NEGOTIABLE INSTRUMENTS LAW
Revalida
Atty. Zarah Villanueva-Castro
1. Villanueva vs. Nite, G.R. No. 148211, 25 July 2006;
- Issuance of Asian Bank Corporation check; Villanueva did not implead Nite,
extrinsic fraud; ABC will only be liable upon its acceptance
FACTS: In this case, respondent Marlyn Nite allegedly took out a loan of 49k from
petitioner. To secure the loan, the respondent issued petitioner an Asian Bank
Corporation check in the amount of 325, 500 dated Feb. 8, 1994. It was later changed to
June 8, 1994 with the consent and concurrence of the petitioner.
The check however was DISHONORED due to a material alteration when petitioner
deposited the check on due date. Respondent thru her representative Emily Abojada
remitted 235k to petitioner as partial payment of the loan. The balance of 174k was due
on Dec. 8, 1994.
On Aug. 24, 1994 however, petitioner filed an action for sum of money and damages
against ABC for the full amount of the dishonoured check. RTC ruled in favour of the
petitioner. ABC Bank was ordered to pay petitionr the value of respondent’s ABC check,
which then remitted to the sheriff a manager’s check amounting to 325,500 drawn on
respondent’s account.
Respondent then filed a petition in the CA which was granted, and annulled and set aside
the order of the RTC for extrinsic fraud. Hence this petition.
ISSUE/s: W/N the CA was correct in its decision to annul the order of the RTC on the
ground of extrinsic fraud? Yes.
W/N the bank is liable to the holder, Villanueva when he sued the bank instead of Nite?
NO.
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HELD:
In any event, the RTC decision may be annulled for lack of jurisdiction over the person of
respondent. The pertinent provisions of the Negotiable Instruments Law are
enlightening:
SEC. 185. Check, defined. – A check is a bill of exchange drawn on a bank payable on
demand. Except as herein otherwise provided, the provisions of this Act applicable to a
bill of exchange payable on demand apply to a check.9 (emphasis ours)
SEC. 189. When check operates as an assignment. – A check of itself does not operate as an
assignment of any part of the funds to the credit of the drawer with the bank, and the
bank is not liable to the holder, unless and until it accepts or certifies the check.
If a bank refuses to pay a check (notwithstanding the sufficiency of funds), the payee-
holder cannot, in view of the cited sections, sue the bank. The payee should instead sue
the drawer who might in turn sue the bank. Section 189 is sound law based on logic and
established legal principles: no privity of contract exists between the drawee-bank and
the payee. Indeed, in this case, there was no such privity of contract between ABC and
petitioner.
Petitioner should not have sued ABC. Contracts take effect only between the parties, their
assigns and heirs, except in cases where the rights and obligations arising from the
contract are not transmissible by their nature, or by stipulation or by provision of
law.10 None of the foregoing exceptions to the relativity of contracts applies in this case.
The contract of loan was between petitioner and respondent. No collection suit could
prosper without respondent who was an indispensable party. Rule 3, Sec. 7 of the Rules of
Court states:
Sec. 7. Compulsory joinder of indispensable parties. – Parties in interest without whom
no final determination can be had of an action shall be joined either as plaintiffs or
defendants. (emphasis ours)
An indispensable party is one whose interest in the controversy is such that a final decree
will necessarily affect his rights. The court cannot proceed without his presence. 11 If an
indispensable party is not impleaded, any judgment is ineffective. 12 On this, Aracelona v.
Court of Appeals13 declared:
Rule 3, Section 7 of the Rules of Court defines indispensable parties as parties-in-interest
without whom there can be no final determination of an action. As such, they must be
joined either as plaintiffs or as defendants. The general rule with reference to the making
of parties in a civil action requires, of course, the joinder of all necessary parties where
possible, and the joinder of all indispensable parties under any and all conditions, their
presence being sine qua non for the exercise of judicial power. It is precisely "when an
indispensable party is not before the court (that) the action should be dismissed." The
absence of an indispensable party renders all subsequent actions of the court null and
void for want of authority to act, not only as to the absent parties but even as to those
present.
NOTE: Extrinsic or collateral fraud pertains to such fraud which prevents the aggrieved
party from having a trial or presenting his case to the court, or is used to procure the
judgment without fair submission of the controversy.6 This refers to acts intended to keep
the unsuccessful party away from the courts as when there is a false promise of
compromise or when one is kept in ignorance of the suit.
2. Equitable PCI vs. Ong, 15 September 2006;
- PCI Bank’s act of clearing the check, when it received the instrument from Ong,
made it liable
A check which has been cleared and credited to the account of the creditor shall
be equivalent to a delivery to the creditor of cash in an amount equal to the
amount credited to his account.
- Manager’s check has the same effect of a certified check; certification =
acceptance
FACTS: Warliza Sarande deposited in her account at PCI Bank the amount of 225k. When
Serande made an inquiry at PCI Bank, on whether the check had been cleared, she
received an affirmative answer. Relying on such assurance, she issued 2 checks drawn
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against the proceeds of TCBT Check No, 249188. One of which was issued to respondent
Rowena Ong owing to a business transaction. On the same day, Ong presented to PCI Bank
said check, and instead of encashing it, requested PCI Bank to convert the proceeds into
a MANAGER’S CHECK, which the PCI Bank obliged. PCI Bank issued the MC for the sum of
132,000.
