1. Metropolitan Bank and Trust Co.

v Junnel’s Marketing Corporation

G.R. 235511 | June 20, 2018
Ponente: Velasco, Jr. J.

Topic: Unauthorized payment of valid checks

Doctrine #1: When a drawee bank pays a person other than the payee named on the check, it essentially
commits a breach of its obligation and renders the payment it made unauthorized. In such cases and
under normal circumstances, the drawee bank may be held liable to the drawer for the amount charged
against the latter's account. it is only when the unauthorized payment of a check had been caused or
was attended by the fault or negligence of the drawer himself can the drawee bank be excused, whether
wholly or partially, from being held liable to the drawer for the said payment. The bank on which a check
is drawn, known as the drawee bank, is under strict liability, based on the contract between the bank
and its customer (drawer), to pay the check only to the payee or the payee's order. x x
Doctrine #2: A collecting bank's mere act of presenting a check for payment to the drawee bank is itself
an assertion, on the part of the former, that it had done its duty to ascertain the validity of prior
indorsements.
Doctrine #3: In the event that it is made to reimburse the drawee bank, the collecting bank can seek
similar reimbursement from the very persons who caused the checks to be deposited and received the
unauthorized payments. Such persons are the ones ultimately liable for the unauthorized payments and
their liability rests on their absolute lack of valid title to the checks that they were able to encash.
Emergency Recit:
JMC - Drawer
Metrobank - Drawee bank Jardine and Premiere – Payees
Junnel Marketing Corp (JMC) has a current account with Metrobank from which it draws checks to pay
its creditors. JMC discovered an anomaly involving 11 checks, which had already been charged against
its account but were not covered by any official receipt. These checks were drawn against Metrobank
and made payable to the orders of Jardine and Premiere. These checks were deposited to an account in
Bankcom, an account that does not belong to either payee or indorsees. The checks were then
presented to Metrobank, which honored it, resulting to loss on the part of JMC. Delizo, a former
accountant of JMC, confessed that she stole several checks,
deposited, and encashed it. JMC filed a complaint for sum of money against Delizo, Bankcom, and
Metrobank. The SC ruled that both Metrobank and Bankcom should bear the loss. Metrobank is liable to
return to JMC the amount of the checks plus interest, while Bankcom is liable to reimburse Metrobank
the same amount plus interest. Bankcom can seek reimbusement from the persons who cause the
checks to be deposited and received the authorized payments. However, none of such persons were
impleaded, thus, no pronouncement as to this matter can be made in favor of Bankcom.
Facts:
Respondent Junnel’s Marketing Corporation (JMC) has a current account
with Metrobank from which it draws checks to pay its different suppliers. During an audit of its
financial records, JMC discovered an anomaly involving 11 checks it had issued to the orders of Jardine
and Premiere on
various dates between October 1998 to May 1999.
The subject checks, which are all crossed checks (P1.4M) had already
been charged against JMC’s current account, but were not covered by any
official receipt from Jardine or Premiere.
An examination of the dorsal portion of the subject checks revealed that
all had been deposited with an account in Bankcom, Dau Branch. And upon inquiring with Jardine and
Premiere, JMC was able to confirm that neither of them owns a Bankcom Account.
 Meanwhile, Respondent Delizo, a former accountant of JMC, executed a handwritten letter addressed
to the President of JMC. Delizo confessed that, during her time as an accountant for JMC, she stole
several company checks drawn against JMC’s current account. She professed that the said checks were
never given to the named payees but were forwarded by her to one Lita Bituin (Bituin). Delizo further
admitted that she, Bituin and an unknown bank manager colluded to cause the deposit and encashing of
the stolen checks and shared in the proceeds thereof.||
JMC filed before the RTC a complaint for sum of money against Delizo, Bankcom, and Metrobank. JMC
alleged that the wrongful conversion of the subject checks was caused by a combination of the "tortious
and felonious" scheme of Delizo and the "negligent and unlawful acts" of Bankcom and Metrobank. JMC
prayed that Delizo, Bankcom and Metrobank be held solidarily liable in its favor for the amount of the
subject checks.
The RTC rendered a decision holding both Bankcom and Metrobank liable to JMC – on a 2/3 to 1/3
ratio but absolving Delizo from any liability. The

