G.R. No.

L-26719 February 27, 1970 defendant, claims that it incurred additional expenses
caused by the resurvey of the property, the additional
THE PHILIPPINE AMERICAN LIFE grading work done in the new road lay-out, the changes
INSURANCE COMPANY, petitioner, in the designs of the buildings and residential houses to
vs. be constructed as prepared for the project by architect
HONORATO R. SANTAMARIA and COURT of Arguelles and the change in the shopping center area
APPEALS (First Division), respondents. which became smaller due to the fact that the actual
area of the project is less than what appeared in the
Manuel Lim, Manuel Y. Macias, De la Rosa, Ferry and topographic map. It also seeks to recover losses it
Associates for petitioner. sustained as a consequence of the delay in the progress
of the project work caused, according to the plaintiff,
De los Santos, De los Santos and De los Santos for by the fault of defendant in the preparation of the
respondents. topographic map, Exhibit I."5

Respondent's defense was next taken up by respondent

Court of Appeals in its decision. "For his defense, the
defendant contends in the first place that under his
FERNANDO, J.:
contract with the plaintiff, he is not required to prepare
a plan which shows the exact boundaries of the project
This petition for the review of a decision of respondent
nor the exact measurement of said boundaries. He also
Court of Appeals, arising allegedly from its failure to
contends that before preparing the topographic map he
apply the Civil Code provision requiring a contractor to
called the attention of Mr. A. G. Capellan,
"execute the work in such a manner that it has the representative of the plaintiff as well as architect
qualities agreed upon" and is free from "defects which Nakpil, architect Arguelles and representative of the
destroy or lessen its value, or fitness" for its use, Monina Construction Company of the fact that there
whether ordinary or stipulated,1 was given due course was then no plan indicating the exact measurement of
as the question raised on a novel provision of the Civil the lot which he was to survey to topographically and
Code2 has not hitherto been passed upon. Petitioner, that he was informed that he should proceed even
The Philippine American Life Insurance Co., imputing
without a survey plan because time was then of the
negligence and incompetence to respondent Honorato
essence and that whatever discrepancies may arise as a
R. Santamaria, the contractor for a topographic survey
result of the absence of such horizontal survey could be
work, as a result of which it suffered damages, would
remedied later. Defendant further contends that
hold him liable. It prevailed in the lower court, but on
inasmuch as a topographic survey could be prepared
appeal, it lost in the Court of Appeals, the decision now
on a property even without indicating definitely its
on review having diligently and meticulously sifted the
metes and bounds, he proceeded with the topographic
competent facts to arrive at the conclusion that far
survey and submitted the result of his work,
from respondent Santamaria being guilty of negligence
topographic map Exhibit I. From the foregoing
or incompetence, he did live up strictly to the terms of
contentions of the defendant he disclaims liability for
the contract. Thus it reversed the judgment of the
losses arising from the discrepancy above referred to."6
lower court and dismissed the complaint. Hence this
petition for review.
What respondent Santamaria was obliged to do under
its contract with petitioner was next discussed in the
It is an admitted fact that in a letter dated September 3,
decision: "To our mind, the correct interpretation of
1952 to petitioner, respondent Santamaria submitted a
the extent of appellant's duty under the contract
written proposal to conduct both a topographic and a contained in Exhibit C is found in the very same
subdivision survey of petitioner's 45 hectare lot in exhibit. It should be noted that in his letter, Exhibit C,
Quezon City, the topographic survey at the rate of defendant offered to make two survey: (1) a
P80.00 per hectare of the area surveyed and mapped topographic and (2) a subdivision survey of a 45
and the subdivision survey at the rate of P28.00 for the hectare housing project for the plaintiff. In his
first 400 lots and P25.00 for each succeeding lot description of the job for the proposed 'subdivision
thereafter. There was an acceptance by petitioner of
survey', defendant stated among others that he would
such proposal limited to the topographic survey only.
relocate all the boundary monuments of the project
On September 23, 1952, respondent Santamaria sought
area."7
to clarify the terms of such topographic survey by him
by stating that it would be "in accordance with a 10-
The considerations that led the Court of Appeals to
meter cross-sectioning and profile survey and a
reject contention of petitioner were set forth in detail in
contour interval of 25 centimeters." He also obligated
its decision: "Plaintiff accepted the offer only in so far
himself to furnish a map at scale 1 to 100 upon the
as the topographic survey is concerned, thereby
completion of the survey. Petitioner was
rejecting the offer of defendant to make a subdivision
agreeable.3 The decision of respondent Court of
survey. Inasmuch as the work of relocating all
Appeals then continued with the facts as found thus:
boundary monuments is included in the rejected offer
"The topographic survey work on the property of
to make a subdivision survey, defendant was justified
plaintiff was done by the defendant during the period
in not determining the boundary of the project area in
from October 3 to November 15, 1952. Thereafter,
his topographic survey. Moreover, considering the
defendant submitted to the plaintiff the result of his
period during which the topographic survey was to be
survey topographic map, Exhibit 1, for which plaintiff
done pursuant to the offer of the defendant as accepted
paid him the agreed sum of P3,600.00 as his fees."4
by the plaintiff, it was impossible for the defendant to
determine the exact boundary of the project area of 45-
Why petitioner, as plaintiff in the original action, felt it hectare because when plaintiff accepted defendant's
was entitled to damages was noted in such decision offer plaintiff has not yet definitely decided to purchase
thus: "Plaintiff, in seeking to recover damages from the
the 45-hectare site from the Philippine Homesite and
Housing Corporation (PHHC). It was only on October
15, 1952 that an agreement entitled 'Sale Agreement'
(Exh. A), that the plaintiff and the PHHC entered into a
contract. It should be noted that under the offer of the
defendant contained in Exhibit C as accepted by the
plaintiff dated September 23, 1952, field work and
drafting had to commence three days after the signing
of the contract and the resulting topographic map
should be submitted to the plaintiff within a period of
18 working days with additional extension for every
day of rain. It is admitted that defendant started work
on his topographic map on October 3, 1952 twelve days
before plaintiff signed the sales agreement with the
PHHC."8
With the foregoing circumstances in mind, the Court of
Appeals yielded its conformity to the stand taken by
respondent Santamaria. Thus: "We agree with the
contention of the appellant as deduced from his
testimony and that of his witness Mr. Jorge that when
a topographic map which is not linearly plotted and
whose boundaries are consequently not accurate is
used in sketching the road lay-out and other parts of
the subdivision scheme, such procedure would be
improper unless the sketch is intended to be merely a
preliminary lay-out subject to final adjustment after a
fixed boundary survey has been made. On this point,
we note with interest the disquisition about city
planning contained in appellee's brief (pp. 12-13).
There can be no question about the correctness of the
stand and the soundness of the reasoning that in
planning a scheme for a new housing project, there
should be not only a topographic survey of the entire
project area but also an accurate planimetric survey of
the same indicating the exact boundaries thereof."9
Its conclusion, now subject of this petition for review
was thus a necessary consequence: "In view of all the
foregoing considerations, we rule that defendant has
not been at fault nor remiss in the performance of his
duty to prepare the topographic map, Exhibit 1,
pursuant to his contract with the plaintiff.
Consequently the decision declaring him liable in
damages to the plaintiff should be reversed." 10
Thus, with the utmost care and conscientious effort in
the scrutiny of the proven facts, respondent Court of
Appeals specifically held that respondent Santamaria
was neither "at fault nor remiss in the performance of
his duty to prepare the topographic map, Exhibit I,
pursuant to his contract with the plaintiff." With such a
finding based, as above noted, on the most meticulous
appraisal of the respective contentions of the parties in
accordance with their proof, it would necessarily follow
that the lower court decision that would hold
respondent Santamaria liable in damages could not
stand. Hence, its reversal by respondent Court of
Appeals. It must have been a realization on the part of
petitioner of the difficult task it had to face, this Court
being bound on questions of fact by the determination
of the Court of Appeals, that must have prompted it to
invoke what for it is the correct interpretation of Art.
1715 of the Civil Code.
As set forth at the outset, this novel question was the
decisive factor in giving this petition due course. Even
if the matter be viewed most favorably from the
standpoint of petitioner, it would be unjustifiable, on
the facts as duly proved, to decide the matter contrary
to the conclusion reached by respondent Court of
Appeals. Petitioner would have us construe the
obligation of the contractor to execute the work in such
a manner that it had the qualities agreed upon and was
free from defects which destroyed or lessened its value
or fitness as well-nigh absolute. It would impose the
duty on the party thus bound to perform such work to
attain, in each and every case, a degree of perfectibility
on pain of being visited with a liability for damages.
That is to misread Art. 1715. It is to give it an
interpretation at war with the demands of reason. It
might have been otherwise if the work agreed upon to
be performed consisted of machinery, which must be
constructed according to specification, otherwise it
would not serve the purpose contemplated. Such is not
the case, however. As Justice Holmes noted, there is no
such principle "against using common sense in
construing laws." 11
Petitioner, however, appears to be of a different mind.
Ignoring the vital circumstance that precluded
respondent Santamaria's work from being as
satisfactory as was hoped for, for which it could not
escape responsibility as it rejected his offer to conduct
both a topographic and a subdivision survey, it would
intepret this codal provision without any thought of the
canons of fairness. It would stretch its meaning in an
unwarranted manner. No legal norm should be
susceptible to such a reproach. If the facts were other
than that so carefully considered in detail by
respondent Court of Appeals, then perhaps this
contention of petitioner, which, at bottom, is the basis
of the three alleged errors committed by respondent
Court of Appeals, would not be so lacking in any
persuasive quality. This Court, no less than petitioner,
must, however, pay heed to such facts duly established.
Our supervisory power as petitioner could not be
unaware, is thus necessarily limited. In the application
of the law, we cannot ignore what had been ascertained
by the Court of Appeals as to the manner an obligation
was fulfilled.
The alleged negligence or incompetence on which this
action was based by petitioner in its complaint in the
lower court was found not to exist by respondent Court
of Appeals. Respondent Santamaria was not at fault; he
was not remiss in the performance of his duty. He lived
up to the terms of the contract as agreed upon between
him and petitioner. It cannot be said, then, that he did
incur liability. It would follow, thus, that the reliance
on this legal norm by petitioner does not call for the
judgment of the Court of Appeals being set aside as
being contrary to law.
WHEREFORE, the decision of respondent Court of
Appeals of September 28, 1966 is affirmed. With costs
against petitioner, The Philippine, American Life
Insurance Company.
G.R. No. L-22405 June 30, 1971
PHILIPPINE EDUCATION CO., INC., plaintiff-
appellant,
vs.
MAURICIO A. SORIANO, ET AL., defendant-
appellees.
Marcial Esposo for plaintiff-appellant.
Office of the Solicitor General Arturo A. Alafriz,
Assistant Solicitor General Antonio G. Ibarra and
Attorney Concepcion Torrijos-Agapinan for
defendants-appellees.
DIZON, J.:
An appeal from a decision of the Court of First
Instance of Manila dismissing the complaint filed by
the Philippine Education Co., Inc. against Mauricio
A. Soriano, Enrico Palomar and Rafael Contreras.
On April 18, 1958 Enrique Montinola sought to
purchase from the Manila Post Office ten (10)
money orders of P200.00 each payable to E.P.
Montinola withaddress at Lucena, Quezon. After the
postal teller had made out money ordersnumbered
124685, 124687-124695, Montinola offered to pay
for them with a private checks were not generally
accepted in payment of money orders, the teller
advised him to see the Chief of the Money Order
Division, but instead of doing so, Montinola
managed to leave building with his own check and
the ten(10) money orders without the knowledge of
the teller.
On the same date, April 18, 1958, upon discovery of
the disappearance of the unpaid money orders, an
urgent message was sent to all postmasters, and the
following day notice was likewise served upon all
banks, instructing them not to pay anyone of the
money orders aforesaid if presented for payment.
The Bank of America received a copy of said notice
three days later.
On April 23, 1958 one of the above-mentioned
money orders numbered 124688 was received by
appellant as part of its sales receipts. The following
day it deposited the same with the Bank of America,
and one day thereafter the latter cleared it with the
Bureau of Posts and received from the latter its face
value of P200.00.
On September 27, 1961, appellee Mauricio A.
Soriano, Chief of the Money Order Division of the
Manila Post Office, acting for and in behalf of his co-
appellee, Postmaster Enrico Palomar, notified the
Bank of America that money order No. 124688
attached to his letter had been found to have been
irregularly issued and that, in view thereof, the
amount it represented had been deducted from the
bank's clearing account. For its part, on August 2 of
the same year, the Bank of America debited
appellant's account with the same amount and gave
it advice thereof by means of a debit memo.
On October 12, 1961 appellant requested the
Postmaster General to reconsider the action taken
by his office deducting the sum of P200.00 from the
clearing account of the Bank of America, but his
request was denied. So was appellant's subsequent
request that the matter be referred to the Secretary
of Justice for advice. Thereafter, appellant elevated
the matter to the Secretary of Public Works and
Communications, but the latter sustained the
actions taken by the postal officers.
In connection with the events set forth above,
Montinola was charged with theft in the Court of
First Instance of Manila (Criminal Case No. 43866)
but after trial he was acquitted on the ground of
reasonable doubt.
On January 8, 1962 appellant filed an action against
appellees in the Municipal Court of Manila praying
for judgment as follows:
WHEREFORE, plaintiff prays that
after hearing defendants be
ordered:
(a) To countermand the notice
given to the Bank of America on
September 27, 1961, deducting from
the said Bank's clearing account the
sum of P200.00 represented by
postal money order No. 124688, or
in the alternative indemnify the
plaintiff in the same amount with
interest at 8-½% per annum from
September 27, 1961, which is the
rate of interest being paid by
plaintiff on its overdraft account;
(b) To pay to the plaintiff out of
their own personal funds, jointly
and severally, actual and moral
damages in the amount of
P1,000.00 or in such amount as will
be proved and/or determined by
this Honorable Court: exemplary
damages in the amount of
P1,000.00, attorney's fees of
P1,000.00, and the costs of action.
Plaintiff also prays for such other
and further relief as may be deemed
just and equitable.
On November 17, 1962, after the parties had
submitted the stipulation of facts reproduced at
pages 12 to 15 of the Record on Appeal, the above-
named court rendered judgment as follows:
WHEREFORE, judgment is hereby
rendered, ordering the defendants
to countermand the notice given to
the Bank of America on September
27, 1961, deducting from said
 Bank's clearing account the sum of
P200.00 representing the amount
of postal money order No. 124688,
or in the alternative, to indemnify
the plaintiff in the said sum of
P200.00 with interest thereon at
the rate of 8-½% per annum from
September 27, 1961 until fully paid;
without any pronouncement as to
cost and attorney's fees.
The case was appealed to the Court of First Instance
of Manila where, after the parties had resubmitted
the same stipulation of facts, the appealed decision
dismissing the complaint, with costs, was rendered.
The first, second and fifth assignments of error
discussed in appellant's brief are related to the other
and will therefore be discussed jointly. They raise
this main issue: that the postal money order in
question is a negotiable instrument; that its nature
as such is not in anyway affected by the letter dated
October 26, 1948 signed by the Director of Posts and
addressed to all banks with a clearing account with
the Post Office, and that money orders, once issued,
create a contractual relationship of debtor and
creditor, respectively, between the government, on
the one hand, and the remitters payees or endorses,
on the other.
It is not disputed that our postal statutes were
patterned after statutes in force in the United States.
For this reason, ours are generally construed in
accordance with the construction given in the
United States to their own postal statutes, in the
absence of any special reason justifying a departure
from this policy or practice. The weight of authority
in the United States is that postal money orders are
not negotiable instruments (Bolognesi vs. U.S. 189
Fed. 395; U.S. vs. Stock Drawers National Bank, 30
Fed. 912), the reason behind this rule being that, in
establishing and operating a postal money order
system, the government is not engaging in
commercial transactions but merely exercises a
governmental power for the public benefit.
The conditions thus imposed in order to enable the
bank to continue enjoying the facilities theretofore
enjoyed by its depositors, were accepted by the Bank
of America. The latter is therefore bound by them.
That it is so is clearly referred from the fact that,
upon receiving advice that the amount represented
by the money order in question had been deducted
from its clearing account with the Manila Post
Office, it did not file any protest against such action.
Moreover, not being a party to the understanding
existing between the postal officers, on the one
hand, and the Bank of America, on the other,
appellant has no right to assail the terms and
conditions thereof on the ground that the letter
setting forth the terms and conditions aforesaid is
void because it was not issued by a Department
Head in accordance with Sec. 79 (B) of the Revised
Administrative Code. In reality, however, said legal
provision does not apply to the letter in question
because it does not provide for a department
regulation but merely sets down certain conditions
upon the privilege granted to the Bank of Amrica to
accept and pay postal money orders presented for
payment at the Manila Post Office. Such being the
case, it is clear that the Director of Posts had ample
authority to issue it pursuant to Sec. 1190 of the
Revised Administrative Code.
In view of the foregoing, We do not find it necessary
to resolve the issues raised in the third and fourth
assignments of error.
WHEREFORE, the appealed decision being in
accordance with law, the same is hereby affirmed
with costs.

