PIO BARRETTO REALTY DEV.

CORP VS COURT OF APPEALS (2001)

G.R. No. 132362 June 28, 2001

PIO BARRETTO REALTY DEVELOPMENT CORPORATION, petitioner,

vs.
COURT OF APPEALS, JUDGE PERFECTO A. S. LAGUIO, JR., RTC-Branch 18, Manila, and
HONOR P. MOSLARES, respondents.

BELLOSILLO, J.:

This petition for review on certiorari assails the Decision dated 30 June 1997 of the Court of Appeals
in CA-G.R. SP No. 33982, "Pio Barretto Realty Development Corporation v. Hon. Perfecto A. Laguio,
et al.," which dismissed the special civil action for certiorari filed by petitioner, as well as its
Resolution dated 14 January 1998 denying reconsideration.

On 2 October 1984 respondent Honor P. Moslares instituted an action for annulment of sale with
damages before the Regional Trial Court of Manila against the Testate Estate of Nicolai Drepin
represented by its Judicial Administrator Atty. Tomas Trinidad and petitioner Pio Barretto Realty
Development Corporation. Moslares alleged that the Deed of Sale over four (4) parcels of land of the
Drepin Estate executed in favor of the Barretto Realty was null and void on the ground that the same
parcels of land had already been sold to him by the deceased Nicolai Drepin. The case was
docketed as Civil Case No. 84-27008 and raffled to respondent Judge Perfecto A. S. Laguio, Jr.,
RTC-Br. 18, Manila.

On 2 May 1986 the parties, to settle the case, executed a Compromise Agreement pertinent portions
of which are quoted hereunder -

1. The Parties agree to sell the Estate, subject matter of the instant case, which is composed
of the following real estate properties, to wit:

a. Three (3) titled properties covered by TCT Nos. 50539, 50540 and 505411 of the
Registry of Deeds for the Province of Rizal, with a total area of 80 hectares, more or
less, and

b. Untitled Property, subject matter of (a) Land Registration Case No. 1602 of the
Regional Trial Court, Pasig, Metro Manila, with an area of 81 hectares, more or less,

subject to the following situations and conditions, to wit:

a. If plaintiff Honor P. Moslares x x x buys the property, he is under obligation, as

follows:

1. To reimburse and pay Defendant Pio Barretto Realty Development

Corporation, represented by Anthony Que, its capital investment of Three
Million Pesos (P3,000,000.00), Philippine Currency, and

2. To pay the Estate of Nicolai Drepin, represented by the Judicial

Administrator, Atty. Tomas Trinidad, the sum of One Million Three Hundred
Fifty Thousand (P1,350,000.00) Pesos, Philippine Currency

1
 b. If defendant Pio Barretto Realty Development Corporation, represented by Mr.
Anthony Que x x x continue[s] to buy the property, it shall pay for the interests of
plaintiff Honor P. Moslares:

1. The sum of One Million (P1,000.000.00) Pesos, Philippine Currency to

plaintiff Honor P. Moslares personally and

2. Pay to the Estate of Nicolai Drepin, through the Judicial Administrator,

Atty. Tomas Trinidad, the balance of the agreed purchase price subject to
negotiation and verification of payments already made.

2. In the event that plaintiff Honor P. Moslares buys the Estate and pays in full the amount of
Three Million (P3,000,000.00) Philippine Currency to defendant Pio Barretto Realty
Development Corporation, and the full sum of One Million Three Hundred Fifty Thousand
(P1,350,000.00) Pesos, Philippine Currency, to the Estate of Nicolai Drepin, through Atty.
Tomas Trinidad, defendant Pio Barretto shall execute the corresponding Deed of
Conveyance in favor of plaintiff Honor P. Moslares and deliver to him all the titles and
pertinent papers to the Estate.

IN WITNESS WHEREOF, the parties hereto hereby sign this Compromise Agreement at
Manila, Philippines, this 2nd day of May 1986 xxxx xxxx xxxx

On 24 July 1986 the trial court rendered a decision approving the Compromise
Agreement.2 However, subsequent disagreements arose on the question of who bought the
properties first.

It must be noted that the Compromise Agreement merely gave Moslares and Barretto Realty options
to buy the disputed lots thus implicitly recognizing that the one who paid first had priority in right.
Moslares claimed that he bought the lots first on 15 January 1990 by delivering to Atty. Tomas
Trinidad two (2) PBCom checks, one (1) in favor of Barretto Realty for P3 million, and the other, in
favor of the Drepin Estate for P1.35 million.

But petitioner Barretto Realty denied receiving the check. Instead, it claimed that it bought the
properties on 7 March 1990 by tendering a Traders Royal Bank Manager's Check for P1million to
Moslares, and a Far East Bank and Trust Company Cashier's Check for P1 million and a Traders
Royal Bank Manager's Check for P350,000.00 to Atty. Tomas Trinidad as Judicial Administrator of
the Estate. However, Moslares and Atty. Trinidad refused to accept the checks.

Consequently, Barretto Realty filed a motion before the trial court alleging that it complied with its
monetary obligations under the Compromise Agreement but that its offers of payment were refused,
and prayed that a writ of execution be issued to compel Moslares and Atty. Trinidad to comply with
the Compromise Agreement and that the latter be directed to turn over the owner's duplicate
certificates of title over the lots.

On 10 May 19903 Judge Laguio, Jr. ordered that "a writ of execution be issued for the enforcement
of the decision of this Court for the parties to deposit with this Court, thru the City Treasurer's Office
of Manila, their respective monetary obligations under the compromise agreement that had been
executed by them x x x x"

Reacting to the order, Atty. Trinidad for the Estate filed an urgent motion to hold the execution in
abeyance on the ground that there was another case involving the issue of ownership over subject
lots pending before the Regional Trial Court of Antipolo City. Moslares in turn filed a motion for

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reconsideration while Barretto Realty moved to amend the order since the lower court did not exactly
grant what it prayed for.

On 14 June 1990, ruling on the three (3) motions, Judge Laguio, Jr., issued his Order -

Considering Defendant Judicial Administrator's urgent motion to hold in abeyance x x x the

plaintiff's motion for reconsideration, and the Defendant Pio Barretto Realty Development,
Inc.'s opposition to both motions x x x this Court finds the two motions without merit and are
accordingly, denied.

As regards Pio Barretto Realty Development, Inc.'s ex-parte motion to amend order x x x the
same is hereby granted and the deputy sheriff of this Court is allowed to deliver to the parties
concerned thru their counsels the bank certified checks mentioned in par. 2 of the motion
(underscoring ours).4

On 20 June 1990 Deputy Sheriff Apolonio L. Golfo of the RTC-Br. 18, Manila, implemented the order
by personally delivering the checks issued by Barretto Realty in favor of Moslares and the Estate to
Atty. Pedro S. Ravelo, counsel for Moslares, and to Atty. Tomas Trinidad, respectively, as recorded
in a Sheriff's Return dated 25 June 1990.5

However, on 17 September 1993, or more than three (3) years later, Moslares filed a Motion for
Execution alleging that he bought the lots subject of the Compromise Agreement on 15 January
1990 and that he paid the amounts specified as payment therefor. He asked that Barretto Realty be
directed to execute a deed of conveyance over subject lots in his favor. In a Supplement to his
motion Moslares contended that the previous tender of the checks by Barretto Realty did not
produce the effect of payment because checks, according to jurisprudence, were not legal tender.

Respondent Judge granted Moslares' Motion for Execution. Consequently, on 8 November 1993
Barretto Realty was ordered to execute a deed of conveyance over the subject lots in favor of
Moslares.

Aggrieved, Barretto Realty moved for reconsideration alleging that respondent Judge could no
longer grant Moslares' motion since the prior sale of subject lots in its favor had already been
recognized when the court sheriff was directed to deliver, and did in fact deliver, the checks it issued
in payment therefor to Moslares and Atty. Trinidad.

On 7 December 1993 respondent Judge granted the motion of Barretto Realty for reconsideration
and ruled -

Considering the motion for reconsideration and to quash writ of execution filed by defendant
Pio Barretto Realty Corporation, Inc., dated 16 November 1993, together with the plaintiff's
comment and/or opposition thereto, dated 18 November 1993, and the movant's reply to the
opposition etc., dated 20 November 1993, this Court finds the motion well taken. The record
shows that on 10 May 1990, a writ of execution was issued by this Court for the parties to
deposit with the Court, thru the City Treasurer's Office of Manila, their respective monetary
obligations under the compromise agreement that they had executed, and that it was only
defendant Pio Barretto Realty Corporation Inc. that had complied therewith, per the return of
this Court's deputy sheriff, Apolonio L. Golfo, dated June 25, 1990. Such being the case,
Defendant Pio Barretto Realty Corporation Inc., is the absolute owner of the real
properties in question and the issue on such ownership is now a closed matter.

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 WHEREFORE, Defendant Pio Barretto Realty Corporation Inc.'s motion for reconsideration
etc., dated November 16, 1993, is hereby granted; this Court's order, dated November 8,
1993, is reconsidered and set aside, and the writ of execution of the same date against
Defendant Pio Barretto Realty Corporation Inc. is ordered quashed (underscoring ours).6

Within a reglementary period Moslares moved to reconsider insisting that Barretto Realty's payment
by check was not valid because (a) the check was not delivered personally to him but to his counsel
Atty. Pedro Ravelo, (b) the check was not encashed hence did not produce the effect of payment;
and, (c) the check was not legal tender per judicial pronouncements. Barretto Realty opposed the
motion, but to no avail. On 11 February 1994 respondent Judge granted the motion for
reconsideration and set aside his Order of 7 December 1993. Judge Laguio ruled that Barretto
Realty's payment through checks was not valid because "a check is not legal tender and it cannot
produce the effect of payment until it is encashed x x x x the check in question has neither been
negotiated nor encashed by the plaintiff."7 At the same time, however, Moslares' alleged payment
of P3,000,000.00 on 15 January 1990 intended for Barretto Realty but delivered to Atty. Tomas
Trinidad was likewise decreed as not valid because the latter was not authorized to accept payment
for Barretto Realty.

Invoking interest of justice and equity, respondent Judge resolved to: (a) set aside its ruling
contained in its order of 7 December 1993 that "(d)efendant Pio Barretto Realty Corporation, Inc., is
the absolute owner of the property in question and the issue on such ownership is now a closed
matter;" (b) order the plaintiff (should he desire to exercise his option to buy the real property in
question) to pay defendant Pio Barretto Realty Corporation, Inc., the sum of P3,000,000.00 within
five (5) days from notice thereof by way of reimbursement of the latter's capital investment; and, (c)
order defendant Pio Barretto Realty Development Corporation, Inc., to pay the plaintiff (in the event
the latter should fail to exercise his said option and the former would want to buy the real property in
question) the sum of P1,000,000.00.

But Moslares failed to exercise his option and pay the amount within the five (5)-day period granted
him. Instead, he filed a Supplemental Motion to Pay praying that he be given additional seven (7)
days within which to do so. Barretto Realty opposed and invoked par. 3 of the Order of 11 February
1994 granting it the option to buy the lots in the event that Moslares should fail to pay within the
period given him. Barretto Realty prayed that the P1 million cashier's check still in Moslares'
possession be considered as sufficient compliance with the pertinent provision of the court's order.
Later, Barretto Realty offered to exchange the check with cash. When Moslares did not appear
however at the designated time for payment on 10 March 1994 before the Branch Clerk of Court,
Barretto Realty filed a motion for consignation praying that it be allowed to deposit
the P1,000,000.00 payment with the cashier of the Office of the Clerk of Court.

Respondent Judge however failed to act on the motion as he went on vacation leave. For reasons
which do not clearly appear in the record, Judge Rosalio G. dela Rosa, Executive Judge of the RTC,
Manila, acted on the motion and granted the prayer of Barretto Realty.8 Upon the return of
respondent Judge Laguio from his vacation, petitioner Barretto Realty immediately filed a motion for
his inhibition on the ground that he had already lost the cold neutrality of an impartial judge as
evident from his "seesaw" orders in the case. On 28 March 1994 respondent Judge denied the
motion for his inhibition. Moslares for his part moved for reconsideration of Executive Judge dela
Rosa's Order of 10 March 1994.

On 15 April 1994, in a Consolidated Order, respondent Judge Laguio set aside the questioned order
of Executive Judge dela Rosa on the ground that the motion for consignation should have been
referred to the pairing judge of Branch 18, Judge Zenaida Daguna of Branch 19. Respondent Judge
further ruled that the questioned order was premature since there were pending motions, namely,

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Moslares' Supplemental Motion to Pay dated 1 March 1994, and Motion to Deposit dated 9 March
1994 which were both filed earlier than Barretto Realty's Motion for Consignation which however
remained unresolved.

Respondent Judge Laguio found Moslares' motions meritorious and granted them. Moslares was
thus given a non-extendible grace period of three (3) days within which to pay the P3,000,000.00 to
Barretto Realty. Moslares then deposited the amount with the Branch Clerk of Court of Br. 18 within
two (2) days from receipt of the order of respondent Judge, and on 25 April 1994 filed a motion for
the Clerk of Court to be authorized to execute the necessary deed of conveyance in his favor.

On 2 May 1994 Barretto Realty filed a petition for certiorari and prohibition with prayer for a
temporary restraining order and/or preliminary injunction with the Court of Appeals assailing the
Orders of respondent Judge dated 28 March 1994 and 15 April 1994 on the ground that they were
issued with grave abuse of discretion.

Meanwhile, on 12 October 1994 or during the pendency of the petition, respondent Judge granted
Moslares' motion and authorized the Clerk of Court to execute the deed of conveyance in his favor.
The implementation of the order however was enjoined by the Court of Appeals on 9 December
1994 when it issued a writ of preliminary injunction barring the issuance of the writ until further
orders from the court.

In its Petition and Memorandum petitioner specifically alleged that respondent Judge's Orders of 8
November 1993,9 11 February 1994,10 15 April 1994,11 and 12 October 199412were all issued with
grave abuse of discretion as the trial court had no more jurisdiction to issue such orders since
the Compromise Agreement of 2 May 1986 which was the basis of the decision of 24 July 1986 had
already been executed and implemented in its favor way back on 20 June 1990.

Petitioner likewise contended that the Order of 28 March 199413denying petitioner's motion for
inhibition was void because it did not state the legal basis thereof; that respondent Judge displayed
obvious bias and prejudice when he issued "seesaw" orders in the case; and, that the bias in favor of
Moslares was apparent when respondent Judge granted the former another three (3)-day period
within which to pay the P3 million notwithstanding the fact that Moslares failed to comply with the
original five (5)-day period given him. With respect to Executive Judge dela Rosa's Order of 10
March 1994, petitioner contended that there was no rule of procedure prohibiting the Executive
Judge from acting on an urgent motion even if the pairing judge of the judge to whom the case was
raffled was present.

The Court of Appeals dismissed the petition. It ruled that the denial by respondent Judge of the
motion for his inhibition was not tainted with grave abuse of discretion correctible by certiorari. Aside
from the fact that judges are given a wide latitude of discretion in determining whether to voluntarily
recuse themselves from a case, which is not lightly interfered with, the appellate court however
observed that the orders and resolutions issued by respondent Judge in the five (5) years he had
been presiding over Civil Case No. 84-27008 indicated that they were not uniformly issued in favor
of one or the other party. As petitioner itself aptly described, respondent Judge's actuations in the
case "seesawed" between the parties.

On the matter of the validity of Judge dela Rosa's Order of 10 March 1994 granting petitioner's
motion for consignation, the Court of Appeals ruled that the order was precipitate and unauthorized
not only because the motion did not comply with the requisites for litigated motions but also because
Judge dela Rosa had no judicial authority to act on the case. His duties as Executive Judge were
purely administrative and did not include acting on a case assigned to another judge.

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With respect to the two (2) writs of execution, one dated 10 May 1990 in favor of petitioner, and the
other dated 11 February 1994 in favor of respondent, the Court of Appeals ruled -

Lastly, anent the existence of two writs of execution, first one for petitioner and the second
for Moslares which the former has repeatedly cited as capricious and whimsical exercise of
judicial discretion by respondent Judge, the records reveal that on 10 May 1990 a writ of
execution was issued in favor of the petitioner upon its motion. For reasons of its own,
petitioner did not pursue its effective and fruitful implementation in accordance with the
decision based on a compromise agreement, spelling out the respective monetary
obligations of petitioner and Moslares. Hence, after the lapse of at least one year, Moslares
filed a motion for execution of the same decision x x x x [I]t cannot be said that respondent
Judge issued two conflicting orders sans any legal basis. What really happened was that the
matter of the first order granting execution in favor of petitioner was repeatedly put at issue
until the order of the court dated 11 February 1994 x x x x Observedly, the said order was
never elevated by petitioner to the appellate courts. Instead, he agreed with it by filing a
"Manifestation and Motion" on 01 March 1994 praying that the P1 Million Cashier's Check
still in the possession of Moslares be considered compliance with paragraph 3 of that order x
xxx

On 14 January 1998 petitioner's motion for reconsideration was denied; hence, this petition.

Petitioner contends that the Court of Appeals erred (a) in concluding that petitioner did not pursue
the effective and fruitful implementation of the writ of execution dated 10 May 1990 in its favor, (b) in
not setting aside Judge Laguio's Orders dated 11 February 1994, 15 April 1994 and 12 October
1994 as patent nullities, and, (c) in disregarding jurisprudence declaring that cashier's or manager's
checks are deemed cash or as good as the money they represent.

We grant the petition. Final and executory decisions, more so with those already executed, may no
longer be amended except only to correct errors which are clerical in nature. They become the law
of the case and are immutable and unalterable regardless of any claim of error or
incorrectness.14 Amendments or alterations which substantially affect such judgments as well as the
entire proceedings held for that purpose are null and void for lack of jurisdiction.15 The reason lies in
the fact that public policy dictates that litigations must be terminated at some definite time and that
the prevailing party should not be denied the fruits of his victory by some subterfuge devised by the
losing party.16

It is not disputed, and in fact borne by the records, that petitioner bought the disputed lots of the
Drepin Estate subject matter of the Compromise Agreement ahead of Moslares and that the checks
issued in payment thereof were even personally delivered by the Deputy Sheriff of the RTC-Br. 18,
Manila, upon Order of respondent Judge dated 14 June 1990 after tender was refused by Moslares
and the Drepin Estate. Respondent Moslares never raised the invalidity of the payment through
checks either through a motion for reconsideration or a timely appeal. Hence, with the complete
execution and satisfaction of the Decision dated 24 July 1986 which approved the Compromise
Agreement, Civil Case No. 84-27008 became closed and terminated leaving nothing else to be done
by the trial court with respect thereto.17 As petitioner correctly contended, the Court of Appeals erred
when it concluded that petitioner did not pursue the fruitful and effective implementation of the writ of
execution in its favor. As already stated petitioner paid for the lots through the court-sanctioned
procedure outlined above. There was no more need for the Drepin Estate, owner of the lots, to
execute a deed of conveyance in petitioner's favor because it had already done so on 10 October
1980. In fact the disputed lots were already registered in petitioner's name under TCT Nos. 50539,
50540 and 50541 as a consequence thereof. That was also why in the penultimate paragraph of
the Compromise Agreement it was provided that in the event respondent Moslares bought the lots

6
ahead of petitioner Barretto Realty the latter, not the Drepin Estate, was to execute the
corresponding deed of conveyance and deliver all the titles and pertinent papers to respondent
Moslares. There was therefore nothing more to be done by way of fruitful and effective
implementation.

Clearly then respondent Judge Laguio no longer had any jurisdiction whatsoever to act on, much
less grant, the motion for execution and supplement thereto filed by Moslares on 17 September
1993 or more than three (3) years later, claiming that he had already bought the lots. The fact that
the check paid to him by Barretto Realty was never encashed should not be invoked against the
latter. As already stated, Moslares never questioned the tender done three (3) years earlier.
Besides, while delivery of a check produces the effect of payment only when it is encashed, the rule
is otherwise if the debtor was prejudiced by the creditor's unreasonable delay in presentment.
Acceptance of a check implies an undertaking of due diligence in presenting it for payment. If no
such presentment was made, the drawer cannot be held liable irrespective of loss or injury sustained
by the payee. Payment will be deemed effected and the obligation for which the check was given as
conditional payment will be discharged.18

Considering the foregoing, respondent Judge Laguio's Order dated 8 November 1993 which granted
private respondent's motion for execution thus nullifying the 1990 sale in favor of petitioner after he
had in effect approved such sale in his Order of 14 June 1990 and after such order had already
become final and executory, amounted to an oppressive exercise of judicial authority, a grave abuse
of discretion amounting to lack of jurisdiction, for which reason, all further orders stemming therefrom
are also null and void and without effect.19

The principle of laches does not attach when the judgment is null and void for want of
jurisdiction.20 The fact that petitioner invoked par. 3 of the Order of 11 February 1994 praying that
its P1,000,000.00 check still in Moslares' possession be considered sufficient payment of the
disputed lots, could not be cited against it. For one thing, petitioner from the very start had always
consistently questioned and assailed the jurisdiction of the trial court to entertain respondent's
motion for execution filed three (3) years after the case had in fact been executed. Secondly,
estoppel being an equitable doctrine cannot be invoked to perpetuate an injustice.21

WHEREFORE, the questioned Decision and Resolution of the Court of Appeals dated 30 June 1997
and 14 January 1998, respectively, are REVERSED and SET ASIDE. The Order of respondent
Judge Perfecto A. S. Laguio Jr. dated 11 February 1994 in Civil Case No. 84-27008, setting aside
his earlier ruling of 7 December 1993 which had declared petitioner Pio Barretto Realty Development
Corporation as the absolute owner of the real properties in question, and all subsequent proceedings
culminating in the Order of 12 October 1994 authorizing the Clerk of Court, RTC-Manila, to execute
a deed of conveyance over subject properties in favor of respondent Honor P. Moslares, are
declared NULL and VOID for want of jurisdiction.

Consequently, petitioner Pio Barretto Realty Development Corporation is declared the absolute
owner of the disputed properties subject matter of the Compromise Agreement dated 2 May 1986 as
fully implemented by the Deputy Sheriff, RTC-Br. 18, Manila, pursuant to the final and executory
Order dated 14 June 1990 of its Presiding Judge Perfecto A. S. Laguio, Jr.

SO ORDERED. 1âw phi 1.nêt

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EDUQUE VS OCAMPO (1950)

G.R. No. L-222 April 26, 1950

SALVACION F. VDA. DE EDUQUE, ETC., plaintiff-appellee,

vs.
JOSE M. OCAMPO, defendant-appellant.

MORAN, C.J.:

This is an action to compel acceptance of payment of a mortgage debt.

On February 16, 1935, Dr. Jose Eduque secured two loans from Mariano Ocampo de Leon, Doña
Escolastica de los Reyes and Don Jose M. Ocampo, the first in the amount of P40,000 and the
second in the sum of P15,000, both payable within the period of twenty years, with interest at the
rate of 5 per cent per annum. Payment of these two loans was guaranteed by mortgage on real
property. In the mortgage contract it is stipulated that any of the mortgage creditors may receive
payment and execute deeds of cancellation of the mortgage debts.

On December 6, 1943, plaintiff and appellee, as administratrix of the estate of the deceased Dr.
Jose Eduque, tendered payment, by means of cashier's check, of the total amount of the two loans,
P55,000, to defendant-appellant Jose M. Ocampo, one of the creditors, who refused to accept
payment. By reason of such refusal, an action was brought and a cashier's check for the total
amount of P55,000 deposited in court. After trial, judgment was rendered against defendant
compelling him to accept the P55,000 deposited in court, to issue deeds for cancellation of the
mortgage debts, and to pay the expenses of consignation and costs.

