
court that several months after indorsing and delivering the check to
really Ramos made the indorsement as it now appears at the back of
him, Ramos demanded the return of the check to him, threatening
Exhibit A. One thing difficult to understand is why Ramos should go
Montinola with bodily harm, even death by himself or his guerrilla
into the laborious task of placing the rubber stamp "Pay to the order
forces if he did not return said check, and that in order to justify the
of" and afterwards move to the typewriter and write the words
non-delivery of the document and to discourage Ramos from getting
"Enrique P. Montinola" "and "517 Isabel Street", and finally sign his
it back, he (Montinola) had to resort to the mutilation of the
name too far below the main indorsement.
document.

(c) Another circumstances which bears heavily upon the claim of

As to what was really written at the back of the check which
Montinola claims to be a full indorsement of the check, we agree
with trial court that the original writing of Ramos on the back of the
check was to the effect that he was assigning only P30,000 of the
value of the document and that he was instructing the bank to
deposit to his credit the balance. This writing was in some
mysterious way obliterated, and in its place was placed the present
indorsement appearing thereon. Said present indorsement occupies
a good portion of the back of the check. It has already been
described in detail. As to how said present indorsement came to be
written, the circumstances surrounding its preparation, the
supposed participation of M. V. Ramos in it and the writing originally
plaintiff Montinola that he acquired the full value of the check and
paid the full consideration therefor is the present condition of said
check. It is now so unclean and discolored; it is pasted in cellophane,
bottled with ink on both sides torn three parts, and with portions
thereof burned-all done by plaintiff, the alleged owner thereof.
The acts done by the very plaintiff on a document so important and
valuable to him, and which according to him involves his life savings,
approximate intentional cancellation. The only reason advanced by
plaintiff as to why tore check, burned the torn edges and bottled out
the registration at the back, is found in the following: That Ramos
came to his house, armed with a revolver, threatened his life and

demanded from him the return of the check; that when he informed
Ramos that he did not have it in the house, but in some deposit
outside thereof and that Ramos promised to return the next day;
that the same night he tore the check into three parts, burned the
sides with a parrafin candle to show traces of burning; and that
upon the return of Ramos the next day he showed the two parts of
the check, the triangle on the right upper part and the torn piece on
the left part, and upon seeing the condition thereof Ramos did not
bother to get the check back. He also said that he placed the blots in
indelible ink to prevent Ramos — if he would be forced to surrender
the middle part of the check — from seeing that it was registered in
the General Auditing Office.
Conceding at the moment these facts to be true, the question is:
Why should Montinola be afraid of Ramos? Montinola claims that
Ramos went there about April, 1945, that is, during liberation. If he
believed he was standing by his rights, he could have very well
sought police protection or transferred to some place where Ramos
could not bother him. And then, really Ramos did not have anything
more to do with this check for the reason that Montinola had
obtained in full the amount thereof, there could not be any reason
why Ramos should have threatened Montinola as stated by the
latter. Under the circumstances, the most logical conclusion is that
Ramos wanted the check at all costs because Montinola did not
acquire the check to such an extent that it borders on intentional
cancellation thereof (see Sections 119-123 Negotiable Instruments
Law) there is room to believe that Montinola did not have so much
investments in that check as to adopted an "what do I care?"
attitude.
And there is the circumstance of the alleged loss of the check. At the
time of the filing of the complaint the check was allegedly lost, so
much so that a photostatic copy thereof was merely attached to the
complaint (see paragraph 7 of the complaint). Yet, during the trial
the original check Exhibit A was produced in court.
But a comparison between the photostatic copy and the original
check reveals discrepancies between the two. The condition of the
check as it was produced is such that it was partially burned,
partially blotted, badly mutilated, discolored and pasted with
cellophane. What is worse is that Montinola's excuse as to how it
was lost, that it was mixed up with household effects is not
plausible, considering the fact that it involves his life savings, and
that before the alleged loss, he took extreme pains and precautions
to save the check from the possible ravages of the war, had it
photographed, registered said check with the General Auditing
Office and he knew that Ramos, since liberation, was hot after the
possession of that check.
(d) It seems that Montinola was not so sure as to what he had
testified to in reference to the consideration he paid for the check.
In court he testified that he paid P450,000 in cash from June to
December 1944, and P400,000 worth of sulphatiazole in January
1945 to complete the alleged consideration of P850,000. When
Montinola testified this way in court, obviously he overlooked a
letter he wrote to the provincial treasurer of Cagayan, Oriental
Misamis, dated May 1, 1947, Exhibit 3 the record. In that letter
Exhibit 3, Montinola told Provincial Treasurer Elizalde of Misamis
Oriental that "Ramos endorsed it (referring to check) to me for
goods in kind, medicine, etc., received by him for the use of the
64
guerrillas." In said letter Exhibit 3, Montinola did not mention the
cash that he paid for the check.
From the foregoing the court concludes that plaintiff Montinola
came into the possession of the check in question about the end of
December 1944 by reason of the fact that M. V. Ramos sold to him
P30,000 of the face value thereof in consideration of the sum of
P90,000 Japanese money, of which only one-half or P45,000 (in
Japanese money) was actually paid by said plaintiff to Ramos. (R. on
A., pp. 31-33; Brief of Appellee, pp. 14-20.)
At the beginning of this decision, we stated that as Provincial
Treasurer of Misamis Oriental, Ubaldo D. Laya was ex officio agent of
the Philippine National Bank branch in that province. On the face of
the check (Exh. A) we now find the words in parenthesis "Agent,
Phil. National Bank" under the signature of Laya, purportedly
showing that he issued the check as agent of the Philippine National
Bank. It this is true, then the bank is not only drawee but also a
drawer of the check, and Montinola evidently is trying to hold the
Philippine National Bank liable in that capacity of drawer, because as
drawee alone, inasmuch as the bank has not yet accepted or
certified the check, it may yet avoid payment.
Laya, testifying in court, stated that he issued the check only as
Provincial Treasurer, and that the words in parenthesis "Agent, Phil.
National Bank" now appearing under his signature did not appear on
the check when he issued the same. In this he was corroborated by
the payee M. V. Ramos who equally assured the court that when he
received the check and then delivered it to Montinola, those words
did not appear under the signature of Ubaldo D. Laya. We again
quote with approval the pertinent portion of the trial court's
decision:
The question is reduced to whether or not the words,
"Agent, Phil. National Bank" were added after Laya had
issued the check. In a straightforward manner and without
vacillation Laya positively testified that the check Exhibit A
was issued by him in his capacity as Provincial Treasurer of
Misamis Oriental and that the words "Agent, Phil. National
Bank" which now appear on the check Exhibit A were not
typewritten below his signature when he signed the said
check and delivered the same to Ramos. Laya assured the
court that there could not be any mistake as to this. For,
according to Laya, when he issued check in his capacity as
agent of the Misamis Oriental agency of the Philippine
National Bank the said check must be countersigned by
the cashier of the said agency — not by the provincial
auditor. He also testified that the said check was issued by
him in his capacity as provincial treasurer of Misamis
Oriental and that is why the same was countersigned by
Provincial Auditor Flores. The Provincial Auditor at that
time had no connection in any capacity with the Misamis
Oriental agency of the Philippine National Bank. Plaintiff
Montinola on the other hand testified that when he
received the check Exhibit A it already bore the words
"Agent, Phil. National Bank" below the signature of Laya
and the printed words "Provincial Treasurer".
After considering the testimony of the one and the other,
the court finds that the preponderance of the evidence
supports Laya's testimony. In the first place, his testimony

was corroborated by the payee M. V. Ramos. But what
renders more probable the testimony of Laya and Ramos
is the fact that the money for which the check was issued
was expressly for the use of the USAFFE of which Ramos
was then disbursing officer, so much so that upon the
delivery of the P400,000 in emergency notes and the
P100,000 check to Ramos, Laya credited his depository
accounts as provincial treasurer with the corresponding
credit entry. In the normal course of events the check
could not have been issued by the bank, and this is borne
by the fact that the signature of Laya was countersigned
by the provincial auditor, not the bank cashier. And then,
too there is the circumstance that this check was issued by
the provincial treasurer of Lanao to Ramos who
requisitioned the said funds in his capacity as disbursing
officer of the USAFFE. The check, Exhibit A is not what we
may term in business parlance, "certified check" or
"cashier's check."
Besides, at the time the check was issued, Laya already
knew that Cebu and Manila were already occupied. He
could not have therefore issued the check-as a bank
employee-payable at the central office of the Philippine
National Bank.
Upon the foregoing circumstances the court concludes
that the words "Agent, Phil. National Bank' below the
signature of Ubaldo D. Laya and the printed words
"Provincial Treasurer" were added in the check after the
same was issued by the Provincial Treasurer of Misamis
Oriental.
From all the foregoing, we may safely conclude as we do that the
words "Agent, Phil. National Bank" now appearing on the face of the
check (Exh. A) were added or placed in the instrument after it was
issued by Provincial Treasurer Laya to M. V. Ramos. There is no
reason known to us why Provincial Treasurer Laya should issue the
check (Exh. A) as agent of the Philippine National Bank. Said check
for P100,000 was issued to complete the payment of the other
check for P500,000 issued by the Provincial Treasurer of Lanao to
Ramos, as part of the advance funds for the USAFFE in Cagayan de
Misamis. The balance of P400,000 in cash was paid to Ramos by Laya
from the funds, not of the bank but of the Provincial Treasury. Said
USAFFE were being financed not by the Bank but by the Government
and, presumably, one of the reasons for the issuance of the
emergency notes in Mindanao was for this purpose. As already
stated, according to Provincial Treasurer Laya, upon receiving a
relatively considerable amount of these emergency notes for his
office, he deposited P500,000 of said currency in the Philippine
National Bank branch in Cebu, and that in issuing the check (Exh. A),
he expected to have it cashed at said Cebu bank branch against his
deposit of P500,000.
The logical conclusion, therefore, is that the check was issued by
Laya only as Provincial Treasurer and as an official of the
Government which was under obligation to provide the USAFFE with
advance funds, and not by the Philippine National Bank which has no
such obligation. The very Annex C, made part of plaintiff's complaint,
and later introduced in evidence for him as Exhibit E states that Laya
issued the check "in his capacity as Provincial Treasurer of Misamis
Oriental", obviously, not as agent of the Bank.
65
Now, did M. V. Ramos add or place those words below the signature
of Laya before transferring the check to Montinola? Let us bear in
mind that Ramos before his induction into the USAFFE had been
working as assistant of Treasurer Laya as ex-officio agent of the
Misamis Oriental branch of the Philippine National Bank. Naturally,
Ramos must have known the procedure followed there as to the
issuance of checks, namely, that when a check is issued by the
Provincial Treasurer as such, it is countersigned by the Provincial
Auditor as was done on the check (Exhibit A), but that if the
Provincial Treasurer issues a check as agent of the Philippine
National Bank, the check is countersigned not by the Provincial
Auditor who has nothing to do with the bank, but by the bank
cashier, which was not done in this case. It is not likely, therefore,
that Ramos had made the insertion of the words "Agent, Phil.
National Bank" after he received the check, because he should have
realized that following the practice already described, the check
having been issued by Laya as Provincial Treasurer, and not as agent
of the bank, and since the check bears the countersignature not of
the Bank cashier of the Provincial Auditor, the addition of the words
"Agent, Phil. National Bank" could not change the status and
responsibility of the bank. It is therefore more logical to believe and
to find that the addition of those words was made after the check
had been transferred by Ramos to Montinola. Moreover, there are
other facts and circumstances involved in the case which support
this view. Referring to the mimeographed record on appeal filed by
the plaintiff-appellant, we find that in transcribing and copying the
check, particularly the face of it (Exhibit A) in the complaint, the
words "Agent, Phil. National Bank" now appearing on the face of the
check under the signature of the Provincial Treasurer, is missing.
Unless the plaintiff in making this copy or transcription in the
complaint committed a serious omission which is decisive as far as
the bank is concerned, the inference is, that at the time the
complaint was filed, said phrase did not appear on the face of the
check. That probably was the reason why the bank in its motion to
dismiss dated September 2, 1947, contended that if the check in
question had been issued by the provincial treasurer in his capacity
as agent of the Philippine National Bank, said treasurer would have
placed below his signature the words "Agent of the Philippine
National Bank". The plaintiff because of the alleged loss of the
check, allegedly attached to the complaint a photostatic copy of said
check and marked it as Annex A. But in transcribing and copying said
Annex A in his complaint, the phrase "Agent, Phil. National Bank"
does not appear under the signature of the provincial treasurer. We
tried to verify this discrepancy by going over the original records of
the Court of First Instance so as to compare the copy of Annex A in
the complaint, with the original Annex A, the photostatic copy, but
said original Annex A appears to be missing from the record. How it
disappeared is not explained. Of course, now we have in the list of
exhibit a photostatic copy marked Annex A and Exhibit B, but
according to the manifestation of counsel for the plaintiff dated
October 15, 1948, said photostatic copy now marked Annex A and
Exhibit B was submitted on October 15, 1948, in compliance with
the verbal order of the trial court. It is therefore evident that the
Annex A now available is not the same original Annex A attached to
the complaint in 1947.
There is one other circumstance, important and worth nothing. If
Annex A also marked Exhibit B is the photostatic copy of the original
check No. 1382 particularly the face thereof (Exhibit A), then said
photostatic copy should be a faithful and accurate reproduction of
the check, particularly of the phrase "Agent, Phil. National Bank"
now appearing under the signature of the Provincial Treasurer on

the face of the original check (Exhibit A). But a minute examination
of and comparison between Annex A, the photostatic copy also
marked Exhibit B and the face of the check, Exhibit A, especially with
the aid of a handlens, show notable differences and discrepancies.
For instance, on Exhibit A, the letter A of the word "Agent" is toward
the right of the tail of the beginning letter of the signature of Ubaldo
D. Laya; this same letter "A" however in Exhibit B is directly under
said tail.
The letter "N" of the word "National" on Exhibit A is underneath the
space between "Provincial" and "Treasurer"; but the same letter "N"
is directly under the letter "I" of the word "Provincial" in Exhibit B.
The first letter "a" of the word "National" is under "T" of the word
"Treasurer" in Exhibit A; but the same letter "a" in Exhibit "B" is just
below the space between the words "Provincial" and "Treasurer".
The letter "k" of the word "Bank" in Exhibit A is after the green
perpendicular border line near the lower right hand corner of the
edge of the check (Exh. A); this same letter "k" however, on Exhibit B
is on the very border line itself or even before said border line.
The closing parenthesis ")" on Exhibit A is a little far from the
perpendicular green border line and appears to be double instead of
one single line; this same ")" on Exhibit B appears in a single line and
is relatively nearer to the border line.
There are other notable discrepancies between the check Annex A
and the photostatic copy, Exhibit B, as regards the relative position
of the phrase "Agent, Phil. National Bank", with the title Provincial
Treasurer, giving ground to the doubt that Exhibit B is a photostatic
copy of the check (Exhibit A).
We then have the following facts. Exhibit A was issued by Laya in his
capacity as Provincial Treasurer of Misamis Oriental as drawer on
the Philippine National Bank as drawee. Ramos sold P30,000 of the
check to Enrique P. Montinola for P90,000 Japanese military notes,
of which only P45,000 was paid by Montinola. The writing made by
Ramos at the back of the check was an instruction to the bank to pay
P30,000 to Montinola and to deposit the balance to his (Ramos)
credit. This writing was obliterated and in its place we now have the
supposed indorsement appearing on the back of the check (Exh. A-
1).
At the time of the transfer of this check (Exh. A) to Montinola about
the last days of December, 1944, or the first days of January, 1945,
the check which, being a negotiable instrument, was payable on
demand, was long overdue by about 2 ½ years. It may therefore be
considered, even then, a stable check. Of course, Montinola claims
that about June, 1944 when Ramos supposedly approached him for
the purpose of negotiating the check, he (Montinola) consulted
President Carmona of the Philippine National Bank who assured him
that the check was good and negotiable. However, President
Carmona on the witness stand flatly denied Montinola's claim and
assured the court that the first time that he saw Montinola was after
the Philippine National Bank, of which he was President, reopened,
after liberation, around August or September, 1945, and that when
shown the check he told Montinola that it was stale. M. V. Ramos
also told the court that it is not true that he ever went with
Montinola to see President Carmona about the check in 1944.
66
On the basis of the facts above related there are several reasons
why the complaint of Montinola cannot prosper. The insertion of the
words "Agent, Phil. National Bank" which converts the bank from a
mere drawee to a drawer and therefore changes its liability,
constitutes a material alteration of the instrument without the
consent of the parties liable thereon, and so discharges the
instrument. (Section 124 of the Negotiable Instruments Law). The
check was not legally negotiated within the meaning of the
Negotiable Instruments Law. Section 32 of the same law provides
that "the indorsement must be an indorsement of the entire
instrument. An indorsement which purports to transfer to the
indorsee a part only of the amount payable, . . . (as in this case) does
not operate as a negotiation of the instrument." Montinola may
therefore not be regarded as an indorsee. At most he may be
regarded as a mere assignee of the P30,000 sold to him by Ramos, in
which case, as such assignee, he is subject to all defenses available
to the drawer Provincial Treasurer of Misamis Oriental and against
Ramos. Neither can Montinola be considered as a holder in due
course because section 52 of said law defines a holder in due course
as a holder who has taken the instrument under certain conditions,
one of which is that he became the holder before it was overdue.
When Montinola received the check, it was long overdue. And,
Montinola is not even a holder because section 191 of the same law
defines holder as the payee or indorsee of a bill or note and
Montinola is not a payee. Neither is he an indorsee for as already
stated, at most he can be considered only as assignee. Neither could
it be said that he took it in good faith. As already stated, he has not
paid the full amount of P90,000 for which Ramos sold him P30,000
of the value of the check. In the second place, as was stated by the
trial court in its decision, Montinola speculated on the check and
took a chance on its being paid after the war. Montinola must have
known that at the time the check was issued in May, 1942, the
money circulating in Mindanao and the Visayas was only the
emergency notes and that the check was intended to be payable in
that currency. Also, he should have known that a check for such a
large amount of P100,000 could not have been issued to Ramos in
his private capacity but rather in his capacity as disbursing officer of
the USAFFE, and that at the time that Ramos sold a part of the check
to him, Ramos was no longer connected with the USAFFE but
already a civilian who needed the money only for himself and his
family.
As already stated, as a mere assignee Montinola is subject to all the
defenses available against assignor Ramos. And, Ramos had he
retained the check may not now collect its value because it had been
issued to him as disbursing officer. As observed by the trial court,
the check was issued to M. V. Ramos not as a person but M. V.
Ramos as the disbursing officer of the USAFFE. Therefore, he had no
right to indorse it personally to plaintiff. It was negotiated in breach
of trust, hence he transferred nothing to the plaintiff.
In view of all the foregoing, finding no reversible error in the
decision appealed from, the same is hereby affirmed with costs.
In the prayer for relief contained at the end of the brief for the
Philippine National Bank dated September 27, 1949, we find this
prayer:
It is also respectfully prayed that this Honorable Court
refer the check, Exhibit A, to the City Fiscal's Office for
 67

appropriate criminal action against the plaintiff-appellant
if the facts so warrant.
Subsequently, in a petition signed by plaintiff-appellant Enrique P.
Montinola dated February 27, 1950, he asked this Court to allow him
to withdraw the original check (Exh. A) for him to keep, expressing
his willingness to submit it to the court whenever needed for
examination and verification. The bank on March 2, 1950 opposed
the said petition on the ground that inasmuch as the appellant's
cause of action in this case is based on the said check, it is absolutely
necessary for the court to examine the original in order to see the
actual alterations supposedly made thereon, and that should this
Court grant the prayer contained in the bank's brief that the check
be later referred to the city fiscal for appropriate action, said check
may no longer be available if the appellant is allowed to withdraw
said document. In view of said opposition this Court resolution of
March 6, 1950, denied said petition for withdrawal.
Acting upon the petition contained in the bank's brief already
mentioned, once the decision becomes final, let the Clerk of Court
transmit to the city fiscal the check (Exh. A) together with all
pertinent papers and documents in this case, for any action he may
deem proper in the premises.
88 Phil 178 – Commercial Law – Negotiable Instruments Law –
Alteration – Assignee – Partial Indorsement
In May 1942, Ubaldo Laya, as provincial treasurer of Misamis
Oriental issued a P100,000.00 Philippine National Bank (PNB) check
to Mariano Ramos. The said check was to be used by Ramos, as
disbursing officer of the US forces at that time, for military purposes.
Before Ramos can encash the check, he was made a prisoner of war
by the invading Japanese forces. When he got free in December
1944, he needed some cash for himself and so he went to a certain
Enrique Montinola and made arrangements.
No. It was not negotiated according to the Negotiable Instruments
Law (NIL) hence it is not a negotiable instrument. There was only a
partial indorsement and not a negotiation contemplated under the
NIL. Only P30k of the P100k amount of the check was indorsed. This
merely make Montinola a mere assignee – and this is the clear
intent of Ramos. Ramos was merely assigning P30k to Montinola.
Montinola may therefore not be regarded as an indorsee and PNB
has all the right to dishonor the check. As mere assignee, he is
subject to all defenses available to the drawer Provincial Treasurer
of Misamis Oriental and against Ramos.
Anent the issue of alteration, the apparent purpose of which is to
make the drawee (PNB) the drawer against which Montinola can
recover from directly. Such material alteration which was done by
Montinola without the consent of the parties liable thereon
discharges the instrument, pursuant to Sec. 124 of the NIL.
Montinola cannot be said to be a holder. He is an assignee. And even
if he is a holder, he is not in good faith because he did not pay the
full amount of the consideration for which the P30k was issued to
him – he only paid 45k Japanese notes out of the 90k Japanese
notes consideration.
At any rate, even assuming that there is proper negotiation,
Montinola can no longer encash said check because when he sought
to have it encashed in January 1945, it is already stale there being
two and half years passing since its time of issuance.