It is to be noted in this connection that some of the

restrictions imposed upon money orders by postal
laws and regulations are inconsistent with the
character of negotiable instruments. For instance,
such laws and regulations usually provide for not
more than one endorsement; payment of money
orders may be withheld under a variety of
circumstances (49 C.J. 1153).

Of particular application to the postal money order

in question are the conditions laid down in the letter
of the Director of Posts of October 26, 1948 (Exhibit
3) to the Bank of America for the redemption of
postal money orders received by it from its
depositors. Among others, the condition is imposed
that "in cases of adverse claim, the money order or
money orders involved will be returned to you (the
bank) and the, corresponding amount will have to
be refunded to the Postmaster, Manila, who reserves
the right to deduct the value thereof from any
amount due you if such step is deemed necessary."
G.R. No. 107508 April 25, 1996
PHILIPPINE NATIONAL BANK, petitioner,
vs.
COURT OF APPEALS, CAPITOL CITY
DEVELOPMENT BANK, PHILIPPINE BANK OF
COMMUNICATIONS, and F. ABANTE
MARKETING, respondents.
KAPUNAN, J.:p
This is a petition for review on certiorari under Rule 45 of
the Rules of Court assailing the decision dated April 29,
1992 of respondent Court of Appeals in CA-G.R. CV No.
24776 and its resolution dated September 16, 1992,
denying petitioner Philippine National Bank's motion for
reconsideration of said decision.
The facts of the case are as follows.
A check with serial number 7-3666-223-3, dated August 7,
1981 in the amount of P97,650.00 was issued by the
Ministry of Education and Culture (now Department of
Education, Culture and Sports [DECS]) payable to F.
Abante Marketing. This check was drawn against
Philippine National Bank (herein petitioner).
On August 11, 1981, F. Abante Marketing, a client of
Capitol City Development Bank (Capitol), deposited the
questioned check in its savings account with said bank. In
turn, Capitol deposited the same in its account with the
Philippine Bank of Communications (PBCom) which, in
turn, sent the check to petitioner for clearing.
Petitioner cleared the check as good and, thereafter,
PBCom credited Capitol's account for the amount stated
in the check. However, on October 19, 1981, petitioner
returned the check to PBCom and debited PBCom's
account for the amount covered by the check, the reason
being that there was a "material alteration" of the check
number.
PBCom, as collecting agent of Capitol, then proceeded to
debit the latter's account for the same amount, and
subsequently, sent the check back to petitioner. Petitioner,
however, returned the check to PBCom.
On the other hand, Capitol could not, in turn, debit F.
Abante Marketing's account since the latter had already
withdrawn the amount of the check as of October 15, 1981.
Capitol sought clarification from PBCom and demanded
the re-crediting of the amount. PBCom followed suit by
requesting an explanation and re-crediting from
petitioner.
Since the demands of Capitol were not heeded, it filed a
civil suit with the Regional Trial Court of Manila against
PBCom which, in turn, filed a third-party complaint
against petitioner for reimbursement/indemnity with
respect to the claims of Capitol. Petitioner, on its part,
filed a fourth-party complaint against F. Abante
Marketing.
On October 3, 1989; the Regional Trial Court rendered its
decision the dispositive portion of which reads:
WHEREFORE, judgment is hereby
rendered as follows:
1.) On plaintiffs complaint, defendant
Philippine Bank of Communications is
ordered to re-credit or reimburse
plaintiff Capitol City Development Bank
the amount of P97,650.00, plus interest
of 12 percent thereto from October 19,
1981 until the amount is fully paid;
2.) On Philippine Bank of
Communications third-party complaint
third-party defendant PNB is ordered to
reimburse and indemnify Philippine
Bank of Communications for whatever
amount PBCom pays to plaintiff;
3.) On Philippine National Bank's
fourth-party complaint, F. Abante
Marketing is ordered to reimburse and
indemnify PNB for whatever amount
PNB pays to PBCom;
4.) On attorney's fees, Philippine Bank
of Communications is ordered to pay
Capitol City Development Bank
attorney's fees in the amount of Ten
Thousand (P10,000.00) Pesos; but
PBCom is entitled to
reimbursement/indemnity from PNB;
and Philippine National Bank to be, in
turn reimbursed or indemnified by F.
Abante Marketing for the same amount;
5.) The Counterclaims of PBCom and
PNB are hereby dismissed;
6.) No pronouncement as to costs.
SO ORDERED. 1
An appeal was interposed before the respondent Court of
Appeals which rendered its decision on April 29, 1992, the
decretal portion of which reads:
WHEREFORE, the judgment appealed
from is modified by exempting PBCom
from liability to plaintiff-appellee for
attorney's fees and ordering PNB to
honor the check for P97,650.00, with
interest as declared by the trial court,
and pay plaintiff-appellee attorney's
fees of P10,000.00. After the check shall
have been honored by PNB, PBCom
shall re-credit plaintiff-appellee's
account with it with the amount. No
pronouncement as to costs.
SO ORDERED. 2
A motion for reconsideration of the decision was denied
by the respondent Court in its resolution dated September
16, 1992 for lack of merit. 3
Hence, petitioner filed the instant petition which raises
the following issues:
I
WHETHER OR NOT AN ALTERATION
OF THE SERIAL NUMBER OF A CHECK
IS A MATERIAL ALTERATION UNDER
THE NEGOTIABLE INSTRUMENTS
LAW.
 II are required to be stated under Section 1 of the Negotiable
Instruments Law.
WHETHER OR NOT A CERTIFICATION
HEREIN ISSUED BY THE MINISTRY OF Section 1 of the Negotiable Instruments Law provides:
EDUCATION CAN BE GIVEN WEIGHT
IN EVIDENCE.
Sec. 1. — Form of negotiable
instruments. An instrument to be
III negotiable must conform to the
following requirements:
WHETHER OR NOT A DRAWEE BANK
WHO FAILED TO RETURN A. CHECK
(a) It must be in writing and signed by
WITHIN THE TWENTY FOUR (24)
the maker or drawer;
HOUR CLEARING PERIOD MAY
RECOVER THE VALUE OF THE CHECK
FROM THE COLLECTING BANK. (b) Must contain an unconditional
promise or order to pay a sum certain in
IV money;

WHETHER OR NOT IN THE ABSENCE (c) Must be payable on demand, or at a

OF MALICE OR ILL WILL PETITIONER fixed or determinable future time;
PNB MAY BE HELD LIABLE FOR
ATTORNEY'S FEES. 4 (d) Must be payable to order or to
bearer; and
We find no merit in the petition.
(e) Where the instrument is addressed
We shall first deal with the effect of the alteration of the to a drawee, he must be named or
serial number on the negotiability of the check in otherwise indicated therein with
question. reasonable certainty.