decision was hinged on the finding that the subject checks were complete and not forged. The
involvement of Bankcom and Metrobank on the wrongful encashment of the subject checks were clearly
established.
The CA affirmed the decision.
Metrobank posits that it should be absolved because it had exercised
absolute diligence in verifying the genuineness of the subject checks. Metrobank also submits that, it
should be Bankcom – as the last indorser of the subject checks – that should bear the loss and be held
solely liable to JMC.
Bankcom, on the other hand, argues that it should be absolved because it was never a party to the
wrongful encashment of the subject checks. Bankcom proffers the view that it is JMC that should bear
the loss of the subject checks. It was JMC’s faulty accounting procedures which led to the subject checks
being stolen and misappropriated.
Issue: Who should bear the loss?
Held: Both.
(1) Metrobank (as drawee bank) is liable to return to JMC the entire amount of the subject checks + 6%
interest; and (2) Bankcom liable to reimburse Metrobank the same amount plus interest.
The instant case involves the unauthorized payment of valid checks, i.e., the payment of checks to
persons other than the payee named therein or his order. The subject checks herein are considered
valid because they are complete and bear genuine signatures.|
The present case involved crossed checks payable to the order of a specified payee that were deposited
in a collecting bank under an account not belonging to the payee or his indorsee but which, upon
presentment, were subsequently honored by the drawee bank. In cases involving the unauthorized
payment of valid checks, the drawee bank becomes liable to the drawer for the amount of the checks
but the drawee bank, in turn, can seek reimbursement from the collecting bank.|||
It has been repeatedly held that in check transactions, the collecting bank 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
collecting bank turns out to be false, then the drawee bank may recover from it up to the amount of the
check.
Metrobank is liable to JMC: (see doctrine # 1)
In the present case, it is apparent that Metrobank had breached JMC's instructions when it paid the
value of the subject checks to Bankcom for the benefit of a certain Account. The payment to such
Account was unauthorized as it was established that the said account does not belong to Jardine or
Premiere, the payees of the subject checks, or to their indorsees. In addition, causal or concurring
negligence on the part of JMC had not been proven. Under such circumstances, Metrobank is clearly
liable to return to JMC the amount of the subject checks.
Bankcom is liable to Metrobank: (see doctrine #2)
Here, it is clear that Bankcom had assumed the warranties of an indorser when it forwarded the subject
checks to PCHC for presentment to Metrobank. By such presentment, Bankcom effectively guaranteed
to Metrobank that the subject checks had been deposited with it to an account that has good title to the
same. This guaranty, however, is a complete falsity because the subject checks were, in truth, deposited
to an account that neither belongs to the payees of the subject checks nor to their indorsees. Hence, as
the subject checks were paid under Bankcom's false guaranty, the latter — as collecting bank — stands
liable to return the value of such checks to Metrobank.
Recourse of Bankcom: (see doctrine #3)
Bankcom ought to have a right of recourse against the persons that caused the anomalous deposit of
the subject checks and received payments therefor. Unfortunately — as none of such persons were
impleaded in the case before us — no pronouncement as to this matter can be made in favor of
Bankcom.

2. FEDERAL EXPRESS CORP v ANTONINO

3. Benjamin Evangelista v. Screenex Inc., represented by Alexander G. Yu GR No. 211564, Nov 20, 2017

FACTS: Evangelista obtained a loan from Screenex which issued 2 checks to the former. There were also
vouchers of Screenex that were signed by the accused evidencing that he received the 2 checks in
acceptance of the loan granted to him. As security for the payment, Evangelista gave 2 open-dated
checks, both pay to order of Screenex. From the time it was issued, they were held in safekeeping
together with the other documents and papers of the company by Philip Gotuaco, Sr., father-in-law of
respondent Alexander Yu, until the former’s death. Before the checks were deposited, there was a
personal demand from the family for Evangelista to settle the loan and a demand letter was sent by the
family lawyer.

Evangelista was charged with violation of BP 22 in a criminal case filed with the MeTC of Makati. The
MeTC found that the prosecution had indeed proved the first 2 elements of cases involving BP 22 but
failed to prove the 3rd element. Also, there was failure on the part of Yu to prove that the demand letter
had actually been received by the addressee and there was no way to determine when the 5-day period
should start to toll, there was failure to establish prima facie evidence of knowledge of insufficiency of
funds, hence, the court acquitted Evangelista of the criminal charges. Ruling on the civil aspect, the
court held that while Evangelista admitted to having issued and delivered the checks to Gotuaco and
having fully paid the amount, no evidence of payment was presented. In the end, Evangelista was
declared liable for the civil obligation.

Timely appeal was made to the RTC raising two errors of the MeTC, to wit: 1) Lower court erred in not
appreciating the fact that the prosecution failed to prove the civil liability and 2) any civil liability
attributable to Evangelista had been extinguished by prescription. RTC held that the checks should be
taken as evidence of Evangelista’s indebtedness to prove that the obligation subsisted. Also, the alleged
payment of by Evangelista was an affirmative defense that he had the burden of proving but that he
failed to discharge.

CA, upon petition for review, denied the same. It held that the reckoning time for the prescriptive period
began when the instrument was issued and the corresponding check returned by the bank to its
depositor; that the issue of prescription was raised for the first time on appeal; and that the loan
obligation was never denied by Evangelista, who claimed it was already settled, but failed to show any
proof of payment.

ISSUE: Whether or not the CA committed a reversible error in holding that Evangelista is still liable for
the total amount indicated in the 2 checks considering that he was already acquitted in the criminal
charged for violation of BP 22.

HELD: In BP 22 cases, the action for the corresponding civil obligation is deemed instituted with the
criminal action. The criminal action for violation of BP 22 necessarily includes the corresponding civil
action and no reservation to file such civil action separately shall be allowed or recognized. This
notwithstanding, the civil action deemed instituted with the criminal action is treated as an independent
civil liability based on contract.