On the back of the check, Ramos wrote:

Pay to the order of Enrique P. Montinola P30,000 only. The balance

to be deposited in the Philippine National Bank to the credit of M. V.
Ramos.

In consideration thereof, Montinola promised to pay 85,000 in

Japanese notes (that time peso notes are valued higher). However,
he was only able to pay 45k in Japanese notes to Ramos.

Later, Montinola sought to have the check encashed but PNB

dishonored the check. It appears that there was an insertion made.
Under the signature of Laya, the words “Agent, Philippine National
Bank” was inserted, thus making it appear that Laya disbursed the
check as an agent of PNB and not as provincial treasurer of Misamis
Oriental (NOTE: at that time, a provincial treasurer is an ex officio
agent of the government’s bank).

ISSUE: Whether or not the subject check is a negotiable instrument.

HELD:

SECOND DIVISION
G.R. No. 129015 August 13, 2004
SAMSUNG CONSTRUCTION COMPANY PHILIPPINES, INC.,
petitioner,
vs.
FAR EAST BANK AND TRUST COMPANY AND COURT OF APPEALS,
respondents.
DECISION
TINGA, J.:
Called to fore in the present petition is a classic textbook question –
if a bank pays out on a forged check, is it liable to reimburse the
drawer from whose account the funds were paid out? The Court of
Appeals, in reversing a trial court decision adverse to the bank,
invoked tenuous reasoning to acquit the bank of liability. We
reverse, applying time-honored principles of law.
The salient facts follow.
Plaintiff Samsung Construction Company Philippines, Inc. ("Samsung
Construction"), while based in Biñan, Laguna, maintained a current
account with defendant Far East Bank and Trust Company1 ("FEBTC")
at the latter’s Bel-Air, Makati branch.2 The sole signatory to Samsung
Construction’s account was Jong Kyu Lee ("Jong"), its Project
Manager,3 while the checks remained in the custody of the
company’s accountant, Kyu Yong Lee ("Kyu").4
On 19 March 1992, a certain Roberto Gonzaga presented for
payment FEBTC Check No. 432100 to the bank’s branch in Bel-Air,
Makati. The check, payable to cash and drawn against Samsung
Construction’s current account, was in the amount of Nine Hundred
Ninety Nine Thousand Five Hundred Pesos (P999,500.00). The bank
teller, Cleofe Justiani, first checked the balance of Samsung
Construction’s account. After ascertaining there were enough funds
to cover the check,5 she compared the signature appearing on the
check with the specimen signature of Jong as contained in the
specimen signature card with the bank. After comparing the two
signatures, Justiani was satisfied as to the authenticity of the
signature appearing on the check. She then asked Gonzaga to
submit proof of his identity, and the latter presented three (3)
identification cards.6
At the same time, Justiani forwarded the check to the branch Senior
Assistant Cashier Gemma Velez, as it was bank policy that two bank
branch officers approve checks exceeding One Hundred Thousand
Pesos, for payment or encashment. Velez likewise counterchecked
the signature on the check as against that on the signature card. He
too concluded that the check was indeed signed by Jong. Velez then
forwarded the check and signature card to Shirley Syfu, another
bank officer, for approval. Syfu then noticed that Jose Sempio III
("Sempio"), the assistant accountant of Samsung Construction, was
also in the bank. Sempio was well-known to Syfu and the other bank
officers, he being the assistant accountant of Samsung Construction.
Syfu showed the check to Sempio, who vouched for the genuineness
of Jong’s signature. Confirming the identity of Gonzaga, Sempio said
that the check was for the purchase of equipment for Samsung
68
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.7 He
reported the matter to Jong, who then proceeded to the bank. Jong
learned of the encashment of the check, and realized that his
signature had been forged. The Bank Manager reputedly told Jong
that he would be reimbursed for the amount of the check.8 Jong
proceeded to the police station and consulted with his lawyers.9
Subsequently, a criminal case for qualified theft was filed against
Sempio before the Laguna court.10
In a letter dated 6 May 1992, Samsung Construction, through
counsel, demanded that FEBTC credit to it the amount of Nine
Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00),
with interest.11 In response, FEBTC said that it was still conducting an
investigation on the matter. Unsatisfied, Samsung Construction filed
a Complaint on 10 June 1992 for violation of Section 23 of the
Negotiable Instruments Law, and prayed for the payment of the
amount debited as a result of the questioned check plus interest,
and attorney’s fees.12 The case was docketed as Civil Case No. 92-
61506 before the Regional Trial Court ("RTC") of Manila, Branch 9.13
During the trial, both sides presented their respective expert
witnesses to testify on the claim that Jong’s signature was forged.
Samsung Corporation, which had referred the check for
investigation to the NBI, presented Senior NBI Document Examiner
Roda B. Flores. She testified that based on her examination, she
concluded that Jong’s signature had been forged on the check. On
the other hand, FEBTC, which had sought the assistance of the
Philippine National Police (PNP),14 presented Rosario C. Perez, a
document examiner from the PNP Crime Laboratory. She testified
that her findings showed that Jong’s signature on the check was
genuine.15
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,16 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.17 Moreover, the appellate court also
held that assuming there was forgery, it occurred due to the
negligence of Samsung Construction, imputing blame on the
accountant Kyu for lack of care and prudence in keeping the checks,
which if observed would have prevented Sempio from gaining access
thereto.18 The Court of Appeals invoked the ruling in PNB v. National

City Bank of New York19 that, if a loss, which must be borne by one
or two innocent persons, can be traced to the neglect or fault of
either, such loss would be borne by the negligent party, even if
innocent of intentional fraud.20
Samsung Construction now argues that the Court of Appeals had
seriously misapprehended the facts when it overturned the RTC’s
finding of forgery. It also contends that the appellate court erred in
finding that it had been negligent in safekeeping the check, and in
applying the equity principle enunciated in PNB v. National City Bank
of New York.
Since the trial court and the Court of Appeals arrived at contrary
findings on questions of fact, the Court is obliged to examine the
record to draw out the correct conclusions. Upon examination of the
record, and based on the applicable laws and jurisprudence, we
reverse the Court of Appeals.
Section 23 of the Negotiable Instruments Law states:
When a signature is forged or made without the authority of the
person whose signature it purports to be, it is wholly inoperative,
and no right to retain the instrument, or to give a discharge
therefor, or to enforce payment thereof against any party thereto,
can be acquired through or under such signature, unless the party
against whom it is sought to enforce such right is precluded from
setting up the forgery or want of authority. (Emphasis supplied)
The general rule is to the effect that a forged signature is "wholly
inoperative," and payment made "through or under such signature"
is ineffectual or does not discharge the instrument.21 If payment is
made, the drawee cannot charge it to the drawer’s account. The
traditional justification for the result is that the drawee is in a
superior position to detect a forgery because he has the maker’s
signature and is expected to know and compare it.22 The rule has a
healthy cautionary effect on banks by encouraging care in the
comparison of the signatures against those on the signature cards
they have on file. Moreover, the very opportunity of the drawee to
insure and to distribute the cost among its customers who use
checks makes the drawee an ideal party to spread the risk to
insurance.23
Brady, in his treatise The Law of Forged and Altered Checks,
elucidates:
When a person deposits money in a general account in a
bank, against which he has the privilege of drawing checks
in the ordinary course of business, the relationship
between the bank and the depositor is that of debtor and
creditor. So far as the legal relationship between the two is
concerned, the situation is the same as though the bank
had borrowed money from the depositor, agreeing to
repay it on demand, or had bought goods from the
depositor, agreeing to pay for them on demand. The bank
owes the depositor money in the same sense that any
debtor owes money to his creditor. Added to this, in the
case of bank and depositor, there is, of course, the bank’s
obligation to pay checks drawn by the depositor in proper
form and presented in due course. When the bank
receives the deposit, it impliedly agrees to pay only upon
the depositor’s order. When the bank pays a check, on
69
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.
It was held that the bank was liable. It was further held
that the fact that the plaintiff waited eight or nine months
after discovering the forgery, before notifying the bank,
did not, as a matter of law, constitute a ratification of the
payment, so as to preclude the plaintiff from holding the
bank liable. xxx
This rule of liability can be stated briefly in these words: "A
bank is bound to know its depositors’ signature." The rule
is variously expressed in the many decisions in which the
question has been considered. But they all sum up to the
proposition that a bank must know the signatures of those
whose general deposits it carries.24
By no means is the principle rendered obsolete with the advent of
modern commercial transactions. Contemporary texts still affirm
this well-entrenched standard. Nickles, in his book Negotiable
Instruments and Other Related Commercial Paper wrote, thus:
The deposit contract between a payor bank and its
customer determines who can draw against the
customer’s account by specifying whose signature is
necessary on checks that are chargeable against the
customer’s account. Therefore, a check drawn against the
account of an individual customer that is signed by
someone other than the customer, and without authority
from her, is not properly payable and is not chargeable to
the customer’s account, inasmuch as any "unauthorized
signature on an instrument is ineffective" as the signature
of the person whose name is signed.25
Under Section 23 of the Negotiable Instruments Law, forgery is a
real or absolute defense by the party whose signature is forged.26
On the premise that Jong’s signature was indeed forged, FEBTC is
liable for the loss since it authorized the discharge of the forged
check. Such liability attaches even if the bank exerts due diligence
and care in preventing such faulty discharge. Forgeries often deceive
the eye of the most cautious experts; and when a bank has been so
deceived, it is a harsh rule which compels it to suffer although no
one has suffered by its being deceived.27 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.28
Thus, the first matter of inquiry is into whether the check was
indeed forged. A document formally presented is presumed to be
genuine until it is proved to be fraudulent. In a forgery trial, this
presumption must be overcome but this can only be done by
convincing testimony and effective illustrations. 29
In ruling that forgery was not duly proven, the Court of Appeals
held:
[There] is ground to doubt the findings of the trial court sustaining
the alleged forgery in view of the conflicting conclusions made by
handwriting experts from the NBI and the PNP, both agencies of the
government.
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
70
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.30
During the testimony of PNP expert Rosario Perez, the RTC bluntly
noted that "apparently, there [are] differences on that questioned
signature and the standard signatures."31 This Court, in examining
the signatures, makes a similar finding. The PNP expert excused the
noted "differences" by asserting that they were mere "variations,"
which are normal deviations found in writing.32 Yet the RTC, which
had the opportunity to examine the relevant documents and to
personally observe the expert witness, clearly disbelieved the PNP
expert. The Court similarly finds the testimony of the PNP expert as
unconvincing. During the trial, she was confronted several times
with apparent differences between strokes in the questioned
signature and the genuine samples. Each time, she would just
blandly assert that these differences were just "variations,"33 as if
the mere conjuration of the word would sufficiently disquiet
whatever doubts about the deviations. Such conclusion, standing
alone, would be of little or no value unless supported by sufficiently
cogent reasons which might amount almost to a demonstration.34
The most telling difference between the questioned and genuine
signatures examined by the PNP is in the final upward stroke in the
signature, or "the point to the short stroke of the terminal in the
capital letter ‘L,’" as referred to by the PNP examiner who had
marked it in her comparison chart as "point no. 6." To the plain eye,
such upward final stroke consists of a vertical line which forms a
ninety degree (90º) 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.35 However, unlike the questioned
signature, the upward strokes of eight (8) of these signatures are
looped, while the upward stroke of the seventh36 forms a severe
forty-five degree (45º) with the previous stroke. The difference is
glaring, and indeed, the PNP examiner was confronted with the
inconsistency in point no. 6.
Q: Now, in this questioned document point no. 6, the "s" stroke is
directly upwards.
A: Yes, sir.
Q: Now, can you look at all these standard signature (sic) were (sic)
point 6 is repeated or the last stroke "s" is pointing directly
upwards?
A: There is none in the standard signature, sir.37
Again, the PNP examiner downplayed the uniqueness of the final
stroke in the questioned signature as a mere variation,38 the same
excuse she proffered for the other marked differences noted by the
Court and the counsel for petitioner.39
There is no reason to doubt why the RTC gave credence to the
testimony of the NBI examiner, and not the PNP expert’s. The NBI

expert, Rhoda Flores, clearly qualifies as an expert witness. A
document examiner for fifteen years, she had been promoted to the
rank of Senior Document Examiner with the NBI, and had held that
rank for twelve years prior to her testimony. She had placed among
the top five examinees in the Competitive Seminar in Question
Document Examination, conducted by the NBI Academy, which
qualified her as a document examiner.40 She had trained with the
Royal Hongkong Police Laboratory and is a member of the
International Association for Identification.41 As of the time she
testified, she had examined more than fifty to fifty-five thousand
questioned documents, on an average of fifteen to twenty
documents a day.42 In comparison, PNP document examiner Perez
admitted to having examined only around five hundred documents
as of her testimony.43
In analyzing the signatures, NBI Examiner Flores utilized the
scientific comparative examination method consisting of analysis,
recognition, comparison and evaluation of the writing habits with
the use of instruments such as a magnifying lense, a stereoscopic
microscope, and varied lighting substances. She also prepared
enlarged photographs of the signatures in order to facilitate the
necessary comparisons.44 She compared the questioned signature as
against ten (10) other sample signatures of Jong. Five of these
signatures were executed on checks previously issued by Jong, while
the other five contained in business letters Jong had signed. 45 The
NBI found that there were significant differences in the handwriting
characteristics existing between the questioned and the sample
signatures, as to manner of execution, link/connecting strokes,
proportion characteristics, and other identifying details.46
The RTC was sufficiently convinced by the NBI examiner’s testimony,
and explained her reasons in its Decisions. While the Court of
Appeals disagreed and upheld the findings of the PNP, it failed to
convincingly demonstrate why such findings were more credible
than those of the NBI expert. As a throwaway, the assailed Decision
noted that the PNP, not the NBI, had the opportunity to examine the
specimen signature card signed by Jong, which was relied upon by
the employees of FEBTC in authenticating Jong’s signature. The
distinction is irrelevant in establishing forgery. Forgery can be
established comparing the contested signatures as against those of
any sample signature duly established as that of the persons whose
signature was forged.
FEBTC lays undue emphasis on the fact that the PNP examiner did
compare the questioned signature against the bank signature cards.
The crucial fact in question is whether or not the check was forged,
not whether the bank could have detected the forgery. The latter
issue becomes relevant only if there is need to weigh the
comparative negligence between the bank and the party whose
signature was forged.
At the same time, the Court of Appeals failed to assess the effect of
Jong’s testimony that the signature on the check was not his.47 The
assertion may seem self-serving at first blush, yet it cannot be
ignored that Jong was in the best position to know whether or not
the signature on the check was his. While his claim should not be
taken at face value, any averments he would have on the matter, if
adjudged as truthful, deserve primacy in consideration. Jong’s
testimony is supported by the findings of the NBI examiner. They are
also backed by factual circumstances that support the conclusion
that the assailed check was indeed forged. Judicial notice can be
71
taken that is highly unusual in practice for a business establishment
to draw a check for close to a million pesos and make it payable to
cash or bearer, and not to order. Jong immediately reported the
forgery upon its discovery. He filed the appropriate criminal charges
against Sempio, the putative forger.48
Now for determination is whether Samsung Construction was
precluded from setting up the defense of forgery under Section 23
of the Negotiable Instruments Law. The Court of Appeals concluded
that Samsung Construction was negligent, and invoked the doctrines
that "where a loss must be borne by one of two innocent person,
can be traced to the neglect or fault of either, it is reasonable that it
would be borne by him, even if innocent of any intentional fraud,
through whose means it has succeeded49 or who put into the power
of the third person to perpetuate the wrong."50 Applying these rules,
the Court of Appeals determined that it was the negligence of
Samsung Construction that allowed the encashment of the forged
check.
In the case at bar, the forgery appears to have been made
possible through the acts of one Jose Sempio III, an
assistant accountant employed by the plaintiff Samsung
[Construction] Co. Philippines, Inc. who 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.51
We recognize that Section 23 of the Negotiable Instruments Law
bars a party from setting up the defense of forgery if it is guilty of
negligence.52 Yet, we are unable to conclude that Samsung
Construction was guilty of negligence in this case. The appellate
court failed to explain precisely how the Korean accountant was
negligent or how more care and prudence on his part would have
prevented the forgery. We cannot sustain this "tar and feathering"
resorted to without any basis.
The bare fact that the forgery was committed by an employee of the
party whose signature was forged cannot necessarily imply that such
party’s negligence was the cause for the forgery. Employers do not
possess the preternatural gift of cognition as to the evil that may
lurk within the hearts and minds of their employees. The Court’s
pronouncement in PCI Bank v. Court of Appeals53 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.54
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,"55 and no contrary version was presented by FEBTC. However,
such testimony cannot prove that the checks were indeed kept in a
safety box, as Jong’s testimony on that point is hearsay, since Kyu,
and not Jong, would have the personal knowledge as to how the
checks were kept.
Still, in the absence of evidence to the contrary, we can conclude
that there was no negligence on Samsung Construction’s part. The
presumption remains that every person takes ordinary care of his
concerns,56 and that the ordinary course of business has been
followed.57 Negligence is not presumed, but must be proven by him
who alleges it.58 While the complaint was lodged at the instance of
Samsung Construction, the matter it had to prove was the claim it
had alleged - whether the check was forged. It cannot be required as
well to prove that it was not negligent, because the legal
presumption remains that ordinary care was employed.
Thus, it was incumbent upon FEBTC, in defense, to prove the
negative fact that Samsung Construction was negligent. While the
payee, as in this case, may not have the personal knowledge as to
the standard procedures observed by the drawer, it well has the
means of disputing the presumption of regularity. Proving a negative
fact may be "a difficult office,"59 but necessarily so, as it seeks to
overcome a presumption in law. FEBTC was unable to dispute the
presumption of ordinary care exercised by Samsung Construction,
hence we cannot agree with the Court of Appeals’ finding of
negligence.
The assailed Decision replicated the extensive efforts which FEBTC
devoted to establish that there was no negligence on the part of the
bank in its acceptance and payment of the forged check. However,
the degree of diligence exercised by the bank would be irrelevant if
the drawer is not precluded from setting up the defense of forgery
under Section 23 by his own negligence. The rule of equity
enunciated in PNB v. National City Bank of New York, 60 as relied
upon by the Court of Appeals, deserves careful examination.
The point in issue has sometimes been said to be that of
negligence. The drawee who has paid upon the forged
signature is held to bear the loss, because he has been
negligent in failing to recognize that the handwriting is
not that of his customer. But it follows obviously that if
the payee, holder, or presenter of the forged paper has
himself been in default, if he has himself been guilty of a
negligence prior to that of the banker, or if by any act of
his own he has at all contributed to induce the banker's
negligence, then he may lose his right to cast the loss upon
the banker.61 (Emphasis supplied)
Quite palpably, the general rule remains that the drawee who has
paid upon the forged signature bears the loss. The exception to this
rule arises only when negligence can be traced on the part of the
drawer whose signature was forged, and the need arises to weigh
the comparative negligence between the drawer and the drawee to
determine who should bear the burden of loss. The Court finds no
72
basis to conclude that Samsung Construction was negligent in the
safekeeping of its checks. For one, the settled rule is that the mere
fact that the depositor leaves his check book lying around does not
constitute such negligence as will free the bank from liability to him,
where a clerk of the depositor or other persons, taking advantage of
the opportunity, abstract some of the check blanks, forges the
depositor’s signature and collect on the checks from the bank. 62 And
for another, in point of fact Samsung Construction was not negligent
at all since it reported the forgery almost immediately upon
discovery.63
It is also worth noting that the forged signatures in PNB v. National
City Bank of New York were not of the drawer, but of indorsers. The
same circumstance attends PNB v. Court of Appeals,64 which was
also cited by the Court of Appeals. It is accepted that a forged
signature of the drawer differs in treatment than a forged signature
of the indorser.
The justification for the distinction between forgery of the
signature of the drawer and forgery of an indorsement is
that the drawee is in a position to verify the drawer’s
signature by comparison with one in his hands, but has
ordinarily no opportunity to verify an indorsement.65
Thus, a drawee bank is generally liable to its depositor in
paying a check which bears either a forgery of the
drawer’s signature or a forged indorsement. But the bank
may, as a general rule, recover back the money which it
has paid on a check bearing a forged indorsement,
whereas it has not this right to the same extent with
reference to a check bearing a forgery of the drawer’s
signature.66
The general rule imputing liability on the drawee who paid out on
the forgery holds in this case.
Since FEBTC puts into issue the degree of care it exercised before
paying out on the forged check, we might as well comment on the
bank’s performance of its duty. It might be so that the bank
complied with its own internal rules prior to paying out on the
questionable check. Yet, there are several troubling circumstances
that lead us to believe that the bank itself was remiss in its duty.
The fact that the check was made out in the amount of nearly one
million pesos is unusual enough to require a higher degree of
caution on the part of the bank. Indeed, FEBTC confirms this through
its own internal procedures. Checks below twenty-five thousand
pesos require only the approval of the teller; those between twenty-
five thousand to one hundred thousand pesos necessitate the
approval of one bank officer; and should the amount exceed one
hundred thousand pesos, the concurrence of two bank officers is
required.67
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.68 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.69 These circumstances are already suspicious if taken
independently, much more so if they are evaluated in concurrence.
Given the shadiness attending Gonzaga’s presentment of the check,
it was not sufficient for FEBTC to have merely complied with its
internal procedures, but mandatory that all earnest efforts be
undertaken to ensure the validity of the check, and of the authority
of Gonzaga to collect payment therefor.
According to FEBTC Senior Assistant Cashier Gemma Velez, the bank
tried, but failed, to contact Jong over the phone to verify the
check.70 She added that calling the issuer or drawer of the check to
verify the same was not part of the standard procedure of the bank,
but an "extra effort."71 Even assuming that such personal verification
is tantamount to extraordinary diligence, it cannot be denied that
FEBTC still paid out the check despite the absence of any proof of
verification from the drawer. Instead, the bank seems to have relied
heavily on the say-so of Sempio, who was present at the bank at the
time the check was presented.
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.72 However, the only proof of such allegations
is the testimony of Gemma Velez, who also testified that she did not
know Sempio personally,73 and had met Sempio for the first time
only on the day the check was encashed.74 In fact, Velez had to
inquire with the other officers of the bank as to whether Sempio was
actually known to the employees of the bank.75 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.76
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
73
that no right to enforce the payment of a check can arise out of a
forged signature. Since the drawer, Samsung Construction, is not
precluded by negligence from setting up the forgery, the general
rule should apply. Consequently, if a bank pays a forged check, it
must be considered as paying out of its funds and cannot charge the
amount so paid to the account of the depositor.77 A bank is liable,
irrespective of its good faith, in paying a forged check.78
WHEREFORE, the Petition is GRANTED. The Decision of 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.
Facts:
Samsung Construction held an account with Far East Bank. One day
a check worth 900,000, payable to cash, was presented by one
Roberto Gonzaga in the Makati Branch of Far East Bank. The check
was certified to be true by Jose Sempio, the assistant accountant of
Samsung, who was also present during the time the check was
cashed. Later however it was discovered that no such check was
ever approved by the Samsung’s head accountant, the president of
the company also never signed any such check.
Issue: Whether or not Far East Bank is liable to reimburse Samsung
for cashing out the forged check, which was drawn from the account
of Samsung
Held:
Far East Bank is liable for reimbursement. Sec. 23 of the Negotiable
Instrument Law states that a forged signature makes the instrument
“wholly inoperative”. If payment is made the drawee (Far East)
cannot charge it to the drawer’s account (Samsung). The fact that
the forgery is clever is immaterial. The forged signature may so
closely resemble the genuine as to defy detection by the depositor
himself. And yet, if the bank pays the check, it is paying out with its
own money and not of the depositor’s. This rule of liability can be
stated briefly in these words: “A bank is bound to know its
depositor’s signature.” The accusation of negligence on the part of
Samsung was not clearly proven. Absence of proof to the contrary,
the presumption is that the ordinary course of business was
followed.