Petitioner anchors its position on Section 125 of the In his book entitled "Pandect of Commercial Law and
Negotiable Instruments Law (ACT No. 2031) 5which Jurisprudence," Justice Jose C. Vitug opines that "an
provides: innocent alteration (generally, changes on items other
than those required to be stated under Sec. 1, N.I.L.) and
Sec. 225. What constitutes a material spoliation (alterations done by a stranger) will not avoid
alteration. Any alteration which the instrument, but the holder may enforce it only
changes: according to its original tenor." 9

(a) The date; Reproduced hereunder are some examples of material and
immaterial alterations:
(b) The sum payable, either for
principal or interest; A. Material Alterations:

(c) The time or place of payment; (1) Substituting the words "or bearer"
for "order."
(d) The number or the relations of the
parties; (2) Writing "protest waived" above
blank indorsements.
(e) The medium or currency in which
payment is to be made; (3) A change in the date from which
interest is to run.
(f) Or which adds a place of payment
where no place of payment is specified, (4) A check was originally drawn as
or any other change or addition which follows: "Iron County Bank, Crystal
alters the effect of the instrument in any Falls, Mich. Aug. 5, 1901. Pay to G.L. or
respect, is a material alteration. order $9 fifty cents CTR" The insertion
of the figure 5 before the figure 9, the
Petitioner alleges that there is no hard and fast rule in the instrument being otherwise unchanged.
interpretation of the aforequoted provision of the
Negotiable Instruments Law. It maintains that under (5) Adding the words "with interest"
Section 125(f), any change that alters the effect of the with or without a fixed rate.
instrument is a material alteration. 6
(6) An alteration in the maturity of a
We do not agree. note, whether the time for payment is
thereby curtailed or extended.
An alteration is said to be material if it alters the effect of
the (7) An instrument was payable "First
instrument. 7It means an unauthorized change in an Nat'l Bank" the plaintiff added the word
instrument that purports to modify in any respect the "Marion."
obligation of a party or an unauthorized addition of words
or numbers or other change to an incomplete instrument (8) Plaintiff, without consent of the
relating to the obligation of a party. 8In other words, a defendant, struck out the name of the
material alteration is one which changes the items which
 defendant as payee and inserted the
name of the maker of the original note.
(9) Striking out the name of the payee
and substituting that of the person who
actually discounted the note.
(10) Substituting the address of the
maker for the name of a co-maker. 10
B. Immaterial Alterations:
(1) Changing "I promise to pay" to "We
promise to pay", where there are two
makers.
(2) Adding the word "annual" after the
interest clause.
(3) Adding the date of maturity as a
marginal notation.
(4) Filling in the date of actual delivery
where the makers of a note gave it with
the date in blank, "July ____."
(5) An alteration of the marginal figures
of a note where the sum stated in words
in the body remained unchanged.
(6) The insertion of the legal rate of
interest where the note had a provision
for "interest at _______ per cent."
(7) A printed form of promissory note
had on the margin the printed words,
"Extended to ________." The holder
on or after maturity wrote in the blank
space the words "May 1, 1913," as a
reference memorandum of a promise
made by him to the principal maker at
the time the words were written to
extend the time of payment.
(8) Where there was a blank for the
place of payment, filling in the blank
with the place desired.
(9) Adding to an indorsee's name the
abbreviation "Cash" when it had been
agreed that the draft should be
discounted by the trust company of
which the indorsee was cashier.
(10) The indorsement of a note by a
stranger after its delivery to the payee at
the time the note was negotiated to the
plaintiff.
(11) An extension of time given by the
holder of a note to the principal maker,
without the consent of a surety co-
maker. 11
The case at bench is unique in the sense that what was
altered is the serial number of the check in question, an
item which, it can readily be observed, is not an essential
requisite for negotiability under Section 1 of the
Negotiable Instruments Law. The aforementioned
alteration did not change the relations between the
parties. The name of the drawer and the drawee were not
altered. The intended payee was the same. The sum of
money due to the payee remained the same. Despite these
findings, however, petitioner insists, that:
xxx xxx xxx
It is an accepted concept, besides being
a negotiable instrument itself, that a
TCAA check by its very nature is the
medium of exchange of governments
(sic) instrumentalities of agencies. And
as (a) safety measure, every government
office o(r) agency (is) assigned TCAA
checks bearing different number series.
A concrete example is that of the
disbursements of the Ministry of
Education and Culture. It is issued by
the Bureau of Treasury sizeable bundles
of checks in booklet form with serial
numbers different from other
government office or agency. Now, for
fictitious payee to succeed in its
malicious intentions to defraud the
government, all it need do is to get hold
of a TCAA Check and have the serial
numbers of portion (sic) thereof
changed or altered to make it appear
that the same was issued by the MEG.
Otherwise, stated, it is through the
serial numbers that (a) TCAA Check is
determined to have been issued by a
particular office or agency of the
government. 12
xxx xxx xxx
Petitioner's arguments fail to convince. The check's serial
number is not the sole indication of its origin.. As
succinctly found by the Court of Appeals, the name of the
government agency which issued the subject check was
prominently printed therein. The check's issuer was
therefore sufficiently identified, rendering the referral to
the serial number redundant and inconsequential. Thus,
we quote with favor the findings of the respondent court:
xxx xxx xxx
If the purpose of the serial number is
merely to identify the issuing
government office or agency, its
alteration in this case had no material
effect whatsoever on the integrity of the
check. The identity of the issuing
government office or agency was not
changed thereby and the amount of the
check was not charged against the
account of another government office or
agency which had no liability under the
check. The owner and issuer of the
check is boldly and clearly printed on
its face, second line from the
top:"MINISTRY OF EDUCATION AND
CULTURE," and below the name of the
payee are the rubber-stamped words:
"Ministry of Educ. & Culture." These
words are not alleged to have been
falsely or fraudulently intercalated into
the check. The ownership of the check is
established without the necessity of
recourse to the serial number. Neither
there any proof that the amount of the
check was erroneously charged against
 the account of a government office or
agency other than the Ministry of
Education and Culture. Hence, the
alteration in the number of the check
did not affect or change the liability of
the Ministry of Education and Culture
under the check and, therefore, is
immaterial. The genuineness of the
amount and the signatures therein of
then Deputy Minister of Education
Hermenegildo C. Dumlao and of the
resident Auditor, Penomio C. Alvarez
are not challenged. Neither is the
authenticity of the different codes
appearing therein questioned . .
. 13 (Emphasis ours.)
Petitioner, thus cannot refuse to accept the check in
question on the ground that the serial number was
altered, the same being an immaterial or innocent one.
We now go to the second issue. It is petitioner's
submission that the certification issued by Minrado C.
Batonghinog, Cashier III of the MEC clearly shows that
the check was altered. Said certification reads:
July 22, 1985
TO WHOM IT MAY CONCERN:
This is to certify that according to the
records of this Office, TCAA PNB Check
Mo. SN7-3666223-3 dated August 7,
1981 drawn in favor of F. Abante
Marketing in the amount of NINETY
(S)EVEN THOUSAND SIX HUNDRED
FIFTY PESOS ONLY (P97,650.00) was
not issued by this Office nor released to
the payee concerned. The series number
of said check was not included among
those requisition by this Office from the
Bureau of Treasury.
Very truly yours,
(SGD.) MINRADO C. BATONGHINOG
Cashier III 14
Petitioner claims that even if the author of the
certification issued by the Ministry of Education and
Culture (MEG) was not presented, still the best evidence
of the material alteration would be the disputed check
itself and the serial number thereon. Petitioner thus
assails the refusal of respondent court to give weight to
the certification because the author thereof was not
presented to identify it and to be cross-examined
thereon. 15
We agree with the respondent court.
The one who signed the certification was not presented
before the trial court to prove that the said document was
really the document he prepared and that the signature
below the said document is his own signature. Neither did
petitioner present an eyewitness to the execution of the
questioned document who could possibly identify
it. 16Absent this proof, we cannot rule on the authenticity
of the contents of the certification. Moreover, as we
previously emphasized, there was no material alteration
on the check, the change of its serial number not being
substantial to its negotiability.
Anent the third issue — whether or not the drawee bank
may still recover the value of the check from the collecting
bank even if it failed to return the check within the
twenty-four (24) hour clearing period because the check
was tampered — suffice it to state that since there is no
material alteration in the check, petitioner has no right to
dishonor it and return it to PBCom, the same being in all
respects negotiable.
However, the amount of P10,000.00 as attorney's fees is
hereby deleted. In their respective decisions, the trial
court and the Court of Appeals failed to explicitly state the
rationale for the said award. The trial court merely ruled
as follows:
With respect to Capitol's claim for
damages consisting of alleged loss of
opportunity, this Court finds that
Capitol failed to adequately substantiate
its claim. What Capitol had presented
was a self-serving, unsubstantiated and
speculative computation of what it
allegedly could have earned or realized
were it not for the debit made by
PBCom which was triggered by the
return and debit made by PNB.
However, this Court finds that it would
be fair and reasonable to impose
interest at 12% per annum on the
principal amount of the check computed
from October 19, 1981 (the date PBCom
debited Capitol's account) until the
amount is fully paid and reasonable
attorney's fees. 17 (Emphasis ours.)
And contrary to the Court of Appeal's resolution,
petitioner unambiguously questioned before it the award
of attorney's fees, assigning the latter as one of the errors
committed by the trial court. 18
The foregoing is in conformity with the guiding principles
laid down in a long line of cases and reiterated recently
in Consolidated Bank & Trust Corporation (Solidbank)
v. Court of Appeals: 19
The award of attorney's fees lies within the discretion of
the court and depends upon the circumstances of each
case. However, the discretion of the court to award
attorney's fees under Article 2208 of the Civil Code of the
Philippines demands factual, legal and equitable
justification, without which the award is a conclusion
without a premise and improperly left to speculation and
conjecture. It becomes a violation of the proscription
against the imposition of a penalty on the right to litigate
(Universal Shipping Lines, Inc. v. Intermediate Appellate
Court, 188 SCRA 170 [1990]). The reason for the award
must be stated in the text of the court's decision. If it is
stated only in the dispositive portion of the decision, the
same shall be disallowed. As to the award of attorney's
fees being an exception rather than the rule, it is necessary
for the court to make findings of fact and law that would
bring the case within the exception and justify the grant of
the award (Refractories Corporation of the Philippines v.
Intermediate Appellate Court, 176 SCRA 539 [176 SCRA
539]).
WHEREFORE, premises considered, except for the
deletion of the award of attorney's fees, the decision of the
Court of Appeals is hereby AFFIRMED. SO ORDERED.
G.R. No. 89802 May 7, 1992
ASSOCIATED BANK and CONRADO
CRUZ, petitioners,
vs.
HON. COURT OF APPEALS, and MERLE V.
REYES, doing business under the name and style
"Melissa's RTW," respondents.
Soluta, Leonidas, Marifosque, Javier, Liboon & aguila
Law Offices for petitioners.
Roberto B. Lugue for private respondent.
CRUZ, J.:
The sole issue raised in this case is whether or not the
private respondent has a cause of action against the
petitioners for their encashment and payment to another
person of certain crossed checks issued in her favor.
The private respondent is engaged in the business of
ready-to-wear garments under the firm name "Melissa's
RTW." She deals with, among other customers,
Robinson's Department Store, Payless Department Store,
Rempson Department Store, and the Corona Bazaar.
These companies issued in payment of their respective
accounts crossed checks payable to Melissa's RTW in the
amounts and on the dates indicated below:
PAYOR BANK AMOUNT DATE
Payless Solid Bank P3,960.00 January
19, 1982
Robinson's FEBTC 4,140.00 December
18, 1981
Robinson's FEBTC 1,650.00 December
24, 1981
Robinson's FEBTC 1,980.00 January
12, 1982
Rempson TRB 1,575.00 January 9, 1982
Corona RCBC 2,500.00 December 22,
1981
When she went to these companies to collect on what she
thought were still unpaid accounts, she was informed of
the issuance of the above-listed crossed checks. Further
inquiry revealed that the said checks had been deposited
with the Associated Bank (hereinafter, "the Bank") and
subsequently paid by it to one Rafael Sayson, one of its
"trusted depositors," in the words of its branch manager
and co-petitioner, Conrado Cruz, Sayson had not been
authorized by the private respondent to deposit and
encash the said checks.
The private respondent sued the petitioners in the
Regional Trial Court of Quezon City for recovery of the
total value of the checks plus damages. After trial,
judgment was rendered requiring them to pay the private
respondent the total value of the subject checks in the
amount of P15,805.00 plus 12% interest, P50,000.00
actual damages, P25,000.00 exemplary damages,
P5,000.00 attorney's fees, and the costs of the suit. 1
The petitioners appealed to the respondent court,
reiterating their argument that the private respondent had
no cause of action against them and should have
proceeded instead against the companies that issued the
checks. In disposing of this contention, the Court of
Appeals 2said:
The cause of action of the appellee in
the case at bar arose from the illegal,
anomalous and irregular acts of the
appellants in violating common banking
practices to the damage and prejudice of
the appellees, in allowing to be
deposited and encashed as well as
paying to improper parties without the
knowledge, consent, authority or
endorsement of the appellee which
totalled P15,805.00, the six (6) checks
in dispute which were "crossed checks"
or "for payee's account only," the
appellee being the payee.
The three (3) elements of a cause of
action are present in the case at bar,
namely: (1) a right in favor of the
plaintiff by whatever means and under
whatever law it arises or is created; (2)
an obligation on the part of the named
defendant to respect or not to violate
such right; and (3) an act or omission
on the part of such defendant violative
of the right of the plaintiff or
constituting a breach thereof. (Republic
Planters Bank vs. Intermediate
Appellate Court, 131 SCRA 631).
And such cause of action has been
proved by evidence of great weight. The
contents of the said checks issued by the
customers of the appellee had not been
questioned. There is no dispute that the
same are crossed checks or for payee's
account only, which is Melissa's RTW.
The appellee had clearly shown that she
had never authorized anyone to deposit