Defendant accepted the judgment with respect to the second loan of P15,000 upon the ground that,
according to him, in the deed of mortgage corresponding to that loan it clearly appeared that the loan
was payable "durante el termino de 20 años," and that the only question remaining between the
parties is the interpretation of the first deed of mortgage regarding the first loan of P40,000. and he
asked the court to order "que de la cantidad de P55,000 consignada en este Juzgado, se entregue
al demandado la suma de P15,000, despues de descontar proporcionalmente cualesquiera
cantidades por deposito y otros conceptos segun los terminos de la decision promulgada." The
order was issued accordingly and the sum of P15,000 out of the P55,000 deposited in court was
delivered to the defendant.

The present appeal concerns the decision of the lower court regarding the first loan of P40,000, and
the principal error assigned by the appellant is that tender of payment by means of a cashier's check
representing Japanese war notes is not valid.

We have already help that Japanese military notes were legal tender during the Japanese
occupation. But appellant argues, further, that the consignation of a cashier's check, which is not
legal tender, is not binding upon him. This question, however, has never been raised in the lower
court. Upon the contrary, defendant accepted impliedly the consignation of the cashier's check when
he himself asked the court that out of the money thus consigned he be paid the amount of the
second loan of P15,000. It is a rule that " a cashier's check may constitute a sufficient tender where
no objection is made on this ground." (62 C. J., p. 670; see also 40 Amer. Jur., p. 764.)

For all the foregoing, judgment is affirmed with cost against appellant.

8
NEW PACIFIC TIMBER VS SENERIS (1980)

G.R. No. L-41764 December 19, 1980

NEW PACIFIC TIMBER & SUPPLY COMPANY, INC., petitioner,

vs.
HON. ALBERTO V. SENERIS, RICARDO A. TONG and EX-OFFICIO SHERIFF HAKIM S.
ABDULWAHID, respondents.

CONCEPCION JR., J.:

A petition for certiorari with preliminary injunction to annul and/or modify the order of the Court of
First Instance of Zamboanga City (Branch ii) dated August 28, 1975 denying petitioner's Ex-
Parte Motion for Issuance of Certificate Of Satisfaction Of Judgment.

Herein petitioner is the defendant in a complaint for collection of a sum of money filed by the private
respondent. 1 On July 19, 1974, a compromise judgment was rendered by the respondent Judge in
accordance with an amicable settlement entered into by the parties the terms and conditions of
which, are as follows:

(1) That defendant will pay to the plaintiff the amount of Fifty Four Thousand Five
Hundred Pesos (P54,500.00) at 6% interest per annum to be reckoned from August
25, 1972;

(2) That defendant will pay to the plaintiff the amount of Six Thousand Pesos
(P6,000.00) as attorney's fees for which P5,000.00 had been acknowledged received
by the plaintiff under Consolidated Bank and Trust Corporation Check No. 16-135022
amounting to P5,000.00 leaving a balance of One Thousand Pesos (P1,000.00);

(3) That the entire amount of P54,500.00 plus interest, plus the balance of P1,000.00
for attorney's fees will be paid by defendant to the plaintiff within five months from
today, July 19, 1974; and

(4) Failure one the part of the defendant to comply with any of the above-conditions,
a writ of execution may be issued by this Court for the satisfaction of the obligation. 2

For failure of the petitioner to comply with his judgment obligation, the respondent Judge, upon
motion of the private respondent, issued an order for the issuance of a writ of execution on
December 21, 1974. Accordingly, writ of execution was issued for the amount of P63,130.00
pursuant to which, the Ex-Officio Sheriff levied upon the following personal properties of the
petitioner, to wit:

(1) Unit American Lathe 24

(1) Unit American Lathe 18 Cracker Wheeler

9
 (1) Unit Rockford Shaper 24

and set the auction sale thereof on January 15, 1975. However, prior to January 15, 1975, petitioner
deposited with the Clerk of Court, Court of First Instance, Zamboanga City, in his capacity as Ex-
Officio Sheriff of Zamboanga City, the sum of P63,130.00 for the payment of the judgment
obligation, consisting of the following:

1. P50.000.00 in Cashier's Check No. S-314361 dated January 3, 1975 of the

Equitable Banking Corporation; and

2. P13,130.00 incash. 3

In a letter dated January 14, 1975, to the Ex-Officio Sheriff, 4 private respondent through counsel,
refused to accept the check as well as the cash deposit. In the 'same letter, private respondent
requested the scheduled auction sale on January 15, 1975 to proceed if the petitioner cannot
produce the cash. However, the scheduled auction sale at 10:00 a.m. on January 15, 1975 was
postponed to 3:00 o'clock p.m. of the same day due to further attempts to settle the case. Again, the
scheduled auction sale that afternoon did not push through because of a last ditch attempt to
convince the private respondent to accept the check. The auction sale was then postponed on the
following day, January 16, 1975 at 10:00 o'clock a.m. 5 At about 9:15 a.m., on January 16, 1975, a
certain Mr. Tañedo representing the petitioner appeared in the office of the Ex-Officio Sheriff and the
latter reminded Mr. Tañedo that the auction sale would proceed at 10:00 o'clock. At 10:00 a.m., Mr.
Tañedo and Mr. Librado, both representing the petitioner requested the Ex-Officio Sheriff to give
them fifteen minutes within which to contract their lawyer which request was granted. After Mr.
Tañedo and Mr. Librado failed to return, counsel for private respondent insisted that the sale must
proceed and the Ex-Officio Sheriff proceeded with the auction sale. 6 In the course of the
proceedings, Deputy Sheriff Castro sold the levied properties item by item to the private respondent
as the highest bidder in the amount of P50,000.00. As a result thereof, the Ex-Officio Sheriff
declared a deficiency of P13,130.00. 7 Thereafter, on January 16, 1975, the Ex-Officio Sheriff issued
a "Sheriff's Certificate of Sale" in favor of the private respondent, Ricardo Tong, married to Pascuala
Tong for the total amount of P50,000.00 only. 8 Subsequently, on January 17, 1975, petitioner filed
an ex-parte motion for issuance of certificate of satisfaction of judgment. This motion was denied by
the respondent Judge in his order dated August 28, 1975. In view thereof, petitioner now questions
said order by way of the present petition alleging in the main that said respondent Judge capriciously
and whimsically abused his discretion in not granting the motion for issuance of certificate of
satisfaction of judgment for the following reasons: (1) that there was already a full satisfaction of the
judgment before the auction sale was conducted with the deposit made to the Ex-Officio Sheriff in
the amount of P63,000.00 consisting of P50,000.00 in Cashier's Check and P13,130.00 in cash; and
(2) that the auction sale was invalid for lack of proper notice to the petitioner and its counsel when
the Ex-Officio Sheriff postponed the sale from June 15, 1975 to January 16, 1976 contrary to Section
24, Rule 39 of the Rules of Court. On November 10, 1975, the Court issued a temporary restraining
order enjoining the respondent Ex-Officio Sheriff from delivering the personal properties subject of
the petition to Ricardo A. Tong in view of the issuance of the "Sheriff Certificate of Sale."

We find the petition to be impressed with merit.

The main issue to be resolved in this instance is as to whether or not the private respondent can
validly refuse acceptance of the payment of the judgment obligation made by the petitioner
consisting of P50,000.00 in Cashier's Check and P13,130.00 in cash which it deposited with the Ex-
Officio Sheriff before the date of the scheduled auction sale. In upholding private respondent's claim
that he has the right to refuse payment by means of a check, the respondent Judge cited the
following:

10
Section 63 of the Central Bank Act:

Sec. 63. Legal Character. — Checks representing deposit money do not have legal
tender power and their acceptance in payment of debts, both public and private, is at
the option of the creditor, Provided, however, that a check which has been cleared
and credited to the account of the creditor shall be equivalent to a delivery to the
creditor in cash in an amount equal to the amount credited to his account.

Article 1249 of the New Civil Code:

Art. 1249. — The payment of debts in money shall be made in the currency
stipulated, and if it is not possible to deliver such currency, then in the currency which
is legal tender in the Philippines.

The delivery of promissory notes payable to order, or bills of exchange or other

mercantile documents shall produce the effect of payment only when they have been
cashed, or when through the fault of the creditor they have been impaired.

In the meantime, the action derived from the original obligation shall be held in
abeyance.

Likewise, the respondent Judge sustained the contention of the private respondent that he has the
right to refuse payment of the amount of P13,130.00 in cash because the said amount is less than
the judgment obligation, citing the following Article of the New Civil Code:

Art. 1248. Unless there is an express stipulation to that effect, the creditor cannot be
compelled partially to receive the presentations in which the obligation consists.
Neither may the debtor be required to make partial payment.

However, when the debt is in part liquidated and in part unliquidated, the creditor
may demand and the debtor may effect the payment of the former without waiting for
the liquidation of the latter.

It is to be emphasized in this connection that the check deposited by the petitioner in the amount of
P50,000.00 is not an ordinary check but a Cashier's Check of the Equitable Banking Corporation, a
bank of good standing and reputation. As testified to by the Ex-Officio Sheriff with whom it has been
deposited, it is a certified crossed check. 9 It is a well-known and accepted practice in the business
sector that a Cashier's Check is deemed as cash. Moreover, since the said check had been certified
by the drawee bank, by the certification, the funds represented by the check are transferred from the
credit of the maker to that of the payee or holder, and for all intents and purposes, the latter
becomes the depositor of the drawee bank, with rights and duties of one in such situation. 10 Where a
check is certified by the bank on which it is drawn, the certification is equivalent to acceptance.11 Said
certification "implies that the check is drawn upon sufficient funds in the hands of the drawee, that
they have been set apart for its satisfaction, and that they shall be so applied whenever the check is
presented for payment. It is an understanding that the check is good then, and shall continue good,
and this agreement is as binding on the bank as its notes in circulation, a certificate of deposit
payable to the order of the depositor, or any other obligation it can assume. The object of certifying a
check, as regards both parties, is to enable the holder to use it as money." 12 When the holder
procures the check to be certified, "the check operates as an assignment of a part of the funds to the
creditors." 13 Hence, the exception to the rule enunciated under Section 63 of the Central Bank Act to
the effect "that a check which has been cleared and credited to the account of the creditor shall be
equivalent to a delivery to the creditor in cash in an amount equal to the amount credited to his

11
account" shall apply in this case. Considering that the whole amount deposited by the petitioner
consisting of Cashier's Check of P50,000.00 and P13,130.00 in cash covers the judgment obligation
of P63,000.00 as mentioned in the writ of execution, then, We see no valid reason for the private
respondent to have refused acceptance of the payment of the obligation in his favor. The auction
sale, therefore, was uncalled for. Furthermore, it appears that on January 17, 1975, the Cashier's
Check was even withdrawn by the petitioner and replaced with cash in the corresponding amount of
P50,000.00 on January 27, 1975 pursuant to an agreement entered into by the parties at the
instance of the respondent Judge. However, the private respondent still refused to receive the same.
Obviously, the private respondent is more interested in the levied properties than in the mere
satisfaction of the judgment obligation. Thus, petitioner's motion for the issuance of a certificate of
satisfaction of judgment is clearly meritorious and the respondent Judge gravely abused his
discretion in not granting the same under the circumstances.

In view of the conclusion reached in this instance, We find no more need to discuss the ground
relied in the petition.

It is also contended by the private respondent that Appeal and not a special civil action for certiorari
is the proper remedy in this case, and that since the period to appeal from the decision of the
respondent Judge has already expired, then, the present petition has been filed out of time. The
contention is untenable. The decision of the respondent Judge in Civil Case No. 250 (166) has long
become final and executory and so, the same is not being questioned herein. The subject of the
petition at bar as having been issued in grave abuse of discretion is the order dated August 28, 1975
of the respondent Judge which was merely issued in execution of the said decision. Thus, even
granting that appeal is open to the petitioner, the same is not an adequate and speedy remedy for
the respondent Judge had already issued a writ of execution. 14

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

1. Declaring as null and void the order of the respondent Judge dated August 28, 1975;

2. Declaring as null and void the auction sale conducted on January 16, 1975 and the certificate of
sale issued pursuant thereto;

3. Ordering the private respondent to accept the sum of P63,130.00 under deposit as payment of the
judgment obligation in his favor;

4. Ordering the respondent Judge and respondent Ex-Officio Sheriff to release the levied properties
to the herein petitioner.

The temporary restraining order issued is hereby made permanent.

Costs against the private respondent.

SO ORDERED.

12
ROMAN CATHOLIC BISHOP OF MALOLOS VS IAC (1990)

[G.R. No. 72110. November 16, 1990.]

ROMAN CATHOLIC BISHOP OF MALOLOS, INC., Petitioner, v. INTERMEDIATE APPELLATE

COURT, and ROBES-FRANCISCO REALTY AND DEVELOPMENT CORPORATION, Respondents.

SYLLABUS

1. CIVIL LAW; CONTRACTS; TENDER OF PAYMENT; CANNOT BE PRESUMED BY MERE

INFERENCE FROM SURROUNDING CIRCUMSTANCES. — We agree with the petitioner that a finding
that the private respondent had sufficient available funds on or before the grace period for the payment of
its obligation does not constitute proof of tender of payment by the latter for its obligation within the said
period. Tender of payment involves a positive and unconditional act by the obligor of offering legal tender
currency as payment to the obligee for the former’s obligation and demanding that the latter accept the
same. Thus, tender of payment cannot be presumed by a mere inference from surrounding
circumstances. At most, sufficiency of available funds is only affirmative of the capacity or ability of the
obligor to fulfill his part of the bargain. But whether or not the obligor avails himself of such funds to settle
his outstanding account remains to be proven by independent and credible evidence. Tender of payment
presupposes not only that the obligor is able, ready, and willing, but more so, in the act of performing his
obligation. Ab posse ad actu non vale illatio. "A proof that an act could have been done is no proof that it
was actually done." The respondent court was therefore in error to have concluded from the sheer proof
of sufficient available funds on the part of the private respondent to meet more than the total obligation
within the grace period, the alleged truth of tender of payment. The same is a classic case of non-
sequitur.

2. ID.; ID.; ID.; NOT VALIDLY CONSTITUTED BY PAYMENT OF A CERTIFIED PERSONAL CHECK. —
With regard to the third issue, granting arguendo that we would rule affirmatively on the two preceding
issues, the case of the private respondent still can not succeed in view of the fact that the latter used a
certified personal check which is not legal tender nor the currency stipulated, and therefore, can not
constitute valid tender of payment. The first paragraph of Art. 1249 of the Civil Code provides that "the
payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver
such currency, then in the currency which is legal tender in the Philippines. The Court en banc in the
recent case of Philippine Airlines v. Court of Appeals, (Promulgated on January 30, 1990) G.R. No. L-
49188, stated thus: Since a negotiable instrument is only a substitute for money and not money, the
delivery of such an instrument does not, by itself, operate as payment (citing Sec. 189, Act 2031 on Negs.
Insts.; Art. 1249, Civil Code; Bryan London Co. v. American Bank, 7 Phil. 255; Tan Sunco v. Santos, 9
Phil. 44; 21 R.C.L. 60, 61). A check, whether a manager’s check or ordinary check, is not legal tender,
and an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt
by the obligee or creditor. Hence, where the tender of payment by the private respondent was not valid
for failure to comply with the requisite payment in legal tender or currency stipulated within the grace
period and as such, was validly refused receipt by the petitioner, the subsequent consignation did not
operate to discharge the former from its obligation to the latter.

3. ID.; ID.; OBLIGATIONS ARISING THEREFROM HAVE THE FORCE OF LAW BETWEEN THE
CONTRACTING PARTIES. — Art. 1159 of the Civil Code of the Philippines provides that "obligations
arising from contracts have the force of law between the contracting parties and should be complied with
in good faith." And unless the stipulations in said contract are contrary to law, morals, good customs,
public order, or public policy, the same are binding as between the parties. (Article 1409, Civil Code, par.
1). What the private respondent should have done if it was indeed desirous of complying with its
obligations would have been to pay the petitioner within the grace period and obtain a receipt of such
payment duly issued by the latter. Thereafter, or, allowing a reasonable time, the private respondent
could have demanded from the petitioner the execution of the necessary documents. In case the

13
petitioner refused, the private respondent could have had always resorted to judicial action for the
legitimate enforcement of its right. For the failure of the private respondent to undertake this more
judicious course of action, it alone shall suffer the consequences.

4. REMEDIAL LAW; APPEAL; FACTUAL FINDINGS OF TRIAL COURT AS A RULE, SHOULD BE

ACCORDED FULL CONSIDERATION AND RESPECT. — On the contrary, the respondent court finds
itself remiss in overlooking or taking lightly the more important findings of fact made by the trial court
which we have earlier mentioned and which as a rule, are entitled to great weight on appeal and should
be accorded full consideration and respect and should not be disturbed unless for strong and cogent
reasons. (Natividad del Rosario Vda. de Alberto v. Court of Appeals, G.R. 29759, May 18, 1989;
Matabuena v. Court of Appeals, G.R. 76542, May 5, 1989).

5. ID.; SUPREME COURT; INSTANCES WHEN THE COURT HAS TO REVIEW THE EVIDENCE. —
While the Court is not a trier of facts, yet, when the findings of fact of the Court of Appeals are at variance
with those of the trial court, (Robleza v. Court of Appeals, G.R. 80364, June 28, 1989) or when the
inference of the Court of Appeals from its findings of fact is manifestly mistaken, (Reynolds Philippine
Corporation v. Court of Appeals, G.R. 38187, January 17, 1987) the Court has to review the evidence in
order to arrive at the correct findings based on the record.

DECISION

This is a petition for review on certiorari which seeks the reversal and setting aside of the decision 1 of
the Court of Appeals, 2 the dispositive portion of which reads:chanrobles law library : red

WHEREFORE, the decision appealed from is hereby reversed and set aside and another one entered for
the plaintiff ordering the defendant-appellee Roman Catholic Bishop of Malolos, Inc. to accept the
balance of P124,000.00 being paid by plaintiff-appellant and thereafter to execute in favor of Robes-
Francisco Realty Corporation a registerable Deed of Absolute Sale over 20,655 square meters portion of
that parcel of land situated in San Jose del Monte, Bulacan described in OCT No. 575 (now Transfer
Certificates of Title Nos. T-169493, 169494,169495 and 169496) of the Register of Deeds of Bulacan. In
case of refusal of the defendant to execute the Deed of Final Sale, the clerk of court is directed to execute
the said document. Without pronouncement as to damages and attorney’s fees. Costs against the
defendant-appellee. 3

The case at bar arose from a complaint filed by the private respondent, then plaintiff, against the
petitioner, then defendant, in the Court of First Instance (now Regional Trial Court) of Bulacan, at Sta.
Maria, Bulacan, 4 for specific performance with damages, based on a contract 5 executed on July 7,
1971.

The property subject matter of the contract consists of a 20,655 sq.m.-portion, out of the 30,655 sq.m.
total area, of a parcel of land covered by Original Certificate of Title No. 575 of the Province of Bulacan,
issued and registered in the name of the petitioner which it sold to the private respondent for and in
consideration of P123,930.00.chanrobles virtual lawlibrary

The crux of the instant controversy lies in the compliance or non-compliance by the private respondent
with the provision for payment to the petitioner of the principal balance of P100,000.00 and the accrued
interest of P24,000.00 within the grace period.

A chronological narration of the antecedent facts is as follows:chanrob1es virtual 1aw library

On July 7, 1971, the subject contract over the land in question was executed between the petitioner as
vendor and the private respondent through its then president, Mr. Carlos F. Robes, as vendee, stipulating
for a downpayment of P23,930.00 and the balance of P100,000.00 plus 12% interest per annum to be
paid within four (4) years from execution of the contract, that is, on or before July 7, 1975. The contract

14
likewise provides for cancellation, forfeiture of previous payments, and reconveyance of the land in
question in case the private respondent would fail to complete payment within the said period.

On March 12, 1973, the private respondent, through its new president, Atty. Adalia Francisco, addressed
a letter 6 to Father Vasquez, parish priest of San Jose Del Monte, Bulacan, requesting to be furnished
with a copy of the subject contract and the supporting documents.

On July 17, 1975, admittedly after the expiration of the stipulated period for payment, the same Atty.
Francisco wrote the petitioner a formal request 7 that her company be allowed to pay the principal
amount of P100,000.00 in three (3) equal installments of six (6) months each with the first installment and
the accrued interest of P24,000.00 to be paid immediately upon approval of the said request.

On July 29, 1975, the petitioner, through its counsel, Atty. Carmelo Fernandez, formally denied the said
request of the private respondent, but granted the latter a grace period of five (5) days from the receipt of
the denial 8 to pay the total balance of P124,000.00, otherwise, the provisions of the contract regarding
cancellation, forfeiture, and reconveyance would be implemented.

On August 4, 1975, the private respondent, through its president, Atty. Francisco, wrote 9 the counsel of
the petitioner requesting an extension of 30 days from said date to fully settle its account. The counsel for
the petitioner, Atty. Fernandez, received the said letter on the same day. Upon consultation with the
petitioner in Malolos, Bulacan, Atty. Fernandez, as instructed, wrote the private respondent a letter 10
dated August 7, 1975 informing the latter of the denial of the request for an extension of the grace period.

Consequently, Atty. Francisco, the private respondent’s president, wrote a letter 11 dated August 22,
1975, directly addressed to the petitioner, protesting the alleged refusal of the latter to accept tender of
payment purportedly made by the former on August 5, 1975, the last day of the grace period. In the same
letter of August 22, 1975, received on the following day by the petitioner, the private respondent
demanded the execution of a deed of absolute sale over the land in question and after which it would pay
its account in full, otherwise, judicial action would be resorted to.chanrobles.com.ph : virtual law library

On August 27, 1975, the petitioner’s counsel, Atty. Fernandez, wrote a reply 12 to the private respondent
stating the refusal of his client to execute the deed of absolute sale due to its (private respondent’s)
failure to pay its full obligation. Moreover, the petitioner denied that the private respondent had made any
tender of payment whatsoever within the grace period. In view of this alleged breach of contract, the
petitioner cancelled the contract and considered all previous payments forfeited and the land as ipso facto
reconveyed.

From a perusal of the foregoing facts, we find that both the contending parties have conflicting versions
on the main question of tender of payment.

The trial court, in its ratiocination, preferred not to give credence to the evidence presented by the
private Respondent. According to the trial court:chanrob1es virtual 1aw library

. . . What made Atty. Francisco suddenly decide to pay plaintiff’s obligation on August 5, 1975, go to
defendant’s office at Malolos, and there tender her payment, when her request of August 4, 1975 had not
yet been acted upon until August 7, 1975? If Atty. Francisco had decided to pay the obligation and had
available funds for the purpose on August 5, 1975, then there would have been no need for her to write
defendant on August 4, 1975 to request an extension of time. Indeed, Atty. Francisco’s claim that she
made a tender of payment on August 5, 1975 — such alleged act, considered in relation to the
circumstances both antecedent and subsequent thereto, being not in accord with the normal pattern of
human conduct — is not worthy of credence. 13

The trial court likewise noted the inconsistency in the testimony of Atty. Francisco, president of the private
respondent, who earlier testified that a certain Mila Policarpio accompanied her on August 5, 1975 to the
office of the petitioner. Another person, however, named Aurora Oracion, was presented to testify as the
secretary-companion of Atty. Francisco on that same occasion.