By definition, a check is a bill of exchange drawn on a bank payable on demand. It is an undertaking that
the drawer will pay the amount indicated thereon. Sec 119 of the NIL, however, states that a negotiable
instrument like a check may be discharged by any other act which will discharge a simple contract for
the payment of money. A check is therefore subject to a 10-year prescription of actions upon a written
contract. If the check is undated as in the present case, the cause of action is reckoned from the
issuance of the check. Assuming that Yu had authority to insert the dates in the checks, the fact that he
did so after the lapse of more than 10 years cannot qualify as changes made within a reasonable period.
The cause of action on the checks has become stale, hence time-barred. Prescription has indeed set in.

We therefore have no other recourse but to grant the petition on the ground of prescription. Even if the
defense was belatedly raised before the RTC for the first time on appeal from the ruling of MeTC, we
nonetheless dismiss the complaint, seeking to enforce civil liability of Evangelista based on the undated
checks. Holding Evanglista liable for the 2 checks has already prescribed.

4. BDO UNIBANK v. ENGR. SELWYN LAO, GR No. 227005, 2017-06-19

Facts:
On March 9, 1999, respondent Engineer Selwyn S. Lao (Lao) filed before the RTC a complaint for
collection of sum of money against Equitable Banking Corporation, now petitioner Banco de Oro
Unibank (BDO), Everlink Pacific Ventures, Inc. (Everlink), and Wu Hsieh a.k.a. George Wu (Wu).
In his complaint, Lao alleged that he was doing business under the name and style of "Selwyn Lao
Construction"; that he was a majority stockholder of Wing An Construction and Development
Corporation (Wing An); that he entered into a transaction with Everlink, through its authorized
representative Wu, under which, Everlink would supply him with "HCG sanitary wares"; and that for the
down payment, he issued two (2) Equitable crossed checks payable to Everlink: Check No. 0127-
242249[4] and Check No. 0127-242250,[5] in the amounts of P273,300.00 and P336,500.00,
respectively.
On August 24, 2001, Lao filed an Amended Complaint, wherein he impleaded Union Bank as additional
defendant for allowing the deposit of the crossed checks in two bank accounts other than the payee's, in
violation of its obligation to deposit the same only to the payee's account.
In its answer, Union Bank argued that Check No. 0127-242249 was deposited in the account of Everlink;
that Check No. 0127-242250 was validly negotiated by Everlink to New Wave; that Check No. 0127-
242250 was presented for payment to BDO, and the proceeds thereof were credited to New Wave's
account; that it was under no obligation to deposit the checks only in the account of Everlink because
there was nothing on the checks which would indicate such restriction; and that a crossed check
continues to be negotiable, the only limitation being that it should be presented for payment by a bank.
Tinimbang testified that Everlink was the payee of the two (2) crossed checks issued by their client, Wing
An; that the checks were deposited with Union Bank, which presented them to BDO for payment.
Atty. Buenaventura claimed that BDO gave credence to Union Bank's representation that the checks
were indeed credited to the account of Everlink. He stated that BDO's only obligations under the
circumstances were to ascertain the genuineness of the checks, to determine if the account was
sufficiently funded and to credit the proceeds to the collecting bank.
For its part, Union Bank presented as its witness Jojina Lourdes C. Vega (Vega), its Branch Business
Manager. Vega testified that the transaction history of Everlink's account with Union Bank and the
notation at the back of the check indicating Everlink's Account No. (005030000925) revealed that the
proceeds of Check No. 0127-242249 were duly credited to Everlink's account on September 22, 1997.
Issues:
whether or not the checks were actually delivered to the payee.
Ruling:

5. Ubas Sr v Chan
FACTS:

Petitioner filed a Complaint against respondent, alleging that respondent, “doing business under the
name and style of UNIMASTER,” was indebted to him in the amount of P1,500,000.00, representing the
price of construction materials allegedly purchased by respondent from him for the construction of the
Macagtas Dam project.

He averred that respondent had issued three checks, payable to “CASH”, but when petitioner presented
the subject checks for encashment, the same were dishonored due to a stop payment order. Petitioner
demanded from respondent the value of the dishonored checks, but to no avail.

For his part, respondent admitted to having issued the subject checks. However, he claimed that they
were not issued to petitioner, but to the project engineer, who, however, lost the same.

The RTC ruled in favor of petitioner and ordered respondent to pay petitioner the amount of
P1,500,000.00 representing the principal obligation plus legal interests.

On appeal, the CA reversed and set aside the RTC’s ruling, dismissing petitioner’s complaint.

Hence, the instant petition.

ISSUE:

Whether or not the CA erred in dismissing petitioner’s complaint for lack of cause of action.
RULING:

The petition is meritorious.

Jurisprudence holds that “in a suit for a recovery of sum of money, as here, the plaintiff-creditor
[(petitioner in this case)] has the burden of proof to show that defendant [(respondent in this case)] had
not paid [him] the amount of the contracted loan. However, it has also been long established that where
the plaintiff-creditor possesses and submits in evidence an instrument showing the indebtedness, a
presumption that the credit has not been satisfied arises in [his] favor.

This presumption stems from Section 24 of the NIL, which provides that:

Section 24. Presumption of Consideration. – Every negotiable instrument is deemed prima facie to have
been issued for a valuable consideration; and every person whose signature appears thereon to have
become a party thereto for value.