SECOND DIVISION
G.R. No. 107382/G.R. No. 107612 January 31, 1996
ASSOCIATED BANK, petitioner,
vs.
HON. COURT OF APPEALS, PROVINCE OF TARLAC and PHILIPPINE
NATIONAL BANK, respondents.
DECISION
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). 1
The facts of the case are as follows:
The Province of Tarlac maintains a current account with the
Philippine National Bank (PNB) Tarlac Branch where the provincial
funds are deposited. Checks issued by the Province are signed by the
Provincial Treasurer and countersigned by the Provincial Auditor or
the Secretary of the Sangguniang Bayan.
A portion of the funds of the province is allocated to the Concepcion
Emergency Hospital. 2 The allotment checks for said government
hospital are drawn to the order of "Concepcion Emergency Hospital,
Concepcion, Tarlac" or "The Chief, Concepcion Emergency Hospital,
Concepcion, Tarlac." The checks are released by the Office of the
Provincial Treasurer and received for the hospital by its
administrative officer and cashier.
In January 1981, the books of account of the Provincial Treasurer
were post-audited by the Provincial Auditor. It was then discovered
that the hospital did not receive several allotment checks drawn by
the Province.
On February 19, 1981, the Provincial Treasurer requested the
manager of the PNB to return all of its cleared checks which were
issued from 1977 to 1980 in order to verify the regularity of their
encashment. After the checks were examined, the Provincial
Treasurer learned that 30 checks amounting to P203,300.00 were
encashed by one Fausto Pangilinan, with the Associated Bank acting
as collecting bank.
It turned out that Fausto Pangilinan, who was the administrative
officer and cashier of payee hospital until his retirement on February
28, 1978, collected the questioned checks from the office of the
Provincial Treasurer. He claimed to be assisting or helping the
hospital follow up the release of the checks and had official receipts.
3 Pangilinan sought to encash the first check 4 with Associated Bank.
However, the manager of Associated Bank refused and suggested
that Pangilinan deposit the check in his personal savings account
74
with the same bank. Pangilinan was able to withdraw the money
when the check was cleared and paid by the drawee bank, PNB.
After forging the signature of Dr. Adena Canlas who was chief of the
payee hospital, Pangilinan followed the same procedure for the
second check, in the amount of P5,000.00 and dated April 20, 1978,
5 as well as for twenty-eight other checks of various amounts and on
various dates. The last check negotiated by Pangilinan was for
f8,000.00 and dated February 10, 1981. 6 All the checks bore the
stamp of Associated Bank which reads "All prior endorsements
guaranteed ASSOCIATED BANK."
Jesus David, the manager of Associated Bank testified that
Pangilinan made it appear that the checks were paid to him for
certain projects with the hospital. 7 He did not find as irregular the
fact that the checks were not payable to Pangilinan but to the
Concepcion Emergency Hospital. While he admitted that his wife
and Pangilinan's wife are first cousins, the manager denied having
given Pangilinan preferential treatment on this account. 8
On February 26, 1981, the Provincial Treasurer wrote the manager
of the PNB seeking the restoration of the various amounts debited
from the current account of the Province. 9
In turn, the PNB manager demanded reimbursement from the
Associated Bank on May 15, 1981. 10
As both banks resisted payment, the Province of Tarlac brought suit
against PNB which, in turn, impleaded Associated Bank as third-
party defendant. The latter then filed a fourth-party complaint
against Adena Canlas and Fausto Pangilinan. 11
After trial on the merits, the lower court rendered its decision on
March 21, 1988, disposing as follows:
WHEREFORE, in view of the foregoing, judgment is hereby rendered:
1. 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 Three
Thousand Three Hundred (P203,300.00) Pesos with legal interest
thereon from March 20, 1981 until fully paid;
2. On the third-party complaint, in favor of defendant/third-party
plaintiff Philippine National Bank (PNB) and against third-party
defendant/fourth-party plaintiff Associated Bank ordering the latter
to reimburse to the former the amount of Two Hundred Three
Thousand Three Hundred (P203,300.00) Pesos with legal interests
thereon from March 20, 1981 until fully paid;.
3. On the fourth-party complaint, the same is hereby ordered
dismissed for lack of cause of action as against fourth-party
defendant Adena Canlas and lack of jurisdiction over the person of
fourth-party defendant Fausto Pangilinan as against the latter.
4. On the counterclaims on the complaint, third-party
complaint and fourth-party complaint, the same are
hereby ordered dismissed for lack of merit.

SO ORDERED. 12
PNB and Associated Bank appealed to the Court of Appeals. 13
Respondent court affirmed the trial court's decision in toto on
September 30, 1992.
Hence these consolidated petitions which seek a reversal of
respondent appellate court's decision.
PNB assigned two errors. First, the bank contends that respondent
court erred in exempting the Province of Tarlac from liability when,
in fact, the latter was negligent because it delivered and released
the questioned checks to Fausto Pangilinan who was then already
retired as the hospital's cashier and administrative officer. PNB also
maintains its innocence and alleges that as between two innocent
persons, the one whose act was the cause of the loss, in this case
the Province of Tarlac, bears the loss.
Next, PNB asserts that it was error for the court to order it to pay
the province and then seek reimbursement from Associated Bank.
According to petitioner bank, respondent appellate Court should
have directed Associated Bank to pay the adjudged liability directly
to the Province of Tarlac to avoid circuity. 14
Associated Bank, on the other hand, argues that the order of liability
should be totally reversed, with the drawee bank (PNB) solely and
ultimately bearing the loss.
Respondent court allegedly erred in applying Section 23 of the
Philippine Clearing House Rules instead of Central Bank Circular No.
580, which, being an administrative regulation issued pursuant to
law, has the force and effect of law. 15 The PCHC Rules are merely
contractual stipulations among and between member-banks. As
such, they cannot prevail over the aforesaid CB Circular.
It likewise contends that PNB, the drawee bank, is estopped from
asserting the defense of guarantee of prior indorsements against
Associated Bank, the collecting bank. In stamping the guarantee (for
all prior indorsements), it merely followed a mandatory requirement
for clearing and had no choice but to place the stamp of guarantee;
otherwise, there would be no clearing. The bank will be in a "no-
win" situation and will always bear the loss as against the drawee
bank. 16
Associated Bank also claims that since PNB already cleared and paid
the value of the forged checks in question, it is now estopped from
asserting the defense that Associated Bank guaranteed prior
indorsements. The drawee bank allegedly has the primary duty to
verify the genuineness of payee's indorsement before paying the
check. 17
While both banks are innocent of the forgery, Associated Bank
claims that PNB was at fault and should solely bear the loss because
it cleared and paid the forged checks.
The case at bench concerns checks payable to the order of
Concepcion Emergency Hospital or its Chief. They were 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.
75
At the time of their indorsement, the checks were order
instruments.
Checks having forged indorsements should be differentiated from
forged checks or checks bearing the forged signature of the drawer.
Section 23 of the Negotiable Instruments Law (NIL) provides:
Sec. 23. FORGED SIGNATURE, EFFECT OF. — When a
signature is forged or made without authority of the
person whose signature it purports to be, it is wholly
inoperative, and no right to retain the instrument, or to
give a discharge therefor, or to enforce payment thereof
against any party thereto, can be acquired through or
under such signature unless the party against whom it is
sought to enforce such right is precluded from setting up
the forgery or want of authority.
A forged signature, whether it be that of the drawer or the payee, is
wholly inoperative and no one can gain title to the instrument
through it. A person whose signature to an instrument was forged
was never a party and never consented to the contract which
allegedly gave rise to such instrument. 18 Section 23 does not avoid
the instrument but only the forged signature. 19 Thus, a forged
indorsement does not operate as the payee's indorsement.
The exception to the general rule in Section 23 is where "a party
against whom it is sought to enforce a right is precluded from
setting up the forgery or want of authority." Parties who warrant or
admit the genuineness of the signature in question and those who,
by their acts, silence or negligence are 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. 20
In bearer instruments, the signature of the payee or holder is
unnecessary to pass title to the instrument. Hence, when the
indorsement is a forgery, only the person whose signature is forged
can raise the defense of forgery against a holder in due course. 21
The checks involved in this case are order instruments, hence, the
following discussion is made with reference to the effects of a
forged indorsement on an instrument payable to order.
Where the instrument is payable to order at the time of the forgery,
such as the checks in this case, the signature of its rightful holder
(here, the payee hospital) is essential to transfer title to the same
instrument. When the holder's indorsement is forged, all parties
prior to the forgery may raise the real defense of forgery against all
parties subsequent thereto. 22
An indorser of an order instrument warrants "that the instrument is
genuine and in all respects what it purports to be; that he has a good
title to it; that all prior parties had capacity to contract; and that the
instrument is at the time of his indorsement valid and subsisting." 23
He cannot interpose the defense that signatures prior to him are
forged.
A collecting bank where a check is deposited and which indorses the
check upon presentment with the drawee bank, is such an indorser.

So even if the indorsement on the check deposited by the banks'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. 24 The general rule then is that the
drawee bank may not debit the drawer's account and is not entitled
to indemnification from the drawer. 25 The risk of loss must perforce
fall on the drawee bank.
However, if the drawee bank can prove a failure by the
customer/drawer to exercise ordinary care that substantially
contributed to the making of the forged signature, the drawer is
precluded from asserting the forgery.
If at the same time the drawee bank was also negligent to the point
of substantially contributing to the loss, then such loss from the
forgery can be apportioned between the negligent drawer and the
negligent bank. 26
In cases involving a forged check, where the drawer's signature is
forged, the drawer can recover from the drawee bank. No drawee
bank has a right to pay a forged check. If it does, it shall have to
recredit the amount of the check to the account of the drawer. The
liability chain ends with the drawee bank whose responsibility it is to
know the drawer's signature since the latter is its customer. 27
In cases involving checks with forged indorsements, such as the
present petition, the chain of liability does not end with the drawee
bank. The drawee bank may not debit the account of the drawer but
may generally pass liability back through the collection chain to the
party who took from the forger and, of course, to the forger himself,
if available. 28 In other words, the drawee bank canseek
reimbursement or a return of the amount it paid from the presentor
bank or person. 29 Theoretically, the latter can demand
reimbursement from the person who indorsed the check to it and so
on. The loss falls on the party who took the check from the forger, or
on the forger himself.
In this case, the checks were indorsed by the collecting bank
(Associated Bank) to the drawee bank (PNB). The former will
necessarily be liable to the latter for the checks bearing forged
indorsements. If the forgery is that of the payee's or holder's
indorsement, the collecting bank is held liable, without prejudice to
the latter proceeding against the forger.
Since a forged indorsement is inoperative, the collecting bank had
no right to be paid by the drawee bank. The former must necessarily
return the money paid by the latter because it was paid wrongfully.
30
76
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 has done its duty
to ascertain the genuineness of the endorsements." 31
The drawee bank is not similarly situated as the collecting bank
because the former makes no warranty as to the genuineness. of
any indorsement. 32 The drawee bank's duty is but to verify the
genuineness of the drawer's signature and not of the indorsement
because the drawer is its client.
Moreover, the collecting bank is made liable because it is privy to
the depositor who negotiated the check. The bank knows him, his
address and history because he is a client. It has taken a risk on his
deposit. The bank is also in a better position to detect forgery, fraud
or irregularity in the indorsement.
Hence, the drawee bank can recover the amount paid on the check
bearing a forged indorsement from the collecting bank. However, a
drawee bank has the duty to promptly inform the presentor of the
forgery upon discovery. If the drawee bank delays in informing the
presentor of the forgery, thereby depriving said presentor of the
right to recover from the forger, the former is deemed negligent and
can no longer recover from the presentor. 33
Applying these rules to the case at bench, PNB, the drawee bank,
cannot debit the current account of the Province of Tarlac because it
paid checks which bore forged indorsements. However, if the
Province of Tarlac as drawer was negligent to the point of
substantially contributing to the loss, then the drawee bank PNB can
charge its account. If both drawee bank-PNB and drawer-Province of
Tarlac were negligent, the loss should be properly apportioned
between them.
The loss incurred by drawee bank-PNB can be passed on to the
collecting bank-Associated Bank which presented and indorsed the
checks to it. Associated Bank can, in turn, hold the forger, Fausto
Pangilinan, liable.
If PNB negligently delayed in informing Associated Bank of the
forgery, thus depriving the latter of the opportunity to recover from
the forger, it forfeits its right to reimbursement and will be made to
bear the loss.

After careful examination of the records, the Court finds that the
Province of Tarlac was equally negligent and should, therefore,
share the burden of loss from the checks bearing a forged
indorsement.
The Province of Tarlac permitted Fausto Pangilinan to collect the
checks when the latter, having already retired from government
service, was no longer connected with the hospital. With the
exception of the first check (dated January 17, 1978), all the checks
were issued and released after Pangilinan's retirement on February
28, 1978. After nearly three years, the Treasurer's office was still
releasing the checks to the retired cashier. In addition, some of the
aid allotment checks were released to Pangilinan and the others to
Elizabeth Juco, the new cashier. The fact that there were now two
persons collecting the checks for the hospital is an unmistakable sign
of an irregularity which should have alerted employees in the
Treasurer's office of the fraud being committed. There is also
evidence indicating that the provincial employees were aware of
Pangilinan's retirement and consequent dissociation from the
hospital. Jose Meru, the Provincial Treasurer, testified:.
ATTY. MORGA:
Q Now, is it true that for a given month there were two releases of
checks, one went to Mr. Pangilinan and one went to Miss Juco?
JOSE MERU:
A Yes, sir.
Q Will you please tell us how at the time (sic) when the authorized
representative of Concepcion Emergency Hospital is and was
supposed to be Miss Juco?
A Well, as far as my investigation show (sic) the assistant cashier told
me that Pangilinan represented himself as also authorized to help in
the release of these checks and we were apparently misled because
they accepted the representation of Pangilinan that he was helping
them in the release of the checks and besides according to them
they were, Pangilinan, like the rest, was able to present an official
receipt to acknowledge these receipts and according to them since
this is a government check and believed that it will eventually go to
the hospital following the standard procedure of negotiating
government checks, they released the checks to Pangilinan aside
from Miss Juco.34
The failure of the Province of Tarlac to exercise due care contributed
to a significant degree to the loss tantamount to negligence. Hence,
the Province of Tarlac should be liable for part of the total amount
paid on the questioned checks.
The drawee bank PNB also breached its duty to pay only according
to the terms of the check. Hence, it cannot escape liability and
should also bear part of the loss.
As earlier stated, PNB can recover from the collecting bank.
In the case of Associated Bank v. CA, 35 six crossed checks with
forged indorsements were deposited in the forger's account with
the collecting bank and were later paid by four different drawee
77
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. . . .
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-Sour (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 maybe prejudiced and lose the
opportunity to go after its depositor.
The Court finds that even if PNB did not return the questioned
checks to Associated Bank within twenty-four hours, as mandated
by the rule, PNB did not commit negligent delay. Under the
circumstances, PNB gave prompt notice to Associated Bank and the
latter bank was not prejudiced in going after Fausto Pangilinan. After
the Province of Tarlac informed PNB of the forgeries, PNB
necessarily had to inspect the checks and conduct its own
investigation. Thereafter, it requested the Provincial Treasurer's
office on March 31, 1981 to return the checks for verification. The
Province of Tarlac returned the checks only on April 22, 1981. Two
days later, Associated Bank received the checks from PNB. 36
Associated Bank was also furnished a copy of the Province's letter of
demand to PNB dated March 20, 1981, thus giving it notice of the
forgeries. At this time, however, Pangilinan's account with
Associated had only P24.63 in it. 37 Had Associated Bank decided to
debit Pangilinan's account, it could not have recovered the amounts
paid on the questioned checks. In addition, while Associated Bank
filed a fourth-party complaint against Fausto Pangilinan, it did not
present evidence against Pangilinan and even presented him as its
rebuttal witness. 38 Hence, Associated Bank was not prejudiced by
PNB's failure to comply with the twenty-four-hour return rule.
Next, Associated Bank contends that PNB is estopped from requiring
reimbursement because the latter paid and cleared the checks. The
Court finds this contention unmeritorious. Even if PNB cleared and
paid the checks, it can still recover from Associated Bank. This is true
even if the payee's Chief Officer who was supposed to have indorsed
the checks is also a customer of the drawee bank. 39 PNB's duty was
to verify the genuineness of the drawer's signature and not the
genuineness of payee's indorsement. Associated Bank, as the
collecting bank, is the entity with the duty to verify the genuineness
of the payee's indorsement.
PNB also avers that respondent court erred in adjudging circuitous
liability by directing PNB to return to the Province of Tarlac the
amount of the checks and then directing Associated Bank to
reimburse PNB. The Court finds nothing wrong with the mode of the
award. The drawer, Province of Tarlac, is a clientor customer of the
PNB, not of Associated Bank. There is no privity of contract between
the drawer and the collecting bank.
The trial court made PNB and Associated Bank liable with legal
interest from March 20, 1981, the date of extrajudicial demand
made by the Province of Tarlac on PNB. The payments to be made in
this case stem from the deposits of the Province of Tarlac in its
current account with the PNB. Bank deposits are considered under
the law as loans. 40 Central Bank Circular No. 416 prescribes a twelve
percent (12%) interest per annum for loans, forebearance of money,
goods or credits in the absence of express stipulation. Normally,
current accounts are likewise interest-bearing, by express contract,
thus excluding them from the coverage of CB Circular No. 416. In
this case, however, the actual interest rate, if any, for the current
78
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. 41 The trial court did not err in
granting legal interest from March 20, 1981, the date of extrajudicial
demand.
The Court finds as reasonable, the proportionate sharing of fifty
percent - fifty percent (50%-50%). Due to the negligence of the
Province of Tarlac in releasing the checks to an unauthorized person
(Fausto Pangilinan), in allowing the retired hospital cashier to
receive the checks for the payee hospital for a period close to three
years and in not properly ascertaining why the retired hospital
cashier was collecting checks for the payee hospital in addition to
the hospital's real cashier, respondent Province contributed to the
loss amounting to P203,300.00 and shall be liable to the PNB for fifty
(50%) percent thereof. In effect, the Province of Tarlac can only
recover fifty percent (50%) of P203,300.00 from PNB.
The collecting bank, Associated Bank, shall be liable to PNB for fifty
(50%) percent of P203,300.00. It is liable on its warranties as
indorser of the checks which were deposited by Fausto Pangilinan,
having guaranteed the genuineness of all prior indorsements,
including that of the chief of the payee hospital, Dr. Adena Canlas.
Associated Bank was also remiss in its duty to ascertain the
genuineness of the payee's indorsement.
IN VIEW OF THE FOREGOING, the petition for review filed by the
Philippine National Bank (G.R. No. 107612) is hereby PARTIALLY
GRANTED. The petition for review filed by the Associated Bank (G.R.
No. 107382) is hereby DENIED. The decision of the trial court is
MODIFIED. The Philippine National Bank shall pay fifty percent (50%)
of P203,300.00 to the Province of Tarlac, with legal interest from
March 20, 1981 until the payment thereof. Associated Bank shall pay
fifty percent (50%) of P203,300.00 to the Philippine National Bank,
likewise, with legal interest from March 20, 1981 until payment is
made.
SO ORDERED.
Facts:
Faustino Pangilinan, cashier of the Concepcion Emergency Hospital,
forged the signature of Dr. Adena Canlas who was the Chief of the
said hospital and endorsed 30 checks amounting to P203,300 to
himself. The money was drawn from the account of the Province of
Tarlac with PNB. Pangilinan deposited the checks to his personal
savings account with Associated Bank which was cleared and paid
for by PNB. The checks have a stamp of Associated Bank which reads
“All prior endorsements guaranteed by Associated Bank”.
The Province of Tarlac, through the Provincial Treasurer, wrote PNB
to restore the various amounts debited from the current account of
the Province. PNB on its part demanded reimbursement from
Associated Bank. Both banks resisted payment which led to the
Province of Tarlac suing PNB. PNB in turn impleaded Associated
Bank in the suit as a third-party defendant while Associated Bank
impleaded Canlas and Pangilinan as fourth-party defendants.
 79

The trial court ruled that 1) PNB should pay the Province of Tarlac
the P203,300 with legal interests, 2) Associated Bank should be pay
the same amount to PNB and 3) dismissed the complaints against
Canlas and Pangilinan. On appeal, the CA affirmed the ruling of the
trial court
Issue: Who should bear the loss arising from the forgery, the
Province of Tarlac, PNB, Associated Bank or Pangilinan?
Held: The SC held that the Province and Associated Bank should bear
losses in the proportion of 50-50.
The Province can only recover 50% of the P203,300 from PNB
because of the negligence they exhibited in releasing the checks to
the then already retired Pangilinan who is an unauthorized person
to handle the said checks.
On the other hand, Associated Bank is liable to PNB only to 50% of
the same amount because of its liability as indorser of the checks
that were deposited by Pangilinan, and guaranteed the genuineness
of the said checks. They failed to exercise due diligence in checking
the veracity of indorsements.
FACTS:
Furthermore, in cases involving checks with forged indorsements,
such as the case at bar, the chain of liability doesn't 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, the forger himself, if available. In other words, the
drawee bank can seek reimbursement or a return of the amount it
paid from the collecting bank or person. The collecting bank
generally suffers the loss because it has te 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 indorsements.
With regard the issue of delay, a delay in informing the bank
of the forgery, which deprives it of the opportunity to go after the
forger, signifies negligence on the part of the drawee bank and
will preclude it from claiming reimbursement. In this case, PNB
wasn't guilty of any negligent delay. Its delay hasn't prejudiced
Associated Bank in any way because even if there wasn't delay,
the fact that there was nothing left of the account of Pangilinan,
there couldn't be anymore reimbursement.