15
Furthermore, the trial court considered as fatal the failure of Atty. Francisco to present in court the
certified personal check allegedly tendered as payment or, at least, its xerox copy, or even bank records
thereof. Finally, the trial court found that the private respondent had insufficient funds available to fulfill
the entire obligation considering that the latter, through its president, Atty. Francisco, only had a savings
account deposit of P64,840.00, and although the latter had a money-market placement of P300,000.00,
the same was to mature only after the expiration of the 5-day grace period.

Based on the above considerations, the trial court rendered a decision in favor of the petitioner, the
dispositive portion of which reads:chanrobles virtual lawlibrary

WHEREFORE, finding plaintiff to have failed to make out its case, the court hereby declares the subject
contract cancelled and plaintiff’s downpayment of P23,930.00 forfeited in favor of defendant, and hereby
dismisses the complaint; and on the counterclaim, the Court orders plaintiff to pay defendant.

(1) Attorney’s fees of P10,000.00;

(2) Litigation expenses of P2,000.00; and

(3) Judicial costs.

SO ORDERED. 14

Not satisfied with the said decision, the private respondent appealed to the respondent Intermediate
Appellate Court (now Court of Appeals) assigning as reversible errors, among others, the findings of the
trial court that the available funds of the private respondent were insufficient and that the latter did not
effect a valid tender of payment and consignation.

The respondent court, in reversing the decision of the trial court, essentially relies on the following
findings:chanrob1es virtual 1aw library

. . . We are convinced from the testimony of Atty. Adalia Francisco and her witnesses that in behalf of the
plaintiff-appellant they have a total available sum of P364,840.00 at her and at the plaintiff’s disposal on
or before August 4, 1975 to answer for the obligation of the plaintiff-appellant. It was not correct for the
trial court to conclude that the plaintiff-appellant had only about P64,840.00 in savings deposit on or
before August 5, 1975, a sum not enough to pay the outstanding account of P124,000.00. The plaintiff-
appellant, through Atty. Francisco proved and the trial court even acknowledged that Atty. Adalia
Francisco had about P300,000.00 in money market placement. The error of the trial court has in
concluding that the money market placement of P300,000.00 was out of reach of Atty. Francisco. But as
testified to by Mr. Catalino Estrella, a representative of the Insular Bank of Asia and America, Atty.
Francisco could withdraw anytime her money market placement and place it at her disposal, thus proving
her financial capability of meeting more than the whole of P124,000.00 then due per contract. This
situation, We believe, proves the truth that Atty. Francisco apprehensive that her request for a 30-day
grace period would be denied, she tendered payment on August 4, 1975 which offer defendant through
its representative and counsel refused to receive. . .15 (Emphasis supplied)

In other words, the respondent court, finding that the private respondent had sufficient available funds,
ipso facto concluded that the latter had tendered payment. Is such conclusion warranted by the facts
proven? The petitioner submits that it is not.cralawnad

Hence, this petition. 16

The petitioner presents the following issues for resolution:chanrob1es virtual 1aw library

x x x

16
A. Is a finding that private respondent had sufficient available funds on or before the grace period for the
payment of its obligation proof that it (private respondent) did tender of (sic) payment for its said
obligation within said period?

x x x

B. Is it the legal obligation of the petitioner (as vendor) to execute a deed of absolute sale in favor of the
private respondent (as vendee) before the latter has actually paid the complete consideration of the sale
— where the contract between and executed by the parties stipulates —

"That upon complete payment of the agreed consideration by the herein VENDEE, the VENDOR shall
cause the execution of a Deed of Absolute Sale in favor of the VENDEE."cralaw virtua1aw library

x x x.

C. Is an offer of a check a valid tender of payment of an obligation under a contract which stipulates that
the consideration of the sale is in Philippine Currency? 17

We find the petition impressed with merit.

With respect to the first issue, we agree with the petitioner that a finding that the private respondent had
sufficient available funds on or before the grace period for the payment of its obligation does not
constitute proof of tender of payment by the latter for its obligation within the said period. Tender of
payment involves a positive and unconditional act by the obligor of offering legal tender currency as
payment to the obligee for the former’s obligation and demanding that the latter accept the same. Thus,
tender of payment cannot be presumed by a mere inference from surrounding circumstances. At most,
sufficiency of available funds is only affirmative of the capacity or ability of the obligor to fulfill his part of
the bargain. But whether or not the obligor avails himself of such funds to settle his outstanding account
remains to be proven by independent and credible evidence. Tender of payment presupposes not only
that the obligor is able, ready, and willing, but more so, in the act of performing his obligation. Ab posse
ad actu non vale illatio. "A proof that an act could have been done is no proof that it was actually
done."cralaw virtua1aw library

The respondent court was therefore in error to have concluded from the sheer proof of sufficient available
funds on the part of the private respondent to meet more than the total obligation within the grace period,
the alleged truth of tender of payment. The same is a classic case of non-sequitur.chanrobles virtual
lawlibrary
On the contrary, the respondent court finds itself remiss in overlooking or taking lightly the more important
findings of fact made by the trial court which we have earlier mentioned and which as a rule, are entitled
to great weight on appeal and should be accorded full consideration and respect and should not be
disturbed unless for strong and cogent reasons. 18

While the Court is not a trier of facts, yet, when the findings of fact of the Court of Appeals are at variance
with those of the trial court, 19 or when the inference of the Court of Appeals from its findings of fact is
manifestly mistaken, 20 the Court has to review the evidence in order to arrive at the correct findings
based on the record.

Apropos the second issue raised, although admittedly the documents for the deed of absolute sale had
not been prepared, the subject contract clearly provides that the full payment by the private respondent is
an a priori condition for the execution of the said documents by the petitioner.

That upon complete payment of the agreed consideration by the herein VENDEE, the VENDOR shall
cause the execution of a Deed of Absolute Sale in favor of the VENDEE. 21

17
The private respondent is therefore in estoppel to claim otherwise as the latter did in the testimony in
cross-examination of its president, Atty. Francisco, which reads:chanrob1es virtual 1aw library

Q Now, you mentioned, Atty. Francisco, that you wanted the defendant to execute the final deed of sale
before you would given (sic) the personal certified check in payment of your balance, is that correct?

A Yes, sir. 22

x x x

Art. 1159 of the Civil Code of the Philippines provides that "obligations arising from contracts have the
force of law between the contracting parties and should be complied with in good faith." And unless the
stipulations in said contract are contrary to law, morals, good customs, public order, or public policy, the
same are binding as between the parties.23

What the private respondent should have done if it was indeed desirous of complying with its obligations
would have been to pay the petitioner within the grace period and obtain a receipt of such payment duly
issued by the latter. Thereafter, or, allowing a reasonable time, the private respondent could have
demanded from the petitioner the execution of the necessary documents. In case the petitioner refused,
the private respondent could have had always resorted to judicial action for the legitimate enforcement of
its right. For the failure of the private respondent to undertake this more judicious course of action, it
alone shall suffer the consequences.chanrobles.com:cralaw:red

With regard to the third issue, granting arguendo that we would rule affirmatively on the two preceding
issues, the case of the private respondent still can not succeed in view of the fact that the latter used a
certified personal check which is not legal tender nor the currency stipulated, and therefore, can not
constitute valid tender of payment. The first paragraph of Art. 1249 of the Civil Code provides that "the
payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver
such currency, then in the currency which is legal tender in the Philippines.

The Court en banc in the recent case of Philippine Airlines v. Court of Appeals, 24 G.R. No. L-49188,
stated thus:chanrob1es virtual 1aw library

Since a negotiable instrument is only a substitute for money and not money, the delivery of such an
instrument does not, by itself, operate as payment (citing Sec. 189, Act 2031 on Negs. Insts.; Art. 1249,
Civil Code; Bryan London Co. v. American Bank, 7 Phil. 255; Tan Sunco v. Santos, 9 Phil. 44; 21 R.C.L.
60, 61). A check, whether a manager’s check or ordinary check, is not legal tender, and an offer of a
check in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or
creditor.

Hence, where the tender of payment by the private respondent was not valid for failure to comply with the
requisite payment in legal tender or currency stipulated within the grace period and as such, was validly
refused receipt by the petitioner, the subsequent consignation did not operate to discharge the former
from its obligation to the latter.

In view of the foregoing, the petitioner in the legitimate exercise of its rights pursuant to the subject
contract, did validly order therefore the cancellation of the said contract, the forfeiture of the previous
payment, and the reconveyance ipso facto of the land in question.chanrobles lawlibrary : rednad

WHEREFORE, the petition for review on certiorari is GRANTED and the DECISION of the respondent
court promulgated on April 25, 1985 is hereby SET ASIDE and ANNULLED and the DECISION of the trial
court dated May 25, 1981 is hereby REINSTATED. Costs against the private Respondent.

SO ORDERED.

18
SESBRENO VS COURT OF APPEALS (1993)

G.R. No. 89252 May 24, 1993

RAUL SESBREÑO, petitioner,

vs.
HON. COURT OF APPEALS, DELTA MOTORS CORPORATION AND PILIPINAS
BANK, respondents.

Salva, Villanueva & Associates for Delta Motors Corporation.

Reyes, Salazar & Associates for Pilipinas Bank.

FELICIANO, J.:

On 9 February 1981, petitioner Raul Sesbreño made a money market placement in the amount of
P300,000.00 with the Philippine Underwriters Finance Corporation ("Philfinance"), Cebu Branch; the
placement, with a term of thirty-two (32) days, would mature on 13 March 1981, Philfinance, also on
9 February 1981, issued the following documents to petitioner:

(a) the Certificate of Confirmation of Sale, "without recourse," No. 20496 of one (1)
Delta Motors Corporation Promissory Note ("DMC PN") No. 2731 for a term of 32
days at 17.0% per annum;

(b) the Certificate of securities Delivery Receipt No. 16587 indicating the sale of DMC
PN No. 2731 to petitioner, with the notation that the said security was in
custodianship of Pilipinas Bank, as per Denominated Custodian Receipt ("DCR") No.
10805 dated 9 February 1981; and

(c) post-dated checks payable on 13 March 1981 (i.e., the maturity date of
petitioner's investment), with petitioner as payee, Philfinance as drawer, and Insular
Bank of Asia and America as drawee, in the total amount of P304,533.33.

On 13 March 1981, petitioner sought to encash the postdated checks issued by Philfinance.
However, the checks were dishonored for having been drawn against insufficient funds.

On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issued by private
respondent Pilipinas Bank ("Pilipinas"). It reads as follows:

PILIPINAS BANK
Makati Stock Exchange Bldg.,
Ayala Avenue, Makati,
Metro Manila

19
TO Raul Sesbreño

20
 DENOMINATED CUSTODIAN RECEIPT

This confirms that as a duly Custodian Bank, and upon instruction of PHILIPPINE
UNDERWRITES FINANCE CORPORATION, we have in our custody the following
securities to you [sic] the extent herein indicated.

SERIAL MAT. FACE ISSUED REGISTERED AMOUNT

NUMBER DATE VALUE BY HOLDER PAYEE

2731 4-6-81 2,300,833.34 DMC PHIL. 307,933.33

UNDERWRITERS
FINANCE CORP.

We further certify that these securities may be inspected by you or your duly
authorized representative at any time during regular banking hours.

Upon your written instructions we shall undertake physical delivery of the above
securities fully assigned to you should this Denominated Custodianship Receipt
remain outstanding in your favor thirty (30) days after its maturity.

P
I
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I
P
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B
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(

21
 B
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1

On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private respondent Pilipinas, Makati
Branch, and handed her a demand letter informing the bank that his placement with Philfinance in
the amount reflected in the DCR No. 10805 had remained unpaid and outstanding, and that he in
effect was asking for the physical delivery of the underlying promissory note. Petitioner then
examined the original of the DMC PN No. 2731 and found: that the security had been issued on 10
April 1980; that it would mature on 6 April 1981; that it had a face value of P2,300,833.33, with the
Philfinance as "payee" and private respondent Delta Motors Corporation ("Delta") as "maker;" and
that on face of the promissory note was stamped "NON NEGOTIABLE." Pilipinas did not deliver the
Note, nor any certificate of participation in respect thereof, to petitioner.

Petitioner later made similar demand letters, dated 3 July 1981 and 3 August 1981,2 again asking
private respondent Pilipinas for physical delivery of the original of DMC PN No. 2731. Pilipinas
allegedly referred all of petitioner's demand letters to Philfinance for written instructions, as has been

22
supposedly agreed upon in "Securities Custodianship Agreement" between Pilipinas and
Philfinance. Philfinance did not provide the appropriate instructions; Pilipinas never released DMC
PN No. 2731, nor any other instrument in respect thereof, to petitioner.

Petitioner also made a written demand on 14 July 19813 upon private respondent Delta for the partial
satisfaction of DMC PN No. 2731, explaining that Philfinance, as payee thereof, had assigned to him
said Note to the extent of P307,933.33. Delta, however, denied any liability to petitioner on the
promissory note, and explained in turn that it had previously agreed with Philfinance to offset its
DMC PN No. 2731 (along with DMC PN No. 2730) against Philfinance PN No. 143-A issued in favor
of Delta.

In the meantime, Philfinance, on 18 June 1981, was placed under the joint management of the
Securities and exchange commission ("SEC") and the Central Bank. Pilipinas delivered to the SEC
DMC PN No. 2731, which to date apparently remains in the custody of the SEC.4

As petitioner had failed to collect his investment and interest thereon, he filed on 28 September 1982
an action for damages with the Regional Trial Court ("RTC") of Cebu City, Branch 21, against private
respondents Delta and Pilipinas.5 The trial court, in a decision dated 5 August 1987, dismissed the
complaint and counterclaims for lack of merit and for lack of cause of action, with costs against
petitioner.

Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195. In a Decision dated
21 March 1989, the Court of Appeals denied the appeal and held:6

Be that as it may, from the evidence on record, if there is anyone that appears liable
for the travails of plaintiff-appellant, it is Philfinance. As correctly observed by the trial
court:

This act of Philfinance in accepting the investment of plaintiff and

charging it against DMC PN No. 2731 when its entire face value was
already obligated or earmarked for set-off or compensation is difficult
to comprehend and may have been motivated with bad faith.
Philfinance, therefore, is solely and legally obligated to return the
investment of plaintiff, together with its earnings, and to answer all the
damages plaintiff has suffered incident thereto. Unfortunately for
plaintiff, Philfinance was not impleaded as one of the defendants in
this case at bar; hence, this Court is without jurisdiction to pronounce
judgement against it. (p. 11, Decision)

WHEREFORE, finding no reversible error in the decision appealed from, the same is
hereby affirmed in toto. Cost against plaintiff-appellant.

Petitioner moved for reconsideration of the above Decision, without success.

Hence, this Petition for Review on Certiorari.

After consideration of the allegations contained and issues raised in the pleadings, the Court
resolved to give due course to the petition and required the parties to file their respective
memoranda.7

23
Petitioner reiterates the assignment of errors he directed at the trial court decision, and contends
that respondent court of Appeals gravely erred: (i) in concluding that he cannot recover from private
respondent Delta his assigned portion of DMC PN No. 2731; (ii) in failing to hold private respondent
Pilipinas solidarily liable on the DMC PN No. 2731 in view of the provisions stipulated in DCR No.
10805 issued in favor r of petitioner, and (iii) in refusing to pierce the veil of corporate entity between
Philfinance, and private respondents Delta and Pilipinas, considering that the three (3) entities
belong to the "Silverio Group of Companies" under the leadership of Mr. Ricardo Silverio, Sr.8

There are at least two (2) sets of relationships which we need to address: firstly, the relationship of
petitioner vis-a-vis Delta; secondly, the relationship of petitioner in respect of Pilipinas. Actually, of
course, there is a third relationship that is of critical importance: the relationship of petitioner and
Philfinance. However, since Philfinance has not been impleaded in this case, neither the trial court
nor the Court of Appeals acquired jurisdiction over the person of Philfinance. It is, consequently, not
necessary for present purposes to deal with this third relationship, except to the extent it necessarily
impinges upon or intersects the first and second relationships.

I.

We consider first the relationship between petitioner and Delta.

The Court of appeals in effect held that petitioner acquired no rights vis-a-vis Delta in respect of the
Delta promissory note (DMC PN No. 2731) which Philfinance sold "without recourse" to petitioner, to
the extent of P304,533.33. The Court of Appeals said on this point:

Nor could plaintiff-appellant have acquired any right over DMC PN No. 2731 as the
same is "non-negotiable" as stamped on its face (Exhibit "6"), negotiation being
defined as the transfer of an instrument from one person to another so as to
constitute the transferee the holder of the instrument (Sec. 30, Negotiable
Instruments Law). A person not a holder cannot sue on the instrument in his own
name and cannot demand or receive payment (Section 51, id.)9

Petitioner admits that DMC PN No. 2731 was non-negotiable but contends that the Note had been
validly transferred, in part to him by assignment and that as a result of such transfer, Delta as
debtor-maker of the Note, was obligated to pay petitioner the portion of that Note assigned to him by
the payee Philfinance.

Delta, however, disputes petitioner's contention and argues:

(1) that DMC PN No. 2731 was not intended to be negotiated or otherwise
transferred by Philfinance as manifested by the word "non-negotiable" stamp across
the face of the Note10 and because maker Delta and payee Philfinance intended that
this Note would be offset against the outstanding obligation of Philfinance
represented by Philfinance PN No. 143-A issued to Delta as payee;

(2) that the assignment of DMC PN No. 2731 by Philfinance was without Delta's
consent, if not against its instructions; and

(3) assuming (arguendo only) that the partial assignment in favor of petitioner was
valid, petitioner took the Note subject to the defenses available to Delta, in particular,
the offsetting of DMC PN No. 2731 against Philfinance PN No. 143-A.11

24
We consider Delta's arguments seriatim.

Firstly, it is important to bear in mind that the negotiation of a negotiable instrument must be
distinguished from the assignment or transfer of an instrument whether that be negotiable or non-
negotiable. Only an instrument qualifying as a negotiable instrument under the relevant statute may
be negotiated either by indorsement thereof coupled with delivery, or by delivery alone where the
negotiable instrument is in bearer form. A negotiable instrument may, however, instead of being
negotiated, also be assigned or transferred. The legal consequences of negotiation as distinguished
from assignment of a negotiable instrument are, of course, different. A non-negotiable instrument
may, obviously, not be negotiated; but it may be assigned or transferred, absent an express
prohibition against assignment or transfer written in the face of the instrument:

The words "not negotiable," stamped on the face of the bill of lading, did not destroy
its assignability, but the sole effect was to exempt the bill from the statutory
provisions relative thereto, and a bill, though not negotiable, may be transferred by
assignment; the assignee taking subject to the equities between the original
parties.12 (Emphasis added)

DMC PN No. 2731, while marked "non-negotiable," was not at the same time stamped "non-
transferable" or "non-assignable." It contained no stipulation which prohibited Philfinance from
assigning or transferring, in whole or in part, that Note.

Delta adduced the "Letter of Agreement" which it had entered into with Philfinance and which should
be quoted in full:

A
p
r
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l
1
0
,
1
9
8
0

Philippine Underwriters Finance Corp.

Benavidez St., Makati,
Metro Manila.

Attention: Mr. Alfredo O. Banaria

SVP-Treasurer

GENTLEMEN:

This refers to our outstanding placement of P4,601,666.67 as evidenced by your

Promissory Note No. 143-A, dated April 10, 1980, to mature on April 6, 1981.

25
As agreed upon, we enclose our non-negotiable Promissory Note No. 2730 and 2731
for P2,000,000.00 each, dated April 10, 1980, to be offsetted [sic] against your PN
No. 143-A upon co-terminal maturity.

Please deliver the proceeds of our PNs to our representative, Mr. Eric Castillo.

V
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Y
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s
,

(
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26
 c
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P
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1
3

We find nothing in his "Letter of Agreement" which can be reasonably construed as a prohibition
upon Philfinance assigning or transferring all or part of DMC PN No. 2731, before the maturity
thereof. It is scarcely necessary to add that, even had this "Letter of Agreement" set forth an explicit
prohibition of transfer upon Philfinance, such a prohibition cannot be invoked against an assignee or
transferee of the Note who parted with valuable consideration in good faith and without notice of
such prohibition. It is not disputed that petitioner was such an assignee or transferee. Our conclusion
on this point is reinforced by the fact that what Philfinance and Delta were doing by their exchange of
their promissory notes was this: Delta invested, by making a money market placement with
Philfinance, approximately P4,600,000.00 on 10 April 1980; but promptly, on the same day,
borrowed back the bulk of that placement, i.e., P4,000,000.00, by issuing its two (2) promissory
notes: DMC PN No. 2730 and DMC PN No. 2731, both also dated 10 April 1980. Thus, Philfinance
was left with not P4,600,000.00 but only P600,000.00 in cash and the two (2) Delta promissory
notes.

Apropos Delta's complaint that the partial assignment by Philfinance of DMC PN No. 2731 had been
effected without the consent of Delta, we note that such consent was not necessary for the validity
and enforceability of the assignment in favor of petitioner.14 Delta's argument that Philfinance's sale
or assignment of part of its rights to DMC PN No. 2731 constituted conventional subrogation, which
required its (Delta's) consent, is quite mistaken. Conventional subrogation, which in the first place is
never lightly inferred,15 must be clearly established by the unequivocal terms of the substituting
obligation or by the evident incompatibility of the new and old obligations on every point.16 Nothing of
the sort is present in the instant case.

It is in fact difficult to be impressed with Delta's complaint, since it released its DMC PN No. 2731 to
Philfinance, an entity engaged in the business of buying and selling debt instruments and other
securities, and more generally, in money market transactions. In Perez v. Court of Appeals,17 the
Court, speaking through Mme. Justice Herrera, made the following important statement:

There is another aspect to this case. What is involved here is a money market
transaction. As defined by Lawrence Smith "the money market is a market dealing in
standardized short-term credit instruments (involving large amounts) where lenders
and borrowers do not deal directly with each other but through a middle manor a
dealer in the open market." It involves "commercial papers" which are instruments
"evidencing indebtness of any person or entity. . ., which are issued, endorsed, sold
or transferred or in any manner conveyed to another person or entity, with or without
recourse". The fundamental function of the money market device in its operation is to
match and bring together in a most impersonal manner both the "fund users" and the
"fund suppliers." The money market is an "impersonal market", free from personal

27
 considerations. "The market mechanism is intended to provide quick mobility of
money and securities."

The impersonal character of the money market device overlooks the individuals or
entities concerned. The issuer of a commercial paper in the money market
necessarily knows in advance that it would be expenditiously transacted and
transferred to any investor/lender without need of notice to said issuer. In practice, no
notification is given to the borrower or issuer of commercial paper of the sale or
transfer to the investor.

xxx xxx xxx

There is need to individuate a money market transaction, a relatively novel institution

in the Philippine commercial scene. It has been intended to facilitate the flow and
acquisition of capital on an impersonal basis. And as specifically required by
Presidential Decree No. 678, the investing public must be given adequate and
effective protection in availing of the credit of a borrower in the commercial paper
market.18 (Citations omitted; emphasis supplied)

We turn to Delta's arguments concerning alleged compensation or offsetting between DMC PN No.
2731 and Philfinance PN No. 143-A. It is important to note that at the time Philfinance sold part of its
rights under DMC PN No. 2731 to petitioner on 9 February 1981, no compensation had as yet taken
place and indeed none could have taken place. The essential requirements of compensation are
listed in the Civil Code as follows:

Art. 1279. In order that compensation may be proper, it is necessary:

(1) 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 consists 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 are 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. (Emphasis supplied)

On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was due. This was
explicitly recognized by Delta in its 10 April 1980 "Letter of Agreement" with Philfinance, where Delta
acknowledged that the relevant promissory notes were "to be offsetted (sic) against [Philfinance] PN
No. 143-A upon co-terminal maturity."