As mentioned, petitioner had presented in evidence the three dishonored checks which were
undeniably signed by respondent.

Besides, Section 16 of the NIL provides that when an instrument is no longer in the possession of the
person who signed it and it is complete in its terms, “a valid and intentional delivery by him is presumed
until the contrary is proved,” as in this case.

Although the checks were under the account name of Unimasters, it should be emphasized that the
manner or mode of payment does not alter the nature of the obligation.

Respondent was not able to overcome the presumption of consideration under Section 24 of the NIL
and establish any of his affirmative defenses. On the other hand, as the holder of the subject checks
which are presumed to have been issued for a valuable consideration, and having established his privity
of contract with respondent, petitioner has substantiated his cause of action by a preponderance of
evidence. ” Consequently, petitioner’s Complaint should be granted.

6. ASIA BREWERY v. EQUITABLE PCI BANK

FACTS

Within the period of September 1996 to July 1998, 10 checks and 16 demand drafts (collectively,
“instruments”) were issued in the name of Charlie Go. The instruments, with a total value of
P3,785,257.38, bore the annotation “endorsed by PCI Bank, Ayala Branch, All Prior Endorsement And/Or
Lack of Endorsement Guaranteed.” All the demand drafts, except those issued by the Lucena City and
Ozamis branches of Allied Bank, were crossed.

In their Complaint, petitioners narrate:

10. None of the above checks and demand drafts set out under the First, Second, Third, Fourth, Fifth,
and Sixth Causes of Action reached payee, co-plaintiff Charlie S. Go.

11. All of the above checks and demand drafts fell into the hands of a certain Raymond U. Keh, then a
Sales Accounting Manager of plaintiff Asia Brewery, Inc., who falsely, willfully, and maliciously
pretending to be the payee, co-plaintiff Charlie S. Go, succeeded in opening accounts with defendant
Equitable PCI Bank in the name of Charlie Go and thereafter deposited the said checks and demand
drafts in said accounts and withdrew the proceeds thereof to the damage and prejudice of plaintiff Asia
Brewery, Inc.

Raymond Keh was allegedly charged with and convicted of theft and ordered to pay the value of the
checks, but not a single centavo was collected, because he jumped bail and left the country while the
cases were still being tried.

ISSUE

Petitioners argue that the trial court seriously erred in dismissing their Complaint for lack of cause of
action.

HELD

The Court believes that it need not delve into the issue of whether the instruments have been delivered,
because it is a matter of defense that would have to be proven during trial on the merits. In Aquino v.
Quiazon, we held that if the allegations in a complaint furnish sufficient basis on which the suit may be
maintained, the complaint should not be dismissed regardless of the defenses that may be raised by the
defendants. In other words, "[a]n affirmative defense, raising the ground that there is no cause of action
as against the defendants poses a question of fact that should be resolved after the conduct of the trial
on the merits.”

RULING

WHEREFORE, the petition is GRANTED. The Order dated 30 January 2008 issued by Judge Benjamin T.
Pozon and the Order dated 23 November 2009 issued by Judge Winlove Dumayas in Civil Case No.
04-336 are REVERSED and SET ASIDE. The Complaint is REINSTATED, and the case is ordered REMANDED
to the Regional Trial Court of Makati City for further proceedings. Let the records of the case be likewise
remanded to the court a quo.

7. RCBC BANK v ODRADA

FACTS:
Odrada sold a second-hand Mitsubishi Montero to Lim. Lim obtained an auto-loan in RCBC. After initial
payment, Odrada executed a Deed of Absolute Sale to Lim while Lim took possession of the car. RCBC
delivered Manager’s checks to Odrada however prior to that, Lim informed Odrada about the
roadworthinesss of the car. Lim requested Odrada to not deposit the manager’s checks. Odrada did not
heed. He deposited said checks. The checks were consequently dishonoured upon Lim’s instruction to
RCBC. Because of the dishonour, Odrada filed a collection case against both Lim and RCBC. Lim
countered that the cancellation was not done ex parte but thru a letter. RCBC contended that the
dishonour was due to Lim’s cancellation of the auto loan.
The RTC ruled in favour of Odrada. It held that the proper party who can ask for the rescission in the
case is Odrada, not Lim, since the former had already complied with his undertaking under the contract,
while Lim failed to pay the payment. The defective condition of the Montero was not a supervening
event that would justify the dishonour of the checks, which is equivalent to cash, and maybe treated as
a promissory note with the bank as maker. The bank being the party primarily liable for the check, the
court ruled that RCBC was liable to Odrada for the value of the managers checks.
Both Lim and RCBC appealed to the CA, which however denied their appeal. It ruled that the two
manager’s checks, which were complete and regular, reached the hands of Lim who deposited the same
in his bank account with Ibank. RCBC knew that the amount reflected on the manager’s checks
represented Lim’s payment for the remaining balance of the Montero’s purchase price. The appellate
court held that when RCBC issued the manager’s checks in favor of Odrada, RCBC admitted the
existence of the payee and his then capacity to endorse, and undertook that on due presentment the
checks which were negotiable instruments would be accepted or paid, or both according to its tenor.
The appellate court held that the effective delivery of the checks to Odrada made RCBC liable for the
checks. It negated RCBC’s defense of want of consideration, finding Odrada a holder in due course of the
managers checks.