the said checks nor to encash the same;
that the appellants had allowed all said
checks to be deposited, cleared and paid
to one Rafael Sayson in violation of the
instructions in the said crossed checks
that the same were for payee's account
only; and that the appellee maintained a
savings account with the Prudential
Bank, Cubao Branch, Quezon City
which never cleared the said checks and
the appellee had been damaged by such
encashment of the same.
We affirm.
Under accepted banking practice, crossing a check is done
by writing two parallel lines diagonally on the left top
portion of the checks. The crossing is special where the
name of a bank or a business institution is written
between the two parallel lines, which means that the
drawee should pay only with the intervention of that
company. 3 The crossing is general where the words
written between the two parallel lines are "and Co." or "for
payee's account only," as in the case at bar. This means
that the drawee bank should not encash the check but
merely accept it for deposit. 4
In State Investment House vs. IAC, 5 this Court declared
that "the effects of crossing a check are: (1) that the check
may not be encashed but only deposited in the bank; (2)
that the check may be negotiated only once -- to one who
has an account with a bank; and (3) that the act of
crossing the check serves as a warning to the holder that
the check has been issued for a definite purpose so that he
must inquire if he has received the check pursuant to that
purpose."
The effects therefore of crossing a check relate to the
mode of its presentment for payment. Under Sec. 72 of the
Negotiable Instruments Law, presentment for payment, to
be sufficient, must be made by the holder or by some
person authorized to receive payment on his behalf. Who
the holder or authorized person is depends on the
instruction stated on the face of the check.
The six checks in the case at bar had been crossed and
issued "for payee's account only." This could only signify
that the drawers had intended the same for deposit only
by the person indicated, to wit, Melissa's RTW.
The petitioners argue that the cause of action for violation
of the common instruction found on the face of the checks
exclusively belongs to the issuers thereof and not to the
payee. Moreover, having acted in good faith as they
merely facilitated the encashment of the checks, they
cannot be made liable to the private respondent.
The subject checks were accepted for deposit by the Bank
for the account of Rafael Sayson although they were
crossed checks and the payee was not Sayson but Melissa's
RTW. The Bank stamped thereon its guarantee that "all
prior endorsements and/or lack of endorsements (were)
guaranteed." By such deliberate and positive act, the Bank
had for all legal intents and purposes treated the said
checks as negotiable instruments and, accordingly,
assumed the warranty of the endorser.
The weight of authority is to the effect that "the possession
of check on a forged or unauthorized indorsement is
wrongful, and when the money is collected on the check,
the bank can be held 'for moneys had and received." 6 The
proceeds are held for the rightful owner of the payment
and may be recovered by him. The position of the bank
taking the check on the forged or unauthorized
indorsement is the same as if it had taken the check and
collected without indorsement at all. The act of the bank
amounts to conversion of the check. 7
It is not disputed that the proceeds of the subject checks
belonged to the private respondent. As she had not at any
time authorized Rafael Sayson to endorse or encash them,
there was conversion of the funds by the Bank.
When the Bank paid the checks so endorsed
notwithstanding that title had not passed to the endorser,
it did so at its peril and became liable to the payee for the
value of the checks. This liability attached whether or not
the Bank was aware of the unauthorized endorsement. 8
The petitioners were negligent when they permitted the
encashment of the checks by Sayson. 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. Its failure to inquire into Sayson's authority was
a breach of a duty it owed to the private respondent.
As the Court stressed in Banco de Oro Savings and
Mortgage Bank vs. Equitable Banking Corp., 9 "the law
imposes a duty of diligence on the collecting bank to
scrutinize checks deposited with it, for the purpose of
determining their genuineness and regularity. The
collecting bank, being primarily engaged in banking, holds
itself out to the public as the expert on this field, and the
law thus holds it to a high standard of conduct."
The petitioners insist that the private respondent has no
cause of action against them because they have no privity
of contract with her. They also argue that it was Eddie
Reyes, the private respondent's own husband, who
endorsed the checks.
Assuming that Eddie Reyes did endorse the crossed
checks, we hold that the Bank would still be liable to the
private respondent because he was not authorized to make
the endorsements. And even if the endorsements were
forged, as alleged, the Bank would still be liable to the
private respondent for not verifying the endorser's
authority. There is no substantial difference between an
actual forging of a name to a check as an endorsement by
a person not authorized to make the signature and the
affixing of a name to a check as an endorsement by a
person not authorized to endorse it. 10
The Bank does not deny collecting the money on the
endorsement. It was its responsibility to inquire as to the
authority of Rafael Sayson to deposit crossed checks
payable to Melissa's RTW upon a prior endorsement by
Eddie Reyes. The failure of the Bank to make this inquiry
was a breach of duty that made it liable to the private
respondent for the amount of the checks.
There being no evidence that the crossed checks were
actually received by the private respondent, she would
have a right of action against the drawer companies,
which in turn could go against their respective drawee
banks, which in turn could sue the herein petitioner as
collecting bank. In a similar situation, it was held that, to
simplify proceedings, the payee of the illegally encashed
checks should be allowed to recover directly from the bank
responsible for such encashment regardless of whether or
not the checks were actually delivered to the payee. 11We
approve such direct action in the case at bar.
It is worth repeating that before presenting the checks for
clearing and for payment, the Bank had stamped on the
back thereof the words: "All prior endorsements and/or
lack of endorsements guaranteed," and thus made the
assurance that it had ascertained the genuineness of all
prior endorsements.
We find that the respondent court committed no
reversible error in holding that the private respondent had
a valid cause of action against the petitioners and that the
latter are indeed liable to her for their unauthorized
encashment of the subject checks. We also agree with the
reduction of the award of the exemplary damages for lack
of sufficient evidence to support them.
WHEREFORE, the petition is DENIED, with costs against
the petitioner. It is so ordered.
G.R. No. 74917 January 20, 1988
BANCO DE ORO SAVINGS AND MORTGAGE
BANK, petitioner,
vs.
EQUITABLE BANKING CORPORATION,
PHILIPPINE CLEARING HOUSE
CORPORATION, AND REGIONAL TRIAL
COURT OF QUEZON CITY, BRANCH XCII
(92), respondents.
GANCAYCO, J.:
This is a petition for review on certiorari of a decision
of the Regional Trial Court of Quezon City promulgated
on March 24, 1986 in Civil Case No. Q-46517 entitled
Banco de Oro Savings and Mortgage Bank versus
Equitable Banking Corporation and the Philippine
Clearing House Corporation after a review of the
Decision of the Board of Directors of the Philippine
Clearing House Corporation (PCHC) in the case of
Equitable Banking Corporation (EBC) vs. Banco de Oro
Savings and Mortgage (BCO), ARBICOM Case No.
84033.
The undisputed facts are as follows:
It appears that some time in March,
April, May and August 1983, plaintiff
through its Visa Card Department,
drew six crossed Manager's check
(Exhibits "A" to "F", and herein
referred to as Checks) having an
aggregate amount of Forty Five
Thousand Nine Hundred and Eighty
Two & 23/100 (P45,982.23) Pesos
and payable to certain member
establishments of Visa Card.
Subsequently, the Checks were
deposited with the defendant to the
credit of its depositor, a certain Aida
Trencio.
Following normal procedures, and
after stamping at the back of the
Checks the usual endorsements. All
prior and/or lack of endorsement
guaranteed the defendant sent the
checks for clearing through the
Philippine Clearing House
Corporation (PCHC). Accordingly,
plaintiff paid the Checks; its clearing
account was debited for the value of
the Checks and defendant's clearing
account was credited for the same
amount,
Thereafter, plaintiff discovered that
the endorsements appearing at the
back of the Checks and purporting to
be that of the payees were forged
and/or unauthorized or otherwise
belong to persons other than the
payees.
Pursuant to the PCHC Clearing Rules
and Regulations, plaintiff presented
the Checks directly to the defendant
for the purpose of claiming
reimbursement from the latter.
However, defendant refused to accept
such direct presentation and to
reimburse the plaintiff for the value of
the Checks; hence, this case.
In its Complaint, plaintiff prays for
judgment to require the defendant to
pay the plaintiff the sum of
P45,982.23 with interest at the rate of
12% per annum from the date of the
complaint plus attorney's fees in the
amount of P10,000.00 as well as the
cost of the suit.
In accordance with Section 38 of the
Clearing House Rules and
Regulations, the dispute was
presented for Arbitration; and Atty.
Ceasar Querubin was designated as
the Arbitrator.
After an exhaustive investigation and
hearing the Arbiter rendered a
decision in favor of the plaintiff and
against the defendant ordering the
PCHC to debit the clearing account of
the defendant, and to credit the
clearing account of the plaintiff of the
amount of P45,982.23 with interest at
the rate of 12% per annum from date
of the complaint and Attorney's fee in
the amount of P5,000.00. No
pronouncement as to cost was made. 1
In a motion for reconsideration filed by the petitioner,
the Board of Directors of the PCHC affirmed the
decision of the said Arbiter in this wise:
In view of all the foregoing, the
decision of the Arbiter is confirmed;
and the Philippine Clearing House
Corporation is hereby ordered to
debit the clearing account of the
defendant and credit the clearing
account of plaintiff the amount of
Forty Five Thousand Nine Hundred
Eighty Two & 23/100 (P45,982.23)
Pesos with interest at the rate of 12%
per annum from date of the
complaint, and the Attorney's fee in
the amount of Five Thousand
(P5,000.00) Pesos.
Thus, a petition for review was filed with the Regional
Trial Court of Quezon City, Branch XCII, wherein in
due course a decision was rendered affirming in
toto the decision of the PCHC.
Hence this petition.
The petition is focused on the following issues:
1. Did the PCHC have any jurisdiction to give due
course to and adjudicate Arbicom Case No. 84033?
2. Were the subject checks non-negotiable and if not,
does it fall under the ambit of the power of the PCHC?
3. Is the Negotiable Instrument Law, Act No. 2031
applicable in deciding controversies of this nature by
the PCHC?
4. What law should govern in resolving controversies of
this nature?
5. Was the petitioner bank negligent and thus
responsible for any undue payment?
Petitioner maintains that the PCHC is not clothed with
jurisdiction because the Clearing House Rules and
Regulations of PCHC cover and apply only to checks
that are genuinely negotiable. Emphasis is laid on the
primary purpose of the PCHC in the Articles of
Incorporation, which states:
To provide, maintain and render an
effective, convenient, efficient,
economical and relevant exchange
and facilitate service limited to check
processing and sorting by way of
assisting member banks, entities
in clearing checks and other clearing
items as defined in existing and in
future Central Bank of the Philippines
circulars, memoranda, circular
letters, rules and regulations and
policies in pursuance to the
provisions of Section 107 of R.A. 265.
...
and Section 107 of R.A. 265 which provides:
xxx xxx xxx
The deposit reserves maintained by
the banks in the Central Bank, in
accordance with the provisions of
Section 1000 shall serve as a basis for
the clearing of checks, and the
settlement of interbank balances ...
Petitioner argues that by law and common sense, the
term check should be interpreted as one that fits the
articles of incorporation of the PCHC, the Central Bank
and the Clearing House Rules stating that it is a
negotiable instrument citing the definition of a "check"
as basically a "bill of exchange" under Section 185 of
the NIL and that it should be payable to "order" or to
"bearer" under Section 126 of game law. Petitioner
alleges that with the cancellation of the printed words
"or bearer from the face of the check, it becomes non-
negotiable so the PCHC has no jurisdiction over the
case.
The Regional Trial Court took exception to this stand
and conclusion put forth by the herein petitioner as it
held:
Petitioner's theory cannot be
maintained. As will be noted, the
PCHC makes no distinction as to the
character or nature of the checks
subject of its jurisdiction. The
pertinent provisions quoted in
petitioners memorandum simply
refer to check(s). Where the law does
not distinguish, we shall not
distinguish.
In the case of Reyes vs. Chuanico (CA-
G.R. No. 20813 R, Feb. 5, 1962) the
Appellate Court categorically stated
that there are four kinds of checks in
this jurisdiction; the regular check;
the cashier's check; the traveller's
check; and the crossed check. The
Court, further elucidated, that while
the Negotiable Instruments Law does
not contain any provision on crossed
checks, it is coon practice in
commercial and banking operations
to issue checks of this character,
obviously in accordance with Article
541 of the Code of Commerce.
Attention is likewise called to Section
185 of the Negotiable Instruments
Law:
Sec. 185. Check
defined. — A check
is a bill of exchange
drawn on a bank
payable on demand.
Except as herein
otherwise provided,
the provisions of this
act applicable to a
bill of exchange
payable on demand
apply to a check
and the provisions of Section 61
(supra) that the drawer may insert in
the instrument an express stipulation
negating or limiting his own liability
to the holder. Consequently, it
appears that the use of the term
"check" in the Articles of
Incorporation of PCHC is to be
perceived as not limited to negotiable
checks only, but to checks as is
generally known in use in commercial
or business transactions.
Anent Petitioner's liability on said
instruments, this court is in full
accord with the ruling of the PCHC
Board of Directors that:
In presenting the
Checks for clearing
and for payment, the
defendant made an
express guarantee
on the validity of "all
prior
endorsements."
Thus, stamped at the
back of the checks
are the defendant's
clear warranty; ALL
PRIOR
ENDORSEMENTS
AND/OR LACK OF
 ENDORSEMENTS as they think it ought to be but as they find it and
GUARANTEED. without regard to consequences. 3
With. out such
warranty, plaintiff The term check as used in the said Articles of
would not have paid Incorporation of PCHC can only connote checks in
on the checks. general use in commercial and business activities. It
cannot be conceived to be limited to negotiable checks
No amount of legal only.
jargon can reverse
the clear meaning of Checks are used between banks and bankers and their
defendant's customers, and are designed to facilitate banking
warranty. As the operations. It is of the essence to be payable on
warranty has proven demand, because the contract between the banker and
to be false and the customer is that the money is needed on demand. 4
inaccurate, the
defendant is liable The participation of the two banks, petitioner and
for any damage private respondent, in the clearing operations of PCHC
arising out of the is a manifestation of their submission to its
falsity of its jurisdiction. Sec. 3 and 36.6 of the PCHC-CHRR
representation. clearing rules and regulations provide:

The principle of SEC. 3. AGREEMENT TO THESE

estoppel, effectively RULES. — It is the general agreement
prevents the and understanding that any
defendant from participant in the Philippine Clearing
denying liability for House Corporation, MICR clearing
any damage operations by the mere fact of their
sustained by the participation, thereby manifests its
plaintiff which, agreement to these Rules and
relying upon an Regulations and its subsequent
action or declaration amendments."
of the defendant,
paid on the Checks. Sec 36.6. (ARBITRATION) — The fact
The same principle that a bank participates in the
of estoppel clearing operations of the PCHC shall
effectively prevents be deemed its written and subscribed
the defendant from consent to the binding effect of this
denying the arbitration agreement as if it had
existence of the done so in accordance with section 4
Checks. (Pp. 1011 of the Republic Act No. 876,
Decision; pp. 4344, otherwise known as the Arbitration
Rollo) Law.

We agree. Further Section 2 of the Arbitration Law mandates:

As provided in the aforecited articles of incorporation
of PCHC its operation extend to "clearing checks and
other clearing items." No doubt transactions on non-
negotiable checks are within the ambit of its
jurisdiction.
In a previous case, this Court had occasion to rule: "Ubi
lex non distinguish nec nos distinguere debemos." 2 It
was enunciated in Loc Cham v. Ocampo, 77 Phil. 636
(1946):
The rule, founded on logic is a
corollary of the principle that general
words and phrases in a statute should
ordinarily be accorded their natural
and general significance. In other
words, there should be no distinction
in the application of a statute where
none is indicated.
There should be no distinction in the application of a
statute where none is indicated for courts are not
authorized to distinguish where the law makes no
distinction. They should instead administer the law not
Two or more persons or parties may
submit to the arbitration of one or
more arbitrators any controversy
existing between them at the time of
the submission and which may be the
subject of an action, or the parties of
any contract may in such contract
agree to settle by arbitration a
controversy thereafter arising
between them. Such submission or
contract shall be valid and
irrevocable, save upon grounds as
exist at law for the revocation of any
contract.
Such submission or contract may
include question arising out of
valuations, appraisals or other
controversies which may be collateral,
incidental, precedent or subsequent
to any issue between the parties. ...
Sec. 21 of the same rules, says:
 Items which have been the subject of
material alteration or items bearing
forged endorsement when such
endorsement is necessary for
negotiation shall be returned by
direct presentation or demand to the
Presenting Bank and not through the
regular clearing house facilities within
the period prescribed by law for the
filing of a legal action by the returning
bank/branch, institution or entity
sending the same. (Emphasis
supplied)
Viewing these provisions the conclusion is clear that
the PCHC Rules and Regulations should not be
interpreted to be applicable only to checks which are
negotiable instruments but also to non-negotiable
instruments and that the PCHC has jurisdiction over
this case even as the checks subject of this litigation are
admittedly non-negotiable.
Moreover, petitioner is estopped from raising the
defense of non-negotiability of the checks in question.
It stamped its guarantee on the back of the checks and
subsequently presented these checks for clearing and it
was on the basis of these endorsements by the
petitioner that the proceeds were credited in its
clearing account.
The petitioner by its own acts and representation can
not now deny liability because it assumed the liabilities
of an endorser by stamping its guarantee at the back of
the checks.
The petitioner having stamped its guarantee of "all
prior endorsements and/or lack of endorsements"
(Exh. A-2 to F-2) is now estopped from claiming that
the checks under consideration are not negotiable
instruments. The checks were accepted for deposit by
the petitioner stamping thereon its guarantee, in order
that it can clear the said checks with the respondent
bank. By such deliberate and positive attitude of the
petitioner it has for all legal intents and purposes
treated the said cheeks as negotiable instruments and
accordingly assumed the warranty of the endorser
when it stamped its guarantee of prior endorsements at
the back of the checks. It led the said respondent to
believe that it was acting as endorser of the checks and
on the strength of this guarantee said respondent
cleared the checks in question and credited the account
of the petitioner. Petitioner is now barred from taking
an opposite posture by claiming that the disputed
checks are not negotiable instrument.
This Court enunciated in Philippine National Bank vs.
Court of Appeals 5 a point relevant to the issue when it
stated the doctrine of estoppel is based upon the
grounds of public policy, fair dealing, good faith and
justice and its purpose is to forbid one to speak against
his own act, representations or commitments to the
injury of one to whom they were directed and who
reasonably relied thereon.
A commercial bank cannot escape the liability of an
endorser of a check and which may turn out to be a
forged endorsement. Whenever any bank treats the
signature at the back of the checks as endorsements
and thus logically guarantees the same as such there
can be no doubt said bank has considered the checks as
negotiable.
Apropos the matter of forgery in endorsements, this
Court has succinctly emphasized 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.
This is laid down in the case of PNB vs. National City
Bank. 6 In another case, this court held that if the
drawee-bank discovers that the signature of the payee
was forged after it has paid the amount of the check to
the holder thereof, it can recover the amount paid from
the collecting bank. 7
A truism stated by this Court is that — "The doctrine of
estoppel precludes a party from repudiating an
obligation voluntarily assumed after having accepted
benefits therefrom. To countenance such repudiation
would be contrary to equity and put premium on fraud
or misrepresentation". 8
We made clear in Our decision in Philippine National
Bank vs. The National City Bank of NY & Motor Service
Co. that:
Where a check is accepted or certified
by the bank on which it is drawn, the
bank is estopped to deny the
genuineness of the drawers signature
and his capacity to issue the
instrument.
If a drawee bank pays a forged check
which was previously accepted or
certified by the said bank, it can not
recover from a holder who did not
participate in the forgery and did not
have actual notice thereof.
The payment of a check does not
include or imply its acceptance in the
sense that this word is used in Section
62 of the Negotiable Instruments
Act. 9
The point that comes uppermost is whether the drawee
bank was negligent in failing to discover the alteration
or the forgery. Very akin to the case at bar is one which
involves a suit filed by the drawer of checks against the
collecting bank and this came about in Farmers State
Bank 10 where it was held:
A cause of action against the
(collecting bank) in favor of the
appellee (the drawer) accrued as a
result of the bank breaching its
implied warranty of the genuineness
of the indorsements of the name of
the payee by bringing about the
presentation of the checks (to the
drawee bank) and collecting the
amounts thereof, the right to enforce
that cause of action was not destroyed
by the circumstance that another
cause of action for the recovery of the
amounts paid on the checks would
 have accrued in favor of the appellee
against another or to others than the
bank if when the checks were paid
they have been indorsed by the payee.
(United States vs. National Exchange
Bank, 214 US, 302, 29 S CT665, 53 L.
Ed 1006, 16 Am. Cas. 11 84;
Onondaga County Savings Bank vs.
United States (E.C.A.) 64 F 703)
Section 66 of the Negotiable Instruments ordains that:
Every indorser who indorsee without
qualification, warrants to all
subsequent holders in due course' (a)
that the instrument is genuine and in
all respects what it purports to be; (b)
that he has good title to it; (c) that all
prior parties have capacity to
contract; and (d) that the instrument
is at the time of his indorsement valid
and subsisting. 11
It has been enunciated in an American case
particularly in American Exchange National Bank vs.
Yorkville Bank 12that: "the drawer owes no duty of
diligence to the collecting bank (one who had accepted
an altered check and had paid over the proceeds to the
depositor) except of seasonably discovering the
alteration by a comparison of its returned checks and
check stubs or other equivalent record, and to inform
the drawee thereof." In this case it was further held
that:
The real and underlying reasons why
negligence of the drawer constitutes
no defense to the collecting bank are
that there is no privity between the
drawer and the collecting bank (Corn
Exchange Bank vs. Nassau Bank, 204
N.Y.S. 80) and the drawer owe to that
bank no duty of vigilance (New York
Produce Exchange Bank vs. Twelfth
Ward Bank, 204 N.Y.S. 54) and no act
of the collecting bank is induced by
any act or representation or
admission of the drawer (Seaboard
National Bank vs. Bank of America
(supra) and it follows that negligence
on the part of the drawer cannot
create any liability from it to the
collecting bank, and the drawer thus
is neither a necessary nor a proper
party to an action by the drawee bank
against such bank. It is quite true that
depositors in banks are under the
obligation of examining their
passbooks and returned vouchers as a
protection against the payment by the
depository bank against forged
checks, and negligence in the
performance of that obligation may
relieve that bank of liability for the
repayment of amounts paid out on
forged checks, which but for such
negligence it would be bound to
repay. A leading case on that subject
is Morgan vs. United States Mortgage
and Trust Col. 208 N.Y. 218, 101 N.E.
871 Amn. Cas. 1914D, 462, L.R.A.
1915D, 74.
Thus We hold that while the drawer generally owes no
duty of diligence to the collecting bank, the law
imposes a duty of diligence on the collecting bank to
scrutinize checks deposited with it for the purpose of
determining their genuineness and regularity. The
collecting bank being primarily engaged in banking
holds itself out to the public as the expert and the law
holds it to a high standard of conduct.
And although the subject checks are non-negotiable the
responsibility of petitioner as indorser thereof remains.
To countenance a repudiation by the petitioner of its
obligation would be contrary to equity and would deal
a negative blow to the whole banking system of this
country.
The court reproduces with approval the following
disquisition of the PCHC in its decision —
II. Payments To Persons Other
Than The Payees Are
Not Valid
And Give Rise To An
Obligation
To Return Amounts
Received
Nothing is more clear than that
neither the defendant's depositor nor
the defendant is entitled to receive
payment payable for the Checks. As
the checks are not payable to
defendant's depositor, payments to
persons other than payees named
therein, their successor-in-interest or
any person authorized to receive
payment are not valid. Article 1240,
New Civil Code of the Philippines
unequivocably provides that:
"Art. 1240. Payment
shall be made to the
person in whose
favor the obligation
has been
constituted, or his
successor-in-
interest, or any
person authorized to
receive it. "
Considering that neither the
defendant's depositor nor the
defendant is entitled to receive
payments for the Checks, payments to
any of them give rise to an obligation
to return the amounts received.
Section 2154 of the New Civil Code
mandates that:
Article 2154. If
something is
 received when there The principle of estoppel effectively
is no right to prevents the defendant from denying
demand it, and it liability for any damages sustained by
was unduly the plaintiff which, relying upon an
delivered through action or declaration of the defendant,
mistake, the paid on the Checks. The same
obligation to return principle of estoppel effectively
it arises. prevents the defendant from denying
the existence of the Checks.
It is contended that plaintiff should
be held responsible for issuing the Whether the Checks have been issued
Checks notwithstanding that the for valuable considerations or not is
underlying transactions were of no serious moment to this case.
fictitious This contention has no basis These Checks have been made the
in our jurisprudence. subject of contracts of endorsement
wherein the defendant made
The nullity of the underlying expressed warranties to induce
transactions does not diminish, but in payment by the drawer of the Checks;
fact strengthens, plaintiffs right to and the defendant cannot now refuse
recover from the defendant. Such liability for breach of warranty as a
nullity clearly emphasizes the consequence of such forged
obligation of the payees to return the endorsements. The defendant has
proceeds of the Checks. If a failure of falsely warranted in favor of plaintiff
consideration is sufficient to warrant the validity of all endorsements and
a finding that a payee is not entitled the genuineness of the cheeks in all
to payment or must return payment respects what they purport to be.
already made, with more reason the
defendant, who is neither the payee The damage that will result if
nor the person authorized by the judgment is not rendered for the
payee, should be compelled to plaintiff is irreparable. The collecting
surrender the proceeds of the Checks bank has privity with the depositor