As noted, the assignment to petitioner was made on 9 February 1981 or from forty-nine (49) days
before the "co-terminal maturity" date, that is to say, before any compensation had taken place.
Further, the assignment to petitioner would have prevented compensation had taken place between
Philfinance and Delta, to the extent of P304,533.33, because upon execution of the assignment in
favor of petitioner, Philfinance and Delta would have ceased to be creditors and debtors of each
other in their own right to the extent of the amount assigned by Philfinance to petitioner. Thus, we

28
conclude that the assignment effected by Philfinance in favor of petitioner was a valid one and that
petitioner accordingly became owner of DMC PN No. 2731 to the extent of the portion thereof
assigned to him.

The record shows, however, that petitioner notified Delta of the fact of the assignment to him only on
14 July 1981, 19 that is, after the maturity not only of the money market placement made by petitioner
but also of both DMC PN No. 2731 and Philfinance PN No. 143-A. In other words, petitioner notified
Delta of his rights as assignee after compensation had taken place by operation of law because the
offsetting instruments had both reached maturity. It is a firmly settled doctrine that the rights of an
assignee are not any greater that the rights of the assignor, since the assignee is merely substituted
in the place of the assignor 20 and that the assignee acquires his rights subject to the equities — i.e.,
the defenses — which the debtor could have set up against the original assignor before notice of the
assignment was given to the debtor. Article 1285 of the Civil Code provides that:

Art. 1285. The debtor who has consented to the assignment of rights made by a
creditor in favor of a third person, cannot set up against the assignee the
compensation which would pertain to him against the assignor, unless the assignor
was notified by the debtor at the time he gave his consent, that he reserved his right
to the compensation.

If the creditor communicated the cession to him but the debtor did not
consent thereto, the latter may set up the compensation of debts previous to the
cession, but not of subsequent ones.

If the assignment is made without the knowledge of the debtor, he may set up the
compensation of all credits prior to the same and also later ones until he
had knowledge of the assignment. (Emphasis supplied)

Article 1626 of the same code states that: "the debtor who, before having knowledge of the
assignment, pays his creditor shall be released from the obligation." In Sison v. Yap-Tico,21 the Court
explained that:

[n]o man is bound to remain a debtor; he may pay to him with whom he contacted to
pay; and if he pay before notice that his debt has been assigned, the law holds him
exonerated, for the reason that it is the duty of the person who has acquired a title by
transfer to demand payment of the debt, to give his debt or notice.22

At the time that Delta was first put to notice of the assignment in petitioner's favor on 14 July 1981,
DMC PN No. 2731 had already been discharged by compensation. Since the assignor Philfinance
could not have then compelled payment anew by Delta of DMC PN No. 2731, petitioner, as assignee
of Philfinance, is similarly disabled from collecting from Delta the portion of the Note assigned to him.

It bears some emphasis that petitioner could have notified Delta of the assignment or sale was
effected on 9 February 1981. He could have notified Delta as soon as his money market placement
matured on 13 March 1981 without payment thereof being made by Philfinance; at that time,
compensation had yet to set in and discharge DMC PN No. 2731. Again petitioner could have
notified Delta on 26 March 1981 when petitioner received from Philfinance the Denominated
Custodianship Receipt ("DCR") No. 10805 issued by private respondent Pilipinas in favor of
petitioner. Petitioner could, in fine, have notified Delta at any time before the maturity date of DMC
PN No. 2731. Because petitioner failed to do so, and because the record is bare of any indication
that Philfinance had itself notified Delta of the assignment to petitioner, the Court is compelled to

29
uphold the defense of compensation raised by private respondent Delta. Of course, Philfinance
remains liable to petitioner under the terms of the assignment made by Philfinance to petitioner.

II.

We turn now to the relationship between petitioner and private respondent Pilipinas. Petitioner
contends that Pilipinas became solidarily liable with Philfinance and Delta when Pilipinas issued
DCR No. 10805 with the following words:

Upon your written instruction, we [Pilipinas] shall undertake physical delivery of the
above securities fully assigned to you —.23

The Court is not persuaded. We find nothing in the DCR that establishes an obligation on the part of
Pilipinas to pay petitioner the amount of P307,933.33 nor any assumption of liability in solidum with
Philfinance and Delta under DMC PN No. 2731. We read the DCR as a confirmation on the part of
Pilipinas that:

(1) it has in its custody, as duly constituted custodian bank, DMC PN No. 2731 of a
certain face value, to mature on 6 April 1981 and payable to the order of Philfinance;

(2) Pilipinas was, from and after said date of the assignment by Philfinance to
petitioner (9 February 1981), holding that Note on behalf and for the benefit of
petitioner, at least to the extent it had been assigned to petitioner by payee
Philfinance;24

(3) petitioner may inspect the Note either "personally or by authorized

representative", at any time during regular bank hours; and

(4) upon written instructions of petitioner, Pilipinas would physically deliver the DMC
PN No. 2731 (or a participation therein to the extent of P307,933.33) "should this
Denominated Custodianship receipt remain outstanding in [petitioner's] favor thirty
(30) days after its maturity."

Thus, we find nothing written in printers ink on the DCR which could reasonably be read as
converting Pilipinas into an obligor under the terms of DMC PN No. 2731 assigned to petitioner,
either upon maturity thereof or any other time. We note that both in his complaint and in his
testimony before the trial court, petitioner referred merely to the obligation of private respondent
Pilipinas to effect the physical delivery to him of DMC PN No. 2731.25 Accordingly, petitioner's theory
that Pilipinas had assumed a solidary obligation to pay the amount represented by a portion of the
Note assigned to him by Philfinance, appears to be a new theory constructed only after the trial court
had ruled against him. The solidary liability that petitioner seeks to impute Pilipinas cannot, however,
be lightly inferred. Under article 1207 of the Civil Code, "there is a solidary liability only when the law
or the nature of the obligation requires solidarity," The record here exhibits no express assumption of
solidary liability vis-a-vis petitioner, on the part of Pilipinas. Petitioner has not pointed to us to any
law which imposed such liability upon Pilipinas nor has petitioner argued that the very nature of the
custodianship assumed by private respondent Pilipinas necessarily implies solidary liability under the
securities, custody of which was taken by Pilipinas. Accordingly, we are unable to hold Pilipinas
solidarily liable with Philfinance and private respondent Delta under DMC PN No. 2731.

We do not, however, mean to suggest that Pilipinas has no responsibility and liability in respect of
petitioner under the terms of the DCR. To the contrary, we find, after prolonged analysis and

30
deliberation, that private respondent Pilipinas had breached its undertaking under the DCR to
petitioner Sesbreño.

We believe and so hold that a contract of deposit was constituted by the act of Philfinance in
designating Pilipinas as custodian or depositary bank. The depositor was initially Philfinance; the
obligation of the depository was owed, however, to petitioner Sesbreño as beneficiary of the
custodianship or depository agreement. We do not consider that this is a simple case of a
stipulation pour autri. The custodianship or depositary agreement was established as an integral part
of the money market transaction entered into by petitioner with Philfinance. Petitioner bought a
portion of DMC PN No. 2731; Philfinance as assignor-vendor deposited that Note with Pilipinas in
order that the thing sold would be placed outside the control of the vendor. Indeed, the constituting
of the depositary or custodianship agreement was equivalent to constructive delivery of the Note (to
the extent it had been sold or assigned to petitioner) to petitioner. It will be seen that custodianship
agreements are designed to facilitate transactions in the money market by providing a basis for
confidence on the part of the investors or placers that the instruments bought by them are effectively
taken out of the pocket, as it were, of the vendors and placed safely beyond their reach, that those
instruments will be there available to the placers of funds should they have need of them. The
depositary in a contract of deposit is obliged to return the security or the thing deposited upon
demand of the depositor (or, in the presented case, of the beneficiary) of the contract, even though a
term for such return may have been established in the said contract.26 Accordingly, any stipulation in
the contract of deposit or custodianship that runs counter to the fundamental purpose of that
agreement or which was not brought to the notice of and accepted by the placer-beneficiary, cannot
be enforced as against such beneficiary-placer.

We believe that the position taken above is supported by considerations of public policy. If there is
any party that needs the equalizing protection of the law in money market transactions, it is the
members of the general public whom place their savings in such market for the purpose of
generating interest revenues.27 The custodian bank, if it is not related either in terms of equity
ownership or management control to the borrower of the funds, or the commercial paper dealer, is
normally a preferred or traditional banker of such borrower or dealer (here, Philfinance). The
custodian bank would have every incentive to protect the interest of its client the borrower or dealer
as against the placer of funds. The providers of such funds must be safeguarded from the impact of
stipulations privately made between the borrowers or dealers and the custodian banks, and
disclosed to fund-providers only after trouble has erupted.

In the case at bar, the custodian-depositary bank Pilipinas refused to deliver the security deposited
with it when petitioner first demanded physical delivery thereof on 2 April 1981. We must again note,
in this connection, that on 2 April 1981, DMC PN No. 2731 had not yet matured and therefore,
compensation or offsetting against Philfinance PN No. 143-A had not yet taken place. Instead of
complying with the demand of the petitioner, Pilipinas purported to require and await the instructions
of Philfinance, in obvious contravention of its undertaking under the DCR to effect physical delivery
of the Note upon receipt of "written instructions" from petitioner Sesbreño. The ostensible term
written into the DCR (i.e., "should this [DCR] remain outstanding in your favor thirty [30] days after its
maturity") was not a defense against petitioner's demand for physical surrender of the Note on at
least three grounds: firstly, such term was never brought to the attention of petitioner Sesbreño at
the time the money market placement with Philfinance was made; secondly, such term runs counter
to the very purpose of the custodianship or depositary agreement as an integral part of a money
market transaction; and thirdly, it is inconsistent with the provisions of Article 1988 of the Civil Code
noted above. Indeed, in principle, petitioner became entitled to demand physical delivery of the Note
held by Pilipinas as soon as petitioner's money market placement matured on 13 March 1981
without payment from Philfinance.

31
We conclude, therefore, that private respondent Pilipinas must respond to petitioner for damages
sustained by arising out of its breach of duty. By failing to deliver the Note to the petitioner as
depositor-beneficiary of the thing deposited, Pilipinas effectively and unlawfully deprived petitioner of
the Note deposited with it. Whether or not Pilipinas itself benefitted from such conversion or unlawful
deprivation inflicted upon petitioner, is of no moment for present purposes. Prima facie, the damages
suffered by petitioner consisted of P304,533.33, the portion of the DMC PN No. 2731 assigned to
petitioner but lost by him by reason of discharge of the Note by compensation, plus legal interest of
six percent (6%) per annum containing from 14 March 1981.

The conclusion we have reached is, of course, without prejudice to such right of reimbursement as
Pilipinas may have vis-a-vis Philfinance.

III.

The third principal contention of petitioner — that Philfinance and private respondents Delta and
Pilipinas should be treated as one corporate entity — need not detain us for long.

In the first place, as already noted, jurisdiction over the person of Philfinance was never acquired
either by the trial court nor by the respondent Court of Appeals. Petitioner similarly did not seek to
implead Philfinance in the Petition before us.

Secondly, it is not disputed that Philfinance and private respondents Delta and Pilipinas have been
organized as separate corporate entities. Petitioner asks us to pierce their separate corporate
entities, but has been able only to cite the presence of a common Director — Mr. Ricardo Silverio,
Sr., sitting on the Board of Directors of all three (3) companies. Petitioner has neither alleged nor
proved that one or another of the three (3) concededly related companies used the other two (2) as
mere alter egos or that the corporate affairs of the other two (2) were administered and managed for
the benefit of one. There is simply not enough evidence of record to justify disregarding the separate
corporate personalities of delta and Pilipinas and to hold them liable for any assumed or
undetermined liability of Philfinance to petitioner.28

WHEREFORE, for all the foregoing, the Decision and Resolution of the Court of Appeals in C.A.-
G.R. CV No. 15195 dated 21 march 1989 and 17 July 1989, respectively, are hereby MODIFIED and
SET ASIDE, to the extent that such Decision and Resolution had dismissed petitioner's complaint
against Pilipinas Bank. Private respondent Pilipinas bank is hereby ORDERED to indemnify
petitioner for damages in the amount of P304,533.33, plus legal interest thereon at the rate of six
percent (6%) per annum counted from 2 April 1981. As so modified, the Decision and Resolution of
the Court of Appeals are hereby AFFIRMED. No pronouncement as to costs.

SO ORDERED.

32
TRADERS ROYAL BANK VS COURT OF APPEALS (1997)

G.R. No. 93397 March 3, 1997

TRADERS ROYAL BANK, petitioner,

vs.
COURT OF APPEALS, FILRITERS GUARANTY ASSURANCE CORPORATION and CENTRAL
BANK of the PHILIPPINES, respondents.

TORRES, JR., J.:

Assailed in this Petition for Review on Certiorari is the Decision of the respondent Court of Appeals
dated January 29, 1990,1 affirming the nullity of the transfer of Central Bank Certificate of
Indebtedness (CBCI) No. D891,2 with a face value of P500,000.00, from the Philippine Underwriters
Finance Corporation (Philfinance) to the petitioner Trader's Royal Bank (TRB), under a Repurchase
Agreement3 dated February 4, 1981, and a Detached Assignment4 dated April 27, 1981.

Docketed as Civil Case No. 83-17966 in the Regional Trial Court of Manila, Branch 32, the action
was originally filed as a Petition for Mandamus5 under Rule 65 of the Rules of Court, to compel the
Central Bank of the Philippines to register the transfer of the subject CBCI to petitioner Traders
Royal Bank (TRB).

In the said petition, TRB stated that:

3. On November 27, 1979, Filriters Guaranty Assurance Corporation (Filriters)

executed a "Detached Assignment" . . ., whereby Filriters, as registered owner, sold,
transferred, assigned and delivered unto Philippine Underwriters Finance
Corporation (Philfinance) all its rights and title to Central Bank Certificates of
Indebtedness of PESOS: FIVE HUNDRED THOUSAND (P500,000) and having an
aggregate value of PESOS: THREE MILLION FIVE HUNDRED THOUSAND
(P3,500,000.00);

4. The aforesaid Detached Assignment (Annex "A") contains an express

authorization executed by the transferor intended to complete the assignment
through the registration of the transfer in the name of PhilFinance, which
authorization is specifically phrased as follows: '(Filriters) hereby irrevocably
authorized the said issuer (Central Bank) to transfer the said bond/certificates on the
books of its fiscal agent;

5. On February 4, 1981, petitioner entered into a Repurchase Agreement with

PhilFinance . . ., whereby, for and in consideration of the sum of PESOS: FIVE
HUNDRED THOUSAND (P500,000.00), PhilFinance sold, transferred and delivered
to petitioner CBCI 4-year, 8th series, Serial No. D891 with a face value of
P500,000.00 . . ., which CBCI was among those previously acquired by PhilFinance
from Filriters as averred in paragraph 3 of the Petition;

33
 6. Pursuant to the aforesaid Repurchase Agreement (Annex "B"), Philfinance agreed
to repurchase CBCI Serial No. D891 (Annex "C"), at the stipulated price of PESOS:
FIVE HUNDRED NINETEEN THOUSAND THREE HUNDRED SIXTY-ONE & 11/100
(P519,361.11) on April 27, 1981;

7. PhilFinance failed to repurchase the CBCI on the agreed date of maturity, April 27,
1981, when the checks it issued in favor of petitioner were dishonored for insufficient
funds;

8. Owing to the default of PhilFinance, it executed a Detached Assignment in favor of

the Petitioner to enable the latter to have its title completed and registered in the
books of the respondent. And by means of said Detachment, Philfinance transferred
and assigned all, its rights and title in the said CBCI (Annex "C") to petitioner and,
furthermore, it did thereby "irrevocably authorize the said issuer (respondent herein)
to transfer the said bond/certificate on the books of its fiscal agent." . . .

9. Petitioner presented the CBCI (Annex "C"), together with the two (2)
aforementioned Detached Assignments (Annexes "B" and "D"), to the Securities
Servicing Department of the respondent, and requested the latter to effect the
transfer of the CBCI on its books and to issue a new certificate in the name of
petitioner as absolute owner thereof;

10. Respondent failed and refused to register the transfer as requested, and
continues to do so notwithstanding petitioner's valid and just title over the same and
despite repeated demands in writing, the latest of which is hereto attached as Annex
"E" and made an integral part hereof;

11. The express provisions governing the transfer of the CBCI were substantially
complied with the petitioner's request for registration, to wit:

"No transfer thereof shall be valid unless made at said office (where
the Certificate has been registered) by the registered owner hereof, in
person or by his attorney duly authorized in writing, and similarly
noted hereon, and upon payment of a nominal transfer fee which may
be required, a new Certificate shall be issued to the transferee of the
registered holder thereof."

and, without a doubt, the Detached Assignments presented to respondent were

sufficient authorizations in writing executed by the registered owner, Filriters, and its
transferee, PhilFinance, as required by the above-quoted provision;

12. Upon such compliance with the aforesaid requirements, the ministerial duties of
registering a transfer of ownership over the CBCI and issuing a new certificate to the
transferee devolves upon the respondent;

Upon these assertions, TRB prayed for the registration by the Central Bank of the subject CBCI in its
name.

On December 4, 1984, the Regional Trial Court the case took cognizance of the defendant Central
Bank of the Philippines' Motion for Admission of Amended Answer with Counter Claim for
Interpleader6 thereby calling to fore the respondent Filriters Guaranty Assurance Corporation
(Filriters), the registered owner of the subject CBCI as respondent.

34
For its part, Filriters interjected as Special Defenses the following:

11. Respondent is the registered owner of CBCI No. 891;

12. The CBCI constitutes part of the reserve investment against liabilities required of
respondent as an insurance company under the Insurance Code;

13. Without any consideration or benefit whatsoever to Filriters, in violation of law

and the trust fund doctrine and to the prejudice of policyholders and to all who have
present or future claim against policies issued by Filriters, Alfredo Banaria, then
Senior Vice-President-Treasury of Filriters, without any board resolution, knowledge
or consent of the board of directors of Filriters, and without any clearance or
authorization from the Insurance Commissioner, executed a detached assignment
purportedly assigning CBCI No. 891 to Philfinance;

xxx xxx xxx

14. Subsequently, Alberto Fabella, Senior Vice-President-Comptroller are Pilar

Jacobe, Vice-President-Treasury of Filriters (both of whom were holding the same
positions in Philfinance), without any consideration or benefit redounding to Filriters
and to the grave prejudice of Filriters, its policy holders and all who have present or
future claims against its policies, executed similar detached assignment forms
transferring the CBCI to plaintiff;

xxx xxx xxx

15. The detached assignment is patently void and inoperative because the
assignment is without the knowledge and consent of directors of Filriters, and not
duly authorized in writing by the Board, as requiring by Article V, Section 3 of CB
Circular No. 769;

16. The assignment of the CBCI to Philfinance is a personal act of Alfredo Banaria
and not the corporate act of Filriters and such null and void;

a) The assignment was executed without consideration and for that reason, the
assignment is void from the beginning (Article 1409, Civil Code);

b) The assignment was executed without any knowledge and consent of the board of
directors of Filriters;

c) The CBCI constitutes reserve investment of Filriters against liabilities, which is a

requirement under the Insurance Code for its existence as an insurance company
and the pursuit of its business operations. The assignment of the CBCI is illegal act
in the sense of malum in se or malum prohibitum, for anyone to make, either as
corporate or personal act;

d) The transfer of dimunition of reserve investments of Filriters is expressly prohibited

by law, is immoral and against public policy;

35
 e) The assignment of the CBCI has resulted in the capital impairment and in the
solvency deficiency of Filriters (and has in fact helped in placing Filriters under
conservatorship), an inevitable result known to the officer who executed assignment.

17. Plaintiff had acted in bad faith and with knowledge of the illegality and invalidity of
the assignment.

a) The CBCI No. 891 is not a negotiable instrument and as a certificate of

indebtedness is not payable to bearer but is a registered in the name of Filriters;

b) The provision on transfer of the CBCIs provides that the Central Bank shall
treat the registered owner as the absolute owner and that the value of the registered
certificates shall be payable only to the registered owner; a sufficient notice to
plaintiff that the assignments do not give them the registered owner's right as
absolute owner of the CBCI's;

c) CB Circular 769, Series of 1980 (Rules and Regulations Governing CBCIs)

provides that the registered certificates are payable only to the registered owner
(Article II, Section 1).

18. Plaintiff knew full well that the assignment by Philfinance of CBCI No. 891 by
Filriters is not a regular transaction made in the usual of ordinary course of business;

a) The CBCI constitutes part of the reserve investments of Filriters against liabilities
requires by the Insurance Code and its assignment or transfer is expressly prohibited
by law. There was no attempt to get any clearance or authorization from the
Insurance Commissioner;

b) The assignment by Filriters of the CBCI is clearly not a transaction in the usual or
regular course of its business;

c) The CBCI involved substantial amount and its assignment clearly constitutes
disposition of "all or substantially all" of the assets of Filriters, which requires the
affirmative action of the stockholders (Section 40, Corporation [sic] Code.7

In its Decision8 dated April 29, 1988, the Regional Trial Court of Manila, Branch XXXIII found the
assignment of CBCI No. D891 in favor of Philfinance, and the subsequent assignment of the same
CBCI by Philfinance in favor of Traders Royal Bank null and void and of no force and effect. The
dispositive portion of the decision reads:

ACCORDINGLY, judgment is hereby rendered in favor of the respondent Filriters

Guaranty Assurance Corporation and against the plaintiff Traders Royal Bank:

(a) Declaring the assignment of CBCI No. 891 in favor of PhilFinance, and the
subsequent assignment of CBCI by PhilFinance in favor of the plaintiff Traders Royal
Bank as null and void and of no force and effect;

(b) Ordering the respondent Central Bank of the Philippines to disregard the said
assignment and to pay the value of the proceeds of the CBCI No. D891 to the
Filriters Guaranty Assurance Corporation;

36
 (c) Ordering the plaintiff Traders Royal Bank to pay respondent Filriters Guaranty
Assurance Corp. The sum of P10,000 as attorney's fees; and

(d) to pay the costs.

SO ORDERED.9

The petitioner assailed the decision of the trial court in the Court of Appeals 10, but their appeals
likewise failed. The findings of the fact of the said court are hereby reproduced:

The records reveal that defendant Filriters is the registered owner of CBCI No. D891.
Under a deed of assignment dated November 27, 1971, Filriters transferred CBCI
No. D891 to Philippine Underwriters Finance Corporation (Philfinance).
Subsequently, Philfinance transferred CBCI No. D891, which was still registered in
the name of Filriters, to appellant Traders Royal Bank (TRB). The transfer was made
under a repurchase agreement dated February 4, 1981, granting Philfinance the right
to repurchase the instrument on or before April 27, 1981. When Philfinance failed to
buy back the note on maturity date, it executed a deed of assignment, dated April 27,
1981, conveying to appellant TRB all its right and the title to CBCI No. D891.

Armed with the deed of assignment, TRB then sought the transfer and registration of
CBCI No. D891 in its name before the Security and Servicing Department of the
Central Bank (CB). Central Bank, however, refused to effect the transfer and
registration in view of an adverse claim filed by defendant Filriters.