ISSUE:
Whether RCBC may refuse to pay said manager’s checks

HELD:
YES.
We address the legal question of whether or not the drawee bank of a manager’s check has the option
of refusing payment by interposing a personal defense of the purchaser of the manager’s check who
delivered the check to a third party.
In resolving this legal question, this Court will examine the nature of a manager’s check and its relation
to personal defenses under the Negotiable Instruments Law.
Jurisprudence defines a manager’s check as a check drawn by the bank’s manager upon the bank itself
and accepted in advance by the bank by the act of its issuance. It is really the bank’s own check and may
be treated as a promissory note with the bank as its maker. Consequently, upon its purchase, the check
becomes the primary obligation of the bank and constitutes its written promise to pay the holder upon
demand. It is similar to a cashier’s check both as to effect and use in that the bank represents that the
check is drawn against sufficient funds.
As a general rule, the drawee bank is not liable until it accepts. Prior to a bill’s acceptance, no
contractual relation exists between the holder and the drawee. Acceptance, therefore, creates a privity
of contract between the holder and the drawee so much so that the latter, once it accepts, becomes the
party primarily liable on the instrument. Accordingly, acceptance is the act which triggers the operation
of the liabilities of the drawee (acceptor) under Section 62 of the Negotiable Instruments Law. Thus,
once he accepts, the drawee admits the following: (a) existence of the drawer; (b) genuineness of the
drawer’s signature; (c) capacity and authority of the drawer to draw the instrument; and (d) existence of
the payee and his then capacity to endorse.
As can be gleaned in a long line of cases decided by this Court, a manager’s check is accepted by the
bank upon its issuance. As compared to an ordinary bill of exchange where acceptance occurs after the
bill is presented to the drawee, the distinct feature of a manager’s check is that it is accepted in
advance. Notably, the mere issuance of a manager’s check creates a privity of contract between the
holder and the drawee bank, the latter primarily binding itself to pay according to the tenor of its
acceptance.
The drawee bank, as a result, has the unconditional obligation to pay a manager’s check to a holder in
due course irrespective of any available personal defenses. However, while this Court has consistently
held that a manager’s check is automatically accepted, a holder other than a holder in due course is still
subject to defences such as if the check had become stale, there is no bad faith or neglicence for the
bank to refuse to pay (International Corporate Bank v. Spouses Gueco) or if there is lack of delivery (Rizal
Commercial Banking Corporation v. Hi-Tri Development Corporation).
We now address the main legal question: if the holder of a manager’s check is not a holder in due
course, can the drawee bank interpose a personal defense of the purchaser?
See Mesina v. Intermediate Appellate Court and United Coconut Planters Bank v. Intermediate Appellate
Court .
The foregoing rulings clearly establish that the drawee bank of a manager’s check may interpose
personal defenses of the purchaser of the manager’s check if the holder is not a holder in due course. In
short, the purchaser of a manager’s check may validly countermand payment to a holder who is not a
holder in due course. Accordingly, the drawee bank may refuse to pay the manager’s check by
interposing a personal defense of the purchaser. Hence, the resolution of the present case requires a
determination of the status of Odrada as holder of the manager’s checks.

In this case, the Court of Appeals gravely erred when it considered Odrada as a holder in due course.
Section 52 of the Negotiable Instruments Law defines a holder in due course as one who has taken the
instrument under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice that it has been previously
dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it. (Emphasis supplied)
To be a holder in due course, the law requires that a party must have acquired the instrument
in good faith and for value.
Good faith means that the person taking the instrument has acted with due honesty with regard to the
rights of the parties liable on the instrument and that at the time he,took the instrument, the holder has
no knowledge of any defect or infirmity of the instrument. To constitute notice of an infirmity in the
instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated
must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in
taking the instrument would amount to bad faith.
Value, on the other hand, is defined as any consideration sufficient to support a simple contract.
In the present case, Odrada attempted to deposit the manager’s checks on 16 April 2002, a day after Lim
had informed him that there was a serious problem with the Montero. Instead of addressing the issue,
Odrada decided to deposit the manager’s checks. Odrada’s actions do not amount to good faith. Clearly,
Odrada failed to make an inquiry even when the circumstances strongly indicated that there arose, at
the very least, a partial failure of consideration due to the hidden defects of the Montero. Odrada’s
action in depositing the manager’s checks despite knowledge of the Montero’s defects amounted to bad
faith. Moreover, when Odrada redeposited the manager’s checks on 19 April 2002, he was already
formally notified by RCBC the previous day of the cancellation of Lim’s auto loan transaction. Following
UCPB, RCBC may refuse payment by interposing a personal defense of Lim – that the title of Odrada had
become defective when there arose a partial failure or lack of consideration.
RCBC acted in good faith in following the instructions of Lim. The records show that Lim notified RCBC of
the defective condition of the Montero before Odrada presented the manager’s checks. Lim informed
RCBC of the hidden defects of the Montero including a misaligned engine, smashed condenser, crippled
bumper support, and defective transmission. RCBC also received a formal notice of cancellation of the
auto loan from Lim and this prompted RCBC to cancel the manager’s checks since the auto loan was the
consideration for issuing the manager’s checks. RCBC acted in good faith in stopping the payment of the
manager’s checks.