received by it. Defendant does not who is the principal culprit in this
have any title to the Checks; neither case. The defendant knows the
can it claim any derivative title to depositor; her address and her
them. history, Depositor is defendant's
client. It has taken a risk on its
III. Having Violated Its Warranty depositor when it allowed her to
collect on the crossed-checks.
On Validity Of All
Endorsements, Having accepted the crossed checks
from persons other than the payees,
Collecting Bank the defendant is guilty of negligence;
Cannot Deny the risk of wrongful payment has to
be assumed by the defendant.
liability To Those
Who Relied On the matter of the award of the
interest and attorney's fees, the Board
On Its Warranty of Directors finds no reason to reverse
the decision of the Arbiter. The
defendant's failure to reimburse the
In presenting the Checks for clearing
plaintiff has constrained the plaintiff
and for payment, the defendant made
to regular the services of counsel in
an express guarantee on the validity
order to protect its interest
of "all prior endorsements." Thus,
notwithstanding that plaintiffs claim
stamped at the bank of the checks are
is plainly valid just and demandable.
the defendant's clear warranty: ALL
In addition, defendant's clear
PRIOR ENDORSEMENTS AND/OR
obligation is to reimburse plaintiff
LACK OF ENDORSEMENTS
upon direct presentation of the
GUARANTEED. Without such
checks; and it is undenied that up to
warranty, plaintiff would not have
this time the defendant has failed to
paid on the checks.
make such reimbursement.
No amount of legal jargon can reverse
WHEREFORE, the petition is DISMISSED for lack of
the clear meaning of defendant's
merit without pronouncement as to costs. The decision
warranty. As the warranty has proven
of the respondent court of 24 March 1986 and its order
to be false and inaccurate, the
of 3 June 1986 are hereby declared to be immediately
defendant is liable for any damage
executory.
arising out of the falsity of its
representation.
SO ORDERED.
G.R. No. 176697
CESAR V. AREZA and LOLITA B. AREZA, Petitioners,
- versus -
EXPRESS SAVINGS BANK, INC. and MICHAEL
POTENCIANO, Respondnets.
DECISION
PEREZ, J.:
Before this Court is a Petition for Review on Certiorari
under Ruic 45 of the Rules of Court, which seeks to
reverse the Decision and Resolution dated 29 June
2006 and 12 February 2007 of the Court of Appeals in
CAG.R. CV No. 83192. The Court of Appeals affirmed
with modification the 22 April 2004 Resolution of the
Regional Trial Court (RTC) of Calamba, Laguna,
Branch 92, in Civil Case No. B-5886.
The factual antecedents follow.
Petitioners Cesar V. Areza and LolitaB. Areza
maintained two bank deposits with respondent Express
Savings Bank’s Biñan branch: 1) Savings Account No.
004-01-000185-5 and 2) Special Savings Account No.
004-02-000092-3.
They were engaged in the business of "buy and sell" of
brand new and second-hand motor vehicles. On 2 May
2000, they received an order from a certain Gerry
Mambuay (Mambuay) for the purchase of a second-
hand Mitsubishi Pajero and a brand-new Honda CRV.
The buyer, Mambuay, paid petitioners with nine (9)
Philippine Veterans Affairs Office (PVAO) checks
payable to different payees and drawn against the
Philippine Veterans Bank (drawee), each valued at Two
Hundred Thousand Pesos (₱200,000.00) for a total of
One Million Eight Hundred Thousand Pesos
(₱1,800,000.00).
About this occasion, petitioners claimed that Michael
Potenciano (Potenciano), the branch manager of
respondent Express Savings Bank (the Bank) was
present during the transaction and immediately offered
the services of the Bank for the processing and eventual
crediting of the said checks to petitioners’ account.
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.
On 3 May 2000, petitioners deposited the said checks
in their savings account with the Bank. The Bank, in
turn, deposited the checks with its depositary bank,
Equitable-PCI Bank, in Biñan,Laguna. Equitable-PCI
Bank presented the checks to the drawee, the
Philippine Veterans Bank, which honored the checks.
On 6 May 2000, Potenciano informed petitioners that
the checks they deposited with the Bank were honored.
He allegedly warned petitioners that the clearing of the
checks pertained only to the availability of funds and
did not mean that the checks were not infirmed.
Thus, the entire amount of ₱1,800,000.00 was
credited to petitioners’ savings account. Based on this
information, 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 the
original amount of ₱4,000.00 to ₱200,000.00. The
drawee returned the checks to Equitable-PCI Bank by
way of Special Clearing Receipts. In August 2000, the
Bank was informed by Equitable-PCI Bank that the
drawee dishonored the checks on the ground of
material alterations. Equitable-PCI Bank initially filed
a protest with the Philippine Clearing House. In
February 2001, the latter ruled in favor of the drawee
Philippine Veterans Bank. Equitable-PCI Bank, in turn,
debited the deposit account of the Bank in the amount
of ₱1,800,000.00.
The Bank insisted that they informed petitioners of
said development in August 2000 by furnishing them
copies of the documents given by its depositary bank.
On the other hand, petitioners maintained that the
Bank never informed them of these developments.
On 9 March 2001, petitioners issued a check in the
amount of ₱500,000.00. Said check was dishonored by
the Bank for the reason "Deposit Under Hold."
According to petitioners, the Bank unilaterally and
unlawfully put their account with the Bank on hold. On
22 March 2001, petitioners’ counsel sent a demand
letter asking the Bank to honor their check. The Bank
refused to heed their request and instead, closed the
Special Savings Account of the petitioners with a
balance of ₱1,179,659.69 and transferred said amount
to their savings account. The Bank then withdrew the
amount of ₱1,800,000.00representing the returned
checks from petitioners’ savings account.
Acting on the alleged arbitrary and groundless
dishonoring of their checks and the unlawful and
unilateral withdrawal from their savings account,
petitioners filed a Complaint for Sum of Money with
Damages against the Bank and Potenciano with the
RTC of Calamba.
On 15 January 2004, the RTC, through Judge Antonio
S. Pozas, ruled in favor of petitioners. The dispositive
portion of the Decision reads:
WHEREFORE, the foregoing considered, the Court
orders that judgment be rendered in favor of plaintiffs
and against the defendants jointly and severally to pay
plaintiffs as follows, to wit:
1. ₱1,800,000.00 representing the amount unlawfully
withdrawn by the defendants from the account of
plaintiffs;
2. ₱500,000.00 as moral damages; and
3. ₱300,000.00 as attorney’s fees.
The trial court reduced the issue to whether or not the
rights of petitioners were violated by respondents when
the deposits of the former were debited by respondents
without any court order and without their knowledge
and consent. According to the trial court, it is the
depositary bank which should safeguard the right of
the depositors over their money. Invoking Article 1977
of the Civil Code, the trial court stated that the
depositary cannot make use of the thing deposited
without the express permission of the depositor. The
trial court also held that respondents should have
observed the 24-hour clearing house rule that checks
should be returned within 24-hours after discovery of
the forgery but in no event beyond the period fixed by
law for filing a legal action. In this case, petitioners
deposited the checks in May 2000, and respondents
notified them of the problems on the check three
months later or in August 2000. In sum, the trial court
characterized said acts of respondents as attended with
bad faith when they debited the amount of
₱1,800,000.00 from the account of petitioners.
Respondents filed a motion for reconsideration while
petitioners filed a motion for execution from the
Decision of the RTC on the ground that respondents’
motion for reconsideration did not conform with
Section 5, Rule 16 of the Rules of Court; hence, it was a
mere scrap of paper that did not toll the running of the
period to appeal.
On 22 April 2004, the RTC, through Pairing Judge
Romeo C. De Leon granted the motion for
reconsideration, set aside the Pozas Decision, and
dismissed the complaint. The trial court awarded
respondents their counterclaim of moral and
exemplary damages of ₱100,000.00 each. The trial
court first applied the principle of liberality when it
disregarded the alleged absence of a notice of hearing
in respondents’ motion for reconsideration. On the
merits, the trial court considered the relationship of
the Bank and petitioners with respect to their savings
account deposits as a contract of loan with the bank as
the debtor and petitioners as creditors. As such, Article
1977 of the Civil Code prohibiting the depository from
making use of the thing deposited without the express
permission of the depositor is not applicable. Instead,
the trial court applied Article 1980 which provides that
fixed, savings and current deposits of money in banks
and similar institutions shall be governed by the
provisions governing simple loan. The trial court then
opined that the Bank had all the right to set-off against
petitioners’ savings deposits the value of their nine
checks that were returned.
On appeal, the Court of Appeals affirmed the ruling of
the trial court but deleted the award of damages. The
appellate court made the following ratiocination:
Any argument as to the notice of hearing has been
resolved when the pairing judge issued the order on
February 24, 2004 setting the hearing on March 26,
2004. A perusal of the notice of hearing shows that
request was addressed to the Clerk of Court and
plaintiffs’ counsel for hearing to be set on March 26,
2004.
The core issues in this case revolve on whether the
appellee bank had the right to debit the amount of
₱1,800,000.00 from the appellants’ accounts and
whether the bank’s act of debiting was done "without
the plaintiffs’ knowledge."
We find that the elements of legal compensation are all
present in the case at bar. Hence, applying the case of
the Bank of the Philippine Islands v. Court of Appeals,
the obligors bound principally are at the same time
creditors of each other. Appellee bank stands as a
debtor of appellant, a depositor. At the same time, said
bank is the creditor of the appellant with respect to the
dishonored treasury warrant checks which amount
were already credited to the account of appellants.
When the appellants had withdrawn the amount of the
checks they deposited and later on said checks were
returned, they became indebted to the appellee bank
for the corresponding amount.
It should be noted that [G]erry Mambuay was the
appellants’ walk in buyer. As sellers, appellants ought
to have exercised due diligence in assessing his credit
or personal background. The 24-hour clearing house
rule is not the one that governs in this case since the
nine checks were discovered by the drawee bank to
contain material alterations.
Appellants merely allege that they were not informed
of any development on the checks returned. However,
this Court believes that the bank and appellants had
opportunities to communicate about the checks
considering that several transactions occurred from the
time of alleged return of the checks to the date of the
debit.
However, this Court agrees with appellants that they
should not pay moral and exemplary damages to each
of the appellees for lack of basis. The appellants were
not shown to have acted in bad faith.
Petitioners filed the present petition for review on
certiorari raising both procedural and substantive
issues, to wit:
1. Whether or not the Honorable Court of Appeals
committed a reversible error of law and grave abuse of
discretion in upholding the legality and/or propriety of
the Motion for Reconsideration filed in violation of
Section 5, Rule 15 of the Rules on Civil Procedure;
2. Whether or not the Honorable Court of Appeals
committed a grave abuse of discretion in declaring that
the private respondents "had the right to debit the
amount of ₱1,800,000.00 from the appellants’
accounts" and the bank’s act of debiting was done with
the plaintiff’s knowledge.
Before proceeding to the substantive issue, we first
resolve the procedural issue raised by petitioners.
Sections 5, Rule 15 of the Rules of Court states:
Section 5. Notice of hearing. - The notice of hearing
shall be addressed to all parties concerned, and shall
specify the time and date of the hearing which must not
be later than ten (10) days after the filing of the
motion.
Petitioners claim that the notice of hearing was
addressed to the Clerk of Court and not to the adverse
party as the rules require. Petitioners add that the
hearing on the motion for reconsideration was
scheduled beyond 10 days from the date of filing.
As held in Maturan v. Araula,
the rule requiring that the notice be addressed to the
adverse party has been substantially complied with
when a copy of the motion for reconsideration was
furnished to the counsel of the adverse party, coupled
with the fact that the trial court acted on said notice of
hearing and, as prayed for, issued an order
setting the hearing of the motion on 26 March 2004.
We would reiterate later that there is substantial
compliance with the foregoing Rule if a copy of the said
motion for reconsideration was furnished to the
counsel of the adverse party.
Now to the substantive issues to which procedural
imperfection must, in this case, give way.
The central issue is whether the Bank had the right to
debit ₱1,800,000.00 from petitioners’ accounts.
On 6 May 2000, the Bank informed petitioners that the
subject checks had been honored. Thus, the amount of
₱1,800,000.00 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 ofChicago v. Bank of the Republic.