Left with no other recourse, TRB filed a special civil action for mandamus against the
Central Bank in the Regional Trial Court of Manila. The suit, however, was
subsequently treated by the lower court as a case of interpleader when CB prayed in
its amended answer that Filriters be impleaded as a respondent and the court
adjudge which of them is entitled to the ownership of CBCI No. D891. Failing to get a
favorable judgment. TRB now comes to this Court on appeal. 11

In the appellate court, petitioner argued that the subject CBCI was a negotiable instrument, and
having acquired the said certificate from Philfinance as a holder in due course, its possession of the
same is thus free fro any defect of title of prior parties and from any defense available to prior parties
among themselves, and it may thus, enforce payment of the instrument for the full amount thereof
against all parties liable thereon. 12

In ignoring said argument, the appellate court that the CBCI is not a negotiable instrument, since the
instrument clearly stated that it was payable to Filriters, the registered owner, whose name was
inscribed thereon, and that the certificate lacked the words of negotiability which serve as an
expression of consent that the instrument may be transferred by negotiation.

Obviously, the assignment of the certificate from Filriters to Philfinance was fictitious, having made
without consideration, and did not conform to Central Bank Circular No. 769, series of 1980, better
known as the "Rules and Regulations Governing Central Bank Certificates of Indebtedness", which
provided that any "assignment of registered certificates shall not be valid unless made . . . by the
registered owner thereof in person or by his representative duly authorized in writing."

Petitioner's claimed interest has no basis, since it was derived from Philfinance whose interest was
inexistent, having acquired the certificate through simulation. What happened was Philfinance

37
merely borrowed CBCI No. D891 from Filriters, a sister corporation, to guarantee its financing
operations.

Said the Court:

In the case at bar, Alfredo O. Banaria, who signed the deed of assignment
purportedly for and on behalf of Filriters, did not have the necessary written
authorization from the Board of Directors of Filriters to act for the latter. For lack of
such authority, the assignment did not therefore bind Filriters and violated as the
same time Central Bank Circular No. 769 which has the force and effect of a law,
resulting in the nullity of the transfer (People v. Que Po Lay, 94 Phil. 640; 3M
Philippines, Inc. vs. Commissioner of Internal Revenue, 165 SCRA 778).

In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could
assign or transfer to Traders Royal Bank and which the latter can register with the
Central Bank.

WHEREFORE, the judgment appealed from is AFFIRMED, with costs against

plaintiff-appellant.

SO ORDERED. 13

Petitioner's present position rests solely on the argument that Philfinance owns 90% of Filriters
equity and the two corporations have identical corporate officers, thus demanding the application of
the doctrine or piercing the veil of corporate fiction, as to give validity to the transfer of the CBCI from
registered owner to petitioner TRB. 14 This renders the payment by TRB to Philfinance of CBCI, as
actual payment to Filriters. Thus, there is no merit to the lower court's ruling that the transfer of the
CBCI from Filriters to Philfinance was null and void for lack of consideration.

Admittedly, the subject CBCI is not a negotiable instrument in the absence of words of negotiability
within the meaning of the negotiable instruments law (Act 2031).

The pertinent portions of the subject CBCI read:

xxx xxx xxx

The Central Bank of the Philippines (the Bank) for value received, hereby promises
to pay bearer, of if this Certificate of indebtedness be registered, to FILRITERS
GUARANTY ASSURANCE CORPORATION, the registered owner hereof, the
principal sum of FIVE HUNDRED THOUSAND PESOS.

xxx xxx xxx

Properly understood, a certificate of indebtedness pertains to certificates for the creation and
maintenance of a permanent improvement revolving fund, is similar to a "bond," (82 Minn. 202).
Being equivalent to a bond, it is properly understood as acknowledgment of an obligation to pay a
fixed sum of money. It is usually used for the purpose of long term loans.

The appellate court ruled that the subject CBCI is not a negotiable instrument, stating that:

38
 As worded, the instrument provides a promise "to pay Filriters Guaranty Assurance
Corporation, the registered owner hereof." Very clearly, the instrument is payable
only to Filriters, the registered owner, whose name is inscribed thereon. It lacks the
words of negotiability which should have served as an expression of consent that the
instrument may be transferred by negotiation.15

A reading of the subject CBCI indicates that the same is payable to FILRITERS GUARANTY
ASSURANCE CORPORATION, and to no one else, thus, discounting the petitioner's submission
that the same is a negotiable instrument, and that it is a holder in due course of the certificate.

The language of negotiability which characterize a negotiable paper as a credit instrument is its
freedom to circulate as a substitute for money. Hence, freedom of negotiability is the touchtone
relating to the protection of holders in due course, and the freedom of negotiability is the foundation
for the protection which the law throws around a holder in due course (11 Am. Jur. 2d, 32). This
freedom in negotiability is totally absent in a certificate indebtedness as it merely to pay a sum of
money to a specified person or entity for a period of time.

As held in Caltex (Philippines), Inc. v. Court of Appeals, 16:

The accepted rule is that the negotiability or non-negotiability of an instrument is

determined from the writing, that is, from the face of the instrument itself. In the
construction of a bill or note, the intention of the parties is to control, if it can be
legally ascertained. While the writing may be read in the light of surrounding
circumstance in order to more perfectly understand the intent and meaning of the
parties, yet as they have constituted the writing to be the only outward and visible
expression of their meaning, no other words are to be added to it or substituted in its
stead. The duty of the court in such case is to ascertain, not what the parties may
have secretly intended as contradistinguished from what their words express, but
what is the meaning of the words they have used. What the parties meant must be
determined by what they said.

Thus, the transfer of the instrument from Philfinance to TRB was merely an assignment, and is not
governed by the negotiable instruments law. The pertinent question then is, was the transfer of the
CBCI from Filriters to Philfinance and subsequently from Philfinance to TRB, in accord with existing
law, so as to entitle TRB to have the CBCI registered in its name with the Central Bank?

The following are the appellate court's pronouncements on the matter:

Clearly shown in the record is the fact that Philfinance's title over CBCI No. D891 is
defective since it acquired the instrument from Filriters fictitiously. Although the deed
of assignment stated that the transfer was for "value received", there was really no
consideration involved. What happened was Philfinance merely borrowed CBCI No.
D891 from Filriters, a sister corporation. Thus, for lack of any consideration, the
assignment made is a complete nullity.

What is more, We find that the transfer made by Filriters to Philfinance did not
conform to Central Bank Circular No. 769, series of 1980, otherwise known as the
"Rules and Regulations Governing Central Bank Certificates of Indebtedness", under
which the note was issued. Published in the Official Gazette on November 19, 1980,
Section 3 thereof provides that any assignment of registered certificates shall not be
valid unless made . . . by the registered owner thereof in person or by his
representative duly authorized in writing.

39
 In the case at bar, Alfredo O. Banaria, who signed the deed of assignment
purportedly for and on behalf of Filriters, did not have the necessary written
authorization from the Board of Directors of Filriters to act for the latter. For lack of
such authority, the assignment did not therefore bind Filriters and violated at the
same time Central Bank Circular No. 769 which has the force and effect of a law,
resulting in the nullity of the transfer (People vs. Que Po Lay, 94 Phil. 640; 3M
Philippines, Inc. vs. Commissioner of Internal Revenue, 165 SCRA 778).

In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could
assign or transfer to Traders Royal Bank and which the latter can register with the
Central Bank

Petitioner now argues that the transfer of the subject CBCI to TRB must upheld, as the respondent
Filriters and Philfinance, though separate corporate entities on paper, have used their corporate
fiction to defraud TRB into purchasing the subject CBCI, which purchase now is refused registration
by the Central Bank.

Says the petitioner;

Since Philfinance own about 90% of Filriters and the two companies have the same
corporate officers, if the principle of piercing the veil of corporate entity were to be
applied in this case, then TRB's payment to Philfinance for the CBCI purchased by it
could just as well be considered a payment to Filriters, the registered owner of the
CBCI as to bar the latter from claiming, as it has, that it never received any payment
for that CBCI sold and that said CBCI was sold without its authority.

xxx xxx xxx

We respectfully submit that, considering that the Court of Appeals has held that the
CBCI was merely borrowed by Philfinance from Filriters, a sister corporation, to
guarantee its (Philfinance's) financing operations, if it were to be consistent therewith,
on the issued raised by TRB that there was a piercing a veil of corporate entity, the
Court of Appeals should have ruled that such veil of corporate entity was, in fact,
pierced, and the payment by TRB to Philfinance should be construed as payment to
Filriters. 17

We disagree with Petitioner.

Petitioner cannot put up the excuse of piercing the veil of corporate entity, as this merely an
equitable remedy, and may be awarded only in cases when the corporate fiction is used to defeat
public convenience, justify wrong, protect fraud or defend crime or where a corporation is a mere
alter ego or business conduit of a person. 18

Peiercing the veil of corporate entity requires the court to see through the protective shroud which
exempts its stockholders from liabilities that ordinarily, they could be subject to, or distinguished one
corporation from a seemingly separate one, were it not for the existing corporate fiction. But to do
this, the court must be sure that the corporate fiction was misused, to such an extent that injustice,
fraud, or crime was committed upon another, disregarding, thus, his, her, or its rights. It is the
protection of the interests of innocent third persons dealing with the corporate entity which the law
aims to protect by this doctrine.

40
The corporate separateness between Filriters and Philfinance remains, despite the petitioners
insistence on the contrary. For one, other than the allegation that Filriters is 90% owned by
Philfinance, and the identity of one shall be maintained as to the other, there is nothing else which
could lead the court under circumstance to disregard their corporate personalities.

Though it is true that when valid reasons exist, the legal fiction that a corporation is an entity with a
juridical personality separate from its stockholders and from other corporations may be
disregarded, 19 in the absence of such grounds, the general rule must upheld. The fact that Filfinance
owns majority shares in Filriters is not by itself a ground to disregard the independent corporate
status of Filriters. In Liddel & Co., Inc. vs. Collector of Internal Revenue, 20 the mere ownership by a
single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is
not of itself a sufficient reason for disregarding the fiction of separate corporate personalities.

In the case at bar, there is sufficient showing that the petitioner was not defrauded at all when it
acquired the subject certificate of indebtedness from Philfinance.

On its face the subject certificates states that it is registered in the name of Filriters. This should
have put the petitioner on notice, and prompted it to inquire from Filriters as to Philfinance's title over
the same or its authority to assign the certificate. As it is, there is no showing to the effect that
petitioner had any dealings whatsoever with Filriters, nor did it make inquiries as to the ownership of
the certificate.

The terms of the CBCI No. D891 contain a provision on its TRANSFER. Thus:

TRANSFER. This Certificate shall pass by delivery unless it is registered in the

owner's name at any office of the Bank or any agency duly authorized by the Bank,
and such registration is noted hereon. After such registration no transfer thereof shall
be valid unless made at said office (where the Certificates has been registered) by
the registered owner hereof, in person, or by his attorney, duly authorized in writing
and similarly noted hereon and upon payment of a nominal transfer fee which may
be required, a new Certificate shall be issued to the transferee of the registered
owner thereof. The bank or any agency duly authorized by the Bank may deem and
treat the bearer of this Certificate, or if this Certificate is registered as herein
authorized, the person in whose name the same is registered as the absolute owner
of this Certificate, for the purpose of receiving payment hereof, or on account hereof,
and for all other purpose whether or not this Certificate shall be overdue.

This is notice to petitioner to secure from Filriters a written authorization for the transfer or to require
Philfinance to submit such an authorization from Filriters.

Petitioner knew that Philfinance is not registered owner of the CBCI No. D891. The fact that a non-
owner was disposing of the registered CBCI owned by another entity was a good reason for
petitioner to verify of inquire as to the title Philfinance to dispose to the CBCI.

Moreover, CBCI No. D891 is governed by CB Circular No. 769, series of 1990 21, known as the Rules
and Regulations Governing Central Bank Certificates of Indebtedness, Section 3, Article V of which
provides that:

Sec. 3. Assignment of Registered Certificates. — Assignment of registered

certificates shall not be valid unless made at the office where the same have been
issued and registered or at the Securities Servicing Department, Central Bank of the
Philippines, and by the registered owner thereof, in person or by his representative,

41
 duly authorized in writing. For this purpose, the transferee may be designated as the
representative of the registered owner.

Petitioner, being a commercial bank, cannot feign ignorance of Central Bank Circular 769, and its
requirements. An entity which deals with corporate agents within circumstances showing that the
agents are acting in excess of corporate authority, may not hold the corporation liable. 22 This is only
fair, as everyone must, in the exercise of his rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and good faith. 23

The transfer made by Filriters to Philfinance did not conform to the said. Central Bank Circular,
which for all intents, is considered part of the law. As found by the courts a quo, Alfredo O. Banaria,
who had signed the deed of assignment from Filriters to Philfinance, purportedly for and in favor of
Filriters, did not have the necessary written authorization from the Board of Directors of Filriters to
act for the latter. As it is, the sale from Filriters to Philfinance was fictitious, and therefore void and
inexistent, as there was no consideration for the same. This is fatal to the petitioner's cause, for then,
Philfinance had no title over the subject certificate to convey the Traders Royal Bank. Nemo potest
nisi quod de jure potest — no man can do anything except what he can do lawfully.

Concededly, the subject CBCI was acquired by Filriters to form part of its legal and capital reserves,
which are required by law 24 to be maintained at a mandated level. This was pointed out by Elias
Garcia, Manager-in-Charge of respondent Filriters, in his testimony given before the court on May
30, 1986.

Q Do you know this Central Bank Certificate of Indebtedness, in

short, CBCI No. D891 in the face value of P5000,000.00 subject of
this case?

A Yes, sir.

Q Why do you know this?

A Well, this was CBCI of the company sought to be examined by the

Insurance Commission sometime in early 1981 and this CBCI No.
891 was among the CBCI's that were found to be missing.

Q Let me take you back further before 1981. Did you have the
knowledge of this CBCI No. 891 before 1981?

A Yes, sir. This CBCI is an investment of Filriters required by the

Insurance Commission as legal reserve of the company.

Q Legal reserve for the purpose of what?

A Well, you see, the Insurance companies are required to put up

legal reserves under Section 213 of the Insurance Code equivalent to
40 percent of the premiums receipt and further, the Insurance
Commission requires this reserve to be invested preferably in
government securities or government binds. This is how this CBCI
came to be purchased by the company.

42
It cannot, therefore, be taken out of the said funds, without violating the requirements of the law.
Thus, the anauthorized use or distribution of the same by a corporate officer of Filriters cannot bind
the said corporation, not without the approval of its Board of Directors, and the maintenance of the
required reserve fund.

Consequently, the title of Filriters over the subject certificate of indebtedness must be upheld over
the claimed interest of Traders Royal Bank.

ACCORDINGLY, the petition is DISMISSED and the decision appealed from dated January 29,
1990 is hereby AFFIRMED.

SO ORDERED.

43
INCIONG VS COURT OF APPEALS (1996)

G.R. No. 96405 June 26, 1996

BALDOMERO INCIONG, JR., petitioner,

vs.
COURT OF APPEALS and PHILIPPINE BANK OF COMMUNICATIONS, respondents.

This is a petition for review on certiorari of the decision of the Court of Appeals affirming that of the Regional Trial Court of Misamis Oriental,
Branch 18,1 which disposed of Civil Case No. 10507 for collection of a sum of money and damages, as follows:

WHEREFORE, defendant BALDOMERO L. INCIONG, JR. is adjudged solidarily

liable and ordered to pay to the plaintiff Philippine Bank of Communications,
Cagayan de Oro City, the amount of FIFTY THOUSAND PESOS (P50,000.00), with
interest thereon from May 5, 1983 at 16% per annum until fully paid; and 6% per
annum on the total amount due, as liquidated damages or penalty from May 5, 1983
until fully paid; plus 10% of the total amount due for expenses of litigation and
attorney's fees; and to pay the costs.

The counterclaim, as well as the cross claim, are dismissed for lack of merit.

SO ORDERED.

Petitioner's liability resulted from the promissory note in the amount of P50,000.00 which he signed
with Rene C. Naybe and Gregorio D. Pantanosas on February 3, 1983, holding themselves jointly
and severally liable to private respondent Philippine Bank of Communications, Cagayan de Oro City
branch. The promissory note was due on May 5, 1983.

Said due date expired without the promissors having paid their obligation. Consequently, on
November 14, 1983 and on June 8, 1984, private respondent sent petitioner telegrams demanding
payment thereof.2 On December 11, 1984 private respondent also sent by registered mail a final
letter of demand to Rene C. Naybe. Since both obligors did not respond to the demands made,
private respondent filed on January 24, 1986 a complaint for collection of the sum of P50,000.00
against the three obligors.

On November 25, 1986, the complaint was dismissed for failure of the plaintiff to prosecute the case.
However, on January 9, 1987, the lower court reconsidered the dismissal order and required the
sheriff to serve the summonses. On January 27, 1987, the lower court dismissed the case against
defendant Pantanosas as prayed for by the private respondent herein. Meanwhile, only the
summons addressed to petitioner was served as the sheriff learned that defendant Naybe had gone
to Saudi Arabia.

In his answer, petitioner alleged that sometime in January 1983, he was approached by his friend,
Rudy Campos, who told him that he was a partner of Pio Tio, the branch manager of private
respondent in Cagayan de Oro City, in the falcata logs operation business. Campos also intimated to
him that Rene C. Naybe was interested in the business and would contribute a chainsaw to the
venture. He added that, although Naybe had no money to buy the equipment, Pio Tio had assured
Naybe of the approval of a loan he would make with private respondent. Campos then persuaded
petitioner to act as a "co-maker" in the said loan. Petitioner allegedly acceded but with the
understanding that he would only be a co-maker for the loan of P50,000.00.

44
Petitioner alleged further that five (5) copies of a blank promissory note were brought to him by
Campos at his office. He affixed his signature thereto but in one copy, he indicated that he bound
himself only for the amount of P5,000.00. Thus, it was by trickery, fraud and misrepresentation that
he was made liable for the amount of P50,000.00.

In the aforementioned decision of the lower court, it noted that the typewritten figure "-- 50,000 --"
clearly appears directly below the admitted signature of the petitioner in the promissory
note. 3 Hence, the latter's uncorroborated testimony on his limited liability cannot prevail over the
presumed regularity and fairness of the transaction, under Sec. 5 (q) of Rule 131. The lower court
added that it was "rather odd" for petitioner to have indicated in a copy and not in the original, of the
promissory note, his supposed obligation in the amount of P5,000.00 only. Finally, the lower court
held that, even granting that said limited amount had actually been agreed upon, the same would
have been merely collateral between him and Naybe and, therefore, not binding upon the private
respondent as creditor-bank.

The lower court also noted that petitioner was a holder of a Bachelor of Laws degree and a labor
consultant who was supposed to take due care of his concerns, and that, on the witness stand, Pio
Tio denied having participated in the alleged business venture although he knew for a fact that the
falcata logs operation was encouraged by the bank for its export potential.

Petitioner appealed the said decision to the Court of Appeals which, in its decision of August 31,
1990, affirmed that of the lower court. His motion for reconsideration of the said decision having
been denied, he filed the instant petition for review on certiorari.

On February 6, 1991, the Court denied the petition for failure of petitioner to comply with the Rules of
Court and paragraph 2 of Circular
No. 1-88, and to sufficiently show that respondent court had committed any reversible error in its
questioned decision.4 His motion for the reconsideration of the denial of his petition was likewise
denied with finality in the Resolution of April 24, 1991.5 Thereafter, petitioner filed a motion for leave
to file a second motion for reconsideration which, in the Resolution of May 27, 1991, the Court
denied. In the same Resolution, the Court ordered the entry of judgment in this case.6

Unfazed, petitioner filed a notion for leave to file a motion for clarification. In the latter motion, he
asserted that he had attached Registry Receipt No. 3268 to page 14 of the petition in compliance
with Circular No. 1-88. Thus, on August 7, 1991, the Court granted his prayer that his petition be
given due course and reinstated the same.7

Nonetheless, we find the petition unmeritorious.

Annexed to the petition is a copy of an affidavit executed on May 3, 1988, or after the rendition of the
decision of the lower court, by Gregorio Pantanosas, Jr., an MTCC judge and petitioner's co-maker
in the promissory note. It supports petitioner's allegation that they were induced to sign the
promissory note on the belief that it was only for P5,000.00, adding that it was Campos who caused
the amount of the loan to be increased to P50,000.00.

The affidavit is clearly intended to buttress petitioner's contention in the instant petition that the Court
of Appeals should have declared the promissory note null and void on the following grounds: (a) the
promissory note was signed in the office of Judge Pantanosas, outside the premises of the bank; (b)
the loan was incurred for the purpose of buying a second-hand chainsaw which cost only P5,000.00;
(c) even a new chainsaw would cost only P27,500.00; (d) the loan was not approved by the board or
credit committee which was the practice, as it exceeded P5,000.00; (e) the loan had no collateral; (f)
petitioner and Judge Pantanosas were not present at the time the loan was released in

45
contravention of the bank practice, and (g) notices of default are sent simultaneously and separately
but no notice was validly sent to him.8 Finally, petitioner contends that in signing the promissory note,
his consent was vitiated by fraud as, contrary to their agreement that the loan was only for the
amount of P5,000.00, the promissory note stated the amount of P50,000.00.

The above-stated points are clearly factual. Petitioner is to be reminded of the basic rule that this
Court is not a trier of facts. Having lost the chance to fully ventilate his factual claims below,
petitioner may no longer be accorded the same opportunity in the absence of grave abuse of
discretion on the part of the court below. Had he presented Judge Pantanosas affidavit before the
lower court, it would have strengthened his claim that the promissory note did not reflect the correct
amount of the loan.

Nor is there merit in petitioner's assertion that since the promissory note "is not a public deed with
the formalities prescribed by law but . . . a mere commercial paper which does not bear the signature
of . . . attesting witnesses," parol evidence may "overcome" the contents of the promissory
note.9 The first paragraph of the parol evidence rule 10 states:

When the terms of an agreement have been reduced to writing, it is considered as

containing all the terms agreed upon and there can be, between the parties and their
successors in interest, no evidence of such terms other than the contents of the
written agreement.

Clearly, the rule does not specify that the written agreement be a public document.

What is required is that the agreement be in writing as the rule is in fact founded on "long experience
that written evidence is so much more certain and accurate than that which rests in fleeting memory
only, that it would be unsafe, when parties have expressed the terms of their contract in writing, to
admit weaker evidence to control and vary the stronger and to show that the
parties intended a different contract from that expressed in the writing signed by them." 11 Thus, for
the parol evidence rule to apply, a written contract need not be in any particular form, or be signed
by both parties. 12 As a general rule, bills, notes and other instruments of a similar nature are not
subject to be varied or contradicted by parol or extrinsic evidence. 13

By alleging fraud in his answer, 14 petitioner was actually in the right direction towards proving that he
and his co-makers agreed to a loan of P5,000.00 only considering that, where a parol
contemporaneous agreement was the inducing and moving cause of the written contract, it may be
shown by parol evidence. 15 However, fraud must be established by clear and convincing evidence,
mere preponderance of evidence, not even being adequate. 16 Petitioner's attempt to prove fraud
must, therefore, fail as it was evidenced only by his own uncorroborated and, expectedly, self-
serving testimony.

Petitioner also argues that the dismissal of the complaint against Naybe, the principal debtor, and
against Pantanosas, his co-maker, constituted a release of his obligation, especially because the
dismissal of the case against Pantanosas was upon the motion of private respondent itself. He cites
as basis for his argument, Article 2080 of the Civil Code which provides that:

The guarantors, even though they be solidary, are released from their obligation
whenever by some act of the creditor, they cannot be subrogated to the rights,
mortgages, and preferences of the latter.