8. LAND BANK v KHO

Doctrine:
public’s trust and confidence in the system is of paramount importance.29 Consequently, banks are
expected to exert the highest degree of, if not the utmost, diligence. Banks hold themselves out to the
public as experts in determining the genuineness of checks and corresponding signatures
thereon.31 Stemming from their primordial duty of diligence, one of a bank’s prime duties is to ascertain
the genuineness of the drawer’s signature on check being encashed.32 This holds especially true for
manager’s checks.

Facts: The respondent Narciso Kho is the sole proprietor of United Oil Petroleum, a business engaged in
trading diesel fuel. Sometime in December 2006, he entered into a verbal agreement to purchase
lubricants from Red Orange International Trading (Red Orange), represented by one Rudy Medel. Red
Orange insisted that it would only accept a Land Bank manager’s check as payment.
Kho, accompanied by Rudy Medel, opened Savings Account No. 0681-0681-80 at the Araneta Branch of
petitioner Land Bank of the Philippines (Land Bank). Kho also purchased Land Bank Manager’s Check No.
07410 leveraged by his newly opened savings account. Recem Macarandan, the Acting Operations
Supervisor of the Araneta branch, and Leida Benitez, the Document Examiner, prepared and signed the
check. Kho requested a photocopy of the manager’s check to provide Red Orange with proof that he had
available funds for the transaction. The branch manager, petitioner Ma. Lorena Flores, accommodated
his request. Kho gave the photocopy of the check to Rudy Medel.7
Thereafter, Kho returned to the bank and picked up check No. 07410. Accordingly, ₱25,000,000.00 was
debited from his savings account.
The business of banking is imbued with public interest; it is an industry where the general
Unfortunately, his deal with Red Orange did not push through.
On January 3, 2006, an employee of the Bank of the Philippine Islands (BPI) called Land Bank, Araneta
Branch, to inform them that Red Orange had deposited check No. 07410 for payment. Flores confirmed
with BPI that Land Bank had issued the check to Kho.8
Subsequently, the officers of the Araneta branch examined the fax copy and thought that the details
matched the check purchased by Kho. Thus, Land Bank confirmed the deposited check.9
On January 5, 2006, Flores informed Kho by phone that Check No. 07410 was cleared and paid by the
BPI, Kamuning branch.10

Shocked, Kho informed Flores that he never negotiated the check because the deal did not materialize.
More importantly, the actual check was still in his possession.11
Kho immediately went to Land Bank with the check No. 07410. They discovered that what was
deposited and encashed with BPI was a spurious manager’s check.
Kho sent Land Bank a final demand letter for the return of his ₱25,000,000.00 and the release of the
₱995,207.27 from his account but the bank did not comply.
Kho filed a Complaint for Specific Performance and Damages against Land Bank, represented by its
Araneta Avenue Branch Manager Flores and its OIC Cruz. He also impleaded Flores and Cruz in their
personal capacities.
Land Bank argued that Kho was negligent because he handed Medel a photocopy of the manager’s
check and that this was the proximate cause of his loss.17
The RTC dismissed the complaint. The RTC reasoned that the failure of the purchaser/drawer to exercise
ordinary care that substantially contributed to the making of the forged check precludes him from
asserting the forgery.19 It held that (1) Kho’s act of giving Medel a photocopy of the check and (2) his
failure to inform the bank that the transaction with Red Orange did not push through were the
proximate causes of his loss.20
The CA set aside the RTC’s decision and remanded the case for further proceedings.
Dissatisfied, Land Bank, Flores, and Cruz, filed separately petitions for review on certiorari before this
Court.

Issue: Can Kho hold Land Bank liable?

Ruling: Yes. The business of banking is imbued with public interest; it is an industry where the general
public’s trust and confidence in the system is of paramount importance.29 Consequently, banks are
expected to exert the highest degree of, if not the utmost, diligence. Banks hold themselves out to the
public as experts in determining the genuineness of checks and corresponding signatures
thereon.31 Stemming from their primordial duty of diligence, one of a bank’s prime duties is to ascertain
the genuineness of the drawer’s signature on check being encashed.32 This holds especially true for
manager’s checks. The genuine check No. 07410 remained in Kho’s possession the entire time and Land
Bank admits that the check it cleared was a fake. When Land Bank’s CCD forwarded the deposited check
to its Araneta branch for inspection, its officers had every opportunity to recognize the forgery of their
signatures or the falsity of the check. Whether by error or neglect, the bank failed to do so, which led to
the withdrawal and eventual loss of the ₱25,000,000.00. This is the proximate cause of the loss. Land
Bank breached its duty of diligence and assumed the risk of
incurring a loss on account of a forged or counterfeit check. Hence, it should suffer the resulting
damage. We cannot agree with the Land Bank and the RTC’s positions that Kho is precluded from
invoking the forgery. While his act of giving Medel a photocopy of the check may have allowed the
latter to create a duplicate, this cannot possibly excuse Land Bank’s failure to recognize that the check
itself –not just the signatures – is a fake instrument. More importantly, Land Bank itself furnished Kho
the photocopy without objecting to the latter’s intention of giving it to Medel.
Kho' s failure to inform Land Bank that the deal did not push through as of January 2, 2006, does not
justify Land Bank's confirmation and clearing of a fake check bearing the forged signatures of its own
officers. Whether or not the deal pushed through, the check remained in Kho's possession. He was
entitled to a reasonable expectation that the bank would not release any funds corresponding to the
check.