The next day, Ong deposited PCI Bank Manager’s Check in her account with Equitable
Banking Corporation. She received a check return-slip informing her that PCI Bank had
stopped the payment of the said check on the ground of irregular issuance.
Despite several demands, PCI Bank refused to pay. Thus, Ong was constrained to file a
Complaint for sum of money, damages, and attorney’s fees against PCI Bank.
PCI Bank argues that the check was returned on the ground that the account against
which it was drawn was already closed. PCI Bank said that it immediately gave notice to
Sarande and Ong about the return of check and requested Ong to return PCI Bank
Manager’s Check as it already constituted failure or want of consideration for the issuance
of PCI Bank Manager’s Check.
After the pre-trial conference, Ong filed a motion for summary judgment. Though they
were duly furnished with a copy of the motion for summary judgment, PCI Bank and its
counsel failed to appear at the scheduled hearing. 5 Neither did they file any written
comment or opposition thereto. The trial court thereafter ordered Ong to formally offer
her exhibits in writing, furnishing copies of the same to PCI Bank which was directed to
file its comment or objection. PCI Bank failed to file any comment or objection. Hence, the
RTC then granted the motion for summary judgment.
PCI then sought recourse before the CA, which the appellate court denied the appeal of
PCI Bank and affirmed the orders and decision of the trial court. Hence this petition.
ISSUE: W/N the CA gravely erred when it held PCI Bank liable? W/N PCI Bank’s issuance
of Manager’s check is wanting of consideration?
HELD: No. The CA was correct in its ruling.
On the matter of unjust enrichment, the fundamental doctrine of unjust enrichment is the
transfer of value without just cause or consideration. The elements of this doctrine are:
enrichment on the part of the defendant; impoverishment on the part of the plaintiff; and
lack of cause. The main objective is to prevent one to enrich himself at the expense of
another. It is based on the equitable postulate that it is unjust for a person to retain
benefit without paying for it.
It is well to stress that the check of Sarande had been cleared by the PCI Bank for which
reason the former issued the check to Ong. A check which has been cleared and credited
to the account of the creditor shall be equivalent to a delivery to the creditor of cash in an
amount equal to the amount credited to his account.
Having cleared the check earlier, PCI Bank, therefore, became liable to Ong and it cannot
allege want or failure of consideration between it and Sarande. Under settled
jurisprudence, Ong is a stranger as regards the transaction between PCI Bank and
Sarande. PCI Bank next insists that since there was no consideration for the issuance of
the manager's check, ergo, Ong is not a holder in due course. This claim is equally without
basis. Pertinent provisions of the Negotiable Instruments Law are hereunder quoted:
SECTION 52. What constitutes a holder in due course. — A holder in due course is a holder
who has taken the instrument under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without
notice it had been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no notice of any
infirmity in the instrument or defect in the title of the person negotiating
it.
The same law provides further:
Sec. 24. Presumption of consideration. — Every negotiable instrument is deemed prima
facie to have been issued for a valuable consideration; and every person whose signature
appears thereon to have become a party thereto for value.
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Sec. 26. What constitutes holder for value. — Where value has at any time been given for
the instrument, the holder is deemed a holder for value in respect to all parties who
become such prior to that time.
Sec. 28. Effect of want of consideration. — Absence or failure of consideration is a matter
of defense as against any person not a holder in due course; and partial failure of
consideration is a defense pro tanto, whether the failure is an ascertained and liquidated
amount or otherwise.
** Easily discernible is that what Ong obtained from PCI Bank was not just any ordinary
check but a manager's check. A manager's check is an order of the bank to pay, drawn
upon itself, committing in effect its total resources, integrity and honor behind its
issuance. By its peculiar character and general use in commerce, a manager's check is
regarded substantially to be as good as the money it represents.
A manager's check stands on the same footing as a certified check. The effect of
certification is found in Section 187, Negotiable Instruments Law.
Sec. 187. Certification of check; effect of. — Where a check is certified by the bank on which
it is drawn, the certification is equivalent to an acceptance.
The effect of issuing a manager's check was incontrovertibly elucidated when we declared
that:
A manager's check is one drawn by the bank's manager upon the bank itself. It is similar to
a cashier's check both as to effect and use. A cashier's check is a check of the bank's cashier
on his own or another check. In effect, it is a bill of exchange drawn by the cashier of a bank
upon the bank itself, and accepted in advance by the act of its issuance. It is really the bank's
own check and may be treated as a promissory note with the bank as a maker. The check
becomes the primary obligation of the bank which issues it and constitutes its written
promise to pay upon demand. The mere issuance of it is considered an acceptance thereof. .
...
By accepting PCI Bank Check No. 073661 issued by Sarande to Ong and issuing in turn a
manager's check in exchange thereof, PCI Bank assumed the liabilities of an acceptor
under Section 62 of the Negotiable Instruments Law which states:
Sec. 62. Liability of acceptor. — The acceptor by accepting the instruments engages that
he will pay it according to the tenor of his acceptance; and admits —
(a) The existence of the drawer, the genuineness of his signature, and his capacity and
authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
With the above jurisprudential basis, the issues on Ong being not a holder in due course
and failure or want of consideration for PCI Bank's issuance of the manager's check is out
of sync.