46
It is to be noted, however, that petitioner signed the promissory note as a solidary co-maker and not
as a guarantor. This is patent even from the first sentence of the promissory note which states as
follows:

Ninety one (91) days after date, for value received, I/we, JOINTLY and SEVERALLY
promise to pay to the PHILIPPINE BANK OF COMMUNICATIONS at its office in the
City of Cagayan de Oro, Philippines the sum of FIFTY THOUSAND ONLY
(P50,000.00) Pesos, Philippine Currency, together with interest . . . at the rate of
SIXTEEN (16) per cent per annum until fully paid.

A solidary or joint and several obligation is one in which each debtor is liable for the entire obligation,
and each creditor is entitled to demand the whole obligation. 17 on the other hand, Article 2047 of the
Civil Code states:

By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section
4, Chapter 3, Title I of this Book shall be observed. In such a case the contract is
called a suretyship. (Emphasis supplied.)

While a guarantor may bind himself solidarily with the principal debtor, the liability of a
guarantor is different from that of a solidary debtor. Thus, Tolentino explains:

A guarantor who binds himself in solidum with the principal debtor under the
provisions of the second paragraph does not become a solidary co-debtor to all
intents and purposes. There is a difference between a solidary co-debtor and a fiador
in solidum (surety). The latter, outside of the liability he assumes to pay the debt
before the property of the principal debtor has been exhausted, retains all the other
rights, actions and benefits which pertain to him by reason of the fiansa; while a
solidary co-debtor has no other rights than those bestowed upon him in Section 4,
Chapter 3, Title I, Book IV of the Civil Code. 18

Section 4, Chapter 3, Title I, Book IV of the Civil Code states the law on joint and several obligations.
Under Art. 1207 thereof, when there are two or more debtors in one and the same obligation, the
presumption is that the obligation is joint so that each of the debtors is liable only for a proportionate
part of the debt. There is a solidary liability only when the obligation expressly so states, when the
law so provides or when the nature of the obligation so requires. 19

Because the promissory note involved in this case expressly states that the three signatories therein
are jointly and severally liable, any one, some or all of them may be proceeded against for the entire
obligation. 20 The choice is left to the solidary creditor to determine against whom he will enforce
collection. 21 Consequently, the dismissal of the case against Judge Pontanosas may not be deemed
as having discharged petitioner from liability as well. As regards Naybe, suffice it to say that the
court never acquired jurisdiction over him. Petitioner, therefore, may only have recourse against his
co-makers, as provided by law.

WHEREFORE, the instant petition for review on certiorari is hereby DENIED and the questioned
decision of the Court of Appeals is AFFIRMED. Costs against petitioner.

SO ORDERED.

47
PHILIPPINE NATIONAL BANK VS RODRIGUEZ (2008)

G.R. No. 170325 September 26, 2008

PHILIPPINE NATIONAL BANK, Petitioner,

vs.
ERLANDO T. RODRIGUEZ and NORMA RODRIGUEZ, Respondents.

DECISION

REYES, R.T., J.:

WHEN the payee of the check is not intended to be the true recipient of its proceeds, is it payable to order
or bearer? What is the fictitious-payee rule and who is liable under it? Is there any exception?

These questions seek answers in this petition for review on certiorari of the Amended Decision1 of the
Court of Appeals (CA) which affirmed with modification that of the Regional Trial Court (RTC). 2

The Facts

The facts as borne by the records are as follows:

Respondents-Spouses Erlando and Norma Rodriguez were clients of petitioner Philippine National Bank
(PNB), Amelia Avenue Branch, Cebu City. They maintained savings and demand/checking accounts,
namely, PNBig Demand Deposits (Checking/Current Account No. 810624-6 under the account name
Erlando and/or Norma Rodriguez), and PNBig Demand Deposit (Checking/Current Account No. 810480-4
under the account name Erlando T. Rodriguez).

The spouses were engaged in the informal lending business. In line with their business, they had a
discounting3 arrangement with the Philnabank Employees Savings and Loan Association (PEMSLA), an
association of PNB employees. Naturally, PEMSLA was likewise a client of PNB Amelia Avenue Branch.
The association maintained current and savings accounts with petitioner bank.

PEMSLA regularly granted loans to its members. Spouses Rodriguez would rediscount the postdated
checks issued to members whenever the association was short of funds. As was customary, the spouses
would replace the postdated checks with their own checks issued in the name of the members.

It was PEMSLA’s policy not to approve applications for loans of members with outstanding debts. To
subvert this policy, some PEMSLA officers devised a scheme to obtain additional loans despite their
outstanding loan accounts. They took out loans in the names of unknowing members, without the
knowledge or consent of the latter. The PEMSLA checks issued for these loans were then given to the
spouses for rediscounting. The officers carried this out by forging the indorsement of the named payees
in the checks.

In return, the spouses issued their personal checks (Rodriguez checks) in the name of the members and
delivered the checks to an officer of PEMSLA. The PEMSLA checks, on the other hand, were deposited
by the spouses to their account.

48
Meanwhile, the Rodriguez checks were deposited directly by PEMSLA to its savings account without any
indorsement from the named payees. This was an irregular procedure made possible through the
facilitation of Edmundo Palermo, Jr., treasurer of PEMSLA and bank teller in the PNB Branch. It appears
that this became the usual practice for the parties.

For the period November 1998 to February 1999, the spouses issued sixty nine (69) checks, in the total
amount of P2,345,804.00. These were payable to forty seven (47) individual payees who were all
members of PEMSLA.4

Petitioner PNB eventually found out about these fraudulent acts. To put a stop to this scheme, PNB
closed the current account of PEMSLA. As a result, the PEMSLA checks deposited by the spouses were
returned or dishonored for the reason "Account Closed." The corresponding Rodriguez checks, however,
were deposited as usual to the PEMSLA savings account. The amounts were duly debited from the
Rodriguez account. Thus, because the PEMSLA checks given as payment were returned, spouses
Rodriguez incurred losses from the rediscounting transactions.

RTC Disposition

Alarmed over the unexpected turn of events, the spouses Rodriguez filed a civil complaint for damages
against PEMSLA, the Multi-Purpose Cooperative of Philnabankers (MCP), and petitioner PNB. They
sought to recover the value of their checks that were deposited to the PEMSLA savings account
amounting to P2,345,804.00. The spouses contended that because PNB credited the checks to the
PEMSLA account even without indorsements, PNB violated its contractual obligation to them as
depositors. PNB paid the wrong payees, hence, it should bear the loss.

PNB moved to dismiss the complaint on the ground of lack of cause of action. PNB argued that the claim
for damages should come from the payees of the checks, and not from spouses Rodriguez. Since there
was no demand from the said payees, the obligation should be considered as discharged.

In an Order dated January 12, 2000, the RTC denied PNB’s motion to dismiss.

In its Answer,5 PNB claimed it is not liable for the checks which it paid to the PEMSLA account without
any indorsement from the payees. The bank contended that spouses Rodriguez, the makers, actually did
not intend for the named payees to receive the proceeds of the checks. Consequently, the payees were
considered as "fictitious payees" as defined under the Negotiable Instruments Law (NIL). Being checks
made to fictitious payees which are bearer instruments, the checks were negotiable by mere delivery.
PNB’s Answer included its cross-claim against its co-defendants PEMSLA and the MCP, praying that in
the event that judgment is rendered against the bank, the cross-defendants should be ordered to
reimburse PNB the amount it shall pay.

After trial, the RTC rendered judgment in favor of spouses Rodriguez (plaintiffs). It ruled that PNB
(defendant) is liable to return the value of the checks. All counterclaims and cross-claims were dismissed.
The dispositive portion of the RTC decision reads:

WHEREFORE, in view of the foregoing, the Court hereby renders judgment, as follows:

1. Defendant is hereby ordered to pay the plaintiffs the total amount of P2,345,804.00 or reinstate
or restore the amount of P775,337.00 in the PNBig Demand Deposit Checking/Current Account
No. 810480-4 of Erlando T. Rodriguez, and the amount of P1,570,467.00 in the PNBig Demand
Deposit, Checking/Current Account No. 810624-6 of Erlando T. Rodriguez and/or Norma
Rodriguez, plus legal rate of interest thereon to be computed from the filing of this complaint until
fully paid;

49
 2. The defendant PNB is hereby ordered to pay the plaintiffs the following reasonable amount of
damages suffered by them taking into consideration the standing of the plaintiffs being sugarcane
planters, realtors, residential subdivision owners, and other businesses:

(a) Consequential damages, unearned income in the amount of P4,000,000.00, as a

result of their having incurred great dificulty (sic) especially in the residential subdivision
business, which was not pushed through and the contractor even threatened to file a
case against the plaintiffs;

(b) Moral damages in the amount of P1,000,000.00;

(c) Exemplary damages in the amount of P500,000.00;

(d) Attorney’s fees in the amount of P150,000.00 considering that this case does not
involve very complicated issues; and for the

(e) Costs of suit.

3. Other claims and counterclaims are hereby dismissed.6

CA Disposition

PNB appealed the decision of the trial court to the CA on the principal ground that the disputed checks
should be considered as payable to bearer and not to order.

In a Decision7 dated July 22, 2004, the CA reversed and set aside the RTC disposition. The CA
concluded that the checks were obviously meant by the spouses to be really paid to PEMSLA. The court
a quo declared:

We are not swayed by the contention of the plaintiffs-appellees (Spouses Rodriguez) that their cause of
action arose from the alleged breach of contract by the defendant-appellant (PNB) when it paid the value
of the checks to PEMSLA despite the checks being payable to order. Rather, we are more convinced by
the strong and credible evidence for the defendant-appellant with regard to the plaintiffs-appellees’ and
PEMSLA’s business arrangement – that the value of the rediscounted checks of the plaintiffs-appellees
would be deposited in PEMSLA’s account for payment of the loans it has approved in exchange for
PEMSLA’s checks with the full value of the said loans. This is the only obvious explanation as to why all
the disputed sixty-nine (69) checks were in the possession of PEMSLA’s errand boy for presentment to
the defendant-appellant that led to this present controversy. It also appears that the teller who accepted
the said checks was PEMSLA’s officer, and that such was a regular practice by the parties until the
defendant-appellant discovered the scam. The logical conclusion, therefore, is that the checks were never
meant to be paid to order, but instead, to PEMSLA. We thus find no breach of contract on the part of the
defendant-appellant.

According to plaintiff-appellee Erlando Rodriguez’ testimony, PEMSLA allegedly issued post-dated

checks to its qualified members who had applied for loans. However, because of PEMSLA’s insufficiency
of funds, PEMSLA approached the plaintiffs-appellees for the latter to issue rediscounted checks in favor
of said applicant members. Based on the investigation of the defendant-appellant, meanwhile, this
arrangement allowed the plaintiffs-appellees to make a profit by issuing rediscounted checks, while the
officers of PEMSLA and other members would be able to claim their loans, despite the fact that they were
disqualified for one reason or another. They were able to achieve this conspiracy by using other members
who had loaned lesser amounts of money or had not applied at all. x x x. 8 (Emphasis added)

50
The CA found that the checks were bearer instruments, thus they do not require indorsement for
negotiation; and that spouses Rodriguez and PEMSLA conspired with each other to accomplish this
money-making scheme. The payees in the checks were "fictitious payees" because they were not the
intended payees at all.

The spouses Rodriguez moved for reconsideration. They argued, inter alia, that the checks on their faces
were unquestionably payable to order; and that PNB committed a breach of contract when it paid the
value of the checks to PEMSLA without indorsement from the payees. They also argued that their cause
of action is not only against PEMSLA but also against PNB to recover the value of the checks.

On October 11, 2005, the CA reversed itself via an Amended Decision, the last paragraph and fallo of
which read:

In sum, we rule that the defendant-appellant PNB is liable to the plaintiffs-appellees Sps. Rodriguez for
the following:

1. Actual damages in the amount of P2,345,804 with interest at 6% per annum from 14 May 1999
until fully paid;

2. Moral damages in the amount of P200,000;

3. Attorney’s fees in the amount of P100,000; and

4. Costs of suit.

WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by Us AFFIRMING WITH
MODIFICATION the assailed decision rendered in Civil Case No. 99-10892, as set forth in the
immediately next preceding paragraph hereof, and SETTING ASIDE Our original decision promulgated in
this case on 22 July 2004.

SO ORDERED.9

The CA ruled that the checks were payable to order. According to the appellate court, PNB failed to
present sufficient proof to defeat the claim of the spouses Rodriguez that they really intended the checks
to be received by the specified payees. Thus, PNB is liable for the value of the checks which it paid to
PEMSLA without indorsements from the named payees. The award for damages was deemed
appropriate in view of the failure of PNB to treat the Rodriguez account with the highest degree of care
considering the fiduciary nature of their relationship, which constrained respondents to seek legal action.

Hence, the present recourse under Rule 45.

Issues

The issues may be compressed to whether the subject checks are payable to order or to bearer and who
bears the loss?

PNB argues anew that when the spouses Rodriguez issued the disputed checks, they did not intend for
the named payees to receive the proceeds. Thus, they are bearer instruments that could be validly
negotiated by mere delivery. Further, testimonial and documentary evidence presented during trial amply
proved that spouses Rodriguez and the officers of PEMSLA conspired with each other to defraud the
bank.

Our Ruling

51
Prefatorily, amendment of decisions is more acceptable than an erroneous judgment attaining finality to
the prejudice of innocent parties. A court discovering an erroneous judgment before it becomes final may,
motu proprio or upon motion of the parties, correct its judgment with the singular objective of achieving
justice for the litigants.10

However, a word of caution to lower courts, the CA in Cebu in this particular case, is in order. The Court
does not sanction careless disposition of cases by courts of justice. The highest degree of diligence must
go into the study of every controversy submitted for decision by litigants. Every issue and factual detail
must be closely scrutinized and analyzed, and all the applicable laws judiciously studied, before the
promulgation of every judgment by the court. Only in this manner will errors in judgments be avoided.

Now to the core of the petition.

As a rule, when the payee is fictitious or not intended to be the true recipient of the proceeds, the check is
considered as a bearer instrument. A check is "a bill of exchange drawn on a bank payable on
demand."11 It is either an order or a bearer instrument. Sections 8 and 9 of the NIL states:

SEC. 8. When payable to order. – The instrument is payable to order where it is drawn payable to the
order of a specified person or to him or his order. It may be drawn payable to the order of –

(a) A payee who is not maker, drawer, or drawee; or

(b) The drawer or maker; or

(c) The drawee; or

(d) Two or more payees jointly; or

(e) One or some of several payees; or

(f) The holder of an office for the time being.

Where the instrument is payable to order, the payee must be named or otherwise indicated therein with
reasonable certainty.

SEC. 9. When payable to bearer. – The instrument is payable to bearer –

(a) When it is expressed to be so payable; or

(b) When it is payable to a person named therein or bearer; or

(c) When it is payable to the order of a fictitious or non-existing person, and such fact is known to
the person making it so payable; or

(d) When the name of the payee does not purport to be the name of any person; or

(e) Where the only or last indorsement is an indorsement in blank.12 (Underscoring supplied)

The distinction between bearer and order instruments lies in their manner of negotiation. Under Section
30 of the NIL, an order instrument requires an indorsement from the payee or holder before it may be
validly negotiated. A bearer instrument, on the other hand, does not require an indorsement to be validly
negotiated. It is negotiable by mere delivery. The provision reads:

52
SEC. 30. What constitutes negotiation. – An instrument is negotiated when it is transferred from one
person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer, it
is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the holder completed
by delivery.

A check that is payable to a specified payee is an order instrument. However, under Section 9(c) of the
NIL, a check payable to a specified payee may nevertheless be considered as a bearer instrument if it is
payable to the order of a fictitious or non-existing person, and such fact is known to the person making it
so payable. Thus, checks issued to "Prinsipe Abante" or "Si Malakas at si Maganda," who are well-known
characters in Philippine mythology, are bearer instruments because the named payees are fictitious and
non-existent.

We have yet to discuss a broader meaning of the term "fictitious" as used in the NIL. It is for this reason
that We look elsewhere for guidance. Court rulings in the United States are a logical starting point since
our law on negotiable instruments was directly lifted from the Uniform Negotiable Instruments Law of the
United States.13

A review of US jurisprudence yields that an actual, existing, and living payee may also be "fictitious" if the
maker of the check did not intend for the payee to in fact receive the proceeds of the check. This usually
occurs when the maker places a name of an existing payee on the check for convenience or to cover up
an illegal activity.14 Thus, a check made expressly payable to a non-fictitious and existing person is not
necessarily an order instrument. If the payee is not the intended recipient of the proceeds of the check,
the payee is considered a "fictitious" payee and the check is a bearer instrument.

In a fictitious-payee situation, the drawee bank is absolved from liability and the drawer bears the loss.
When faced with a check payable to a fictitious payee, it is treated as a bearer instrument that can be
negotiated by delivery. The underlying theory is that one cannot expect a fictitious payee to negotiate the
check by placing his indorsement thereon. And since the maker knew this limitation, he must have
intended for the instrument to be negotiated by mere delivery. Thus, in case of controversy, the drawer of
the check will bear the loss. This rule is justified for otherwise, it will be most convenient for the maker
who desires to escape payment of the check to always deny the validity of the indorsement. This despite
the fact that the fictitious payee was purposely named without any intention that the payee should receive
the proceeds of the check.15

The fictitious-payee rule is best illustrated in Mueller & Martin v. Liberty Insurance Bank. 16 In the said
case, the corporation Mueller & Martin was defrauded by George L. Martin, one of its authorized
signatories. Martin drew seven checks payable to the German Savings Fund Company Building
Association (GSFCBA) amounting to $2,972.50 against the account of the corporation without authority
from the latter. Martin was also an officer of the GSFCBA but did not have signing authority. At the back
of the checks, Martin placed the rubber stamp of the GSFCBA and signed his own name as indorsement.
He then successfully drew the funds from Liberty Insurance Bank for his own personal profit. When the
corporation filed an action against the bank to recover the amount of the checks, the claim was denied.

The US Supreme Court held in Mueller that when the person making the check so payable did not intend
for the specified payee to have any part in the transactions, the payee is considered as a fictitious payee.
The check is then considered as a bearer instrument to be validly negotiated by mere delivery. Thus, the
US Supreme Court held that Liberty Insurance Bank, as drawee, was authorized to make payment to the
bearer of the check, regardless of whether prior indorsements were genuine or not.17

The more recent Getty Petroleum Corp. v. American Express Travel Related Services Company,
Inc.18 upheld the fictitious-payee rule. The rule protects the depositary bank and assigns the loss to the
drawer of the check who was in a better position to prevent the loss in the first place. Due care is not
even required from the drawee or depositary bank in accepting and paying the checks. The effect is that a

53
showing of negligence on the part of the depositary bank will not defeat the protection that is derived from
this rule.

However, there is a commercial bad faith exception to the fictitious-payee rule. A showing of commercial
bad faith on the part of the drawee bank, or any transferee of the check for that matter, will work to strip it
of this defense. The exception will cause it to bear the loss. Commercial bad faith is present if the
transferee of the check acts dishonestly, and is a party to the fraudulent scheme. Said the US Supreme
Court in Getty:

Consequently, a transferee’s lapse of wary vigilance, disregard of suspicious circumstances which might
have well induced a prudent banker to investigate and other permutations of negligence are not relevant
considerations under Section 3-405 x x x. Rather, there is a "commercial bad faith" exception to UCC 3-
405, applicable when the transferee "acts dishonestly – where it has actual knowledge of facts and
circumstances that amount to bad faith, thus itself becoming a participant in a fraudulent scheme. x x x
Such a test finds support in the text of the Code, which omits a standard of care requirement from UCC 3-
405 but imposes on all parties an obligation to act with "honesty in fact." x x x 19 (Emphasis added)

Getty also laid the principle that the fictitious-payee rule extends protection even to non-bank transferees
of the checks.

In the case under review, the Rodriguez checks were payable to specified payees. It is unrefuted that the
69 checks were payable to specific persons. Likewise, it is uncontroverted that the payees were actual,
existing, and living persons who were members of PEMSLA that had a rediscounting arrangement with
spouses Rodriguez.

What remains to be determined is if the payees, though existing persons, were "fictitious" in its broader
context.

For the fictitious-payee rule to be available as a defense, PNB must show that the makers did not intend
for the named payees to be part of the transaction involving the checks. At most, the bank’s thesis shows
that the payees did not have knowledge of the existence of the checks. This lack of knowledge on the
part of the payees, however, was not tantamount to a lack of intention on the part of respondents-
spouses that the payees would not receive the checks’ proceeds. Considering that respondents-spouses
were transacting with PEMSLA and not the individual payees, it is understandable that they relied on the
information given by the officers of PEMSLA that the payees would be receiving the checks.

Verily, the subject checks are presumed order instruments. This is because, as found by both lower
courts, PNB failed to present sufficient evidence to defeat the claim of respondents-spouses that the
named payees were the intended recipients of the checks’ proceeds. The bank failed to satisfy a requisite
condition of a fictitious-payee situation – that the maker of the check intended for the payee to have no
interest in the transaction.

Because of a failure to show that the payees were "fictitious" in its broader sense, the fictitious-payee rule
does not apply. Thus, the checks are to be deemed payable to order. Consequently, the drawee bank
bears the loss.20

PNB was remiss in its duty as the drawee bank. It does not dispute the fact that its teller or tellers
accepted the 69 checks for deposit to the PEMSLA account even without any indorsement from the
named payees. It bears stressing that order instruments can only be negotiated with a valid indorsement.

A bank that regularly processes checks that are neither payable to the customer nor duly indorsed by the
payee is apparently grossly negligent in its operations.21 This Court has recognized the unique public
interest possessed by the banking industry and the need for the people to have full trust and confidence

54
in their banks.22 For this reason, banks are minded to treat their customer’s accounts with utmost care,
confidence, and honesty.23

In a checking transaction, the drawee bank has the duty to verify the genuineness of the signature of the
drawer and to pay the check strictly in accordance with the drawer’s instructions, i.e., to the named payee
in the check. It should charge to the drawer’s accounts only the payables authorized by the latter.
Otherwise, the drawee will be violating the instructions of the drawer and it shall be liable for the amount
charged to the drawer’s account.24

In the case at bar, respondents-spouses were the bank’s depositors. The checks were drawn against
respondents-spouses’ accounts. PNB, as the drawee bank, had the responsibility to ascertain the
regularity of the indorsements, and the genuineness of the signatures on the checks before accepting
them for deposit. Lastly, PNB was obligated to pay the checks in strict accordance with the instructions of
the drawers. Petitioner miserably failed to discharge this burden.

The checks were presented to PNB for deposit by a representative of PEMSLA absent any type of
indorsement, forged or otherwise. The facts clearly show that the bank did not pay the checks in strict
accordance with the instructions of the drawers, respondents-spouses. Instead, it paid the values of the
checks not to the named payees or their order, but to PEMSLA, a third party to the transaction between
the drawers and the payees.alf-ITC

Moreover, PNB was negligent in the selection and supervision of its employees. The trustworthiness of
bank employees is indispensable to maintain the stability of the banking industry. Thus, banks are
enjoined to be extra vigilant in the management and supervision of their employees. In Bank of the
Philippine Islands v. Court of Appeals,25 this Court cautioned thus:

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

PNB’s tellers and officers, in violation of banking rules of procedure, permitted the invalid deposits of
checks to the PEMSLA account. Indeed, when it is the gross negligence of the bank employees that
caused the loss, the bank should be held liable.27

PNB’s argument that there is no loss to compensate since no demand for payment has been made by the
payees must also fail. Damage was caused to respondents-spouses when the PEMSLA checks they
deposited were returned for the reason "Account Closed." These PEMSLA checks were the
corresponding payments to the Rodriguez checks. Since they could not encash the PEMSLA checks,
respondents-spouses were unable to collect payments for the amounts they had advanced.