9. AGUILAR v LIGHT BRINGERS CREDIT COOPERATIVES

SUMMARY: The petitioners were sued for a sum of money they allegedly borrowed from the respondent cooperative. After filing
their answers, they failed to appear for pre-trial. The respondent was allowed to present evidence ex parte and the court ruled in its
favor based on the evidence presented. The petitioners then appealed to the RTC, filed a motion for reconsideration/ new trial, filed
an appeal to the CA, all of these were dismissed.

DOCTRINE: Pre-trial cannot be taken for granted. It is not a mere technicality in court proceeding for it serves a vital objective:
the simplification, abbreviation, and expedition of the trial, if not indeed its dispensation. If the absent party is the plaintiff, then
his case shall be dismissed. If it is the defendant who fails to appear, the plaintiff shall be allowed to present his evidence ex parte
and the court shall render judgment on the basis thereof. Thus, the plaintiff is given the privilege to present his evidence without
objection from the defendant, the likelihood being that the court will decide in favor of the plaintiff, the defendant having forfeited
the opportunity to rebut or present his own evidence.
*Failure to attend the pre-trial conference does not result in the “default” of the respondent.

1. The case began as 3 separate complaints for a sum of money against Aguilar, Calimbas and a certain Tantiangco filed by
Lightbringers. The cases were consolidated before the MCTC, Dinalupihan, Bataan. The petitioners and Tantiangco filed their
answers and denied having borrowed any amount of money.

2. On the scheduled pre-trial conference, only the respondent and its counsel appeared. The MCTC issued the order allowing it
to present evidence ex parte. It presented its general manager as sole witness.

3. The petitioners insisted that they should be allowed to cross examine the witness even if the cases was being heard ex parte.

4. In the interest of justice, the MCTC directed the counsels of all the parties to submit their position papers on whether a party
declared “as in default” might still participate in the trial of the case. Again, only the respondent complied. The MCTC then
held that because the proceedings were being heard ex parte, parties “as in default” have no right to participate therein and
cross-examine the witness.

5. The case against Tantiangco was dismissed, there being no showing that she had received the amount claimed. However the
MCTC held that the petitioners were liable to respondent for their debts.

6. The petitioners then filed their notice of appeal and their joint memorandum of appeal before the RTC of Bataan arguing that
had they been allowed to present evidence, they could have established that the debts were bogus. The RTC affirmed the
MCTC decision.

7. The petitioners then filed their joint motion for new trial/reconsideration before the RTC. They reiterated that they did not
receive the amounts claimed. As an alternative prayer, they asked that the case be remanded to the MCTC for a new trial on
account of the Sinumpaang Salaysay of the bookkeeper of the respondent. The RTC dismissed their motion.

8. They then appealed to the CA. The appeal was dismissed for being formally defective, the verification and disclaimer of forum
shopping and the affidavit of service had a defective jurat.

ISSUE:
Procedural issue: WoN the petitioners should have been allowed to cross-examine the respondent’s witness and present
evidence. NO

Substantive issue: WoN the respondent should be awarded attorney’s fees. NO

RULING: The Petition is partially GRANTED.

(Granted as far as attorney’s fees are concerned, they were not able to present any basis for the award of attorney’s fees in the lower
court.)

RATIO:
1. The rule is that a court can only consider the evidence presented by the respondent in the MCTC because the petitioners failed
to attend the pre-trial conference. The failure of the respondents to attend caused the petitioner to present its evidence ex parte
and the court to render judgment on the basis thereof.

2. If the absent party is the plaintiff, then his case shall be dismissed. If it is the defendant who fails to appear, the plaintiff shall
be allowed to present his evidence ex parte and the court shall render judgment on the basis thereof. Thus, the plaintiff is given
the privilege to present his evidence without objection from the defendant, the likelihood being that the court will decide in
favor of the plaintiff, the defendant having forfeited the opportunity to rebut or present his own evidence.

3. Pre-trial cannot be taken for granted. It is not a mere technicality in court proceeding for it serves a vital objective: the
simplification, abbreviation, and expedition of the trial, if not indeed its dispensation. More significantly, the pre-trial has been
institutionalized as the answer to the clarion call for the speedy disposition of cases. Hailed as the most important procedural
innovation in Anglo-Saxon justice in the nineteenth century, it paved the way for a less cluttered trial and resolution of the
case. It is, thus, mandatory for the trial court to conduct pre-trial in civil cases in order to realize the paramount objective of
simplifying, abbreviating, and expediting trial.
4. The Court can only consider the evidence on record offered by the respondent. The petitioners lost their right to present their
evidence during trial and a fortiori on appeal due to their disregard of the mandatory attendance in the pretrial conference.