The province of Tarlac maintains an account with PNB-Tarlac.

Part of its funds is appropriated for the benefit of Concepcion
Emergency Hospital. During a post-audit done by the province, it
was found out that 30 of its checks weren’t received by the hospital.
Upon further investigation, it was found out that the checks were
encashed by Pangilinan who was a former cashier and
administrative officer of the hospital through forged
indorsements. This prompted the provincial treasurer to
ask for reimbursement from PNB and thereafter, PNB from
Associated Bank. As the two banks didn't want to reimburse, an
action was filed against them.

HELD:

There is a distinction on forged indorsements with regard

bearer instruments and instruments payable to order.

With instruments payable to bearer, 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 holder in due
course.

In instruments payable to order, the signature of the rightful

holder is essential to transfer title to the same instrument.
When the holder’s signature is forged, all parties prior to the
forgery may raise the real defense of forgery against all parties
subsequent thereto. In connection to this, an indorser warrants
that the instrument is genuine. A collecting bank is such an
indorser. So even if the indorsement 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.
 80

THIRD DIVISION Sometime in September, 1988, the BIR again assessed plaintiffs for
their tax liabilities for the years 1979-82. It was then they discovered
G.R. No. 138510 October 10, 2002 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
TRADERS ROYAL BANK, petitioner,
payment by unknown persons to defendant Security Bank and Trust
vs.
Company (SBTC), Taytay Branch as shown by the bank’s routing
RADIO PHILIPPINES NETWORK, INC.,
symbol transit number (BRSTN 01140027) or clearing code stamped
INTERCONTINENTAL BROADCASTING CORPORATION and
on the reverse sides of the checks.
BANAHAW BROADCASTING CORPORATION,
through the BOARD OF ADMINISTRATORS,
and SECURITY BANK AND TRUST COMPANY, respondents. 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
DECISION
BIR P18,962,225.25 in settlement of their unpaid deficiency taxes.

CORONA, J.:
Thereafter, plaintiffs sent letters to both defendants, demanding
that the amounts covered by the checks be reimbursed or credited
Petitioner seeks the review and prays for the reversal of the to their account. The defendants refused, hence, the instant suit.3
Decision1 of April 30, 1999 of Court of Appeals in CA-G.R. CV No.
54656, the dispositive portion of which reads:
On February 17, 1985, the trial court rendered its decision, thus:

WHEREFORE, the appealed decision is AFFIRMED with modification

WHEREFORE, in view of the foregoing considerations, judgment is
in the sense that appellant SBTC is hereby absolved from any
hereby rendered in favor of the plaintiffs and against the defendants
liability. Appellant TRB is solely liable to the appellees for the
by :
damages and costs of suit specified in the dispositive portion of the
appealed decision. Costs against appellant TRB.
a) Condemning the defendant Traders Royal Bank to pay
actual damages in the sum of Nine Million Seven Hundred
SO ORDERED.2
Ninety Thousand and Seven Hundred Sixteen Pesos and
Eighty-Seven Centavos (P9,790,716.87) broken down as
As found by the Court of Appeals, the antecedent facts of the case follows:
are as follows:
1) To plaintiff RPN-9 - P4,155,835.00
On April 15, 1985, the Bureau of Internal Revenue (BIR) assessed
plaintiffs Radio Philippines Network (RPN), Intercontinental
2) To Plaintiff IBC-13 - P3,949,406.12
Broadcasting Corporation (IBC), and Banahaw Broadcasting
Corporation (BBC) of their tax obligations for the taxable years 1978
to 1983. 3) To Plaintiff BBC-2 - P1,685,475.72

On March 25, 1987, Mrs. Lourdes C. Vera, plaintiffs’ comptroller, plus interest at the legal rate from the filing of this case in court.
sent a letter to the BIR requesting settlement of plaintiffs’ tax
obligations. b) Condemning the defendant Security Bank and Trust
Company, being collecting bank, to reimburse the
The BIR granted the request and accordingly, on June 26, 1986, defendant Traders Royal Bank, all the amounts which the
plaintiffs purchased from defendant Traders Royal Bank (TRB) three latter would pay to the aforenamed plaintiffs;
(3) manager’s checks to be used as payment for their tax liabilities,
to wit: c) 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
Check Number Amount fees equivalent to twenty-five percent of the total amount
recovered; and
30652 P4,155.835.00

30650 3,949,406.12 d) Costs of suit.

30796 1,685,475.75 SO ORDERED.4

Defendant TRB, through Aida Nuñez, TRB Branch Manager at Defendants Traders Royal Bank and Security Bank and Trust
Broadcast City Branch, turned over the checks to Mrs. Vera who was Company, Inc. both appealed the trial court’s decision to the Court
supposed to deliver the same to the BIR in payment of plaintiffs’ of Appeals. However, as quoted in the beginning hereof, the
taxes. 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."5 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
81
check. Its only remedy is against the person to whom it paid the
money.6
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.7
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.8 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.9
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 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. NAME OF
BANK/BRANCH BRSTN (Date of clearing)."
Here, not one of the disputed checks bears the requisite
endorsement of appellant 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 latter Bank
which received the same.
It was likewise established during the trial that whenever appellant
SBTC receives a check for deposit, its practice is to stamp on its face
the words, "non-negotiable". Lana Echevarria’s testimony is
relevant:
"ATTY. ROMANO: Could you tell us briefly the procedure you follow
in receiving checks?
"A: First of all, I verify the check itself, the place, the date, the
amount in words and everything. And then, if all these things are in
order and verified in the data sheet I stamp my non-negotiable
stamp at the face of the check."
Unfortunately, the words "non-negotiable" do not appear on the
face of either of the three (3) disputed checks.
Moreover, the aggregate amount of the checks is not reflected in
the clearing documents of appellant SBTC. Section 19 of the Rules of
the PCHC states:
"Section 19 – Regular Item Procedure:
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
countercheck 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.
The foregoing circumstances taken altogether create a serious doubt
on whether the disputed checks passed through the hands of
appellant SBTC."10
We subscribe to the foregoing findings and conclusions of the Court
of Appeals.
82
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.
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.
We agree with petitioner, however, that it should not be made to
pay exemplary damages to RPN, IBC and BBC because its wrongful
act was not done in bad faith, and it did not act in a wanton,
fraudulent, reckless or malevolent manner.11
We find the award of attorney’s fees, 25% of P10 million, to be
manifestly exorbitant.12 Considering the nature and extent of the
services rendered by respondent networks’ counsel, however, the
Court deems it appropriate to award the amount of P100,000 as
attorney’s fees.
WHEREFORE, the appealed decision is MODIFIED by deleting the
award of 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 hereby AFFIRMED.
SO ORDERED.
Lessons Applicable: Liabilities of the Parties (Negotiable
Instruments Law)
FACTS: Traders (sold 3 managers check)> RPN,IBC,BBC (received by
<Mrs. Vera) --(not received) BIR-- > SBTC (deposited by unknown
persons)
April 15, 1985: Bureau of Internal Revenue (BIR) assessed Radio
Philippines Network (RPN), Intercontinental Broadcasting
Corporation (IBC), and Banahaw Broadcasting Corporation (BBC) of
their tax obligations for the taxable years 1978 to 1983.
March 25, 1987: Mrs. Lourdes C. Vera, RPN,IBC,BBC comptroller,
sent a letter to the BIR requesting settlement of their tax obligations
which was granted
June 26, 1986: RPN, IBC and BBC purchased from Traders 3
manager’s checks to be used as payment for their tax liabilities.
Traders, through Aida Nuñez, turned over the checks to Mrs. Vera
who was supposed to deliver them to the BIR in payment
September, 1988: BIR again assessed plaintiffs for their tax liabilities
for the years 1979-82. It was discovered the 3 managers checks
were never delivered nor paid to the BIR by Mrs. Vera. The checks
 83

were presented for payment by unknown persons to Security Bank
and Trust Company (SBTC).
BIR issued warrants of levy, distraint and garnishment against them.
They were constrained to enter into a compromise and paid BIR
P18,962,225.25 in settlement
Traders sent letters to RPN and SBTC, demanding that the amounts
covered by the checks be reimbursed or credited to their account
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.

RTC: favored Traders against RPN and SBTC

CA: absolved SBTC and held Traders solely liable

SBTC denies liability on the ground that it had no participation in the

negotiation of the checks

ISSUE: W/N Traders should solely bare the loss for its negligence

HELD:

YES. CA affirmed.

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. Despite the fraud, Traders paid the 3 checks in the
total amount of P9,790,716.87

Primary duty of Traders 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 it who cashed the check.

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.

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

FIRST DIVISION
G.R. No. 149454 May 28, 2004
BANK OF THE PHILIPPINE ISLANDS, petitioner,
vs.
CASA MONTESSORI INTERNATIONALE LEONARDO T. YABUT,
respondents.
DECISION
PANGANIBAN, J.:
By the nature of its functions, a bank is required to take meticulous
care of the deposits of its clients, who have the right to expect high
standards of integrity and performance from it.
Among its obligations in furtherance thereof is knowing the
signatures of its clients. Depositors are not estopped from
questioning wrongful withdrawals, even if they have failed to
question those errors in the statements sent by the bank to them for
verification.
The Case
Before us are two Petitions for Review1 under Rule 45 of the Rules of
Court, assailing the March 23, 2001 Decision2 and the August 17,
2001 Resolution3 of the Court of Appeals (CA) in CA-GR CV No.
63561. The decretal portion of the assailed Decision reads as
follows:
"WHEREFORE, upon the premises, the decision appealed from is
AFFIRMED with the modification that defendant bank [Bank of the
Philippine Islands (BPI)] is held liable only for one-half of the value of
the forged checks in the amount of P547,115.00 after deductions
subject to REIMBURSEMENT from third party defendant Yabut who
is likewise ORDERED to pay the other half to plaintiff corporation
[Casa Montessori Internationale (CASA)]."4
The assailed Resolution denied all the parties’ Motions for
Reconsideration.
The Facts
The facts of the case are narrated by the CA as follows:
"On November 8, 1982, plaintiff CASA Montessori International5
opened Current Account No. 0291-0081-01 with defendant BPI[,]
with CASA’s President Ms. Ma. Carina C. Lebron as one of its
authorized signatories.
"In 1991, after conducting an investigation, plaintiff discovered that
nine (9) of its checks had been encashed by a certain Sonny D.
Santos since 1990 in the total amount of P782,000.00, on the
following dates and amounts:
"It turned out that ‘Sonny D. Santos’ with account at BPI’s Greenbelt
Branch [was] a fictitious name used by third party defendant
84
Leonardo T. Yabut who worked as external auditor of CASA. Third
party defendant voluntarily admitted that he forged the signature of
Ms. Lebron and encashed the checks. "The PNP Crime Laboratory
conducted an examination of the nine (9) checks and concluded that
the handwritings thereon compared to the standard signature of
Ms. Lebron were not written by the latter.
"On March 4, 1991, plaintiff filed the herein Complaint for Collection
with Damages against defendant bank praying that the latter be
ordered to reinstate the amount of P782,500.007 in the current and
savings accounts of the plaintiff with interest at 6% per annum.
"On February 16, 1999, the RTC rendered the appealed decision in
favor of the plaintiff."8
Ruling of the Court of Appeals
Modifying the Decision of the Regional Trial Court (RTC), the CA
apportioned the loss between BPI and CASA. The appellate court
took into account CASA’s contributory negligence that resulted in
the undetected forgery. It then ordered Leonardo T. Yabut to
reimburse BPI half the total amount claimed; and CASA, the other
half. It also disallowed attorney’s fees and moral and exemplary
damages.
Hence, these Petitions.9
Issues
In GR No. 149454, Petitioner BPI submits the following issues for our
consideration:
"I. The Honorable Court of Appeals erred in deciding this case NOT
in accord with the applicable decisions of this Honorable Court to
the effect that forgery cannot be presumed; that it must be proved
by clear, positive and convincing evidence; and that the burden of
proof lies on the party alleging the forgery.
"II. The Honorable Court of Appeals erred in deciding this case not in
accord with applicable laws, in particular the Negotiable
Instruments Law (NIL) which precludes CASA, on account of its own
negligence, from asserting its forgery claim against BPI, specially
taking into account the absence of any negligence on the part of
BPI."10
In GR No. 149507, Petitioner CASA submits the following issues:
"1. The Honorable Court of Appeals erred when it ruled that ‘there is
no showing that [BPI], although negligent, acted in bad faith x x x’
thus denying the prayer for the award of attorney’s fees, moral
damages and exemplary damages to [CASA]. The Honorable Court
also erred when it did not order [BPI] to pay interest on the amounts
due to [CASA].
"2. The Honorable Court of Appeals erred when it declared that
[CASA] was likewise negligent in the case at bar, thus warranting its
conclusion that the loss in the amount of P547,115.00 be
‘apportioned between [CASA] and [BPI] x x x.’"11

These issues can be narrowed down to three. First, was there
forgery under the Negotiable Instruments Law (NIL)? Second, were
any of the parties negligent and therefore precluded from setting up
forgery as a defense? Third, should moral and exemplary damages,
attorney’s fees, and interest be awarded?
The Court’s Ruling
The Petition in GR No. 149454 has no merit, while that in GR No.
149507 is partly meritorious.
First Issue:
Forged Signature Wholly Inoperative
Section 23 of the NIL provides:
"Section 23. Forged signature; effect of. -- When a
signature is forged or made without the authority of the
person whose signature it purports to be, it is wholly
inoperative, and no right x x x to enforce payment thereof
against any party thereto, can be acquired through or
under such signature, unless the party against whom it is
sought to enforce such right is precluded from setting up
the forgery or want of authority."12
Under this provision, a forged signature is a real13 or absolute
defense,14 and a person whose signature on a negotiable instrument
is forged is deemed to have never become a party thereto and to
have never consented to the contract that allegedly gave rise to it. 15
The counterfeiting of any writing, consisting in the signing of
another’s name with intent to defraud, is forgery.16
In the present case, we hold that there was forgery of the drawer’s
signature on the check.
First, both the CA17 and the RTC18 found that Respondent Yabut
himself had voluntarily admitted, through an Affidavit, that he had
forged the drawer’s signature and encashed the checks.19 He never
refuted these findings.20 That he had been coerced into admission
was not corroborated by any evidence on record.21
Second, the appellate and the trial courts also ruled that the PNP
Crime Laboratory, after its examination of the said checks,22 had
concluded that the handwritings thereon -- compared to the
standard signature of the drawer -- were not hers.23 This conclusion
was the same as that in the Report24 that the PNP Crime Laboratory
had earlier issued to BPI -- the drawee bank -- upon the latter’s
request.
Indeed, we respect and affirm the RTC’s factual findings, especially
when affirmed by the CA, since these are supported by substantial
evidence on record.25
Voluntary Admission Not Violative of Constitutional Rights
85
The voluntary admission of Yabut did not violate his constitutional
rights (1) on custodial investigation, and (2) against self-
incrimination.
In the first place, he was not under custodial investigation.26 His
Affidavit was executed in private and before private individuals.27
The mantle of protection under Section 12 of Article III of the 1987
Constitution28 covers only the period "from the time a person is
taken into custody for investigation of his possible participation in
the commission of a crime or from the time he is singled out as a
suspect in the commission of a crime although not yet in custody." 29
Therefore, to fall within the ambit of Section 12, quoted above,
there must be an arrest or a deprivation of freedom, with "questions
propounded on him by the police authorities for the purpose of
eliciting admissions, confessions, or any information."30 The said
constitutional provision does "not apply to spontaneous statements
made in a voluntary manner"31 whereby an individual orally admits
to authorship of a crime.32 "What the Constitution proscribes is the
compulsory or coercive disclosure of incriminating facts."33
Moreover, the right against self-incrimination34 under Section 17 of
Article III35 of the Constitution, which is ordinarily available only in
criminal prosecutions, extends to all other government proceedings
-- including civil actions, legislative investigations,36 and
administrative proceedings that possess a criminal or penal aspect37
-- but not to private investigations done by private individuals. Even
in such government proceedings, this right may be waived,38
provided the waiver is certain; unequivocal; and intelligently,
understandingly and willingly made.39
If in these government proceedings waiver is allowed, all the more is
it so in private investigations. It is of no moment that no criminal
case has yet been filed against Yabut. The filing thereof is entirely up
to the appropriate authorities or to the private individuals upon
whom damage has been caused. As we shall also explain later, it is
not mandatory for CASA -- the plaintiff below -- to implead Yabut in
the civil case before the lower court.
Under these two constitutional provisions, "[t]he Bill of Rights40 does
not concern itself with the relation between a private individual and
another individual. It governs the relationship between the
individual and the State."41 Moreover, the Bill of Rights "is a charter
of liberties for the individual and a limitation upon the power of the
[S]tate."42 These rights43 are guaranteed to preclude the slightest
coercion by the State that may lead the accused "to admit
something false, not prevent him from freely and voluntarily telling
the truth."44
Yabut is not an accused here. Besides, his mere invocation of the
aforesaid rights "does not automatically entitle him to the
constitutional protection."45 When he freely and voluntarily
executed46 his Affidavit, the State was not even involved. Such
Affidavit may therefore be admitted without violating his
constitutional rights while under custodial investigation and against
self-incrimination.
Clear, Positive and Convincing Examination and Evidence

The examination by the PNP, though inconclusive, was nevertheless
clear, positive and convincing.
Forgery "cannot be presumed."47 It must be established by clear,
positive and convincing evidence.48 Under the best evidence rule as
applied to documentary evidence like the checks in question, no
secondary or substitutionary evidence may inceptively be
introduced, as the original writing itself must be produced in court.49
But when, without bad faith on the part of the offeror, the original
checks have already been destroyed or cannot be produced in court,
secondary evidence may be produced.50 Without bad faith on its
part, CASA proved the loss or destruction of the original checks
through the Affidavit of the one person who knew of that fact51 --
Yabut. He clearly admitted to discarding the paid checks to cover up
his misdeed.52 In such a situation, secondary evidence like microfilm
copies may be introduced in court.
The drawer’s signatures on the microfilm copies were compared
with the standard signature. PNP Document Examiner II Josefina de
la Cruz testified on cross-examination that two different persons had
written them.53 Although no conclusive report could be issued in the
absence of the original checks,54 she affirmed that her findings were
90 percent conclusive.55 According to her, even if the microfilm
copies were the only basis of comparison, the differences were
evident.56 Besides, the RTC explained that although the Report was
inconclusive, no conclusive report could have been given by the
PNP, anyway, in the absence of the original checks.57 This
explanation is valid; otherwise, no such report can ever be relied
upon in court.
Even with respect to documentary evidence, the best evidence rule
applies only when the contents of a document -- such as the
drawer’s signature on a check -- is the subject of inquiry.58 As to
whether the document has been actually executed, this rule does
not apply; and testimonial as well as any other secondary evidence
is admissible.59 Carina Lebron herself, the drawer’s authorized
signatory, testified many times that she had never signed those
checks. Her testimonial evidence is admissible; the checks have not
been actually executed. The genuineness of her handwriting is
proved, not only through the court’s comparison of the questioned
handwritings and admittedly genuine specimens thereof,60 but
above all by her.
The failure of CASA to produce the original checks neither gives rise
to the presumption of suppression of evidence61 nor creates an
unfavorable inference against it.62 Such failure merely authorizes the
introduction of secondary evidence63 in the form of microfilm
copies. Of no consequence is the fact that CASA did not present the
signature card containing the signatures with which those on the
checks were compared.64 Specimens of standard signatures are not
limited to such a card. Considering that it was not produced in
evidence, other documents that bear the drawer’s authentic
signature may be resorted to.65 Besides, that card was in the
possession of BPI -- the adverse party.
We have held that without the original document containing the
allegedly forged signature, one cannot make a definitive comparison
that would establish forgery;66 and that a comparison based on a
mere reproduction of the document under controversy cannot
produce reliable results.67 We have also said, however, that a judge
cannot merely rely on a handwriting expert’s testimony,68 but
86
should also exercise independent judgment in evaluating the
authenticity of a signature under scrutiny.69 In the present case,
both the RTC and the CA conducted independent examinations of
the evidence presented and arrived at reasonable and similar
conclusions. Not only did they admit secondary evidence; they also
appositely considered testimonial and other documentary evidence
in the form of the Affidavit.
The best evidence rule admits of exceptions and, as we have
discussed earlier, the first of these has been met.70 The result of
examining a questioned handwriting, even with the aid of experts
and scientific instruments, may be inconclusive;71 but it is a non
sequitur to say that such result is not clear, positive and convincing.
The preponderance of evidence required in this case has been
satisfied.72
Second Issue:
Negligence Attributable to BPI Alone
Having established the forgery of the drawer’s signature, BPI -- the
drawee -- erred in making payments by virtue thereof. The forged
signatures are wholly inoperative, and CASA -- the drawer whose
authorized signatures do not appear on the negotiable instruments -
- cannot be held liable thereon. Neither is the latter precluded from
setting up forgery as a real defense.
Clear Negligence in Allowing Payment Under a Forged Signature
We have repeatedly emphasized that, since the banking business is
impressed with public interest, of paramount importance thereto is
the trust and confidence of the public in general. Consequently, the
highest degree of diligence73 is expected,74 and high standards of
integrity and performance are even required, of it.75 By the nature of
its functions, a bank is "under obligation to treat the accounts of its
depositors with meticulous care,76 always having in mind the
fiduciary nature of their relationship."77
BPI contends that it has a signature verification procedure, in which
checks are honored only when the signatures therein are verified to
be the same with or similar to the specimen signatures on the
signature cards. Nonetheless, it still failed to detect the eight
instances of forgery. Its negligence consisted in the omission of that
degree of diligence required78 of a bank. It cannot now feign
ignorance, for very early on we have already ruled that a bank is
"bound to know the signatures of its customers; and if it pays a
forged check, it must be considered as making the payment out of
its own funds, and cannot ordinarily charge the amount so paid to
the account of the depositor whose name was forged."79 In fact, BPI
was the same bank involved when we issued this ruling seventy
years ago.
Neither Waiver nor Estoppel Results from Failure to Report Error in
Bank Statement
The monthly statements issued by BPI to its clients contain a notice
worded as follows: "If no error is reported in ten (10) days, account
will be correct."80 Such notice cannot be considered a waiver, even if
CASA failed to report the error. Neither is it estopped from
questioning the mistake after the lapse of the ten-day period.