A bank that has been remiss in its duty must suffer the consequences of its negligence. Being issued to
named payees, PNB was duty-bound by law and by banking rules and procedure to require that the
checks be properly indorsed before accepting them for deposit and payment. In fine, PNB should be held
liable for the amounts of the checks.

One Last Note

We note that the RTC failed to thresh out the merits of PNB’s cross-claim against its co-defendants
PEMSLA and MPC. The records are bereft of any pleading filed by these two defendants in answer to the
complaint of respondents-spouses and cross-claim of PNB. The Rules expressly provide that failure to file
an answer is a ground for a declaration that defendant is in default.28 Yet, the RTC failed to sanction the
failure of both PEMSLA and MPC to file responsive pleadings. Verily, the RTC dismissal of PNB’s cross-

55
claim has no basis. Thus, this judgment shall be without prejudice to whatever action the bank might take
against its co-defendants in the trial court.

To PNB’s credit, it became involved in the controversial transaction not of its own volition but due to the
actions of some of its employees. Considering that moral damages must be understood to be in concept
of grants, not punitive or corrective in nature, We resolve to reduce the award of moral damages
to P50,000.00.29

WHEREFORE, the appealed Amended Decision is AFFIRMED with the MODIFICATION that the award
for moral damages is reduced to P50,000.00, and that this is without prejudice to whatever civil, criminal,
or administrative action PNB might take against PEMSLA, MPC, and the employees involved.

SO ORDERED.

56
CALTEX (PHIL.) VS COURT OF APPEALS (1992)

G.R. No. 97753 August 10, 1992

CALTEX (PHILIPPINES), INC., petitioner,

vs.
COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.

REGALADO, J.:

This petition for review on certiorari impugns and seeks the reversal of the decision promulgated by
respondent court on March 8, 1991 in CA-G.R. CV No. 23615 1 affirming with modifications, the
earlier decision of the Regional Trial Court of Manila, Branch XLII, 2 which dismissed the complaint
filed therein by herein petitioner against respondent bank.

The undisputed background of this case, as found by the court a quo and adopted by respondent
court, appears of record:

1. On various dates, defendant, a commercial banking institution, through its Sucat

Branch issued 280 certificates of time deposit (CTDs) in favor of one Angel dela Cruz
who deposited with herein defendant the aggregate amount of P1,120,000.00, as
follows: (Joint Partial Stipulation of Facts and Statement of Issues, Original Records,
p. 207; Defendant's Exhibits 1 to 280);

CTD CTD
Dates Serial Nos. Quantity Amount

22 Feb. 82 90101 to 90120 20 P80,000

26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000
——— ————
Total 280 P1,120,000
===== ========

2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein plaintiff in
connection with his purchased of fuel products from the latter (Original Record, p.
208).

57
3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, the
Sucat Branch Manger, that he lost all the certificates of time deposit in dispute. Mr.
Tiangco advised said depositor to execute and submit a notarized Affidavit of Loss,
as required by defendant bank's procedure, if he desired replacement of said lost
CTDs (TSN, February 9, 1987, pp. 48-50).

4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant bank
the required Affidavit of Loss (Defendant's Exhibit 281). On the basis of said affidavit
of loss, 280 replacement CTDs were issued in favor of said depositor (Defendant's
Exhibits 282-561).

5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from
defendant bank in the amount of Eight Hundred Seventy Five Thousand Pesos
(P875,000.00). On the same date, said depositor executed a notarized Deed of
Assignment of Time Deposit (Exhibit 562) which stated, among others, that he (de la
Cruz) surrenders to defendant bank "full control of the indicated time deposits from
and after date" of the assignment and further authorizes said bank to pre-terminate,
set-off and "apply the said time deposits to the payment of whatever amount or
amounts may be due" on the loan upon its maturity (TSN, February 9, 1987, pp. 60-
62).

6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex

(Phils.) Inc., went to the defendant bank's Sucat branch and presented for verification
the CTDs declared lost by Angel dela Cruz alleging that the same were delivered to
herein plaintiff "as security for purchases made with Caltex Philippines, Inc." by said
depositor (TSN, February 9, 1987, pp. 54-68).

7. On November 26, 1982, defendant received a letter (Defendant's Exhibit 563) from
herein plaintiff formally informing it of its possession of the CTDs in question and of
its decision to pre-terminate the same.

8. On December 8, 1982, plaintiff was requested by herein defendant to furnish the

former "a copy of the document evidencing the guarantee agreement with Mr. Angel
dela Cruz" as well as "the details of Mr. Angel dela Cruz" obligation against which
plaintiff proposed to apply the time deposits (Defendant's Exhibit 564).

9. No copy of the requested documents was furnished herein defendant.

10. Accordingly, defendant bank rejected the plaintiff's demand and claim for
payment of the value of the CTDs in a letter dated February 7, 1983 (Defendant's
Exhibit 566).

11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured and
fell due and on August 5, 1983, the latter set-off and applied the time deposits in
question to the payment of the matured loan (TSN, February 9, 1987, pp. 130-131).

12. In view of the foregoing, plaintiff filed the instant complaint, praying that
defendant bank be ordered to pay it the aggregate value of the certificates of time
deposit of P1,120,000.00 plus accrued interest and compounded interest therein at
16% per annum, moral and exemplary damages as well as attorney's fees.

After trial, the court a quo rendered its decision dismissing the instant complaint. 3

58
On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of the complaint,
hence this petition wherein petitioner faults respondent court in ruling (1) that the subject certificates
of deposit are non-negotiable despite being clearly negotiable instruments; (2) that petitioner did not
become a holder in due course of the said certificates of deposit; and (3) in disregarding the
pertinent provisions of the Code of Commerce relating to lost instruments payable to bearer. 4

The instant petition is bereft of merit.

A sample text of the certificates of time deposit is reproduced below to provide a better
understanding of the issues involved in this recourse.

SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%

Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____

This is to Certify that B E A R E R has deposited in this Bank the sum

of PESOS: FOUR THOUSAND ONLY, SECURITY BANK SUCAT
OFFICE P4,000 & 00 CTS Pesos, Philippine Currency, repayable to
said depositor 731 days. after date, upon presentation and surrender
of this certificate, with interest at the rate of 16% per cent per annum.

(Sgd. Illegible) (Sgd. Illegible)

—————————— ———————————

AUTHORIZED SIGNATURES 5

Respondent court ruled that the CTDs in question are non-negotiable instruments, nationalizing as
follows:

. . . While it may be true that the word "bearer" appears rather boldly in the CTDs
issued, it is important to note that after the word "BEARER" stamped on the space
provided supposedly for the name of the depositor, the words "has deposited" a
certain amount follows. The document further provides that the amount deposited
shall be "repayable to said depositor" on the period indicated. Therefore, the text of
the instrument(s) themselves manifest with clarity that they are payable, not to
whoever purports to be the "bearer" but only to the specified person indicated
therein, the depositor. In effect, the appellee bank acknowledges its depositor Angel
dela Cruz as the person who made the deposit and further engages itself to pay said
depositor the amount indicated thereon at the stipulated date. 6

We disagree with these findings and conclusions, and hereby hold that the CTDs in question are
negotiable instruments. Section 1 Act No. 2031, otherwise known as the Negotiable Instruments
Law, enumerates the requisites for an instrument to become negotiable, viz:

59
 (a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;

(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwise

indicated therein with reasonable certainty.

The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties'
bone of contention is with regard to requisite (d) set forth above. It is noted that Mr. Timoteo P.
Tiangco, Security Bank's Branch Manager way back in 1982, testified in open court that the
depositor reffered to in the CTDs is no other than Mr. Angel de la Cruz.

xxx xxx xxx

Atty. Calida:

q In other words Mr. Witness, you are saying that per books of the
bank, the depositor referred (sic) in these certificates states that it
was Angel dela Cruz?

witness:

a Yes, your Honor, and we have the record to show that Angel dela
Cruz was the one who cause (sic) the amount.

Atty. Calida:

q And no other person or entity or company, Mr. Witness?

witness:

a None, your Honor. 7

xxx xxx xxx

Atty. Calida:

q Mr. Witness, who is the depositor identified in all of these

certificates of time deposit insofar as the bank is concerned?

witness:

a Angel dela Cruz is the depositor. 8

xxx xxx xxx

60
On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is
determined from the writing, that is, from the face of the instrument itself.9 In the construction of a bill
or note, the intention of the parties is to control, if it can be legally ascertained. 10 While the writing
may be read in the light of surrounding circumstances in order to more perfectly understand the
intent and meaning of the parties, yet as they have constituted the writing to be the only outward and
visible expression of their meaning, no other words are to be added to it or substituted in its stead.
The duty of the court in such case is to ascertain, not what the parties may have secretly intended as
contradistinguished from what their words express, but what is the meaning of the words they have
used. What the parties meant must be determined by what they said. 11

Contrary to what respondent court held, the CTDs are negotiable instruments. The documents
provide that the amounts deposited shall be repayable to the depositor. And who, according to the
document, is the depositor? It is the "bearer." The documents do not say that the depositor is Angel
de la Cruz and that the amounts deposited are repayable specifically to him. Rather, the amounts
are to be repayable to the bearer of the documents or, for that matter, whosoever may be the bearer
at the time of presentment.

If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only, it could
have with facility so expressed that fact in clear and categorical terms in the documents, instead of
having the word "BEARER" stamped on the space provided for the name of the depositor in each
CTD. On the wordings of the documents, therefore, the amounts deposited are repayable to
whoever may be the bearer thereof. Thus, petitioner's aforesaid witness merely declared that Angel
de la Cruz is the depositor "insofar as the bank is concerned," but obviously other parties not privy to
the transaction between them would not be in a position to know that the depositor is not the bearer
stated in the CTDs. Hence, the situation would require any party dealing with the CTDs to go behind
the plain import of what is written thereon to unravel the agreement of the parties thereto through
facts aliunde. This need for resort to extrinsic evidence is what is sought to be avoided by the
Negotiable Instruments Law and calls for the application of the elementary rule that the interpretation
of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. 12

The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer is in
the negative. The records reveal that Angel de la Cruz, whom petitioner chose not to implead in this
suit for reasons of its own, delivered the CTDs amounting to P1,120,000.00 to petitioner without
informing respondent bank thereof at any time. Unfortunately for petitioner, although the CTDs are
bearer instruments, a valid negotiation thereof for the true purpose and agreement between it and
De la Cruz, as ultimately ascertained, requires both delivery and indorsement. For, although
petitioner seeks to deflect this fact, the CTDs were in reality delivered to it as a security for De la
Cruz' purchases of its fuel products. Any doubt as to whether the CTDs were delivered as payment
for the fuel products or as a security has been dissipated and resolved in favor of the latter by
petitioner's own authorized and responsible representative himself.

In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr.,
Caltex Credit Manager, wrote: ". . . These certificates of deposit were negotiated to us by Mr. Angel
dela Cruz to guarantee his purchases of fuel products" (Emphasis ours.) 13 This admission is
conclusive upon petitioner, its protestations notwithstanding. Under the doctrine of estoppel, an
admission or representation is rendered conclusive upon the person making it, and cannot be denied
or disproved as against the person relying thereon. 14 A party may not go back on his own acts and
representations to the prejudice of the other party who relied upon them. 15 In the law of evidence,
whenever a party has, by his own declaration, act, or omission, intentionally and deliberately led
another to believe a particular thing true, and to act upon such belief, he cannot, in any litigation
arising out of such declaration, act, or omission, be permitted to falsify it. 16

61
If it were true that the CTDs were delivered as payment and not as security, petitioner's credit
manager could have easily said so, instead of using the words "to guarantee" in the letter
aforequoted. Besides, when respondent bank, as defendant in the court below, moved for a bill of
particularity therein 17 praying, among others, that petitioner, as plaintiff, be required to aver with
sufficient definiteness or particularity (a) the due date or dates of payment of the alleged
indebtedness of Angel de la Cruz to plaintiff and (b) whether or not it issued a receipt showing that
the CTDs were delivered to it by De la Cruz as payment of the latter's alleged indebtedness to it,
plaintiff corporation opposed the motion. 18 Had it produced the receipt prayed for, it could have
proved, if such truly was the fact, that the CTDs were delivered as payment and not as security.
Having opposed the motion, petitioner now labors under the presumption that evidence willfully
suppressed would be adverse if produced. 19

Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al. vs.
Philippine National Bank, et al. 20 is apropos:

. . . Adverting again to the Court's pronouncements in Lopez, supra, we quote

therefrom:

The character of the transaction between the parties is to be

determined by their intention, regardless of what language was used
or what the form of the transfer was. If it was intended to secure the
payment of money, it must be construed as a pledge; but if there was
some other intention, it is not a pledge. However, even though a
transfer, if regarded by itself, appears to have been absolute, its
object and character might still be qualified and explained by
contemporaneous writing declaring it to have been a deposit of the
property as collateral security. It has been said that a transfer of
property by the debtor to a creditor, even if sufficient on its face to
make an absolute conveyance, should be treated as a pledge if the
debt continues in inexistence and is not discharged by the transfer,
and that accordingly the use of the terms ordinarily importing
conveyance of absolute ownership will not be given that effect in such
a transaction if they are also commonly used in pledges and
mortgages and therefore do not unqualifiedly indicate a transfer of
absolute ownership, in the absence of clear and unambiguous
language or other circumstances excluding an intent to pledge.

Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the Negotiable
Instruments Law, an instrument is negotiated when it is transferred from one person to another in
such a manner as to constitute the transferee the holder thereof, 21 and a holder may be the payee or
indorsee of a bill or note, who is in possession of it, or the bearer thereof. 22 In the present case,
however, there was no negotiation in the sense of a transfer of the legal title to the CTDs in favor of
petitioner in which situation, for obvious reasons, mere delivery of the bearer CTDs would have
sufficed. Here, the delivery thereof only as security for the purchases of Angel de la Cruz (and we
even disregard the fact that the amount involved was not disclosed) could at the most constitute
petitioner only as a holder for value by reason of his lien. Accordingly, a negotiation for such purpose
cannot be effected by mere delivery of the instrument since, necessarily, the terms thereof and the
subsequent disposition of such security, in the event of non-payment of the principal obligation, must
be contractually provided for.

The pertinent law on this point is that where the holder has a lien on the instrument arising from
contract, he is deemed a holder for value to the extent of his lien. 23 As such holder of collateral

62
security, he would be a pledgee but the requirements therefor and the effects thereof, not being
provided for by the Negotiable Instruments Law, shall be governed by the Civil Code provisions on
pledge of incorporeal rights, 24 which inceptively provide:

Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be

pledged. The instrument proving the right pledged shall be delivered to the creditor,
and if negotiable, must be indorsed.

Art. 2096. A pledge shall not take effect against third persons if a description of the
thing pledged and the date of the pledge do not appear in a public instrument.

Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of
respondent court quoted at the start of this opinion show that petitioner failed to produce any
document evidencing any contract of pledge or guarantee agreement between it and Angel de la
Cruz. 25 Consequently, the mere delivery of the CTDs did not legally vest in petitioner any right
effective against and binding upon respondent bank. The requirement under Article 2096
aforementioned is not a mere rule of adjective law prescribing the mode whereby proof may be
made of the date of a pledge contract, but a rule of substantive law prescribing a condition without
which the execution of a pledge contract cannot affect third persons adversely. 26

On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of respondent
bank was embodied in a public instrument. 27 With regard to this other mode of transfer, the Civil
Code specifically declares:

Art. 1625. An assignment of credit, right or action shall produce no effect as against
third persons, unless it appears in a public instrument, or the instrument is recorded
in the Registry of Property in case the assignment involves real property.

Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether as
purchaser, assignee or lien holder of the CTDs, neither proved the amount of its credit or the extent
of its lien nor the execution of any public instrument which could affect or bind private respondent.
Necessarily, therefore, as between petitioner and respondent bank, the latter has definitely the better
right over the CTDs in question.

Finally, petitioner faults respondent court for refusing to delve into the question of whether or not
private respondent observed the requirements of the law in the case of lost negotiable instruments
and the issuance of replacement certificates therefor, on the ground that petitioner failed to raised
that issue in the lower court. 28

On this matter, we uphold respondent court's finding that the aspect of alleged negligence of private
respondent was not included in the stipulation of the parties and in the statement of issues submitted
by them to the trial court. 29 The issues agreed upon by them for resolution in this case are:

1. Whether or not the CTDs as worded are negotiable instruments.

2. Whether or not defendant could legally apply the amount covered by the CTDs
against the depositor's loan by virtue of the assignment (Annex "C").

3. Whether or not there was legal compensation or set off involving the amount
covered by the CTDs and the depositor's outstanding account with defendant, if any.

63
 4. Whether or not plaintiff could compel defendant to preterminate the CTDs before
the maturity date provided therein.

5. Whether or not plaintiff is entitled to the proceeds of the CTDs.

6. Whether or not the parties can recover damages, attorney's fees and litigation
expenses from each other.

As respondent court correctly observed, with appropriate citation of some doctrinal authorities, the
foregoing enumeration does not include the issue of negligence on the part of respondent bank. An
issue raised for the first time on appeal and not raised timely in the proceedings in the lower court is
barred by estoppel. 30 Questions raised on appeal must be within the issues framed by the parties
and, consequently, issues not raised in the trial court cannot be raised for the first time on appeal. 31

Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a case
are properly raised. Thus, to obviate the element of surprise, parties are expected to disclose at a
pre-trial conference all issues of law and fact which they intend to raise at the trial, except such as
may involve privileged or impeaching matters. The determination of issues at a pre-trial conference
bars the consideration of other questions on appeal. 32

To accept petitioner's suggestion that respondent bank's supposed negligence may be considered
encompassed by the issues on its right to preterminate and receive the proceeds of the CTDs would
be tantamount to saying that petitioner could raise on appeal any issue. We agree with private
respondent that the broad ultimate issue of petitioner's entitlement to the proceeds of the questioned
certificates can be premised on a multitude of other legal reasons and causes of action, of which
respondent bank's supposed negligence is only one. Hence, petitioner's submission, if accepted,
would render a pre-trial delimitation of issues a useless exercise. 33

Still, even assuming arguendo that said issue of negligence was raised in the court below, petitioner
still cannot have the odds in its favor. A close scrutiny of the provisions of the Code of Commerce
laying down the rules to be followed in case of lost instruments payable to bearer, which it invokes,
will reveal that said provisions, even assuming their applicability to the CTDs in the case at bar, are
merely permissive and not mandatory. The very first article cited by petitioner speaks for itself.

Art 548. The dispossessed owner, no matter for what cause it may be, may apply to
the judge or court of competent jurisdiction, asking that the principal, interest or
dividends due or about to become due, be not paid a third person, as well as in order
to prevent the ownership of the instrument that a duplicate be issued him. (Emphasis
ours.)

xxx xxx xxx

The use of the word "may" in said provision shows that it is not mandatory but discretionary on the
part of the "dispossessed owner" to apply to the judge or court of competent jurisdiction for the
issuance of a duplicate of the lost instrument. Where the provision reads "may," this word shows that
it is not mandatory but discretional. 34 The word "may" is usually permissive, not mandatory. 35 It is an
auxiliary verb indicating liberty, opportunity, permission and possibility. 36

Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of the Code of
Commerce, on which petitioner seeks to anchor respondent bank's supposed negligence, merely
established, on the one hand, a right of recourse in favor of a dispossessed owner or holder of a
bearer instrument so that he may obtain a duplicate of the same, and, on the other, an option in

64
favor of the party liable thereon who, for some valid ground, may elect to refuse to issue a
replacement of the instrument. Significantly, none of the provisions cited by petitioner categorically
restricts or prohibits the issuance a duplicate or replacement instrument sans compliance with the
procedure outlined therein, and none establishes a mandatory precedent requirement therefor.

WHEREFORE, on the modified premises above set forth, the petition is DENIED and the appealed
decision is hereby AFFIRMED.

SO ORDERED.

65
SAN MIGUEL CORP. VS PUZON JR. (2010)

G.R. No. 167567 September 22, 2010

SAN MIGUEL CORPORATION, Petitioner,

vs.
BARTOLOME PUZON, JR., Respondent.

DECISION

DEL CASTILLO, J.:

This petition for review assails the December 21, 2004 Decision1 and March 28, 2005 Resolution2 of
the Court of Appeals (CA) in CA-G.R. SP No. 83905, which dismissed the petition before it and
denied reconsideration, respectively.

Factual Antecedents

Respondent Bartolome V. Puzon, Jr., (Puzon) owner of Bartenmyk Enterprises, was a dealer of beer
products of petitioner San Miguel Corporation (SMC) for Parañaque City. Puzon purchased SMC
products on credit. To ensure payment and as a business practice, SMC required him to issue
postdated checks equivalent to the value of the products purchased on credit before the same were
released to him. Said checks were returned to Puzon when the transactions covered by these
checks were paid or settled in full.

On December 31, 2000, Puzon purchased products on credit amounting to ₱11,820,327 for which
he issued, and gave to SMC, Bank of the Philippine Islands (BPI) Check Nos. 27904 (for
₱309,500.00) and 27903 (for ₱11,510,827.00) to cover the said transaction.

On January 23, 2001, Puzon, together with his accountant, visited the SMC Sales Office in
Parañaque City to reconcile his account with SMC. During that visit Puzon allegedly requested to
see BPI Check No. 17657. However, when he got hold of BPI Check No. 27903 which was attached
to a bond paper together with BPI Check No. 17657 he allegedly immediately left the office with his
accountant, bringing the checks with them.

SMC sent a letter to Puzon on March 6, 2001 demanding the return of the said checks. Puzon
ignored the demand hence SMC filed a complaint against him for theft with the City Prosecutor’s
Office of Parañaque City.

Rulings of the Prosecutor and the Secretary of Department of Justice (DOJ)

The investigating prosecutor, Elizabeth Yu Guray found that the "relationship between [SMC] and
[Puzon] appears to be one of credit or creditor-debtor relationship. The problem lies in the
reconciliation of accounts and the non-payment of beer empties which cannot give rise to a criminal
prosecution for theft."3 Thus, in her July 31, 2001 Resolution,4 she recommended the dismissal of

the case for lack of evidence. SMC appealed.

66
On June 4, 2003, the DOJ issued its resolution5 affirming the prosecutor’s Resolution dismissing the
case. Its motion for reconsideration having been denied in the April 23, 2004 DOJ Resolution,6 SMC
filed a petition for certiorari with the CA.

Ruling of the Court of Appeals

The CA found that the postdated checks were issued by Puzon merely as a security for the payment
of his purchases and that these were not intended to be encashed. It thus concluded that SMC did
not acquire ownership of the checks as it was duty bound to return the same checks to Puzon after
the transactions covering them were settled. The CA agreed with the prosecutor that there was no
theft, considering that a person cannot be charged with theft for taking personal property that
belongs to himself. It disposed of the appeal as follows:

WHEREFORE, finding no grave abuse of discretion committed by public respondent, the instant
petition is hereby DISMISSED. The assailed Resolutions of public respondent, dated 04 June 2003
and 23 April 2004, are AFFIRMED. No costs at this instance.

SO ORDERED.7

The motion for reconsideration of SMC was denied. Hence, the present petition.