3. Security Bank & Trust Company (SBTC) vs. RCBC, G.R. Nos. 170984 & 170987,
January 30, 2009;
- SBTC is liable because when it issued a manager’s check for 8M, RCBC relied
on the integrity and honor of the check as it is regarded in commercial
transactions.
- Effect of issuance of Manager’s check is equivalent to acceptance
FACTS: SBTC issued a manager’s check for 8 milion, payable to CAS, as proceeds of the
loan granted to Guidon Construction and Development Corporation. On the same day, the
8 million check, along with other checks, was deposited by Continental Manufacturing
Corporation in its current account with RCBC. Immediately, RCBC honoured the 8M check
and allowed CMC to withdraw the same.
On the next banking day, GCDC issued a stop payment order to SBTC, claiming that the
8M check was released to a third party by mistake. Consequently, SBTC dishonoured and
returned the MC to RCBC. Thereafter, the check was returned back and forth between the
two banks, resulting in automatic debits and credits in each bank’s clearing balance.
RCBC then filed a complaint for damages against SBTC with CFI of Rizal. It was transferred
to RTC of Makati. The RTC of Makati rendered a decision in favour of RCBC. The CA
affirmed the RTC’s decision. Hence this petition.
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ISSUE: Is SBTC liable to RCBC for the remaining 4 million? Is SBTC liable to pay for lost
interest income on the remaining 4M, exemplary damages and attorney’s fees?
HELD: At the outset, it must be noted that the questioned check issued by SBTC is not just
an ordinary check but a manager's check. A manager's check is one drawn by a bank's
manager upon the bank itself. It stands on the same footing as a certified check, which is
deemed to have been accepted by the bank that certified it. As the bank's own check, a
manager's check becomes the primary obligation of the bank and is accepted in advance
by the act of its issuance.
In this case, RCBC, in immediately crediting the amount of P8 million to CMC's account,
relied on the integrity and honor of the check as it is regarded in commercial transactions.
Where the questioned check, which was payable to "Cash", appeared regular on its face,
and the bank found nothing unusual in the transaction, as the drawer usually issued
checks in big amounts made payable to cash, RCBC cannot be faulted in paying the value
of the questioned check.
In our considered view, SBTC cannot escape liability by invoking Monetary Board
Resolution No. 2202 dated December 21, 1979, prohibiting drawings against uncollected
deposits. For we must point out that the Central Bank at that time issued a Memorandum
dated July 9, 1980, which interpreted said Monetary Board Resolution No. 2202. Thus, it
gave banks the discretion to allow immediate drawings on uncollected deposits of
manager's checks, among others. Consequently, RCBC, in allowing the immediate
withdrawal against the subject manager's check, only exercised a prerogative expressly
granted to it by the Monetary Board.
Moreover, neither Monetary Board Resolution No. 2202 nor the July 9, 1980
Memorandum alters the extraordinary nature of the manager's check and the relative
rights of the parties thereto. SBTC's liability as drawer remains the same — by drawing
the instrument, it admits the existence of the payee and his then capacity to indorse; and
engages that on due presentment, the instrument will be accepted, or paid, or both,
according to its tenor.
Concerning RCBC's claim for lost interest income on the remaining P4 million, this is
already covered by the amount of damages in the form of legal interest of 6%, based on
Article 2200 19 and 2209 20 of the Civil Code of the Philippines, as awarded by the Court the extent of the bill prior to presented for immediate the drawer, the payee, or
of Appeals in its decision. alteration. payment over the counter. either the drawee bank or
depositary bank was negligent
In addition to the above-mentioned award of compensatory damages, we also find merit and such negligence
It is also the bank to which a
in the need to award exemplary damages in order to set an example for the public good. This view appears to be in substantially contributed to
check is transferred for
The banking system has become an indispensable institution in the modern world and consonance with Section the loss from alteration.
deposit in an account at such
plays a vital role in the economic life of every civilized society. 124 of the Negotiable bank, even if the check is
Instruments Law which physically received and In the instant case, no
Whether as mere passive entities for the safe-keeping and saving of money or as active states that a material indorsed first by another negligence can be attributed
instruments of business and commerce, banks have attained an ubiquitous presence alteration avoids an bank. to petitioners. We lend
among the people, who have come to regard them with respect and even gratitude and, instrument except as against credence to their claim that at
above all, trust and confidence. In this connection, it is important that banks should guard an assenting party and A collecting bank is defined the time of the sales
against injury attributable to negligence or bad faith on its part. As repeatedly subsequent indorsers, but a transaction, the Bank's branch
as any bank handling an item
emphasized, since the banking business is impressed with public interest, the trust and holder in due course may manager was present and even
for collection except the
confidence of the public in it is of paramount importance. Consequently, the highest enforce payment according offered the Bank's services for
bank on which the check is
degree of diligence is expected, and high standards of integrity and performance are to its original tenor.