This notice is a simple confirmation81 or "circularization" -- in
accounting parlance -- that requests client-depositors to affirm the
accuracy of items recorded by the banks.82 Its purpose is to obtain
from the depositors a direct corroboration of the correctness of
their account balances with their respective banks.83 Internal or
external auditors of a bank use it as a basic audit procedure84 -- the
results of which its client-depositors are neither interested in nor
privy to -- to test the details of transactions and balances in the
bank’s records.85 Evidential matter obtained from independent
sources outside a bank only serves to provide greater assurance of
reliability86 than that obtained solely within it for purposes of an
audit of its own financial statements, not those of its client-
depositors.
Furthermore, there is always the audit risk that errors would not be
detected87 for various reasons. One, materiality is a consideration in
audit planning;88 and two, the information obtained from such a
substantive test is merely presumptive and cannot be the basis of a
valid waiver.89 BPI has no right to impose a condition unilaterally and
thereafter consider failure to meet such condition a waiver. Neither
may CASA renounce a right90 it has never possessed.91
Every right has subjects -- active and passive. While the active
subject is entitled to demand its enforcement, the passive one is
duty-bound to suffer such enforcement.92
On the one hand, BPI could not have been an active subject, because
it could not have demanded from CASA a response to its notice.
Besides, the notice was a measly request worded as follows: "Please
examine x x x and report x x x."93 CASA, on the other hand, could not
have been a passive subject, either, because it had no obligation to
respond. It could -- as it did -- choose not to respond.
Estoppel precludes individuals from denying or asserting, by their
own deed or representation, anything contrary to that established
as the truth, in legal contemplation.94 Our rules on evidence even
make a juris et de jure presumption95 that whenever one has, by
one’s own act or omission, intentionally and deliberately led another
to believe a particular thing to be true and to act upon that belief,
one cannot -- in any litigation arising from such act or omission -- be
permitted to falsify that supposed truth.96
In the instant case, CASA never made any deed or representation
that misled BPI. The former’s omission, if any, may only be deemed
an innocent mistake oblivious to the procedures and consequences
of periodic audits. Since its conduct was due to such ignorance
founded upon an innocent mistake, estoppel will not arise.97 A
person who has no knowledge of or consent to a transaction may
not be estopped by it.98 "Estoppel cannot be sustained by mere
argument or doubtful inference x x x."99 CASA is not barred from
questioning BPI’s error even after the lapse of the period given in
the notice.
Loss Borne by Proximate Source of Negligence
For allowing payment100 on the checks to a wrongful and fictitious
payee, BPI -- the drawee bank -- becomes liable to its depositor-
drawer. Since the encashing bank is one of its branches,101 BPI can
easily go after it and hold it liable for reimbursement.102 It "may not
debit the drawer’s account103 and is not entitled to indemnification
from the drawer."104 In both law and equity, when one of two
87
innocent persons "must suffer by the wrongful act of a third person,
the loss must be borne by the one whose negligence was the
proximate cause of the loss or who put it into the power of the third
person to perpetrate the wrong."105
Proximate cause is determined by the facts of the case.106 "It is that
cause which, in natural and continuous sequence, unbroken by any
efficient intervening cause, produces the injury, and without which
the result would not have occurred."107
Pursuant to its prime duty to ascertain well the genuineness of the
signatures of its client-depositors on checks being encashed, BPI is
"expected to use reasonable business prudence."108 In the
performance of that obligation, it is bound by its internal banking
rules and regulations that form part of the contract it enters into
with its depositors.109
Unfortunately, it failed in that regard. First, Yabut was able to open a
bank account in one of its branches without privity;110 that is,
without the proper verification of his corresponding identification
papers. Second, BPI was unable to discover early on not only this
irregularity, but also the marked differences in the signatures on the
checks and those on the signature card. Third, despite the
examination procedures it conducted, the Central Verification
Unit111 of the bank even passed off these evidently different
signatures as genuine. Without exercising the required prudence on
its part, BPI accepted and encashed the eight checks presented to it.
As a result, it proximately contributed to the fraud and should be
held primarily liable112 for the "negligence of its officers or agents
when acting within the course and scope of their employment."113 It
must bear the loss.
CASA Not Negligent in Its Financial Affairs
In this jurisdiction, the negligence of the party invoking forgery is
recognized as an exception114 to the general rule that a forged
signature is wholly inoperative.115 Contrary to BPI’s claim, however,
we do not find CASA negligent in handling its financial affairs. CASA,
we stress, is not precluded from setting up forgery as a real defense.
Role of Independent Auditor
The major purpose of an independent audit is to investigate and
determine objectively if the financial statements submitted for audit
by a corporation have been prepared in accordance with the
appropriate financial reporting practices116 of private entities. The
relationship that arises therefrom is both legal and moral.117 It
begins with the execution of the engagement letter118 that
embodies the terms and conditions of the audit and ends with the
fulfilled expectation of the auditor’s ethical119 and competent
performance in all aspects of the audit.120
The financial statements are representations of the client; but it is
the auditor who has the responsibility for the accuracy in the
recording of data that underlies their preparation, their form of
presentation, and the opinion121 expressed therein.122 The auditor
does not assume the role of employee or of management in the
client’s conduct of operations123 and is never under the control or
supervision124 of the client.

Yabut was an independent auditor125 hired by CASA. He handled its
monthly bank reconciliations and had access to all relevant
documents and checkbooks.126 In him was reposed the client’s127
trust and confidence128 that he would perform precisely those
functions and apply the appropriate procedures in accordance with
generally accepted auditing standards.129 Yet he did not meet these
expectations. Nothing could be more horrible to a client than to
discover later on that the person tasked to detect fraud was the
same one who perpetrated it.
Cash Balances Open to Manipulation
It is a non sequitur to say that the person who receives the monthly
bank statements, together with the cancelled checks and other
debit/credit memoranda, shall examine the contents and give notice
of any discrepancies within a reasonable time. Awareness is not
equipollent with discernment.
Besides, in the internal accounting control system prudently
installed by CASA,130 it was Yabut who should examine those
documents in order to prepare the bank reconciliations.131 He
owned his working papers,132 and his output consisted of his opinion
as well as the client’s financial statements and accompanying notes
thereto. CASA had every right to rely solely upon his output -- based
on the terms of the audit engagement -- and could thus be
unwittingly duped into believing that everything was in order.
Besides, "[g]ood faith is always presumed and it is the burden of the
party claiming otherwise to adduce clear and convincing evidence to
the contrary."133
Moreover, there was a time gap between the period covered by the
bank statement and the date of its actual receipt. Lebron personally
received the December 1990 bank statement only in January 1991134
-- when she was also informed of the forgery for the first time, after
which she immediately requested a "stop payment order." She
cannot be faulted for the late detection of the forged December
check. After all, the bank account with BPI was not personal but
corporate, and she could not be expected to monitor closely all its
finances. A preschool teacher charged with molding the minds of the
youth cannot be burdened with the intricacies or complexities of
corporate existence.
There is also a cutoff period such that checks issued during a given
month, but not presented for payment within that period, will not
be reflected therein.135 An experienced auditor with intent to
defraud can easily conceal any devious scheme from a client unwary
of the accounting processes involved by manipulating the cash
balances on record -- especially when bank transactions are
numerous, large and frequent. CASA could only be blamed, if at all,
for its unintelligent choice in the selection and appointment of an
auditor -- a fault that is not tantamount to negligence.
Negligence is not presumed, but proven by whoever alleges it.136 Its
mere existence "is not sufficient without proof that it, and no other
cause,"137 has given rise to damages.138 In addition, this fault is
common to, if not prevalent among, small and medium-sized
business entities, thus leading the Professional Regulation
Commission (PRC), through the Board of Accountancy (BOA), to
require today not only accreditation for the practice of public
accountancy,139 but also the registration of firms in the practice
thereof. In fact, among the attachments now required upon
88
registration are the code of good governance140 and a sworn
statement on adequate and effective training.141
The missing checks were certainly reported by the bookkeeper142 to
the accountant143 -- her immediate supervisor -- and by the latter to
the auditor. However, both the accountant and the auditor, for
reasons known only to them, assured the bookkeeper that there
were no irregularities.
The bookkeeper144 who had exclusive custody of the checkbooks145
did not have to go directly to CASA’s president or to BPI. Although
she rightfully reported the matter, neither an investigation was
conducted nor a resolution of it was arrived at, precisely because
the person at the top of the helm was the culprit. The vouchers,
invoices and check stubs in support of all check disbursements could
be concealed or fabricated -- even in collusion -- and management
would still have no way to verify its cash accountabilities.
Clearly then, Yabut was able to perpetrate the wrongful act through
no fault of CASA. If auditors may be held liable for breach of contract
and negligence,146 with all the more reason may they be charged
with the perpetration of fraud upon an unsuspecting client. CASA
had the discretion to pursue BPI alone under the NIL, by reason of
expediency or munificence or both. Money paid under a mistake
may rightfully be recovered,147 and under such terms as the injured
party may choose.
Third Issue:
Award of Monetary Claims
Moral Damages Denied
We deny CASA’s claim for moral damages.
In the absence of a wrongful act or omission,148 or of fraud or bad
faith,149 moral damages cannot be awarded.150 The adverse result of
an action does not per se make the action wrongful, or the party
liable for it. One may err, but error alone is not a ground for granting
such damages.151 While no proof of pecuniary loss is necessary
therefor -- with the amount to be awarded left to the court’s
discretion152 -- the claimant must nonetheless satisfactorily prove
the existence of its factual basis153 and causal relation154 to the
claimant’s act or omission.155
Regrettably, in this case CASA was unable to identify the particular
instance -- enumerated in the Civil Code -- upon which its claim for
moral damages is predicated.156 Neither bad faith nor negligence so
gross that it amounts to malice157 can be imputed to BPI. Bad faith,
under the law, "does not simply connote bad judgment or
negligence;158 it imports a dishonest purpose or some moral
obliquity and conscious doing of a wrong, a breach of a known duty
through some motive or interest or ill will that partakes of the
nature of fraud."159
As a general rule, a corporation -- being an artificial person without
feelings, emotions and senses, and having existence only in legal
contemplation -- is not entitled to moral damages,160 because it
cannot experience physical suffering and mental anguish.161
However, for breach of the fiduciary duty required of a bank, a

corporate client may claim such damages when its good reputation
is besmirched by such breach, and social humiliation results
therefrom.162 CASA was unable to prove that BPI had debased the
good reputation of,163 and consequently caused incalculable
embarrassment to, the former. CASA’s mere allegation or
supposition thereof, without any sufficient evidence on record,164 is
not enough.
Exemplary Damages Also Denied
We also deny CASA’s claim for exemplary damages.
Imposed by way of correction165 for the public good,166 exemplary
damages cannot be recovered as a matter of right.167 As we have
said earlier, there is no bad faith on the part of BPI for paying the
checks of CASA upon forged signatures. Therefore, the former
cannot be said to have acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner.168 The latter, having no right to
moral damages, cannot demand exemplary damages.169
Attorney’s Fees Granted
Although it is a sound policy not to set a premium on the right to
litigate,170 we find that CASA is entitled to reasonable attorney’s fees
based on "factual, legal, and equitable justification."171
When the act or omission of the defendant has compelled the
plaintiff to incur expenses to protect the latter’s interest,172 or
where the court deems it just and equitable,173 attorney’s fees may
be recovered. In the present case, BPI persistently denied the claim
of CASA under the NIL to recredit the latter’s account for the value
of the forged checks. This denial constrained CASA to incur expenses
and exert effort for more than ten years in order to protect its
corporate interest in its bank account. Besides, we have already
cautioned BPI on a similar act of negligence it had committed
seventy years ago, but it has remained unrelenting. Therefore, the
Court deems it just and equitable to grant ten percent (10%)174 of
the total value adjudged to CASA as attorney’s fees.
Interest Allowed
For the failure of BPI to pay CASA upon demand and for compelling
the latter to resort to the courts to obtain payment, legal interest
may be adjudicated at the discretion of the Court, the same to run
from the filing175 of the Complaint.176 Since a court judgment is not a
loan or a forbearance of recovery, the legal interest shall be at six
percent (6%) per annum.177 "If the obligation consists in the
payment of a sum of money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the contrary,
shall be the payment of x x x legal interest, which is six percent per
annum."178 The actual base for its computation shall be "on the
amount finally adjudged,"179 compounded180 annually to make up
for the cost of money181 already lost to CASA.
Moreover, the failure of the CA to award interest does not prevent
us from granting it upon damages awarded for breach of contract.182
Because BPI evidently breached its contract of deposit with CASA,
we award interest in addition to the total amount adjudged. Under
Section 196 of the NIL, any case not provided for shall be "governed
by the provisions of existing legislation or, in default thereof, by the
89
rules of the law merchant."183 Damages are not provided for in the
NIL. Thus, we resort to the Code of Commerce and the Civil Code.
Under Article 2 of the Code of Commerce, acts of commerce shall be
governed by its provisions and, "in their absence, by the usages of
commerce generally observed in each place; and in the absence of
both rules, by those of the civil law."184 This law being silent, we look
at Article 18 of the Civil Code, which states: "In matters which are
governed by the Code of Commerce and special laws, their
deficiency shall be supplied" by its provisions. A perusal of these
three statutes unmistakably shows that the award of interest under
our civil law is justified.
WHEREFORE, the Petition in GR No. 149454 is hereby DENIED, and
that in GR No. 149507 PARTLY GRANTED. The assailed Decision of
the Court of Appeals is AFFIRMED with modification: BPI is held
liable for P547,115, the total value of the forged checks less the
amount already recovered by CASA from Leonardo T. Yabut, plus
interest at the legal rate of six percent (6%) per annum --
compounded annually, from the filing of the complaint until paid in
full; and attorney’s fees of ten percent (10%) thereof, subject to
reimbursement from Respondent Yabut for the entire amount,
excepting attorney’s fees. Let a copy of this Decision be furnished
the Board of Accountancy of the Professional Regulation
Commission for such action as it may deem appropriate against
Respondent Yabut. No costs.
SO ORDERED.
FACTS:
CASA Montessori International opened a current account with BPI
with CASAs President Ms. Ma. Carina C. Lebron as one of its
authorized signatories. In 1991, after conducting an investigation,
plaintiff discovered that nine (9) of its checks had been encashed by
a certain Sonny D. Santos since 1990 in the total amount of
P782,000.00. It turned out that Sonny D. Santos with account at BPIs
Greenbelt Branch [was] a fictitious name used by third party
defendant Leonardo T. Yabut who worked as external auditor of
CASA. Third party defendant voluntarily admitted that he forged the
signature of Ms. Lebron and encashed the checks.
The PNP Crime Laboratory conducted an examination of the nine (9)
checks and concluded that the handwritings thereon compared to
the standard signature of Ms. Lebron were not written by the latter.
On March 4, 1991, plaintiff filed the herein Complaint for Collection
with Damages against defendant bank.
ISSUE 1: Was there forgery under the Negotiable Instruments Law
(NIL)?

HELD:
YES. Forgery cannot be presumed. It must be established by clear,
positive and convincing evidence. Under the best evidence rule as
applied to documentary evidence like the checks in question, no
secondary or substitutionary evidence may inceptively be
introduced, as the original writing itself must be produced in court.
But when, without bad faith on the part of the offeror, the original
checks have already been destroyed or cannot be produced in court,
secondary evidence may be produced. Without bad faith on its part,
CASA proved the loss or destruction of the original checks through
the Affidavit of the one person who knew of that fact- Yabut. He
clearly admitted to discarding the paid checks to cover up his
misdeed. In such a situation, secondary evidence like microfilm
copies may be introduced in court.
Even with respect to documentary evidence, the best evidence rule
applies only when the contents of a document -- such as the drawers
signature on a check -- is the subject of inquiry.
ISSUE 2: Is BPI liable as the drawee bank for allowing payment on
the checks to a wrongful and fictitious payee?
HELD:
YES. BPI -- the drawee bank -- becomes liable to its depositor-drawer
for allowing payment on the checks to a wrongful and fictitious
payee. Since the encashing bank is one of its branches, BPI can easily
go after it and hold it liable for reimbursement. It may not debit the
drawers account and is not entitled to indemnification from the
drawer. In both law and equity, when one of two innocent persons
must suffer by the wrongful act of a third person, the loss must be
borne by the one whose negligence was the proximate cause of the
loss or who put it into the power of the third person to perpetrate
the wrong.
A bank is bound to know the signatures of its customers; and if it
pays a forged check, it must be considered as making the payment
out of its own funds, and cannot ordinarily charge the amount so
paid to the account of the depositor whose name was forged.
Facts:
CASA Montessori International opened an account with BPI, with
CASA’s President as one of its authorized signatories. It discovered
that 9 of its checks had been encashed by a certain Sonny D. Santos
whose name turned out to be fictitious, and was used by a certain
Yabut, CASA’s external auditor. He voluntarily admitted that he
forged the signature and encashed the checks.
RTC granted the Complaint for Collection with Damages against BPI
ordering to reinstate the amount in the account, with interest. CA
took account of CASA’s contributory negligence and apportioned the
loss between CASA and BPI, and ordred Yabut to reimburse both.
90
BPI contends that the monthly statements it issues to its clients
contain a notice worded as follows: “If no error is reported in 10
days, account will be correct” and as such, it should be considered a
waiver.
Issue: Whether or not waiver or estoppel results from failure to
report the error in the bank statement
Held: Such notice cannot be considered a waiver, even if CASA failed
to report the error. Neither is it estopped from questioning the
mistake after the lapse of the ten-day period.
This notice is a simple confirmation or "circularization" -- in
accounting parlance -- that requests client-depositors to affirm the
accuracy of items recorded by the banks. Its purpose is to obtain
from the depositors a direct corroboration of the correctness of
their account balances with their respective banks.
Every right has subjects -- active and passive. While the active
subject is entitled to demand its enforcement, the passive one is
duty-bound to suffer such enforcement. On the one hand, BPI could
not have been an active subject, because it could not have
demanded from CASA a response to its notice. CASA, on the other
hand, could not have been a passive subject, either, because it had
no obligation to respond. It could -- as it did -- choose not to
respond.
Estoppel precludes individuals from denying or asserting, by their
own deed or representation, anything contrary to that established
as the truth, in legal contemplation. Our rules on evidence even
make a juris et de jure presumption that whenever one has, by one’s
own act or omission, intentionally and deliberately led another to
believe a particular thing to be true and to act upon that belief, one
cannot -- in any litigation arising from such act or omission -- be
permitted to falsify that supposed truth.
In the instant case, CASA never made any deed or representation
that misled BPI. The former’s omission, if any, may only be deemed
an innocent mistake oblivious to the procedures and consequences
of periodic audits. Since its conduct was due to such ignorance
founded upon an innocent mistake, estoppel will not arise. A person
who has no knowledge of or consent to a transaction may not be
estopped by it. "Estoppel cannot be sustained by mere argument or
doubtful inference x x x." CASA is not barred from questioning BPI’s
error even after the lapse of the period given in the notice.