In said case, a certain Andrew Manning stole a draft
and substituted his name for that of the original payee.
He offered it as payment to a jeweler in exchange for
certain jewelry. The jeweler deposited the draft to the
defendant bank which collected the equivalent amount
from the drawee. Upon learning of the alteration, the
drawee sought to recover from the defendant bank the
amount of the draft, as money paid by mistake. The
court denied recovery on the ground that the drawee by
accepting admitted the existence of the payee and his
capacity to endorse.
Still, in Wells Fargo Bank & Union Trust Co. v. Bank of
Italy,
the court echoed the court’s interpretation in National
City Bank of Chicago, in this wise:
We think the construction placed upon the section by
the Illinois court is correct and that it was not the
legislative intent that the obligation of the acceptor
should be limited to the tenor of the instrument as
drawn by the maker, as was the rule at common law,
but that it should be enforceable in favor of a holder in
due course against the acceptor according to its tenor
at the time of its acceptance or certification.
The foregoing opinion and the Illinois decision which it
follows give effect to the literal words of the Negotiable
Instruments Law. As stated in the Illinois case: "The
court must take the act as it is written and should give
to the words their natural and common meaning . . . if
the language of the act conflicts with statutes or
decisions in force before its enactment the courts
should not give the act a strained construction in order
to make it harmonize with earlier statutes or
decisions." The wording of the act suggests that a
change in the common law was intended. A careful
reading thereof, independent of any common-law
influence, requires that the words "according to the
tenor of his acceptance" be construed as referring to
the instrument as it was at the time it came into the
hands of the acceptor for acceptance, for he accepts no
other instrument than the one presented to him — the
altered form — and it alone he engages to pay. This
conclusion is in harmony with the law of England and
the continental countries. It makes for the usefulness
and currency of negotiable paper without seriously
endangering accepted banking practices, for banking
institutions can readily protect themselves against
liability on altered instruments either by qualifying
their acceptance or certification or by relying on
forgery insurance and special paper which will make
alterations obvious. All of the arguments advanced
against the conclusion herein announced seem highly
technical in the face of the practical facts that the
drawee bank has authenticated an instrument in a
certain form, and that commercial policy favors the
protection of anyone who, in due course, changes his
position on the faith of that authentication.
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.
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.
The law imposes a duty of diligence on the collecting
bank to scrutinize checks deposited with it for the
purpose of determining their genuineness and
regularity. The collecting bank being primarily engaged
in banking holds itself out to the public as the expert
and the law holds it to a high standard of conduct.
As collecting banks, the Bank and Equitable-PCI Bank
are both liable for the amount of the materially altered
checks. Since Equitable-PCI Bank is not a party to this
case and the Bank allowed its account with Equitable
PCI Bank to be debited, it has the option to seek
recourse against the latter in another forum.
24-HOUR CLEARING RULE
Petitioners faulted the drawee bank for not following
the 24-hour clearing period because it was only in
August 2000 that the drawee bank notified Equitable-
PCI that there were material alterations in the checks.
We do not subscribe to the position taken by
petitioners that the drawee bank was at fault because it
did not follow the 24-hour clearing period which
provides that when a drawee bank fails to return a
forged or altered check to the collecting bank within
the 24-hour clearing period, the collecting bank is
absolved from liability.
Section 21 of the Philippine Clearing House Rules and
Regulations provides: Sec. 21. Special Return Items
Beyond The Reglementary Clearing Period.- Items
which have been the subject of material alteration or
items bearing forged endorsement when such
endorsement is necessary for negotiation shall be
returned by direct presentation or demand to the
Presenting Bank and not through the regular clearing
house facilities within the period prescribed by law for
the filing of a legal action by the returning
bank/branch, institution or entity sending the same.
Antonio Viray, in his book Handbook on Bank
Deposits, elucidated:
It is clear that the so-called "24-hour" rule has been
modified. In the case of Hongkong & Shanghai vs.
People’s Bank reiterated in Metropolitan Bank and
Trust Co. vs. FNCB, the Supreme Court strictly
enforced the 24-hour rule under which the drawee
bank forever loses the right to claim against
presenting/collecting bank if the check is not returned
at the next clearing day o rwithin 24 hours. Apparently,
the commercial banks felt strict enforcement of the 24-
hour rule is too harsh and therefore made
representations and obtained modification of the rule,
which modification is now incorporated in the Manual
of Regulations. Since the same commercial banks
controlled the Philippine Clearing House Corporation,
incorporating the amended rule in the PCHC Rules
naturally followed.
As the rule now stands, the 24-hour rule is still in force,
that is, any check which should be refused by the
drawee bank in accordance with long standing and
accepted banking practices shall be returned through
the PCHC/local clearing office, as the case may be, not
later than the next regular clearing (24-hour). The
modification, however, is that items which have been
the subject of material alteration or bearing forged
endorsement may be returned even beyond 24 hours so
long that the same is returned within the prescriptive
period fixed by law. The consensus among lawyers is
that the prescriptiveperiod is ten (10)years because a
check or the endorsement thereon is a written contract.
Moreover, the item need not be returned through the
clearing house but by direct presentation to the
presenting bank.
In short, the 24-hour clearing rule does not apply to
altered checks.
LIABILITY OF PETITIONERS
The 2008 case of Far East Bank & Trust Company v.
Gold Palace Jewelry Co. is in point. A foreigner
purchased several pieces of jewelry from Gold Palace
Jewelry using a United Overseas Bank (Malaysia)
issued draft addressed to the Land Bank of the
Philippines (LBP). Gold Palace jewelry deposited the
draft in the company’s account with Far East Bank. Far
East Bank presented the draft for clearing to LBP. The
latter cleared the same and Gold Palace Jewelry's
account was credited with the amount stated in the
draft. Consequently, Gold Palace Jewelry released the
pieces of jewelries to the foreigner. Three weeks later,
LBP informed Far East Bank that the amount in the
foreign draft had been materially altered from
₱300,000.00 to ₱380,000.00. LBP returned the check
to Far East Bank. Far East Bank refunded LBP the
₱380,000.00 paid by LBP. Far East Bank initially
debited ₱168,053.36 from Gold Palace Jewelry’s
account and demanded the payment of the difference
between the amount in the altered draft and the
amount debited from Gold Palace Jewelry.
However, for the reasons already discussed above, our
pronouncement in the Far East Bank and Trust
Company case that "the drawee is liable on its payment
of the check according to the tenor of the check at the
time of payment, which was the raised amount"
is inapplicable to the factual milieu obtaining herein.
We only adopt said decision in so far as it adjudged
liability on the part of the collecting bank, thus:
Thus, considering that, in this case, Gold Palace is
protected by Section 62 of the NIL, its collecting agent,
Far East, should not have debited the money paid by
the drawee bank from respondent company's account.
When Gold Palace deposited the check with Far East,
the latter, under the terms of the deposit and the
provisions of the NIL, became an agent of the former
for the collection of the amount in the draft. The
subsequent payment by the drawee bank and the
collection of the amount by the collecting bank closed
the transaction insofar as the drawee and the holder of
the check or his agent are concerned, converted the
check into a mere voucher, and, as already discussed,
foreclosed the recovery by the drawee of the amount
paid. This closure of the transaction is a matter of
course; otherwise, uncertainty in commercial
transactions, delay and annoyance will arise if a bank
at some future time will call on the payee for the return
of the money paid to him on the check.
As the transaction in this case had been closed and the
principal agent relationship between the payee and the
collecting bank had already ceased, the latter in
returning the amount to the drawee bank was already
acting on its own and should now be responsible for its
own actions. x x x Likewise, Far East cannot invoke the
warranty of the payee/depositor who indorsed the
instrument for collection to shift the burden it brought
upon itself. This is precisely because the said
indorsement is only for purposes of collection which,
under Section 36 of the NIL, is a restrictive
indorsement. It did not in any way transfer the title of
the instrument to the collecting bank. Far East did not
own the draft, it merely presented it for payment.
Considering that the warranties of a general indorser
as provided in Section 66 of the NIL are based upon a
transfer of title and are available only to holders in due
course, these warranties did not attach to the
indorsement for deposit and collection made by Gold
Palace to Far East. Without any legal right to do so, the
collecting bank, therefore, could not debit respondent's
account for the amount it refunded to the drawee bank.
The foregoing considered, we affirm the ruling of the
appellate court to the extent that Far East could not
debit the account of Gold Palace, and for doing so, it
must return what it had erroneously taken.
Applying the foregoing ratiocination, the Bank cannot
debit the savings account of petitioners. A
depositary/collecting bank may resist or defend against
a claim for breach of warranty if the drawer, the payee,
or either the drawee bank or depositary bank was
negligent and such negligence substantially
contributed to the loss from alteration. In the instant
case, no negligence can be attributed to petitioners. We
lend credence to their claim that at the time of the sales
transaction, the Bank’s branch manager was present
and even offered the Bank’s services for the processing
and eventual crediting of the checks. True to the
branch manager’s words, the checks were cleared three
days later when deposited by petitioners and the entire
amount of the checks was credited to their savings
account.
ON LEGAL COMPENSATION
Petitioners insist that the Bank cannot be considered a
creditor of the petitioners because it should have made
a claim of the amount of ₱1,800,000.00 from
Equitable-PCI Bank, its own depositary bank and the
collecting bank in this case and not from them.
The Bank cannot set-off the amount it paid to
Equitable-PCI Bank with petitioners’ savings account.
Under Art. 1278 of the New Civil Code, compensation
shall take place when two persons, in their own right,
are creditors and debtors of each other. And the
requisites for legal compensation are:
Art. 1279. In order that compensation may be proper, it
is necessary:
(1) That each one of the obligors be bound principally,
and that he be at the same time a principal creditor of
the other;
(2) That both debts consist in a sum of money, or if the
things due are consumable, they be of the same kind,
and also of the same quality if the latter has been
stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or
controversy, commenced by third persons and
communicated in due time to the debtor.
It is well-settled that the relationship of the depositors
and the Bank or similar institution is that of creditor-
debtor. Article 1980 of the New Civil Code provides
that fixed, savings and current deposits of money in
banks and similar institutions shall be governed by the
provisions concerning simple loans. The bank is the
debtor and the depositor is the creditor. The depositor
lends the bank money and the bank agrees to pay the
depositor on demand. The savings deposit agreement
between the bank and the depositor is the contract that
determines the rights and obligations of the parties.
But as previously discussed, petitioners are not liable
for the deposit of the altered checks. The Bank, as the
depositary and collecting bank ultimately bears the
loss. Thus, there being no indebtedness to the Bank on
the part of petitioners, legal compensation cannot take
place. DAMAGES
the amount withdrawn from the latter’s account. We do
not conform with said ruling regarding the finding of
bad faith on the part of respondents, as well as its
failure to observe the 24-hour clearing rule.
WHEREFORE, the petition is GRANTED. The
Decision and Resolution dated 29 June 2006 and 12
February 2007 respectively of the Court of Appeals in
CA-G.R. CV No. 83192 are REVERSED and SET
ASIDE. The 15 January 2004 Decision of the Regional
Trial Court of Calamba City, Branch 92 in Civil Case
No. B-5886 rendered by Judge Antonio S. Pozas is
REINSTATE Donly insofar as it ordered respondents
to jointly and severally pay petitioners ₱1,800,000.00
representing the amount withdrawn from the latter’s
account. The award of moral damages and attorney’s
fees are DELETED.
SO ORDERED.