the processing and eventual
drawn. crediting of the checks. True to
required of it. SBTC having failed in this respect, the award of exemplary damages to RCBC
in the amount of P50,000.00 is warranted. the branch manager's words,
It is settled in law that a the checks were cleared three
Thus, when the drawee bank
negotiable instrument, such days later when deposited by
4. Areza vs. Express Savings Bank, Inc., 734 SCRA 588, G.R. No. 176697 September pays a materially altered petitioners and the entire
10, 2014; check, it violates the terms as a check, whether a
manager's check or ordinary amount of the checks was
of the check, as well as its credited to their savings
- Buy and sell cars of Sps. Areza to Gerry Mambuay; Phil Veterans Checks duty to charge its client's check, is not legal tender. As
account.
dishonored account only for bona fide such, after receiving the
disbursements he had deposit, under its own rules,
- LIABILITIES OF DRAWEE; DEPOSITARY BANK; PETITIONERS made. If the drawee did not the Bank shall credit the
pay according to the original amount in petitioners'
DRAWEE DEPOSITARY BANK PETITIONERS account or infuse value
tenor of the instrument, as
directed by the drawer, then thereon only after the
VETERANS BANK Express Savings; and PCI Spouses Areza drawee bank shall have paid
Equitable it has no right to claim
reimbursement from the the amount of the check or
The Bank cannot debit the drawer, much less, the right the check has been cleared
A depositary bank is the first savings account of petitioners. for deposit.
to deduct the erroneous
The acceptor/drawee bank to take an item even
A depositary/collecting bank payment it made from the
despite the tenor of his though it is also the payor If a depositary/collecting
may resist or defend against a drawer's account which it
acceptance is liable only to bank, unless the item is claim for breach of warranty if bank indorses, it is liable

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 was expected to treat with under Sec. 66. INSTRUMENT
utmost fidelity. IS GENUINE AND IN ALL
RESPECTS WHAT IT
PURPORTS TO BE.
FACTS: Petitioners Cesar and Lolita Areza maintained 2 bank deposits with respondent
Express Savings Bank (the Bank). They were engaged in the business of “buy and sell” of
brand new and second hand motor vehicles. On May 2, 2000, they received an order from
a certain Gerry Mambuay for the purchase of a 2nd-hand Pajero and a brand new Honda
CRV. The buyer, Mambuay paid petitioners with 9 PVAO checks payable to different
payees and drawn against Philippine Veterans Bank, each vaued at 200k, for a total of
1.8m.
Petitioners then claimed that Michael Potenciano, the branch manager of respondent
Express Savings Bank was present during the transaction and immediately offered the
services of Bank for the processing and eventual crediting of the said checks to
petitioner’s account. On the other hand, Potenciano countered that he was prevailed upon
to accept the checks by way of accommodation of petitioners who were valued clients of
the Bank.
Petitioners then deposited the said checks in their savings account with the Bank. The
Bank in turn deposited the said checks with its depositary bank, Equitable-PCI Bank.
Equitable-PCI Bank presented the checks to the drawee, the Philippine Veterans Bank,
which honoured the checks.
Potenciano informed petitioners that the checks they deposited were honoured. He
allegedly warned petitioners that the clearing of the checks pertained only to the
availability of funds and did not mean that the checks were not infirmed. Thus, the entire
amount of 1.8M was credited to petitioner’’s savings account. Based on such info,
petitioners released the two cars to the buyer.
Sometime in July 2000, the subject checks were returned by PVAO to the drawee on the
ground that the amount on the face of the checks was altered from 4k to 200k. The drawee
returned the checks to Equitable-PCI Bank by way of Special Clearing receipts.
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The Bank insisted that they informed petitioners of said development by furnishing them
copies of the documents given by its depositary bank. Petitioners just denied.
Petitioners issued a check in the amt. of 500k. It was dishonoured by the bank for the
reason DEPOSIT UNDER HOLD. According to petitioners, the Bank unilaterally and
unlawfully put their account with the Bank on hold. Petitioner then sent a demand letter
asking the Bank to honor their check. The Bank refused to do so. The Bank then withdrew
the amt of 1.8m representing the returned checks from petitioners’ savings account.
Petitioners then filed a complaint for sum of money w damages against the Bank and
Potenciano with RTC of Calamba. RTC ruled in favour of Calamba. The CA affirmed the
ruling of RTC. Hence this petition.
ISSUE: W/N the Bank had the right to debit 1.8M from petitioners’ accounts
HELD:
On 6 May 2000, the Bank informed petitioners that the subject checks had been honored.
Thus, the amount of P1,800,000.00 was accordingly credited to petitioners' accounts,
prompting them to release the purchased cars to the buyer.
Unknown to petitioners, the Bank deposited the checks in its depositary bank, Equitable-
PCI Bank. Three months had passed when the Bank was informed by its depositary bank
that the drawee had dishonored the checks on the ground of material alterations.
The return of the checks created a chain of debiting of accounts, the last loss eventually
falling upon the savings account of petitioners with respondent bank. The trial court in
its reconsidered decision and the appellate court were one in declaring that petitioners
should bear the loss.
We reverse.
The fact that material alteration caused the eventual dishonor of the checks issued by
PVAO is undisputed. In this case, before the alteration was discovered, the checks were
already cleared by the drawee bank, the Philippine Veterans Bank. Three months had
lapsed before the drawee dishonored the checks and returned them to Equitable-PCI
Bank, the respondents' depositary bank. And it was not until 10 months later when
petitioners' accounts were debited. A question thus arises: What are the liabilities of the
drawee, the intermediary banks, and the petitioners for the altered checks?