FIRST DIVISION
G.R. No. 172954 October 5, 2011
ENGR. JOSE E. CAYANAN, Petitioner,
vs.
NORTH STAR INTERNATIONAL TRAVEL, INC., Respondent.
DECISION
VILLARAMA, JR., J.:
Petitioner Engr. Jose E. Cayanan appeals the May 31, 2006 Decision1
of the Court of Appeals (CA) in CA-G.R. SP No. 65538 finding him
civilly liable for the value of the five checks which are the subject of
Criminal Case Nos. 166549-53.
The antecedent facts are as follows:
North Star International Travel Incorporated (North Star) is a
corporation engaged in the travel agency business while petitioner is
the owner/general manager of JEAC International Management and
Contractor Services, a recruitment agency.
On March 17,2 1994, Virginia Balagtas, the General Manager of
North Star, in accommodation and upon the instruction of its client,
petitioner herein, sent the amount of US$60,0003 to View Sea
Ventures Ltd., in Nigeria from her personal account in Citibank
Makati. On March 29, 1994, Virginia again sent US$40,000 to View
Sea Ventures by telegraphic transfer,4 with US$15,000 coming from
petitioner. Likewise, on various dates, North Star extended credit to
petitioner for the airplane tickets of his clients, with the total
amount of such indebtedness under the credit extensions eventually
reaching P510,035.47.5
To cover payment of the foregoing obligations, petitioner issued the
following five checks to North Star:
Check No : 246822
Drawn Against : Republic Planters Bank
Amount : P695,000.00
Dated/Postdated : May 15, 1994
Payable to : North Star International Travel, Inc.
Check No : 246823
Drawn Against : Republic Planters Bank
Amount : P278,000.00
Dated/Postdated : May 15, 1994
Payable to : North Star International Travel, Inc.
91
Check No : 246824
Drawn Against : Republic Planters Bank
Amount : P22,703.00
Dated/Postdated : May 15, 1994
Payable to : North Star International Travel, Inc.
Check No : 687803
Drawn Against : PCIB
Amount : P1,500,000.00
Dated/Postdated : April 14, 1994
Payable to : North Star International Travel, Inc.
Check No : 687804
Drawn Against : PCIB
Amount : P35,000.00
Dated/Postdated : April 14, 1994
Payable to : North Star International Travel, Inc.6
When presented for payment, the checks in the amount of
P1,500,000 and P35,000 were dishonored for insufficiency of funds
while the other three checks were dishonored because of a stop
payment order from petitioner.7 North Star, through its counsel,
wrote petitioner on September 14, 19948 informing him that the
checks he issued had been dishonored. North Star demanded
payment, but petitioner failed to settle his obligations. Hence, North
Star instituted Criminal Case Nos. 166549-53 charging petitioner
with violation of Batas Pambansa Blg. 22, or the Bouncing Checks
Law, before the Metropolitan Trial Court (MeTC) of Makati City.
The Informations,9 which were similarly worded except as to the
check numbers, the dates and amounts of the checks, alleged:
That on or about and during the month of March 1994 in the
Municipality of Makati, Metro Manila, Philippines, a place within the
jurisdiction of this Honorable Court, the above-named accused,
being the authorized signatory of [JEAC] Int’l Mgt & Cont. Serv. did
then and there willfully, unlawfully and feloniously make out[,] draw
and issue to North Star Int’l. Travel Inc. herein rep. by Virginia D.
Balagtas to apply on account or for value the checks described
below:
said accused well knowing that at the time of issue thereof, did not
have sufficient funds in or credit with the drawee bank for the
payment in full of the face amount of such check upon its
presentment, which check when presented for payment within
ninety (90) days from the date thereof was subsequently dishonored

by the drawee bank for the reason PAYMENT STOPPED/DAIF and
despite receipt of notice of such dishonor the accused failed to pay
the payee the face amount of said check or to make arrangement
for full payment thereof within five (5) banking days after receiving
notice.
Contrary to law.
Upon arraignment, petitioner pleaded not guilty to the charges.
After trial, the MeTC found petitioner guilty beyond reasonable
doubt of violation of B.P. 22. Thus:
WHEREFORE, finding the accused, ENGR. JOSE E. CAYANAN GUILTY
beyond reasonable doubt of Violation of Batas Pambansa Blg. 22 he
is hereby sentenced to suffer imprisonment of one (1) year for each
of the offense committed.
Accused is likewise ordered to indemnify the complainant North Star
International Travel, Inc. represented in this case by Virginia
Balagtas, the sum of TWO MILLION FIVE HUNDRED THIRTY
THOUSAND AND SEVEN HUNDRED THREE PESOS (P2,530,703.00)
representing the total value of the checks in [question] plus FOUR
HUNDRED EIGHTY[-]FOUR THOUSAND SEVENTY[-]EIGHT PESOS AND
FORTY[-]TWO CENTAVOS (P484,078.42) as interest of the value of
the checks subject matter of the instant case, deducting therefrom
the amount of TWO HUNDRED TWENTY THOUSAND PESOS
(P220,000.00) paid by the accused as interest on the value of the
checks duly receipted by the complainant and marked as Exhibit "FF"
of the record.
SO ORDERED.10
On appeal, the Regional Trial Court (RTC) acquitted petitioner of the
criminal charges. The RTC also held that there is no basis for the
imposition of the civil liability on petitioner. The RTC ratiocinated
that:
In the instant cases, the checks issued by the accused were
presented beyond the period of NINETY (90) DAYS and therefore,
there is no violation of the provision of Batas Pambansa Blg. 22 and
the accused is not considered to have committed the offense. There
being no offense committed, accused is not criminally liable and
there would be no basis for the imposition of the civil liability arising
from the offense.11
Aggrieved, North Star elevated the case to the CA. On May 31, 2006,
the CA reversed the decision of the RTC insofar as the civil aspect is
concerned and held petitioner civilly liable for the value of the
subject checks. The fallo of the CA decision reads:
WHEREFORE, the petition is GRANTED. The assailed Decision of the
RTC insofar as Cayanan's civil liability is concerned, is NULLIFIED and
SET ASIDE. The indemnity awarded by the MeTC in its September 1,
1999 Decision is REINSTATED.
SO ORDERED.12
92
The CA ruled that although Cayanan was acquitted of the criminal
charges, he may still be held civilly liable for the checks he issued
since he never denied having issued the five postdated checks which
were dishonored.
Petitioner now assails the CA decision raising the lone issue of
whether the CA erred in holding him civilly liable to North Star for
the value of the checks.13
Petitioner argues that the CA erred in holding him civilly liable to
North Star for the value of the checks since North Star did not give
any valuable consideration for the checks. He insists that the
US$85,000 sent to View Sea Ventures was not sent for the account
of North Star but for the account of Virginia as her investment. He
points out that said amount was taken from Virginia’s personal
dollar account in Citibank and not from North Star’s corporate
account.
Respondent North Star, for its part, counters that petitioner is liable
for the value of the five subject checks as they were issued for value.
Respondent insists that petitioner owes North Star P2,530,703 plus
interest of P264,078.45, and that the P220,000 petitioner paid to
North Star is conclusive proof that the checks were issued for value.
The petition is bereft of merit.
We have held that upon issuance of a check, in the absence of
evidence to the contrary, it is presumed that the same was issued
for valuable consideration which may consist either in some right,
interest, profit or benefit accruing to the party who makes the
contract, or some forbearance, detriment, loss or some
responsibility, to act, or labor, or service given, suffered or
undertaken by the other side.14 Under the Negotiable Instruments
Law, it is presumed that every party to an instrument acquires the
same for a consideration or for value.15 As petitioner alleged that
there was no consideration for the issuance of the subject checks, it
devolved upon him to present convincing evidence to overthrow the
presumption and prove that the checks were in fact issued without
valuable consideration.16 Sadly, however, petitioner has not
presented any credible evidence to rebut the presumption, as well
as North Star’s assertion, that the checks were issued as payment
for the US$85,000 petitioner owed.
Notably, petitioner anchors his defense of lack of consideration on
the fact that he did not personally receive the US$85,000 from
Virginia. However, we note that in his pleadings, he never denied
having instructed Virginia to remit the US$85,000 to View Sea
Ventures. Evidently, Virginia sent the money upon the agreement
that petitioner will give to North Star the peso equivalent of the
amount remitted plus interest. As testified to by Virginia, Check No.
246822 dated May 15, 1994 in the amount of P695,000.00 is
equivalent to US$25,000; Check No. 246823 dated May 15, 1994 in
the amount of P278,000 is equivalent to US$10,000; Check No.
246824 in the amount of P22,703 represents the one month interest
for P695,000 and P278,000 at the rate of twenty-eight (28%) percent
per annum;17 Check No. 687803 dated April 14, 1994 in the amount
of P1,500,000 is equivalent to US$50,000 and Check No. 687804
dated 14 April 1994 in the amount of P35,000 represents the one
month interest for P1,500,000 at the rate of twenty-eight (28%)
percent per annum.18 Petitioner has not substantially refuted these
averments.1avvphi1

Concomitantly, petitioner’s assertion that the dollars sent to Nigeria
was for the account of Virginia Balagtas and as her own investment
with View Sea Ventures deserves no credence. Virginia has not been
shown to have any business transactions with View Sea Ventures
and from all indications, she only remitted the money upon the
request and in accordance with petitioner’s instructions. The
evidence shows that it was petitioner who had a contract with View
Sea Ventures as he was sending contract workers to Nigeria; Virginia
Balagtas’s participation was merely to send the money through
telegraphic transfer in exchange for the checks issued by petitioner
to North Star. Indeed, the transaction between petitioner and North
Star is actually in the nature of a loan and the checks were issued as
payment of the principal and the interest.
As aptly found by the trial court:
It is to be noted that the checks subject matter of the instant case
were issued in the name of North Star International Inc.,
represented by private complainant Virginia Balagtas in replacement
of the amount of dollars remitted by the latter to Vie[w] Sea
Ventures in Nigeria. x x x But Virginia Balagtas has no business
transaction with Vie[w] Sea Ventures where accused has been
sending his contract workers and the North Star provided the trip
tickets for said workers sent by the accused. North Star International
has no participation at all in the transaction between accused and
the Vie[w] Sea Ventures except in providing plane ticket used by the
contract workers of the accused upon its understanding with the
latter. The contention of the accused that the dollars were sent by
Virginia Balagtas to Nigeria as business investment has not been
shown by any proof to set aside the foregoing negative
presumptions, thus negates accused contentions regarding the
absence of consideration for the issuance of checks. x x x19
Petitioner claims that North Star did not give any valuable
consideration for the checks since the US$85,000 was taken from
the personal dollar account of Virginia and not the corporate funds
of North Star. The contention, however, deserves scant
consideration. The subject checks, bearing petitioner’s signature,
speak for themselves. The fact that petitioner himself specifically
named North Star as the payee of the checks is an admission of his
liability to North Star and not to Virginia Balagtas, who as manager
merely facilitated the transfer of funds. Indeed, it is highly
inconceivable that an experienced businessman like petitioner
would issue various checks in sizeable amounts to a payee if these
are without consideration. Moreover, we note that Virginia Balagtas
averred in her Affidavit20 that North Star caused the payment of the
US$60,000 and US$25,000 to View Sea Ventures to accommodate
petitioner, which statement petitioner failed to refute. In addition,
petitioner did not question the Statement of Account No. 863921
dated August 31, 1994 issued by North Star which contained
itemized amounts including the US$60,000 and US$25,000 sent
through telegraphic transfer to View Sea Ventures per his
instruction. Thus, the inevitable conclusion is that when petitioner
issued the subject checks to North Star as payee, he did so to settle
his obligation with North Star for the US$85,000. And since the only
payment petitioner made to North Star was in the amount of
P220,000.00, which was applied to interest due, his liability is not
extinguished. Having failed to fully settle his obligation under the
checks, the appellate court was correct in holding petitioner liable to
pay the value of the five checks he issued in favor of North Star.
93
WHEREFORE, the present appeal by way of a petition for review on
certiorari is DENIED for lack of merit. The Decision dated May 31,
2006 of the Court of Appeals in CA-G.R. SP No. 65538 is AFFIRMED.
With costs against petitioner.
SO ORDERED.
Check; issuance for consideration. Upon issuance of a check, in the
absence of evidence to the contrary, it is presumed that the same
was issued for valuable consideration which may consist either in
some right, interest, profit or benefit accruing to the party who
makes the contract, or some forbearance, detriment, loss or some
responsibility, to act, or labor, or service given, suffered or
undertaken by the other side. Under the Negotiable Instruments
Law, it is presumed that every party to an instrument acquires the
same for a consideration or for value. As petitioner alleged that
there was no consideration for the issuance of the subject checks, it
devolved upon him to present convincing evidence to overthrow the
presumption and prove that the checks were in fact issued without
valuable consideration. Sadly, however, petitioner has not
presented any credible evidence to rebut the presumption, as well
as North Star’s assertion, that the checks were issued as payment
for the US$85,000 petitioner owed. Engr. Jose E. Cayanan vs. North
Star International Travel, Inc. G.R. No. 172954. October 5, 2011
Sec 24: Presumption of Consideration
FACTS:
North Star extended credit to Cayanan for air tickets of clients -
P510,034.47, and for payment to View Sea Ventures of the amounts
of $60,000 which came from respondent General Manager’s
(Virginia) personal account (ordered by Cayanan), and another
$40,000 by telegraphic transfer with $15,000 from petitioner.
Cayanan then issued 3 checks drawn from Republic Planters Bank
(RPB) and 2 checks from PCIB. When drawn for payment, the checks
from PCIB amounting to 1.5M and 35,000 were dishonored for
insufficiency of funds while the 3 checks from RPB were dishonored
due to a stop payment by Cayanan. Upon demand for payment,
Cayanan failed to settle. 5 violations of BP 22 were filed by North
Star in MeTC. which found Cayanan Guilty. On Appeal, the RTC
acquitted him. The CA, however, held Cayanan civilly liable. The
Supreme Court held that Cayanan’s defense that there was no
consideration for the issuance of checks could not hold as he has not
presented credible evidence to rebut presumption that the checks
were issued for a valuable consideration.
ISSUE/S:
1. WON checks issued by Cayanan were for valuable consideration?
2. WON Cayanan is civilly liable to North Star for the value of the
checks?
 94

HELD:

1. Yes, checks were issued for a valuable consideration. Cayanan has

not presented credible evidence to rebut resumption that checks
were issued for a valuable consideration.

Contrary to petitioners claims that North Star did not give any
valuable consideration for the checks since the US$85,000 was taken
from the personal dollar account of Virginia and not the corporate
funds of North Star, the fact that petitioner himself specifically
named North Star as the payee of the checks is an admission of his
liability to North Star and not to Virginia Balagtas. Also, his defense
that dollars sent to View Sea in Nigeria was Virginia’s own
investment could not hold as she only remitted such money due to
Cayanan’s request/ instructions – this he never denied. It was him
who had business transactions with View Sea and not Virginia.

Transaction between North Star and Cayanan was actually in the

nature of a loan, and checks were issued as payment of such hence
there was no absence of consideration for the issuance of checks.

2. Yes, Cayanan is liable.

Having failed to fully settle his obligation (loan) under the checks,
the appellate court was correct in holding petitioner liable to pay the
value of the five checks he issued in favor of North Star.

SC DECISION: Petition Denied. Cayanan liable.


SECOND DIVISION
G.R. No. 154947 August 11, 2004
LEODEGARIO BAYANI, petitioner,
vs.
PEOPLE OF THE PHILIPPINES, respondent.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari of the Decision1 of 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.3
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, 1992.4 Rubia told Evangelista that Bayani
asked her to rediscount the check for him because he needed the
money.5 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.6 After Rubia endorsed
the check, Evangelista gave her the amount of P55,000.00.7
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.8 The reason for
the dishonor of the check was stamped at its dorsal portion. As of
95
August 27, 1992, the balance of Bayani’s account with the bank was
P2,414.96.9 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.10
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.11 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.12 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. 05493613 which formed part of the checks in
the checkbook issued to him by the PSBank.14 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.15
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.16
Bayani further testified that his wife discovered the loss of the
checks when he brought his wife to the office of Atty. Emmanuel
Velasco.17 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.18 He later tried to
contact Rubia but failed. He finally testified that he could not recall
having affixed his signature on the check.19
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.20
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 judgment21
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.22
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,23 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.
96
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.24
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.25
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:26
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.27
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.28
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 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.
Such presumption cannot be overcome by the petitioner’s bare
denial of receipt of the amount of P55,000.00 from Rubia.
The petitioner cannot, likewise, seek refuge in the ruling of this
Court in Magno vs. Court of Appeals29 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:
It is intriguing to realize that Mrs. Teng did not want the
petitioner to know that 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 language, a
97
scheme whereby Mrs. Teng as the supplier of the
equipment in the name of her corporation, Mancor, would
be able to "sell or lease" its goods as in this case, and at
the same time, privately financing those who desperately
need petty accommodations as this one. This modus
operandi has in so many instances victimized unsuspecting
businessmen, who likewise need protection from the law,
by availing of the deceptively called "warranty deposit"
not realizing that they also fall prey to leasing equipment
under the guise of lease-purchase agreement when it is a
scheme designed to skim off business clients.30
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:
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.31
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 the fact that at the time the petitioner drew and issued the
check, he knew that the residue of the funds in his account with the
drawee bank was insufficient to pay the amount of the check.
IN LIGHT OF ALL THE FOREOING, the petition is DENIED DUE
COURSE. The decision of the Court of Appeals is AFFIRMED.
No costs.
SO ORDERED.
SECOND DIVISION
G.R. No. 183852 October 20, 2010

CARMELA BROBIO MANGAHAS, Petitioner,
vs.
EUFROCINA A. BROBIO, Respondent.
RESOLUTION
NACHURA, J.:
This petition for review on certiorari seeks to set aside the Court of
Appeals (CA) Decision1 dated February 21, 2008, which dismissed
petitioner’s action to enforce payment of a promissory note issued
by respondent, and Resolution2 dated July 9, 2008, which denied
petitioner’s motion for reconsideration.
The case arose from the following facts:
On January 10, 2002, Pacifico S. Brobio (Pacifico) died intestate,
leaving three parcels of land. He was survived by his wife,
respondent Eufrocina A. Brobio, and four legitimate and three
illegitimate children; petitioner Carmela Brobio Mangahas is one of
the illegitimate children.
On May 12, 2002, the heirs of the deceased executed a Deed of
Extrajudicial Settlement of Estate of the Late Pacifico Brobio with
Waiver. In the Deed, petitioner and Pacifico’s other children, in
consideration of their love and affection for respondent and the sum
of P150,000.00, waived and ceded their respective shares over the
three parcels of land in favor of respondent. According to petitioner,
respondent promised to give her an additional amount for her share
in her father’s estate. Thus, after the signing of the Deed, petitioner
demanded from respondent the promised additional amount, but
respondent refused to pay, claiming that she had no more money.3
A year later, while processing her tax obligations with the Bureau of
Internal Revenue (BIR), respondent was required to submit an
original copy of the Deed. Left with no more original copy of the
Deed, respondent summoned petitioner to her office on May 31,
2003 and asked her to countersign a copy of the Deed. Petitioner
refused to countersign the document, demanding that respondent
first give her the additional amount that she promised. Considering
the value of the three parcels of land (which she claimed to be
worth P20M), petitioner asked for P1M, but respondent begged her
to lower the amount. Petitioner agreed to lower it to P600,000.00.
Because respondent did not have the money at that time and
petitioner refused to countersign the Deed without any assurance
that the amount would be paid, respondent executed a promissory
note. Petitioner agreed to sign the Deed when respondent signed
the promissory note which read —
31 May 2003
This is to promise that I will give a Financial Assistance to CARMELA
B. MANGAHAS the amount of P600,000.00 Six Hundred Thousand
only on June 15, 2003.
(SGD)
EUFROCINA A. BROBIO4
98
When the promissory note fell due, respondent failed and refused to
pay despite demand. Petitioner made several more demands upon
respondent but the latter kept on insisting that she had no money.
On January 28, 2004, petitioner filed a Complaint for Specific
Performance with Damages5 against respondent, alleging in part—
2. That plaintiff and defendant are legal heirs of the
deceased, Pacifico S. Brobio[,] who died intestate and
leaving without a will, on January 10, 2002, but leaving
several real and personal properties (bank deposits), and
some of which were the subject of the extra-judicial
settlement among them, compulsory heirs of the
deceased, Pacifico Brobio. x x x.
3. That in consideration of the said waiver of the plaintiff
over the listed properties in the extra-judicial settlement,
plaintiff received the sum of P150,000.00, and the
defendant executed a "Promissory Note" on June 15,
2003, further committing herself to give plaintiff a
financial assistance in the amount of P600,000.00. x x x.
4. That on its due date, June 15, 2003, defendant failed to
make good of her promise of delivering to the plaintiff the
sum of P600,000.00 pursuant to her "Promissory Note"
dated May 31, 2003, and despite repeated demands,
defendant had maliciously and capriciously refused to
deliver to the plaintiff the amount [of] P600,000.00, and
the last of which demands was on October 29, 2003. x x x.6
In her Answer with Compulsory Counterclaim,7 respondent admitted
that she signed the promissory note but claimed that she was forced
to do so. She also claimed that the undertaking was not supported
by any consideration. More specifically, she contended that —
10. Defendant was practically held "hostage" by the
demand of the plaintiff. At that time, defendant was so
much pressured and was in [a] hurry to submit the
documents to the Bureau of Internal Revenue because of
the deadline set and for fear of possible penalty if not
complied with. Defendant pleaded understanding but
plaintiff was adamant. Her hand could only move in
exchange for 1 million pesos.
11. Defendant, out of pressure and confused disposition,
was constrained to make a promissory note in a reduced
amount in favor of the plaintiff. The circumstances in the
execution of the promissory note were obviously attended
by involuntariness and the same was issued without
consideration at all or for illegal consideration.8
On May 15, 2006, the Regional Trial Court (RTC) rendered a decision
in favor of petitioner. The RTC found that the alleged "pressure and
confused disposition" experienced by respondent and the
circumstances that led to the execution of the promissory note do
not constitute undue influence as would vitiate respondent’s
consent thereto. On the contrary, the RTC observed that —
It is clear from all the foregoing that it is the defendant who took
improper advantage of the plaintiff’s trust and confidence in her by