The Bank incurred a delay in informing petitioners of

the checks’ dishonor. The Bank was informed of the
dishonor by Equitable-PCI Bank as early as August
2000 but it was only on 7 March 2001 when the Bank
informed petitioners that it will debit from their
account the altered amount. This delay is tantamount
to negligence on the part of the collecting bank which
would entitle petitioners to an award for damages
under Article 1170 of the New Civil Code which reads:

Art. 1170. Those who in the performance of their

obligations are guilty of fraud, negligence, or delay, and
those who in any manner contravene the tenor thereof,
are liable for damages.

The damages in the form of actual or compensatory

damages represent the amount debited by the Bank
from petitioners’ account.

We delete the award of moral damages. Contrary to the

lower court’s finding, there was no showing that the
Bank acted fraudulently or in bad faith. It may have
been remiss in its duty to diligently protect the account
of its depositors but its honest but mistaken belief that
petitioners’ account should be debited is not
tantamount to bad faith. We also delete the award of
attorney’s fees for it is not a sound public policy to
place a premium on the right to litigate. No damages
can be charged to those who exercise such precious
right in good faith, even if done erroneously.

To recap, the drawee bank, Philippine Veterans Bank

in this case, is only liable to the extent of the check
prior to alteration. Since Philippine Veterans Bank paid
the altered amount of the check, it may pass the
liability back as it did, to Equitable-PCI Bank, the
collecting bank. The collecting banks, Equitable-PCI
Bank and the Bank, are ultimately liable for the
amount of the materially altered check. It cannot
further pass the liability back to the petitioners absent
any showing in the negligence on the part of the
petitioners which substantially contributed to the loss
from alteration.

Based on the foregoing, we affirm the Pozas decision

only insofar as it ordered respondents to jointly and
severally pay petitioners ₱1,800,000.00, representing