LIABILITY OF THE DRAWEE
Section 63 of Act No. 2031 or the Negotiable Instruments Law provides that the acceptor,
by accepting the instrument, engages that he will pay it according to the tenor of his
acceptance. The acceptor is a drawee who accepts the bill. In Philippine National Bank v.
Court of Appeals , the payment of the amount of a check implies not only acceptance but
also compliance with the drawee's obligation.
In case the negotiable instrument is altered before acceptance, is the drawee liable for the
original or the altered tenor of acceptance? There are two divergent intepretations
proffered by legal analysts. The first view is supported by the leading case of National City
Bank of Chicago v. Bank of the Republic. 16 In said case, a certain Andrew Manning stole
a draft and substituted his name for that of the original payee.
He offered it as payment to a jeweler in exchange for certain jewelry. The jeweller
deposited the draft to the defendant bank which collected the equivalent amount from
the drawee. Upon learning of the alteration, the drawee sought to recover from the
defendant bank the amount of the draft, as money paid by mistake. The court denied
recovery on the ground that the drawee by accepting admitted the existence of the payee
and his capacity to endorse.
The second view is that the acceptor/drawee despite the tenor of his acceptance is
liable only to the extent of the bill prior to alteration. This view appears to be in
consonance with Section 124 of the Negotiable Instruments Law which states that a
material alteration avoids an instrument except as against an assenting party and
subsequent indorsers, but a holder in due course may enforce payment according to its
original tenor. Thus, when the drawee bank pays a materially altered check, it violates the
terms of the check, as well as its duty to charge its client's account only for bona fide
disbursements he had made. If the drawee did not pay according to the original tenor of
the instrument, as directed by the drawer, then it has no right to claim reimbursement
from the drawer, much less, the right to deduct the erroneous payment it made from the
drawer's account which it was expected to treat with utmost fidelity.
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The drawee, however, still has recourse to recover its loss. It may pass the liability back
to the collecting bank which is what the drawee bank exactly did in this case. It debited
the account of Equitable-PCI Bank for the altered amount of the checks.
LIABILITY OF DEPOSITARY BANK AND COLLECTING BANK
A depositary bank is the first bank to take an item even though it is also the payor bank,
unless the item is presented for immediate payment over the counter. It is also the bank
to which a check is transferred for deposit in an account at such bank, even if the check is
physically received and indorsed first by another bank. A collecting bank is defined as any
bank handling an item for collection except the bank on which the check is drawn.
When petitioners deposited the check with the Bank, they were designating the latter as
the collecting bank. This is in consonance with the rule that a negotiable instrument, such
as a check, whether a manager's check or ordinary check, is not legal tender. As such, after
receiving the deposit, under its own rules, the Bank shall credit the amount in petitioners'
account or infuse value thereon only after the drawee bank shall have paid the amount of
the check or the check has been cleared for deposit.
The Bank and Equitable-PCI Bank are both depositary and collecting banks. A
depositary/collecting bank where a check is deposited, and which endorses the check
upon presentment with the drawee bank, is an endorser. Under Section 66 of the
Negotiable Instruments Law, an endorser warrants "that the instrument is genuine and
in all respects what it purports to be; that he has good title to it; that all prior parties had
capacity to contract; and that the instrument is at the time of his endorsement valid and
subsisting."
It has been repeatedly held that in check transactions, the depositary/collecting bank or
last endorser generally suffers the loss because it has the duty to ascertain the
genuineness of all prior endorsements considering that the act of presenting the
check for payment to the drawee is an assertion that the party making the
presentment has done its duty to ascertain the genuineness of the endorsements.
If any of the warranties made by the depositary/collecting bank turns out to be false, then
the drawee bank may recover from it up to the amount of the check.
5. Wesleyan University Philippines v. Nowella Reyes, July 30, 2014);
FACTS: Nowella Reyes was dismissed for allegedly mishandling the accounts of Wesleyan
University.
As it were, respondent did not deny, in fact admitted, the encashment of the three
hundred thousand peso (PhP300,000) crossed check payable to the University Treasurer
which covered the total amount of the "love gift" for administrative and academic officials
of WUP. Neither did she deny the fact that the Treasury Department encashed checks
issued to WUP personnel rather than requiring them to have the checks encashed by the
bank. Instead, she explained that the beneficiaries of the amounts strongly requested that
their love gifts be given in cash, hence the encashment of the PhP300,000 crossed check
and, thereafter, the accommodation and encashment of their checks directly by the
Treasury Department. Moreover, she submitted a document bearing the signatures of the
recipients of the "love gift" as proof that the amount was disposed properly. 28 She
further insisted that this was the usual practice of the University and that she merely
accommodated the requests of WUP personnel especially when Chinabank was already
closed.
Jurisprudence has pronounced that the crossing of a check means that the check may not
be encashed but only deposited in the bank. 29 As Treasurer, respondent knew or is at
least expected to be aware of and abide by this basic banking practice and commercial
custom. Clearly, the issuance of a crossed check reflects management's intention to
safeguard the funds covered thereby, its special instruction to have the same deposited
to another account and its restriction on its encashment.