resorting to a worthless written promise, which she was intent on
reneging. On the other hand, plaintiff did not perform an unlawful
conduct when she insisted on a written commitment from the
defendant, as embodied in the promissory note in question, before
affixing her signature that was asked of her by the defendant
because, as already mentioned, that was the only opportunity
available to her or which suddenly and unexpectedly presented itself
to her in order to press her demand upon the defendant to satisfy
the correct amount of consideration due to her. In other words, as
the defendant had repeatedly rebuffed her plea for additional
consideration by claiming lack of money, it is only natural for the
plaintiff to seize the unexpected opportunity that suddenly
presented itself in order to compel the defendant to give to her
[what is] due [her]. And by executing the promissory note which the
defendant had no intention of honoring, as testified to by her, the
defendant clearly acted in bad faith and took advantage of the trust
and confidence that plaintiff had reposed in her.9
The RTC also brushed aside respondent’s claim that the promissory
note was not supported by valuable consideration. The court
maintained that the promissory note was an additional
consideration for the waiver of petitioner’s share in the three
properties in favor of respondent. Its conclusion was bolstered by
the fact that the promissory note was executed after negotiation
and haggling between the parties. The dispositive portion of the RTC
decision reads:
WHEREFORE, judgment is hereby rendered as follows:
1. Ordering the defendant to pay to plaintiff the sum of Six
Hundred Thousand Pesos (P600,000.00) which she
committed to pay to plaintiff under the promissory note in
question, plus interest thereon at the rate of 12% per
annum computed from the date of the filing of the
complaint;
2. Ordering the defendant to pay to plaintiff the sum of
P50,000.00 as attorney’s fees; and
3. Ordering the defendant to pay to plaintiff the costs of
this suit.
SO ORDERED.10
On February 21, 2008, the CA reversed the RTC decision and
dismissed the complaint.11 The CA found that there was a complete
absence of consideration in the execution of the promissory note,
which made it inexistent and without any legal force and effect. The
court noted that "financial assistance" was not the real reason why
respondent executed the promissory note, but only to secure
petitioner’s signature. The CA held that the waiver of petitioner’s
share in the three properties, as expressed in the deed of
extrajudicial settlement, may not be considered as the consideration
of the promissory note, considering that petitioner signed the Deed
way back in 2002 and she had already received the consideration of
P150,000.00 for signing the same. The CA went on to hold that if
petitioner disagreed with the amount she received, then she should
have filed an action for partition.
99
Further, the CA found that intimidation attended the signing of the
promissory note. Respondent needed the Deed countersigned by
petitioner in order to comply with a BIR requirement; and, with
petitioner’s refusal to sign the said document, respondent was
forced to sign the promissory note to assure petitioner that the
money promised to her would be paid.
Petitioner moved for the reconsideration of the CA Decision. In a
Resolution dated July 9, 2008, the CA denied petitioner’s motion.12
In this petition for review, petitioner raises the following issues:
1. The Honorable Court of Appeals erred in the
appreciation of the facts of this case when it found that
intimidation attended the execution of the promissory
note subject of this case.
2. The Honorable Court of Appeals erred when it found
that the promissory note was without consideration.
3. The Honorable Court of Appeals erred when it stated
that petitioner should have filed [an action] for partition
instead of a case for specific performance.13
The petition is meritorious.
Contracts are voidable where consent thereto is given through
mistake, violence, intimidation, undue influence, or fraud. In
determining whether consent is vitiated by any of these
circumstances, courts are given a wide latitude in weighing the facts
or circumstances in a given case and in deciding in favor of what
they believe actually occurred, considering the age, physical
infirmity, intelligence, relationship, and conduct of the parties at the
time of the execution of the contract and subsequent thereto,
irrespective of whether the contract is in a public or private
writing.14
Nowhere is it alleged that mistake, violence, fraud, or intimidation
attended the execution of the promissory note. Still, respondent
insists that she was "forced" into signing the promissory note
because petitioner would not sign the document required by the
BIR. In one case, the Court – in characterizing a similar argument by
respondents therein – held that such allegation is tantamount to
saying that the other party exerted undue influence upon them.
However, the Court said that the fact that respondents were
"forced" to sign the documents does not amount to vitiated
consent.15
There is undue influence when a person takes improper advantage
of his power over the will of another, depriving the latter of a
reasonable freedom of choice.16 For undue influence to be present,
the influence exerted must have so overpowered or subjugated the
mind of a contracting party as to destroy his free agency, making
him express the will of another rather than his own.17
Respondent may have desperately needed petitioner’s signature on
the Deed, but there is no showing that she was deprived of free
agency when she signed the promissory note. Being forced into a
situation does not amount to vitiated consent where it is not shown
that the party is deprived of free will and choice. Respondent still

had a choice: she could have refused to execute the promissory note
and resorted to judicial means to obtain petitioner’s signature.
Instead, respondent chose to execute the promissory note to obtain
petitioner’s signature, thereby agreeing to pay the amount
demanded by petitioner.
The fact that respondent may have felt compelled, under the
circumstances, to execute the promissory note will not negate the
voluntariness of the act. As rightly observed by the trial court, the
execution of the promissory note in the amount of P600,000.00 was,
in fact, the product of a negotiation between the parties.
Respondent herself testified that she bargained with petitioner to
lower the amount:
ATTY. VILLEGAS:
Q And is it not that there was even a bargaining from P1-M to
P600,000.00 before you prepare[d] and [sign[ed] that promissory
note marked as Exhibit "C"?
A Yes, sir.
Q And in fact, you were the one [who] personally wrote the amount
of P600,000.00 only as indicated in the said promissory note?
A Yes, sir.
COURT:
Q So, just to clarify. Carmela was asking an additional amount of P1-
M for her to sign this document but you negotiated with her and
asked that it be lowered to P600,000.00 to which she agreed, is that
correct?
A Yes, Your Honor. Napilitan na po ako.
Q But you negotiated and asked for its reduction from P1-M to
P600,000.00?
A Yes, Your Honor.18
Contrary to the CA’s findings, the situation did not amount to
intimidation that vitiated consent.1awphil There is intimidation
when one of the contracting parties is compelled to give his consent
by a reasonable and well-grounded fear of an imminent and grave
evil upon his person or property, or upon the person or property of
his spouse, descendants, or ascendants.19 Certainly, the payment of
penalties for delayed payment of taxes would not qualify as a
"reasonable and well-grounded fear of an imminent and grave evil."
We join the RTC in holding that courts will not set aside contracts
merely because solicitation, importunity, argument, persuasion, or
appeal to affection was used to obtain the consent of the other
party. Influence obtained by persuasion or argument or by appeal to
affection is not prohibited either in law or morals and is not
obnoxious even in courts of equity.20
On the issue that the promissory note is void for not being
supported by a consideration, we likewise disagree with the CA.
100
A contract is presumed to be supported by cause or consideration.21
The presumption that a contract has sufficient consideration cannot
be overthrown by a mere assertion that it has no consideration. To
overcome the presumption, the alleged lack of consideration must
be shown by preponderance of evidence.22 The burden to prove lack
of consideration rests upon whoever alleges it, which, in the present
case, is respondent.
Respondent failed to prove that the promissory note was not
supported by any consideration. From her testimony and her
assertions in the pleadings, it is clear that the promissory note was
issued for a cause or consideration, which, at the very least, was
petitioner’s signature on the document.1avvphi1
It may very well be argued that if such was the consideration, it was
inadequate. Nonetheless, even if the consideration is inadequate,
the contract would not be invalidated, unless there has been fraud,
mistake, or undue influence.23 As previously stated, none of these
grounds had been proven present in this case.
The foregoing discussion renders the final issue insignificant. Be that
as it may, we would like to state that the remedy suggested by the
CA is not the proper one under the circumstances. An action for
partition implies that the property is still owned in common.24
Considering that the heirs had already executed a deed of
extrajudicial settlement and waived their shares in favor of
respondent, the properties are no longer under a state of co-
ownership; there is nothing more to be partitioned, as ownership
had already been merged in one person.
WHEREFORE, premises considered, the CA Decision dated February
21, 2008 and its Resolution dated July 9, 2008 are REVERSED and SET
ASIDE. The RTC decision dated May 15, 2006 is REINSTATED.
SO ORDERED.
DOCTRINE RE CONSENT AND CONSIDERATION IN CONTRACTS
DIGEST
FACTS:
ABC needed from XYZ an original copy of a deed of extrajudicial
settlement. XYZ told ABC that he will sign only if ABC will give him
the additional money he promised as his share in the estate in the
amount of P1,000,000.00. XYZ bargained until the reduced amount
of P600,000.00was agreed. Since XYZ has no money at that time, he
executed a promissory note. When the due date came, XYZ refused
to pay. ABC sued. The defense of XYZ was there was no consent
since he was just forced to sign the promissory note and there was
no consideration. RTC ruled in favor of ABC. Court of Appeals
reversed the RTC decision on the ground that there was indeed no
consent and consideration in the execution of the promissory note.
ISSUE: Was the promissory note void for lack of consent and
consideration?

RULING:
When XYZ signed the promissory note there was consent and
consideration.
As to the matter of consent, the Court ruled as follows:
Contracts are voidable where consent thereto is given through
mistake, violence, intimidation, undue influence, or fraud. In
determining whether consent is vitiated by any of these
circumstances, courts are given a wide latitude in weighing the facts
or circumstances in a given case and in deciding in favor of what
they believe actually occurred, considering the age, physical
infirmity, intelligence, relationship, and conduct of the parties at the
time of the execution of the contract and subsequent thereto,
irrespective of whether the contract is in a public or private
writing.[1][14]
Nowhere is it alleged that mistake, violence, fraud, or intimidation
attended the execution of the promissory note. Still, respondent
insists that she was “forced” into signing the promissory note
because petitioner would not sign the document required by the
BIR. In one case, the Court – in characterizing a similar argument by
respondents therein – held that such allegation is tantamount to
saying that the other party exerted undue influence upon them.
However, the Court said that the fact that respondents were
“forced” to sign the documents does not amount to vitiated
consent.[2][15]
There is undue influence when a person takes improper advantage
of his power over the will of another, depriving the latter of a
reasonable freedom of choice.[3][16] For undue influence to be
present, the influence exerted must have so overpowered or
subjugated the mind of a contracting party as to destroy his free
agency, making him express the will of another rather than his
own.[4][17]
Respondent may have desperately needed petitioner’s signature on
the Deed, but there is no showing that she was deprived of free
agency when she signed the promissory note. Being forced into a
situation does not amount to vitiated consent where it is not shown
that the party is deprived of free will and choice. Respondent still
had a choice: she could have refused to execute the promissory note
and resorted to judicial means to obtain petitioner’s signature.
Instead, respondent chose to execute the promissory note to obtain
petitioner’s signature, thereby agreeing to pay the amount
demanded by petitioner.
The fact that respondent may have felt compelled, under the
circumstances, to execute the promissory note will not negate the
voluntariness of the act. As rightly observed by the trial court, the
execution of the promissory note in the amount of P600,000.00 was,
in fact, the product of a negotiation between the parties.
Contrary to the CA’s findings, the situation did not amount to
intimidation that vitiated consent. There is intimidation when one of
101
the contracting parties is compelled to give his consent by a
reasonable and well-grounded fear of an imminent and grave evil
upon his person or property, or upon the person or property of his
spouse, descendants, or ascendants.[5][19] Certainly, the payment
of penalties for delayed payment of taxes would not qualify as a
“reasonable and well-grounded fear of an imminent and grave evil.”
We join the RTC in holding that courts will not set aside contracts
merely because solicitation, importunity, argument, persuasion, or
appeal to affection was used to obtain the consent of the other
party. Influence obtained by persuasion or argument or by appeal to
affection is not prohibited either in law or morals and is not
obnoxious even in courts of equity.[6][20]
As to the matter of consideration, the court ruled as follows:
On the issue that the promissory note is void for not being
supported by a consideration, we likewise disagree with the CA.
A contract is presumed to be supported by cause or
consideration.[7][21] The presumption that a contract has sufficient
consideration cannot be overthrown by a mere assertion that it has
no consideration. To overcome the presumption, the alleged lack of
consideration must be shown by preponderance of evidence.[8][22]
The burden to prove lack of consideration rests upon whoever
alleges it, which, in the present case, is respondent.
Respondent failed to prove that the promissory note was not
supported by any consideration. From her testimony and her
assertions in the pleadings, it is clear that the promissory note was
issued for a cause or consideration, which, at the very least, was
petitioner’s signature on the document.
It may very well be argued that if such was the consideration, it was
inadequate. Nonetheless, even if the consideration is inadequate,
the contract would not be invalidated, unless there has been fraud,
mistake, or undue influence.[9][23] As previously stated, none of
these grounds had been proven present in this case.
FACTS:
Pacifico died and left 3 parcels of land. He was survived by his wife,
Eufrocina, 4legit and 3 illegit children. Carmela is one of the
illegitimate children. The heirs executed a Deed of Extrajudicial
Settlement of Estate with Waiver. In the Deed, Carmela and the
other children, in consideration of their love and affection for
Eufrocina and the sum of P150k waived their shares over the land in
favor of Eufrocina. According to Carmela, Eufrocina promised to give
her an additional amount for her share in her father’s estate. After
the signing of the Deed, Carmela demanded from Eufrocina the
promised additional amount, but Eufrocina refused to pay. Later,
Eufrocina needed an original copy of the Deed for submission to the
BIR. She didn’t have a copy anymore so she asked Carmela to
countersign a copy of theDeed. Carmela refused, demanding that
Eufrocina first give her the additionalamount that she promised.
Carmela asked for P1M, but Eufrocina begged her tolower the
 102

amount. Carmela agreed to lower it to P600k. Because Eufrocina did no showing that she was deprived of free agency when she signed
nothave the money at that time, Eufrocina executed a promissory thepromissory note.
note.Upon maturity of the PN, Eufrocina failed and refused to pay
despite severaldemands so Carmela filed a complaint with the RTC. Section 24 of the NIL provides that “A contract is presumed to
Eufrocina alleged that shewas practically held "hostage" by the besupported by cause or consideration.” The presumption that a
demand of Carmela because at that time, Eufrocina was so much contracthas sufficient consideration cannot be overthrown by a
pressured to submit the documents to the BIR. She (Eufrocina) also mere assertionthat it has no consideration.
claimed that the circumstances in the execution of the
To overcome the presumption, the alleged lack of consideration
promissorynote were obviously attended by involuntariness and the
must be shown by preponderance of evidence. The burden to
same was issued withoutconsideration at all or for illegal
provelack of consideration rests upon whoever alleges it, which, in
consideration. The RTC ruled in favor of Carmela. The CA reversed
the present case, isEufrocina.Eufrocina failed to prove that the
the RTC decision because therewas a complete absence of
promissory note was not supported by anyconsideration. From her
consideration in the execution of the promissory note,which made it
testimony and her assertions in the pleadings, it is clearthat the
inexistent and without any legal force and effect. The court
promissory note was issued for a cause or consideration, which, at
notedthat "financial assistance" was not the real reason why
the veryleast, was Carmela’s signature on the document.
Eufrocina executed thepromissory note, but only to secure
Carmela’s signature. The CA held that thewaiver of Carmela’s share
It may very well be argued that if such was the consideration, it was
in the properties may not be considered as theconsideration of the
inadequate. Nonetheless, even if theconsideration is inadequate,
promissory note, considering that Carmela signed the Deedway back
the contract would not be invalidated, unless there hasbeen fraud,
in 2002 and she had already received the consideration of P150k
mistake, or undue influence. As previously stated, none of
forsigning the same. The CA also found that intimidation attended
thesegrounds had been proven present in this case.
the signing of thepromissory note. Eufrocina needed the Deed
countersigned by Carmela in order tocomply with a BIR requirement
so Eufrocina was forced to sign the promissory noteto assure
Carmela that the money promised to her would be paid.

ISSUE/S:

1. W/N the CA erred in the appreciation of the facts of this case

when it foundthat intimidation attended the execution of the
promissory note subject of this case.2. W/N the CA erred when it
found that the promissory note was withoutconsideration. (this is
the more relevant issue)

HELD:

1.YES

2.YES

RATIO:

Eufrocina insists that she was "forced" into signing the promissory
note becauseCarmela would not sign the document required by the
BIR.

Being forced into asituation does not amount to vitiated consent

where it is not shown thatthe party is deprived of free will and
choice. There is undue influence when aperson takes improper
advantage of his power over the will of another, deprivingthe latter
of a reasonable freedom of choice. For undue influence to be
present, theinfluence exerted must have so overpowered the mind
of a contracting party as todestroy his free agency, making him
express the will of another rather than his own.Eufrocina may have
desperately needed petitioner’s signature on the Deed, butthere is

FIRST DIVISION
G.R. No. 185945 December 05, 2012
FIDELIZA J. AGLIBOT, Petitioner,
vs.
INGERSOL L. SANTIA, Respondent.
DECISION
REYES, J.:
Before the Court is a Petition for Review on Certiorari under Rule 45
of the 1997 Rules of Civil Procedure seeking to annul and set aside
the Decision1 dated March I 8, 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 P3,000,000.00 with
12% interest per annum from 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.
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,
103
except as to the amount, number and date of the checks, and the
reason for the dishonor, uniformly alleged, as follows:
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 P50,000.00, Philippine Currency, payable to and in payment of an
obligation with the complainant, although the said accused knew
fully 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 that 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 P50,000.00
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.
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 P3,000,000.00 representing the total face value of the eleven
checks plus interest of 12% per annum from the filing of the cases
on November 2, 2004 until fully paid, attorney’s fees of P30,000.00
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;
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 doubt10 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 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
104
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 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 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:

(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;
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,18
although under Article 135819 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
105
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 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 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
 106

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)
neither of them heeded his demand. Consequently, eleven (11)
Informations for violation of B.P. 22 were filed before the MTCC.
MTCC acquitted Aglibot. On appeal, the RTC rendered a decision
absolving Aglibot and dismissing the civil aspect of the case on the
ground of failure to fulfill a condition precedent of exhausting all
means to collect from the principal debtor.
On appeal, the Court of Appeals ruled that the RTC erred when it
dismissed the civil aspect of the case. Hence, the CA ruled that
Aglibot is personally liable for the loan.

The relation between an accommodation party and the party Thus, Aglibot filed this instant petition for certiorari. She argued that
accommodated is, in effect, one of principal and surety — the she was merely a guarantor of the obligation and therefore, entitled
accommodation party being the surety. It is a settled rule that a to the benefit of excussion under Article of the 2058 of the Civil
surety is bound equally and absolutely with the principal and is Code. She further posited that she is not personally liable on the
deemed an original promisor and debtor from the beginning. The
checks since she merely contracted the loan in behalf of PLCC.
liability is immediate and direct.26 It is not a valid defense that the
accommodation party did not receive any valuable consideration
ISSUES:
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
I. Whether or not Aglibot is entitled to the benefit of excussion?
time he acquired the instrument, he knew that the indorser was
only an accommodation party.271âwphi1
II. Whether or not Aglibot is personally liable on the checks?

Moreover, it was held in Aruego that unlike in a contract of HELD:

suretyship, the liability of the accommodation party remains not
only primary but also unconditional to a holder for value, such that
The petition is bereft of merit.
even if the accommodated party receives an extension of the period
for payment without the consent of the accommodation party, the
CIVIL LAW: guaranty; benefit of excussion; Statute of Frauds;
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 contracts
is a solidary co-debtor.
FIRST ISSUE: Aglibot cannot invoke the benefit of excussion.
The mere fact, then, that Aglibot issued her own checks to Santia
It is settled that the liability of the guarantor is only subsidiary, and
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 all the properties of the principal debtor, the PLCC in this case, must
would have been otherwise had it been shown that Aglibot was a first be exhausted before the guarantor may be held answerable for
mere guarantor, except that since checks were issued ostensibly in the debt. Thus, the creditor may hold the guarantor liable only after
payment for the loan, the provisions of the Negotiable Instruments judgment has been obtained against the principal debtor and the
Law must take primacy in application. latter is unable to pay, for obviously the exhaustion of the principals
property the benefit of which the guarantor claims cannot even
WHEREFORE, premises considered, the Petition for Review on begin to take place before judgment has been obtained. This rule is
Certiorari is DENIED and the Decision dated March 18, 2008 of the
contained in Article 2062 of the Civil Code, which provides that the
Court of Appeals in CA-G.R. SP No. I 00021 is hereby AFFIRMED.
action brought by the creditor must be filed against the principal
debtor alone, except in some instances mentioned in Article 2059
SO ORDERED.
when the action may be brought against both the guarantor and the
principal debtor.
FACTS:
The Court must, however, reject Aglibots claim as a mere guarantor
Engr. Ingersol L. Santia (Santia) loaned the amount of P2,500,000.00
of the indebtedness of PLCC to Santia for want of proof, in view of
to Pacific Lending & Capital Corporation (PLCC), through its
Article 1403(2) of the Civil Code, embodying the Statute of Frauds.
Manager, petitioner Fideliza J. Aglibot (Aglibot). The loan was
Under the above provision, concerning a guaranty agreement, which
evidenced by a promissory note. Allegedly as a guaranty for the
is a promise to answer for the debt or default of another, the law
payment of the note, Aglibot issued and delivered to Santia eleven
clearly requires that it, or some note or memorandum thereof, be in
(11) post-dated personal checks drawn from her own account
writing. Otherwise, it would be unenforceable unless ratified,
maintained at Metrobank. Upon presentment of the checks for
although under Article 1358 of the Civil Code, a contract of guaranty
payment, they were dishonored by the bank for having been drawn
does not have to appear in a public document. Contracts are
against insufficient funds or closed account. Santia thus demanded
generally obligatory in whatever form they may have been entered
payment from PLCC and Aglibot of the face value of the checks, but
 107

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.