10. RIVERA v SPS CHUA

FACTS: The parties were friends and kumpadres for a long time already. Rivera obtained a loan from the
Spouses Chua evidenced by a Promissory Note. The relevant parts of the note are the following:

(a) FOR VALUE RECEIVED, I, RODRIGO RIVERA promise to pay spouses SALVADOR C. CHUA and VIOLETA
SY CHUA, the sum of One Hundred Twenty Thousand Philippine Currency (_120,000.00) on December
31, 1995.

(b) It is agreed and understood that failure on my part to pay the amount of (_120,000.00) One Hundred
Twenty Thousand Pesos on December 31, 1995. I agree to pay the sum equivalent to FIVEPERCENT (5%)
interest monthly from the date of default until the entire obligation is fully paid for.

Three years from the date of payment stipulated in the promissory note, Rivera, issued

and delivered to Spouses Chua two (2) checks drawn against his account at Philippine Commercial
International Bank (PCIB) but upon presentment for payment, the two checks were dishonored forthe
reason “account closed.” As of 31 May 1999, the amount due the Spouses Chua was pegged at
P366,000.00 covering the principal of P120,000.00 plus five percent (5%) interest per month from 1
January 1996 to 31 May 1999.

The Spouses Chua alleged that they have repeatedly demanded payment from Rivera to no avail.
Because of Rivera’s unjustified refusal to pay, the Spouses Chua were constrained to file a suit before
the MeTC, Branch 30, Manila.

The MeTC ruled against Rivera requiring him to pay the spouses Chua P120,000.00 plus stipulated
interest at the rate of 5% per month from 1 January 1996, and legal interest at the rate of 12% percent
per annum from 11 June 1999 and was affirmed by the RTC of Manila. The Court of Appeals further
affirmed the decision upon appeal of the two inferior courts but with modification of lowering the
stipulated interest to 12% per annum. Hence, a petition at the Supreme Court.

ISSUES:

1. Whether or not the Promissory Note executed as evidence of loan falls under Negiotiable Instruments
Law.

2. Whether or not a demand from spouses Chua is needed to make Rivera liable.

3. Whether or not the stipulated interest is unconscionable and should really be lowered.

Held: 1. NO, the Promissory Note executed as evidence of loan does not fall under Negotiable
Instruments Law. The instrument is still governed by the Civil Code as to interpretation of their
obligations. The Supreme Court held that the Instrument was not able to meet the requisites laid down
by Section 1 of the Negotiable Instruments Law as the instrument was made out to specific persons,
herein respondents, the Spouses Chua, and not to order or to bearer, or to the order of the Spouses
Chua as payees.

cals not a negotiable instrument and therefore outside the coverage of Section 70 of the NIL which
provides that presentment for payment is not necessary to charge the person liable on the instrument,
Rivera is still liable under the terms of the Promissory Note that he issued. Article 1169 of the Civil Code
explicitly provides that the demand by the creditor shall not be necessary in order that delay may exist
when the obligation or the law expressly so declare. The clause in the Promissory Note containing the
stipulation of interest (letter B in the above facts) which expressly requires the debtor (Rivera) to pay a
5% monthly interest from the “date of default” until the entire obligation is fully paid for. Theparties
evidently agreed that the maturity of the obligation at a date certain, 31 December 1995, will give rise to
the obligation to pay interest.

3. YES, the stipulated interest is unconscionable and should really be lowered. The Supreme Court held
that as observed by Rivera, the stipulated interest of 5% per month or 60% per annum in addition to
legal interests and attorney’s fees is, indeed, highly iniquitous and unreasonable and stipulated interest
rates if illegal and are unconscionable the Court is allowed to temper interest rates when necessary.
Since the interest rate agreed upon is void, the parties are considered to have no stipulation regarding
the interest rate, thus, the rate of interest should be 12% per annum computed from the date of judicial
or extrajudicial demand. However, the 12% per annum rate of legal interest is only applicable until 30
June 2013, before the advent and effectivity of Bangko Sentral ng Pilipinas (BSP) Circular No. 799, Series
of 2013 reducing the rate of legal interest to 6% per annum. Pursuant to our ruling in Nacar v. Gallery
Frames,30 BSP Circular No. 799 is prospectively applied from 1 July 2013.

11. AREZA v EXPRESS SAVINGS BANK

Doctrines: 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 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.

Facts: Petitioners received an order for the purchase of a motor vehicle from Gerry Mambuay where the
latter 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). Petitioners deposited the said checks in their savings account with the
Express Savings Bank which, in turn, deposited the checks with its depositary bank, Equitable-PCI Bank
and the latter presented the checks to the drawee, the Philippine Veterans Bank, which honored the
checks. However, 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.
After informing Express Savings Bank that the drawee dishonored the checks, Equitable-PCI Bank
debited the deposit account of ESB in the amount of P1.8M. Express Savings Bank then withdrew the
amount of P1.8M representing the returned checks from petitioners saving account.

Issue: Whether or not Express Savings Bank had the right to debit ₱1,800,000.00 from petitioners’
accounts.

Held: No, Express Savings Bank cannot debit the savings account of petitioners. 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.” As collecting bank, Express Savings Bank is liable for the amount of the materially
altered checks. 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.