Here, respondent, as aptly detailed in the auditor's report, disregarded management's
intentions and ignored the measures in place to secure the handling of WUP's funds. By
encashing the crossed checks, respondent put the funds covered thereby under the risk
of being lost, stolen, co-mingled with other funds or spent for other purposes.
Furthermore, the accommodation and encashment by the Treasury Department of checks
issued to WUP personnel were highly irregular. First, WUP, not being a bank, had no
business encashing the checks of its personnel. More importantly, in encashing the said
checks, the Treasury Department made disbursements contrary to the wishes of
management because, in issuing said checks, management has made clear its intention
that movies therefor would be sourced from petitioner's deposit with Chinabank, under
a specific account, and not from the cash available in the Treasury Department.
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That the encashment of crossed checks and payment of checks directly to WUP personnel
had been the practice of the previous and present administration of petitioner is of no
moment. To Our mind, this was simply respondent's convenient excuse, a poorly
disguised afterthought, when her unbecoming carelessness in managing WUP's finances
was exposed. Moreover, the prevalence of this practice could have been contained if only
respondent consistently observed the regular procedure for encashing crossed checks
and properly handled requests for accommodation of checks issued to the WUP
personnel.
7. Land Bank of the Philippines vs. Kho, 796 SCRA 21, G.R. No. 205839, G.R. No. 205840
July 7, 2016
- Ito yung nasa exam. Photocopy of the check, transaction did not materialize, is the bank
liable? YES. The signatures that were admitted to be fake. A drawer or a depositor of the
bank is only precluded from asserting the forgery if the drawee bank can prove his
failure to exercise ordinary care and if this negligence substantially contributed to
the forgery or the perpetration of the fraud.
FACTS: The respondent Narciso Kho is the sole proprietor of United Oil Petroleum, a
business engaged in trading diesel fuel. Sometime in December 2006, he entered into a
verbal agreement to purchase lubricants from Red Orange International Trading (Red
Orange), represented by one Rudy Medel. Red Orange insisted that it would only accept a
Land Bank manager's check as payment.
Narciso Kho then, accompanied by Rudy Medel, opened a Savings Account with Land
Bank Philippines. His initial 25,993,537.37 deposit which consisted of manager’s checks.
Kho also purchased Land Bank Manager’s Ceck leveraged by his newly opened savings
account. The check was postdated to January 2, 2006 and scheduled for actual delivery
on the same date after the three checks were expected to have been cleared. It was valued
at 25m and made payable to Red Orange.
Kho requested a photocopy of the manager’s check to provide Red Orange with proof that
he had available funds for the transaction. The branch manager accommodated his
request. Kho gave the photocopy to Rudy Medel. Kho returned to the bank and picked up
the check. Accordingly, the 25m was debited from his savings account. Unfortunately, his
deal with Red Orange did not push through.
On Jan. 3, 2006, an employee of the BPI called Landbank to inform them that Red Orange
had deposited check for payment. Flores confirmed with BPI that Land Bank had issued
the check to Kho.
The Land Bank confirmed the deposited check when its Central Clearing department
faxed a copy of the deposited check. Flores informed Kho by phone that it was cleared and
paid by BPI.
SHOCKED, Kho informed Flores that he never negotiated the check because the deal did
not materialize. More importantly, the actual check was still in his possession.
Kho immediately went to Land Bank with the check No. 07410. They discovered that what
was deposited was a SPURIOUS manager’s ceck. Kho demanded the cancellation of the
MC and the release of the remaining money in his account. However, Flores refused his
request because she had no authority to do so at the time.
Kho asserted that the manager’s check was still in his possession and that he had no
obligation to inform Land Bank whether or not he had already negotiated the check. Land
Bank argues that Kho was negligent because he had handed Medel a photocopy of the
manager’s check and that this was the proximate cause of his loss.
RTC dismissed the complaint because when Kho gave Medel a photocopy of the check and
his failure to inform the bank that the transaction with Red Orange did not push through
were the proximate causes of the loss. CA set aside the RTC’s decision.
ISSUE: W/N Kho should bear the loss?
HELD: No. This case can already be resolved based on these undisputed facts. Therefore,
the CA erred when it remanded the case for further proceedings.
That said, we cannot agree that the proximate causes of the loss were Kho's act of giving
Medel a photocopy of check No. 07410 and his failure to inform Land Bank that his deal
with Red Orange did not push through.
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Proximate cause — which is determined by a mixed consideration of logic, common sense,
policy, and precedent — is "that cause which, in natural and continuous sequence, unbroken
by any effcient intervening cause, produces the injury, and without which the result would
not have occurred."
We cannot understand how both the RTC and the CA overlooked the fact that Land Bank's
offcers cleared the counterfeit check. We stress that the signatories of the genuine check
No. 07410 were Land Bank's officers themselves.
The business of banking is imbued with public interest; it is an industry where the general
public's trust and confidence in the system is of paramount importance.
Consequently, banks are expected to exert the highest degree of, if not the utmost,
diligence. They are obligated to treat their depositors' accounts with meticulous care,
always keeping in mind the fiduciary nature of their relationship.