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.

MERCANTILE LAW: accommodation party

SECOND ISSUE: Aglibot is an accommodation party and therefore

liable to Santia.

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 PLCCs manager merely to guarantee the investment of
Santia. The facts 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.

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. 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.

Petition is DENIED. Court of Appeals is AFFIRMED.


FIRST DIVISION
G.R. No. 180257 February 23, 2011
EUSEBIO GONZALES, Petitioner,
vs.
PHILIPPINE COMMERCIAL AND INTERNATIONAL BANK, EDNA
OCAMPO, and ROBERTO NOCEDA, Respondents.
DECISION
VELASCO, JR., J.:
The Case
This is an appeal via a Petition for Review on Certiorari under 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 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 Edna Ocampo (Ocampo) until she was
replaced by respondent Roberto Noceda (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.
108
The monthly interest dues of the loans were paid by the spouses
Panlilio through the automatic debiting of their account 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 letter6 to 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 freezing 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 considering 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 toto the 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:
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).
109
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.
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?

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
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 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?
110
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:
[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 be presumed but must be established
by law or contract.22 Article 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 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.
111
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. 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.
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?
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
112
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 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 party who has no personal interest in the PhP
1,800,000 loan. Without a clear and determinate demand through a
formal written notice for the exact periodic interest dues for the
loans, Gonzales cannot be expected to pay for them.
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 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.
It was only through a letter30 sent by PCIB dated October 2, 1998
but incongruously showing the delinquencies of the PhP 1,800,000
loan at a much later date, i.e., as of October 31, 1998, when
Gonzales was formally apprised by PCIB. In it, the interest due was
PhP 106,1616.71 and penalties for the unpaid interest due of PhP
64,766.66, or a total aggregate due of PhP 171,383.37. But it is not
certain and the records do not show when the letter was sent and
when Gonzales received it. What is clear is that such letter was
belatedly sent by PCIB and received by Gonzales after the fact that
the latter’s FCD was already frozen, his credit line under the COHLA
was terminated or suspended, and his PhP 250,000 check in favor of
Unson was dishonored.
And way much later, or on May 4, 1999, was a demand letter from
the counsel of 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
embarrassment from the dishonor of his check drawn against the
credit line.
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 accommodation party. PCIB is
obliged to formally inform and apprise Gonzales of the defaults and
the outstanding obligations, more so when PCIB was invoking the
solidary liability of Gonzales. This PCIB failed to do.

Second. PCIB was grossly negligent in not giving prior notice to
Gonzales about its course of action to suspend, terminate, or revoke
the credit line, thereby violating the clear stipulation in the COHLA.
The COHLA, in its effectivity clause, clearly provides:
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 BANK upon prior notice
served on CLIENT.31 (Emphasis ours.)
It is undisputed that the bank unilaterally revoked, suspended, and
terminated the COHLA without giving Gonzales prior notice as
required by the above stipulation in the COHLA. Noceda testified on
cross-examination on the Offering Ticket32 recommending the
termination of the credit line, thus:
ATTY. DE JESUS: [on Cross-Examination]
This Exhibit 8, you have not furnished at anytime a copy to the
plaintiff Mr. Gonzales is it not?
NOCEDA:
No sir but verbally it was relayed to him.
Q: But you have no proof that Mr. Gonzales came to know about this
Exhibit 8?
A: It was relayed to him verbally.
Q: But there is no written proof?
A: No sir.
Q: And it is only now that you claim that it was verbally relayed to
him, it’s only now when you testified in Court?
A: Before . . .
Q: To whom did you relay this information?
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?
113
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?
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 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 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
114
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 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 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 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
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
115
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.1avvphi1 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 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.
 116

The award of moral damages is aimed at a restoration within the Ruling:

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.
YES.
In the instant case, Gonzales suffered from the negligence and bad
faith of PCIB. From the testimonies of Gonzales’ witnesses,
particularly those of Dominador Santos and Freddy Gomez, 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.
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.
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.

No pronouncement as to costs.

SO ORDERED.

Facts:

Petitioner was a client of PCIB for a good 15 years and was granted a
credit line with the aggregate amount of his accounts as collateral
for the availment of the said line. Petitioner served as an
accommodation party to spouses Panlilio who obtained loans
covered by promissory notes, notably stating that petitioner is
solidary liable with the spouses for the payment of the loans. The
loan was granted and the spouses received the proceeds but
subsequently defaulted in the payment of said dues. As a result, the
credit line was terminated and the FCD account of petitioner was
frozen. In the meantime, Gonzales issued a check but was
dishonored which resulted to a falling out and a heated argument
causing him great embarrassment and humiliation. Petitioner filed a
case with the RTC on account of the alleged unjust dishonor of the
check. RTC ruled in favor of PCIB. CA affirmed in toto.

Issue: Whether or not PCIB acted in bad faith by dishonoring the

check of petitioner.

FIRST DIVISION
G.R. No. 146511 September 5, 2007
TOMAS ANG, petitioner,
vs.
ASSOCIATED BANK AND ANTONIO ANG ENG LIONG, respondents.
DECISION
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.
In the Complaint,4 respondent Bank alleged that on October 3 and 9,
1978, the defendants obtained a loan of P50,000, evidenced by a
promissory note bearing PN-No. DVO-78-382, and P30,000,
evidenced by a promissory note bearing PN-No. DVO-78-390. As
agreed, the loan would be payable, jointly and severally, on January
31, 1979 and December 8, 1978, respectively. In addition,
subsequent amendments5 to the promissory notes as well as the
disclosure statements6 stipulated that the loan would earn 14%
interest rate per annum, 2% service charge per annum, 1% penalty
charge per month from due date until fully paid, and attorney's fees
equivalent to 20% of the outstanding obligation.
Despite repeated demands for payment, the latest of which were on
September 13, 1988 and September 9, 1986, on Antonio Ang Eng
Liong and Tomas Ang, respectively, respondent Bank claimed that
the defendants failed and refused to settle their obligation, resulting
in a total indebtedness of P539,638.96 as of July 31, 1990, broken
down as follows:
In his Answer,7 Antonio Ang Eng Liong only admitted to have
secured a loan amounting to P80,000. He pleaded though that the
bank "be ordered to submit a more reasonable computation"
considering that there had been "no correct and reasonable
statement of account" sent to him by the bank, which was allegedly
collecting excessive interest, penalty charges, and attorney's fees
despite knowledge that his business was destroyed by fire, hence,
he had no source of income for several years.
For his part, petitioner Tomas Ang filed an Answer with
Counterclaim and Cross-claim.8 He interposed the affirmative
defenses that: the bank is not the real party in interest as it is not
the holder of the promissory notes, much less a holder for value or a
holder in due course; the bank knew that he did not receive any
valuable consideration for affixing his signatures on the notes but
117
merely lent his name as an accommodation party; he accepted the
promissory notes in blank, with only the printed provisions and the
signature of Antonio Ang Eng Liong appearing therein; it was the
bank which completed the notes upon the orders, instructions, or
representations of his co-defendant; PN-No. DVO-78-382 was
completed in excess of or contrary to the authority given by him to
his co-defendant who represented that he 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 loan did not push through; the promissory notes did not
indicate in what capacity he was intended to be bound; the bank
granted his co-defendant successive extensions of time within which
to pay, without his (Tomas Ang) knowledge and consent; the bank
imposed new and additional stipulations on interest, penalties,
services charges 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 Law; the bank
caused the 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 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 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) 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) P11,663.89 as accrued service charge; and
3) P34,991.67 as accrued overdue penalty charge.
On the second cause of action:
1) the amount of P50,000.00 (sic) representing the principal account
with 14% interest from June 27, 1983 with 2% service charge and 6%
overdue penalty charges per annum until fully paid;
2) P7,088.34 representing accrued service charge;
3) P21,265.00 as accrued overdue penalty charge;
118
4) the amount of P10,000.00 as attorney's fees; and
5) the amount of P620.00 as litigation expenses and to pay the costs.
SO ORDERED.16
The decision became final and executory as no appeal was taken
therefrom. Upon the bank's ex-parte motion, the court accordingly
issued a writ of execution on April 5, 1991.17
Thereafter, on June 3, 1991, the court set the pre-trial conference
between the bank and Tomas Ang,18 who, in turn, filed a Motion to
Dismiss19 on the ground of lack of jurisdiction over the case in view
of the alleged finality of the February 21, 1991 Decision. He
contended that Sec. 4, Rule 18 of the old Rules sanctions only one
judgment in case of several defendants, one of whom is declared in
default. Moreover, in his Supplemental Motion to Dismiss,20 Tomas
Ang maintained that he is released from his obligation as a solidary
guarantor and accommodation party because, by the bank's actions,
he is now precluded from asserting his cross-claim against Antonio
Ang Eng Liong, upon whom a final and executory judgment had
already been issued.
The court denied the motion as well as the motion for
reconsideration thereon.21 Tomas Ang subsequently filed a petition
for certiorari and prohibition before this Court, which, however,
resolved to refer the same to the Court of Appeals.22 In accordance
with the prayer of Tomas Ang, the appellate court promulgated its
Decision on January 29, 1992 in CA G.R. SP No. 26332, which
annulled and set aside the portion of the Order dated November 23,
1990 setting the ex-parte presentation of the bank's evidence
against Antonio Ang Eng Liong, the Decision dated February 21, 1991
rendered against him based on such evidence, and the Writ of
Execution issued on April 5, 1991.23
Trial then ensued between the bank and Tomas Ang. Upon the
latter's motion during the pre-trial conference, Antonio Ang Eng
Liong was again declared in default for his failure to answer the
cross-claim within the reglementary period.24
When Tomas Ang was about to present evidence in his behalf, he
filed a Motion for Production of Documents,25 reasoning:
2. That corroborative to, and/or preparatory or incident to his
testimony[,] there is [a] need for him to examine original records in
the custody and possession of plaintiff, viz:
a. original Promissory Note (PN for brevity) # DVO-78-382
dated October 3, 1978[;]
b. original of Disclosure Statement in reference to PN #
DVO-78-382;
c. original of PN # DVO-78-390 dated October 9, 1978;
d. original of Disclosure Statement in reference to PN #
DVO-78-390;

e. Statement or Record of Account with the Associated
Banking Corporation or its successor, of Antonio Ang in CA
No. 470 (cf. Exh. O) including bank records, withdrawal
slips, notices, other papers and relevant dates relative to
the overdraft of Antonio Eng Liong in CA No. 470;
f. Loan Applications of Antonio Ang Eng Liong or borrower
relative to PN Nos. DVO-78-382 and DVO-78-390 (supra);
g. Other supporting papers and documents submitted by
Antonio Ang Eng Liong relative to his loan application vis-
à-vis PN. Nos. DVO-78-382 and DVO-78-390 such as
financial 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 non-existence 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 certiorari and 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 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
119
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, 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:
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:
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. 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. 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
120
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 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 co-maker 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:
2) Related to the above jurisdictional issues, defendant-
appellee Tomas Ang has recently discovered that upon the
filing of 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 above-stated.
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. 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. Did the trial court have jurisdiction over the case at all?
3. Did the Court of Appeals [commit] error in assigning its own error
and raising its own issue?
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
121
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 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 petitioner'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
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.
122
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. 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 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.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.50
Incidentally, 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, 1992,52 and again from December 31, 1993
until June 30, 1995,53 and then from July 1, 1995 up to December 31,
1999,54 and further from January 1, 2000 until December 31, 2000.55
Thenceforth, the Privatization and Management Office was
established and 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 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.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 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 directly and
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 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 co-maker, constituted a release of his
obligation, especially because the dismissal of the case
against Pantanosas was upon the motion of private
123
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) per cent per
annum until 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 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 co-signed 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 all of the
debtors. Nonetheless, petitioner, as an accommodation party, may
seek reimbursement 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 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.
124
As the promissory notes were not discharged or impaired through
any act or omission of the bank, Sections 119 (d)77 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 value therefor81 because the
phrase "without receiving value therefor" used in Sec. 29 of the NIL
means "without receiving value by virtue of the instrument" and not
as it is apparently supposed to mean, "without receiving payment
for lending his name."82 Stated differently, when a third person
advances the face value of the note to the accommodated party at
the time of its creation, the consideration for the note as regards its
maker is the money advanced to the accommodated party. It is
enough that value was given for the note at the time of its
creation.83 As in the instant case, a sum of money was received by
virtue of the notes, hence, it is immaterial so far as the bank is
concerned whether one of the signers, particularly petitioner, has or
has not received anything in payment of the use of his name.84
Under the law, upon the maturity of the note, a surety may pay the
debt, demand the collateral security, if there be any, and dispose of
it to his benefit, or, if applicable, subrogate himself in the place of
the creditor with the right to enforce the guaranty against the other
signers of the note for the reimbursement of what he is entitled to
recover from them.85 Regrettably, none of these were prudently
done by petitioner. When he was first notified by the 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 supposed
"extension of time" given by the bank to his co-debtor.
Furthermore, since the liability of an accommodation party remains
not only primary but also unconditional to a holder for value, even if
the accommodated party receives an extension of the period for
payment without the consent of the accommodation party, the
latter is still liable for the whole obligation and such extension does
not release him because as far as a holder for value is concerned, he
is a solidary co-debtor.87 In Clark v. Sellner,88 this Court held:
x x x The mere delay of the creditor in enforcing the guaranty has
not by any means impaired his action against the defendant. It
should not be lost sight of that the defendant's signature on the
note is an assurance to the creditor that the collateral guaranty will
remain good, and that otherwise, he, the defendant, will be
personally responsible for the payment.
True, that if the creditor had done any act whereby the guaranty
was impaired in its value, or discharged, such an act would have
wholly or partially released the surety; but it must be born in mind
that it is a recognized doctrine in the matter of suretyship that with
respect to the surety, the creditor is under no obligation to display
any diligence in the enforcement of his rights as a creditor. His mere
inaction indulgence, passiveness, or delay in proceeding against the

principal debtor, or the fact that he did not enforce the guaranty or
apply on the payment of such funds as were available, constitute no
defense at all for the surety, unless the contract expressly requires
diligence and promptness on the part of the creditor, which is not
the case in the present action. There is in some decisions a tendency
toward holding that the creditor's laches may discharge the surety,
meaning by laches a negligent forbearance. This theory, however, is
not generally accepted and the courts almost universally consider it
essentially inconsistent with the relation of the parties to the note.
(21 R.C.L., 1032-1034)89
Neither can petitioner benefit from the alleged "insolvency" of
Antonio Ang Eng Liong for want of clear and convincing evidence
proving the same. Assuming it to be true, he also did not exercise
diligence in demanding security to protect himself from the danger
thereof in the event that he (petitioner) would eventually be sued by
the bank. Further, whether petitioner may or may not obtain
security from Antonio Ang Eng Liong cannot in any manner affect his
liability to the bank; the said remedy is a matter of concern
exclusively between themselves as accommodation party and
accommodated party. The fact that petitioner stands only as a
surety in relation to Antonio Ang Eng Liong is immaterial to the claim
of the bank and does not a whit diminish nor defeat the rights of the
latter as a holder for value. To sanction his theory is to give
unwarranted legal recognition to the patent absurdity of a situation
where a co-maker, when sued on an instrument by a holder in due
course and for value, can escape liability by the convenient
expedient of interposing the defense that he is a merely an
accommodation party.90
In sum, as regards the other issues and errors alleged in this
petition, the Court notes that these were the very same questions of
fact raised on appeal before the Court of Appeals, although at times
couched in different terms and explained more lengthily in the
petition. Suffice it to say that the same, being factual, have been
satisfactorily passed upon and considered both by the trial and
appellate courts. It is doctrinal that only errors of law and not of fact
are reviewable by this Court in petitions for review on certiorari
under Rule 45 of the Rules of Court. Save for the most cogent and
compelling reason, it is not our function under the rule to examine,
evaluate or weigh the probative value of the evidence presented by
the parties all over again.91
WHEREFORE, the October 9, 2000 Decision and December 26, 2000
Resolution of the Court of Appeals in CA-G.R. CV No. 53413 are
AFFIRMED. The petition is DENIED for lack of merit.
No costs.
SO ORDERED.
Facts:
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. In
the Complaint, respondent Bank alleged that on October 3 and 9,
1978, the defendants obtained a loan of P evidenced by a
125
promissory note bearing PN-No. DVO-78-382, and P 50,000, 30,000,
evidenced by a promissory note bearing PNNo. DVO-78-390. As
agreed, the loan would be payable, jointly and severally, on January
31, 1979 and December 8, 1978, respectively. In addition,
subsequent amendments to the promissory notes as well as the
disclosure statements6 stipulated that the loan would earn 14%
interest rate per annum, 2% service charge per annum, 1% penalty
charge per month from due date until fully paid, and attorney’s fees
equivalent to 20% of the outstanding obligation. Despite repeated
demands for payment, the latest of which were on September 13,
1988 and September 9, 1986, on Antonio Ang Eng Liong and Tomas
Ang, respectively, respondent Bank claimed that the defendants
failed and refused to settle their obligation, resulting in a total
indebtedness of P 539,638.96 as of July 31, 1990. In his Answer,
Antonio Ang Eng Liong only admitted to have secured a loan
amounting to P 80,000. He pleaded though that the bank “be
ordered to submit a more reasonable computation” considering that
there had been “no correct and reasonable statement of account”
sent to him by the bank, which was allegedly collecting excessive
interest, penalty charges, and attorney’s fees despite knowledge
that his business was destroyed by fire, hence, he had no source of
income for several years. For his part, petitioner Tomas Ang filed an
Answer with Counterclaim and Cross-claim. He interposed the
affirmative defenses that: the bank is not the real party in interest as
it is not the holder of the promissory notes, much less a holder for
value or a holder in due course; the bank knew that he did not
receive any valuable consideration for affixing his signatures on the
notes but merely lent his name as an accommodation party; he
accepted the promissory notes in blank, with only the printed
provisions and the signature of Antonio Ang Eng Liong appearing
therein.
Issue: Whether or not Petitioner is liable to the obligation despite
being a mere co-maker and accommodation party.
Held:
Yes. 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 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 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
 126

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.
from the beginning; As such, he is deemed an original promisor and
debtor 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.

In the instant case, petitioner agreed to be “jointly and severally”

liable under the two promissory notes that he co-signed 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 all of the
debtors. Nonetheless, petitioner, as an accommodation party, may
seek reimbursement from Antonio Ang Eng Liong, being the party
accommodated.

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. value therefore It is no
defense to state on his part that he did not receive any because the
phrase “without receiving value therefor” used in Sec. 29 of the NIL
means “without receiving value by virtue of the instrument” and not
as it is apparently supposed to mean, “without receiving payment
for lending his name.” 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.

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.

SECOND DIVISION
G.R. No. 166405 August 6, 2008
CLAUDE P. BAUTISTA, petitioner,
vs.
AUTO PLUS TRADERS, INCORPORATED and COURT OF APPEALS
(Twenty-First Division), respondents.
DECISION
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. 223 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 Informations4 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:
127
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.5
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.6
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.7
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.8
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 299 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,10 we are compelled to settle this issue.
A perusal of the two check return slips11 in conjunction with the
Current Account Statements12 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.13 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. 14
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
128
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. 15 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.16 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, 2000.17 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.
FACTS:
Bautista, in his capacity as President of Cruiser Bus Lines and
Transport Corporation, purchased various spare parts from Auto
Plus Traders, Inc. (Auto Plus) and issued 2 post-dated checks
amounting to P151,200.00 and P97,500.00 to cover his purchases.
The checks were subsequently dishonored. Auto Plus then executed
an affidavit-complaint for violation of BP. Blg. 22 against Bautista.
Consequently, 2Informations for violation of BP Blg. 22 were filed
with the Municipal Trial Court inCities (MTCC) of Davao against
Bautista. The first decision of the MTCC directed Cruiser Bus Line[s]
and Transport Corporation, through Bautista to pay the complainant
the value of the twochecks plus interests and other fees such as
filing fees.
 129

It was modified, and Bautista himself was directed to pay for the
liabilities to Auto Plus. The CA affirmed the decision. Bautista 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. Auto Plus
counters that Bautista should be held personally liable for both
checks, alleging that Bautista issued two post-dated checks: a
personal check in his and a corporation check under the account of
Cruiser Bus Lines. According to Autoplus, Bautista, by issuing his
check to cover the obligation of the corporation, became an
accommodation party.

ISSUE: W/N Bautista became an accommodation party, making him

personally and civilly liable to the Auto Plus for the value of the two
checks.

HELD:

No. Contrary to Autoplus's contentions, Bautista cannot be

considered liable as an 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 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:

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 Bautista 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 Bautista issued the
check and in what capacity. In the absence of concrete evidence it
cannot just be assumed that Bautista intended to lend his name to
the corporation. Hence, Bautista 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.