Banks hold themselves out to the public as experts in determining the genuineness of
checks and corresponding signatures thereon. Stemming from their primordial duty of
diligence, one of a bank's prime duties is to ascertain the genuineness of the drawer's
signature on check being encashed. This holds especially true for manager's checks. A
manager's check is a bill of exchange drawn by a bank upon itself, and is accepted by its
issuance. It is an order of the bank to pay, drawn upon itself, committing in effect its total
resources, integrity, and honor behind its issuance. The check is signed by the manager
(or some other authorized officer) for the bank. In this case, the signatories were
Macarandan and Benitez.
The genuine check No. 07410 remained in Kho's possession the entire time and Land
Bank admits that the check it cleared was a fake. When Land Bank's CCD forwarded the
deposited check to its Araneta branch for inspection, its officers had every opportunity to
recognize the forgery of their signatures or the falsity of the check.
Whether by error or neglect, the bank failed to do so, which led to the withdrawal and
eventual loss of the P25,000,000.00.
This is the proximate cause of the loss. Land Bank breached its duty of diligence and
assumed the risk of incurring a loss on account of a forged or counterfeit check.
Hence, it should suffer the resulting damage.
We cannot agree with the Land Bank and the RTC's positions that Kho is precluded from
invoking the forgery. A drawer or a depositor of the bank is precluded from asserting the
forgery if the drawee bank can prove his failure to exercise ordinary care and if this
negligence substantially contributed to the forgery or the perpetration of the fraud.
9. Nyco Sales Corporation vs. BA Finance Corporation, 200 SCRA 637;
- Assignment of credit; Nyco’s execution of a Deed of Assignment in favour of BA
Finance; Nyco is liable under Art. 1628, not only on dishonour of checks alone
FACTS: It appears on record that petitioner Nyco Sales Corporation whose president and
general manager is Rufino Yao, is engaged in the business of selling construction
materials with principal office in Davao City. Sometime in 1978, the brothers Santiago
and Renato Fernandez (hereinafter referred to as the Fernandezes), both acting in behalf
of Sanshell Corporation, approached Rufino Yao for credit accommodation. They
requested Nyco, thru Yao, to grant Sanshell discounting privileges which Nyco had with
BA Finance Corporation (hereinafter referred to as BA Finance). Yao apparently
acquiesced, hence on or about November 15, 1978, the Fernandezes went to Yao for the
purpose of discounting Sanshell's post-dated check which was a BPI-Davao Branch Check
No. 499648 dated February 17, 1979 for the amount of P60,000.00. The said check was
payable to Nyco. Following the discounting process agreed upon, Nyco, thru Yao,
endorsed the check in favor of BA Finance. Thereafter, BA Finance issued a check payable
to Nyco which endorsed it in favor of Sanshell. Sanshell then made use of and/or
negotiated the check. Accompanying the exchange of checks was a Deed of Assignment
executed by Nyco in favor of BA Finance with the conformity of Sanshell. Nyco was
represented by Rufino Yao, while Sanshell was represented by the Fernandez brothers.
Under the said Deed, the subject of the discounting was the aforecited check.
At the back thereof and of every deed of assignment was the Continuing Suretyship
Agreement whereby the Fernandezes unconditionally guaranteed to BA Finance the full,
faithful and prompt payment and discharge of any and all indebtedness of Nyco.
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The BPI check, however, was dishonored by the drawee bank upon presentment for
payment. BA Finance immediately reported the matter to the Fernandezes who
thereupon issued a substitute check dated February 19, 1979 for the same amount in
favor of BA Finance.
It was a Security Bank and Trust Company check bearing the number 183157, which was
again dishonored when it was presented for payment. Despite repeated demands, Nyco
and the Fernandezes failed to settle the obligation with BA Finance, thus prompting the
latter to institute an action in court (Ibid., p. 28). Nyco and the Fernandezes, despite
having been served with summons and copies of the complaint, failed to file their answer
and were consequently declared in default. On May 16, 1980, the lower court ruled in
favor of BA Finance ordering them to pay the former jointly and severally, the sum of
P65,536.67 plus 14% interest per annum from July 1, 1979 and attorney's fees in the
amount of P3,000.00 as well as the costs of suit.
The appellate court affirmed RTC’s decision but modified that the interest should run
from Feb. 19, 1979 until paid and not from Feb 1, 1979.
ISSUE: W/N the assignor is liable to its assignee for its dishonoured checks
HELD: Yes. An assignment of credit is the process of transferring the right of the assignor
to the assignee, who would then be allowed to proceed against the debtor. It may be done
either gratuitously or onerously, in which case, the assignment has an effect similar to
that of a sale.
According to Article 1628 of the Civil Code, the assignor-vendor warrants both the credit
itself (its existence and legality) and the person of the debtor (his solvency), if so
stipulated, as in the case at bar. Consequently, if there be any breach of the above
warranties, the assignor-vendor should be held answerable therefor. There is no question
then that the assignor-vendor is indeed liable for the invalidity of whatever he assigned
to the assignee-vendee.
Considering now the facts of the case at bar, it is beyond dispute that Nyco executed a
deed of assignment in favor of BA Finance with Sanshell Corporation as the debtor-
obligor.
BA Finance is actually enforcing said deed and the check covered thereby is merely an
incidental or collateral matter. This particular check merely evidenced the credit which
was actually assigned to BA Finance. Thus, the designation is immaterial as it could be
any other check. Both the lower and the appellate courts recognized this and so it is
utterly misplaced to say that Nyco is being held liable for both the BPI and the SBTC
checks. It is only what is represented by the said checks that Nyco is being asked to pay.
Indeed, nowhere in the dispositive parts of the decisions of the courts can it be gleaned
that BA Finance may recover from the two checks.
Nyco's pretension that it had not been notified of the fact of dishonor is belied not only by
the formal demand letter but also by the findings of the trial court that Rufino Yao of Nyco
and the Fernandez Brothers of Sanshell had frequent contacts before, during and after the
dishonor. More importantly, it fails to realize that for as long as the credit remains
outstanding, it shall continue to be liable to BA Finance as its assignor. The dishonor of an
assigned check simply stresses its liability and the failure to give a notice of dishonor will
not discharge it from such liability. This is because the cause of action stems from the
breach of the warranties embodied in the Deed of Assignment, and not from the
dishonoring of the check alone (See Art. 1628, Civil Code).
10. Arceo, Jr. vs. People of the Philippines, G.R. No. 142641, 17 July 2006;
- BP 22!
FACTS: Petitioner obtained a loan from Josefino Cenizal in the amount of 100k. Several
weeks thereafter, petitioner obtained an additional loan of 50k. Petitioner then issued in
favour of Cenizal , BPI Check which is postdated August 4, 1991 for 150k at Cenizal’s
house located at Panay Avenue.
When Aug. 4, 1991 came, Cenizal did not deposit the check immediately because
petitioner promised that he would replace the check with cash. Such promise was made
verbally 7 times. When his patience ran out, Cenizal brought the check to the bank for
encashment. The head office of the Bank informed Cenizal that the check bounce because
of insufficient funds.
Thereafter, Cenizal went to the house of petitioner to inform him of the dishonour of the
check but he found out that petitioner already left the place. So Cenizal referred the
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matter to a lawyer who wrote the letter giving petitioner 3 days from receipt to pay the
amount of the check. But he still failed to do so. Cenizal filed a complaint against petitioner
and the RTC found him guilty of the violation of BP 22. The CA affirmed the decision of
RTC.
ISSUE: W/N Petitioner should be liable for BP 22? Should he be liable for the dishonour
of the check because it was presented beyond the 90-day period?
HELD: Yes. The petitioner’s arguments are devoid of merit. The 90-day period provided
in the law is not an element of the offense. Neither does it discharge petitioner from his
duty to maintain sufficient funds in the account within a reasonable time from the date
indicated in the check. According to current banking practice, the reasonable period
within which to present a check to the drawee bank is six months. Thereafter, the check
becomes stale and the drawer is discharged from liability thereon to the extent of the loss
caused by the delay.
Thus, Cenizal's presentment of the check to the drawee bank 120 days (four months) after
its issue was still within the allowable period. Petitioner was freed neither from the
obligation to keep sufficient funds in his account nor from liability resulting from the
dishonor of the check.
Petitiner was charged for violating the first paragraph of BP 22. The elements of the
offense are:
1. the making, drawing and issuance of any check to apply to account or for value;
2. knowledge of the maker, drawer, or issuer that at the time of issue he does not have
sufficient funds in or credit with the drawee bank for the payment of the check in full
upon its presentment; and
3. subsequent dishonor of the check by the drawee bank for insufficiency of funds or
credit, or dishonor of the check for the same reason had not the drawer, without any valid
cause, ordered the bank to stop payment.
The trial court found that, contrary to petitioner's claim, Cenizal's counsel had informed
petitioner in writing of the check's dishonor and demanded payment of the value of the
check. Despite receipt of the notice of dishonor and demand for payment, petitioner still
failed to pay the amount of the check.

Petitioner cannot claim that he was deprived of the period of ve banking days from
receipt of notice of dishonor within which to pay the amount of the check. 9 While
petitioner may have been given only three days to pay the value of the check, the trial
court found that the amount due thereon remained unpaid even after five banking days
from his receipt of the notice of dishonor. This negated his claim that he had already paid
Cenizal and should therefore be relieved of any liability.

Moreover, petitioner's claim of payment was nothing more than a mere allegation. He
presented no proof to support it. If indeed there was payment, petitioner should have
redeemed or taken the check back in the ordinary course of business. Instead, the check
remained in the possession of the payee who demanded the satisfaction of petitioner's
obligation when the check became due as well as when the check was dishonored by the
drawee bank.

These findings (due notice to petitioner and nonpayment of the obligation) were
confirmed by the appellate court. This Court has no reason to rule otherwise. Well-settled
is the rule that the factual findings of the trial court, when affirmed by the appellate court,
are not to be disturbed.hese elements are present in this case.

8. State Investment House vs. CA, 217 SCRA 32;

11. Allied Banking vs. CA, GG Sportswear, 11 July 2006

6. Equitable Banking Corporation vs. Special Steel Products, Inc., 672 SCRA 212, G.R. No.
175350 June 13, 2012;

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