Issues

Petitioner now raises the following issues:

WHETHER X X X PUZON HAD STOLEN FROM SMC ON JANUARY 23, 2001, AMONG OTHERS
BPI CHECK NO. 27903 DATED MARCH 30, 2001 IN THE AMOUNT OF PESOS: ELEVEN
MILLION FIVE HUNDRED TEN THOUSAND EIGHT HUNDRED TWENTY SEVEN
(Php11,510,827.00)

II

WHETHER X X X THE POSTDATED CHECKS ISSUED BY PUZON, PARTICULARLY BPI CHECK

NO. 27903 DATED MARCH 30, 2001 IN THE AMOUNT OF PESOS: ELEVEN MILLION FIVE
HUNDRED TEN THOUSAND EIGHT HUNDRED TWENTY SEVEN (Php11,510,827.00), WERE
ISSUED IN PAYMENT OF HIS BEER PURCHASES OR WERE USED MERELY AS SECURITY TO
ENSURE PAYMENT OF PUZON’S OBLIGATION.

III

WHETHER X X X THE PRACTICE OF SMC IN RETURNING THE POSTDATED CHECKS ISSUED

IN PAYMENT OF BEER PRODUCTS PURCHASED ON CREDIT SHOULD THE TRANSACTIONS
COVERED BY THESE CHECKS [BE] SETTLED ON [THE] MATURITY DATES THEREOF COULD
BE LIKENED TO A CONTRACT OF PLEDGE.

IV

67
WHETHER X X X SMC HAD ESTABLISHED PROBABLE CAUSE TO JUSTIFY THE INDICTMENT
OF PUZON FOR THE CRIME OF THEFT PURSUANT TO ART. 308 OF THE REVISED PENAL
CODE.8

Petitioner's Arguments

SMC contends that Puzon was positively identified by its employees to have taken the subject
postdated checks. It also contends that ownership of the checks was transferred to it because these
were issued, not merely as security but were, in payment of Puzon’s purchases. SMC points out that
it has established more than sufficient probable cause to justify the indictment of Puzon for the crime
of Theft.

Respondent’s Arguments

On the other hand, Puzon contends that SMC raises questions of fact that are beyond the province
of an appeal on certiorari. He also insists that there is no probable cause to charge him with theft
because the subject checks were issued only as security and he therefore retained ownership of the
same.

Our Ruling

The petition has no merit.

Preliminary Matters

At the outset we find that as pointed out by Puzon, SMC raises questions of fact. The resolution of
the first issue raised by SMC of whether respondent stole the subject check, which calls for the
Court to determine whether respondent is guilty of a felony, first requires that the facts be duly
established in the proper forum and in accord with the proper procedure. This issue cannot be
resolved based on mere allegations of facts and affidavits. The same is true with the second issue
raised by petitioner, to wit: whether the checks issued by Puzon were payments for his purchases or
were intended merely as security to ensure payment. These issues cannot be properly resolved in
the present petition for review on certiorari which is rooted merely on the resolution of the prosecutor
finding no probable cause for the filing of an information for theft.

The third issue raised by petitioner, on the other hand, would entail venturing into constitutional
matters for a complete resolution. This route is unnecessary in the present case considering that the
main matter for resolution here only concerns grave abuse of discretion and the existence of
probable cause for theft, which at this point is more properly resolved through another more clear cut
route.

Probable Cause for Theft

"Probable cause is defined as such facts and circumstances that will engender a well-founded belief
that a crime has been committed and that the respondent is probably guilty thereof and should be
held for trial."9 On the fine points of the determination of probable cause, Reyes v. Pearlbank
Securities, Inc.10 comprehensively elaborated that:

The determination of [the existence or absence of probable cause] lies within the discretion of the
prosecuting officers after conducting a preliminary investigation upon complaint of an offended party.
Thus, the decision whether to dismiss a complaint or not is dependent upon the sound discretion of

68
the prosecuting fiscal. He may dismiss the complaint forthwith, if he finds the charge insufficient in
form or substance or without any ground. Or he may proceed with the investigation if the complaint
in his view is sufficient and in proper form. To emphasize, the determination of probable cause for
the filing of information in court is an executive function, one that properly pertains at the first
instance to the public prosecutor and, ultimately, to the Secretary of Justice, who may direct the filing
of the corresponding information or move for the dismissal of the case. Ultimately, whether or not a
complaint will be dismissed is dependent on the sound discretion of the Secretary of Justice. And
unless made with grave abuse of discretion, findings of the Secretary of Justice are not subject to
review.

For this reason, the Court considers it sound judicial policy to refrain from interfering in the conduct
of preliminary investigations and to leave the Department of Justice ample latitude of discretion in
the determination of what constitutes sufficient evidence to establish probable cause for the
prosecution of supposed offenders. Consistent with this policy, courts do not reverse the Secretary
of Justice's findings and conclusions on the matter of probable cause except in clear cases of grave
abuse of discretion.

In the present case, we are also not sufficiently convinced to deviate from the general rule of non-
interference. Indeed the CA did not err in dismissing the petition for certiorari before it, absent grave
abuse of discretion on the part of the DOJ Secretary in not finding probable cause against Puzon for
theft.

The Revised Penal Code provides:

Art. 308. Who are liable for theft. - Theft is committed by any person who, with intent to gain but
without violence against, or intimidation of persons nor force upon things, shall take personal
property of another without the latter’s consent.

xxxx

"[T]he essential elements of the crime of theft are the following: (1) that there be a taking of personal
property; (2) that said property belongs to another; (3) that the taking be done with intent to gain; (4)
that the taking be done without the consent of the owner; and (5) that the taking be accomplished
without the use of violence or intimidation against persons or force upon things."11

Considering that the second element is that the thing taken belongs to another, it is relevant to
determine whether ownership of the subject check was transferred to petitioner. On this point the
Negotiable Instruments Law provides:

Sec. 12. Antedated and postdated – The instrument is not invalid for the reason only that it is
antedated or postdated, provided this is not done for an illegal or fraudulent purpose. The person to
whom an instrument so dated is delivered acquires the title thereto as of the date of delivery.
(Underscoring supplied.)

Note however that delivery as the term is used in the aforementioned provision means that the party
delivering did so for the purpose of giving effect thereto.12 Otherwise, it cannot be said that there has
been delivery of the negotiable instrument. Once there is delivery, the person to whom the
instrument is delivered gets the title to the instrument completely and irrevocably.

If the subject check was given by Puzon to SMC in payment of the obligation, the purpose of giving
effect to the instrument is evident thus title to or ownership of the check was transferred upon

69
delivery. However, if the check was not given as payment, there being no intent to give effect to the
instrument, then ownership of the check was not transferred to SMC.

The evidence of SMC failed to establish that the check was given in payment of the obligation of
Puzon. There was no provisional receipt or official receipt issued for the amount of the check. What
was issued was a receipt for the document, a "POSTDATED CHECK SLIP."13

Furthermore, the petitioner's demand letter sent to respondent states "As per company policies on
receivables, all issuances are to be covered by post-dated checks. However, you have deviated
from this policy by forcibly taking away the check you have issued to us to cover the December
issuance."14 Notably, the term "payment" was not used instead the terms "covered" and "cover" were
used.

Although the petitioner's witness, Gregorio L. Joven III, states in paragraph 6 of his affidavit that the
check was given in payment of the obligation of Puzon, the same is contradicted by his statements
in paragraph 4, where he states that "As a standard company operating procedure, all beer
purchases by dealers on credit shall be covered by postdated checks equivalent to the value of the
beer products purchased"; in paragraph 9 where he states that "the transaction covered by the said
check had not yet been paid for," and in paragraph 8 which clearly shows that partial payment is
expected to be made by the return of beer empties, and not by the deposit or encashment of the
check. Clearly the term "cover" was not meant to be used interchangeably with "payment."
1avvphi1

When taken in conjunction with the counter-affidavit of Puzon – where he states that "As the [liquid
beer] contents are paid for, SMC return[s] to me the corresponding PDCs or request[s] me to replace
them with whatever was the unpaid balance."15 – it becomes clear that both parties did not intend for
the check to pay for the beer products. The evidence proves that the check was accepted, not as
payment, but in accordance with the long-standing policy of SMC to require its dealers to issue
postdated checks to cover its receivables. The check was only meant to cover the transaction and in
the meantime Puzon was to pay for the transaction by some other means other than the check. This
being so, title to the check did not transfer to SMC; it remained with Puzon. The second element of
the felony of theft was therefore not established. Petitioner was not able to show that Puzon took a
check that belonged to another. Hence, the prosecutor and the DOJ were correct in finding no
probable cause for theft.

Consequently, the CA did not err in finding no grave abuse of discretion committed by the DOJ in
sustaining the dismissal of the case for theft for lack of probable cause.

WHEREFORE, the petition is DENIED. The December 21, 2004 Decision and March 28, 2005
Resolution of the Court of Appeals in CA-G.R. SP. No. 83905 are AFFIRMED.

SO ORDERED.

70
ASTRO-ELECTRONICS CORP. VS PHILGUARANTEE (2003)

[G.R. No. 136729. September 23, 2003.]

ASTRO ELECTRONICS CORP. and PETER ROXAS, Petitioners, v. PHILIPPINE EXPORT AND
FOREIGN LOAN GUARANTEE CORPORATION, Respondent.

AUSTRIA-MARTINEZ, J.:

Assailed in this petition for review on certiorari under Rule 45 of the Rules of Court is the decision of the
Court of Appeals in CA-G.R. CV No. 41274, 1 affirming the decision of the Regional Trial Court (Branch
147) of Makati, then Metro Manila, whereby petitioners Peter Roxas and Astro Electronics Corp. (Astro for
brevity) were ordered to pay respondent Philippine Export and Foreign Loan Guarantee Corporation
(Philguarantee), jointly and severally, the amount of P3,621,187.52 with interests and costs. nad

The antecedent facts are undisputed.

Astro was granted several loans by the Philippine Trust Company (Philtrust) amounting to P3,000,000.00
with interest and secured by three promissory notes: PN No. PFX-254 dated December 14, 1981 for
P600,000.00, PN No. PFX-258 also dated December 14, 1981 for P400,000.00 and PN No. 15477 dated
August 27, 1981 for P2,000,000.00. In each of these promissory notes, it appears that petitioner Roxas
signed twice, as President of Astro and in his personal capacity. 2 Roxas also signed a Continuing
Suretyship Agreement in favor of Philtrust Bank, as President of Astro and as surety. 3

Thereafter, Philguarantee, with the consent of Astro, guaranteed in favor of Philtrust the payment of 70%
of Astro’s loan, 4 subject to the condition that upon payment by Philguarantee of said amount, it shall be
proportionally subrogated to the rights of Philtrust against Astro. 5

As a result of Astro’s failure to pay its loan obligations, despite demands, Philguarantee paid 70% of the
guaranteed loan to Philtrust. Subsequently, Philguarantee filed against Astro and Roxas a complaint for
sum of money with the RTC of Makati.

In his Answer, Roxas disclaims any liability on the instruments, alleging, inter alia, that he merely signed
the same in blank and the phrases "in his personal capacity" and "in his official capacity" were
fraudulently inserted without his knowledge. 6

After trial, the RTC rendered its decision in favor of Philguarantee with the following dispositive
portion:chanrob1es virtual 1aw library

WHEREFORE, in view of all the foregoing, the Court hereby renders judgment in favor or (sic) the plaintiff
and against the defendants Astro Electronics Corporation and Peter T. Roxas, ordering the then (sic) to
pay, jointly and severally, the plaintiff the sum of P3,621,187.52 representing the total obligation of
defendants in favor of plaintiff Philguarantee as of December 31, 1984 with interest at the stipulated rate
of 16% per annum and stipulated penalty charges of 16% per annum computed from January 1, 1985
until the amount is fully paid. With costs.

SO ORDERED. 7

The trial court observed that if Roxas really intended to sign the instruments merely in his capacity as
President of Astro, then he should have signed only once in the promissory note. 8

On appeal, the Court of Appeals affirmed the RTC decision agreeing with the trial court that Roxas failed

71
to explain satisfactorily why he had to sign twice in the contract and therefore the presumption that private
transactions have been fair and regular must be sustained. 9

In the present petition, the principal issue to be resolved is whether or not Roxas should be jointly and
severally liable (solidary) with Astro for the sum awarded by the RTC.

The answer is in the affirmative.

Astro’s loan with Philtrust Bank is secured by three promissory notes. These promissory notes are valid
and binding against Astro and Roxas. As it appears on the notes, Roxas signed twice: first, as president
of Astro and second, in his personal capacity. In signing his name aside from being the President of
Astro, Roxas became a co-maker of the promissory notes and cannot escape any liability arising from it.
Under the Negotiable Instruments Law, persons who write their names on the face of promissory notes
are makers, 10 promising that they will pay to the order of the payee or any holder according to its tenor.
11 Thus, even without the phrase "personal capacity," Roxas will still be primarily liable as a joint and
several debtor under the notes considering that his intention to be liable as such is manifested by the fact
that he affixed his signature on each of the promissory notes twice which necessarily would imply that he
is undertaking the obligation in two different capacities, official and personal.

Unnoticed by both the trial court and the Court of Appeals, a closer examination of the signatures affixed
by Roxas on the promissory notes, Exhibits "A-4" and "3-A" and "B-4" and "4-A" readily reveals that
portions of his signatures covered portions of the typewritten words "personal capacity" indicating with
certainty that the typewritten words were already existing at the time Roxas affixed his signatures thus
demolishing his claim that the typewritten words were just inserted after he signed the promissory notes.
If what he claims is true, then portions of the typewritten words would have covered portions of his
signatures, and not vice versa.chanrob1es virtua1 1aw 1ibrary

As to the third promissory note, Exhibit "C-4" and "5-A", the copy submitted is not clear so that this Court
could not discern the same observations on the notes, Exhibits "A-4" and "3-A" and "B-4" and "4-A" .

Nevertheless, the following discussions equally apply to all three promissory notes.

The three promissory notes uniformly provide: "FOR VALUE RECEIVED, I/We jointly, severally and
solidarily, promise to pay to PHILTRUST BANK or order . . ." 12 An instrument which begins with "I",
"We", or "Either of us" promise to pay, when signed by two or more persons, makes them solidarily liable.
13 Also, the phrase "joint and several" binds the makers jointly and individually to the payee so that all
may be sued together for its enforcement, or the creditor may select one or more as the object of the suit.
14 Having signed under such terms, Roxas assumed the solidary liability of a debtor and Philtrust Bank
may choose to enforce the notes against him alone or jointly with Astro.

Roxas’ claim that the phrases "in his personal capacity" and "in his official capacity" were inserted on the
notes without his knowledge was correctly disregarded by the RTC and the Court of Appeals. It is not
disputed that Roxas does not deny that he signed the notes twice. As aptly found by both the trial and
appellate court, Roxas did not offer any explanation why he did so. It devolves upon him to overcome the
presumptions that private transactions are presumed to be fair and regular 15 and that a person takes
ordinary care of his concerns. 16 Aside from his self-serving allegations, Roxas failed to prove the truth of
such allegations. Thus, said presumptions prevail over his claims. Bare allegations, when unsubstantiated
by evidence, documentary or otherwise, are not equivalent to proof under our Rules of Court. 17

Roxas is the President of Astro and reasonably, a businessman who is presumed to take ordinary care of
his concerns. Absent any countervailing evidence, it cannot be gainsaid that he will not sign a document
without first informing himself of its contents and consequences. Clearly, he knew the nature of the
transactions and documents involved as he not only executed these notes on two different dates but he
also executed, and again, signed twice, a "Continuing Suretyship Agreement" notarized on July 31, 1981,
wherein he guaranteed, jointly and severally with Astro the repayment of P3,000,000.00 due to Philtrust.
Such continuing suretyship agreement even re-enforced his solidary liability to Philtrust because as a

72
surety, he bound himself jointly and severally with Astro’s obligation. 18 Roxas cannot now avoid liability
by hiding under the convenient excuse that he merely signed the notes in blank and the phrases "in his
personal capacity" and "in his official capacity" were fraudulently inserted without his knowledge.

Lastly, Philguarantee has all the right to proceed against petitioner. It is subrogated to the rights of
Philtrust to demand for and collect payment from both Roxas and Astro since it already paid the value of
70% of Roxas and Astro Electronics Corp.’s loan obligation, in compliance with its contract of "Guarantee"
in favor of Philtrust.

Subrogation is the transfer of all the rights of the creditor to a third person, who substitutes him in all his
rights. 19 It may either be legal or conventional. Legal subrogation is that which takes place without
agreement but by operation of law because of certain acts. 20 Instances of legal subrogation are those
provided in Article 1302 of the Civil Code. Conventional subrogation, on the other hand, is that which
takes place by agreement of the parties. 21

Roxas’ acquiescence is not necessary for subrogation to take place because the instant case is one of
legal subrogation that occurs by operation of law, and without need of the debtor’s knowledge. 22 Further,
Philguarantee, as guarantor, became the transferee of all the rights of Philtrust as against Roxas and
Astro because the "guarantor who pays is subrogated by virtue thereof to all the rights which the creditor
had against the debtor." 23

WHEREFORE, finding no error with the decision of the Court of Appeals dated December 10, 1998, the
same is hereby AFFIRMED in toto.chanrob1es virtua1 1aw 1ibrary

SO ORDERED.

73
DEVELOPMENT BANK OF RIZAL VS SIMA WEI (1993)

G.R. No. 85419 March 9, 1993

DEVELOPMENT BANK OF RIZAL, plaintiff-petitioner,

vs.
SIMA WEI and/or LEE KIAN HUAT, MARY CHENG UY, SAMSON TUNG, ASIAN INDUSTRIAL
PLASTIC CORPORATION and PRODUCERS BANK OF THE PHILIPPINES, defendants-
respondents.

Yngson & Associates for petitioner.

Henry A. Reyes & Associates for Samso Tung & Asian Industrial Plastic Corporation.

Eduardo G. Castelo for Sima Wei.

Monsod, Tamargo & Associates for Producers Bank.

Rafael S. Santayana for Mary Cheng Uy.

CAMPOS, JR., J.:

On July 6, 1986, the Development Bank of Rizal (petitioner Bank for brevity) filed a complaint for a
sum of money against respondents Sima Wei and/or Lee Kian Huat, Mary Cheng Uy, Samson Tung,
Asian Industrial Plastic Corporation (Plastic Corporation for short) and the Producers Bank of the
Philippines, on two causes of action:

(1) To enforce payment of the balance of P1,032,450.02 on a promissory note

executed by respondent Sima Wei on June 9, 1983; and

(2) To enforce payment of two checks executed by Sima Wei, payable to petitioner,
and drawn against the China Banking Corporation, to pay the balance due on the
promissory note.

Except for Lee Kian Huat, defendants filed their separate Motions to Dismiss alleging a common
ground that the complaint states no cause of action. The trial court granted the defendants' Motions
to Dismiss. The Court of Appeals affirmed this decision, * to which the petitioner Bank, represented
by its Legal Liquidator, filed this Petition for Review by Certiorari, assigning the following as the
alleged errors of the Court of Appeals:1

(1) THE COURT OF APPEALS ERRED IN HOLDING THAT THE PLAINTIFF-

PETITIONER HAS NO CAUSE OF ACTION AGAINST DEFENDANTS-
RESPONDENTS HEREIN.

(2) THE COURT OF APPEALS ERRED IN HOLDING THAT SECTION 13, RULE 3
OF THE REVISED RULES OF COURT ON ALTERNATIVE DEFENDANTS IS NOT
APPLICABLE TO HEREIN DEFENDANTS-RESPONDENTS.

74
The antecedent facts of this case are as follows:

In consideration for a loan extended by petitioner Bank to respondent Sima Wei, the latter executed
and delivered to the former a promissory note, engaging to pay the petitioner Bank or order the
amount of P1,820,000.00 on or before June 24, 1983 with interest at 32% per annum. Sima Wei
made partial payments on the note, leaving a balance of P1,032,450.02. On November 18, 1983,
Sima Wei issued two crossed checks payable to petitioner Bank drawn against China Banking
Corporation, bearing respectively the serial numbers 384934, for the amount of P550,000.00 and
384935, for the amount of P500,000.00. The said checks were allegedly issued in full settlement of
the drawer's account evidenced by the promissory note. These two checks were not delivered to the
petitioner-payee or to any of its authorized representatives. For reasons not shown, these checks
came into the possession of respondent Lee Kian Huat, who deposited the checks without the
petitioner-payee's indorsement (forged or otherwise) to the account of respondent Plastic
Corporation, at the Balintawak branch, Caloocan City, of the Producers Bank. Cheng Uy, Branch
Manager of the Balintawak branch of Producers Bank, relying on the assurance of respondent
Samson Tung, President of Plastic Corporation, that the transaction was legal and regular,
instructed the cashier of Producers Bank to accept the checks for deposit and to credit them to the
account of said Plastic Corporation, inspite of the fact that the checks were crossed and payable to
petitioner Bank and bore no indorsement of the latter. Hence, petitioner filed the complaint as
aforestated.

The main issue before Us is whether petitioner Bank has a cause of action against any or all of the
defendants, in the alternative or otherwise.

A cause of action is defined as an act or omission of one party in violation of the legal right or rights
of another. The essential elements are: (1) legal right of the plaintiff; (2) correlative obligation of the
defendant; and (3) an act or omission of the defendant in violation of said legal right.2

The normal parties to a check are the drawer, the payee and the drawee bank. Courts have long
recognized the business custom of using printed checks where blanks are provided for the date of
issuance, the name of the payee, the amount payable and the drawer's signature. All the drawer has
to do when he wishes to issue a check is to properly fill up the blanks and sign it. However, the mere
fact that he has done these does not give rise to any liability on his part, until and unless the check is
delivered to the payee or his representative. A negotiable instrument, of which a check is, is not only
a written evidence of a contract right but is also a species of property. Just as a deed to a piece of
land must be delivered in order to convey title to the grantee, so must a negotiable instrument be
delivered to the payee in order to evidence its existence as a binding contract. Section 16 of the
Negotiable Instruments Law, which governs checks, provides in part:

Every contract on a negotiable instrument is incomplete and revocable until delivery

of the instrument for the purpose of giving effect thereto. . . .

Thus, the payee of a negotiable instrument acquires no interest with respect thereto until its delivery
to him.3 Delivery of an instrument means transfer of possession, actual or constructive, from one
person to another.4 Without the initial delivery of the instrument from the drawer to the payee, there
can be no liability on the instrument. Moreover, such delivery must be intended to give effect to the
instrument.

The allegations of the petitioner in the original complaint show that the two (2) China Bank checks,
numbered 384934 and 384935, were not delivered to the payee, the petitioner herein. Without the
delivery of said checks to petitioner-payee, the former did not acquire any right or interest therein

75
and cannot therefore assert any cause of action, founded on said checks, whether against the
drawer Sima Wei or against the Producers Bank or any of the other respondents.

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

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

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

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

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

In the light of the foregoing, the judgment of the Court of Appeals dismissing the petitioner's
complaint is AFFIRMED insofar as the second cause of action is concerned. On the first cause of
action, the case is REMANDED to the trial court for a trial on the merits, consistent with this
decision, in order to determine whether respondent Sima Wei is liable to the Development Bank of
Rizal for any amount under the promissory note allegedly signed by her.

SO ORDERED.

76
REPUBLIC PLANTERS BANK VS COURT OF APPEALS (1992)

G.R. No. 93073 December 21, 1992

REPUBLIC PLANTERS BANK, petitioner,

vs.
COURT OF APPEALS and FERMIN CANLAS, respondents.

CAMPOS, JR., J.:

This is an appeal by way of a Petition for Review on Certiorari from the decision * of the Court of Appeals in
CA G.R. CV No. 07302, entitled "Republic Planters Bank.Plaintiff-Appellee vs. Pinch Manufacturing Corporation, et al., Defendants, and
Fermin Canlas, Defendant-Appellant", which affirmed the decision ** in Civil Case No. 82-5448 except that it completely absolved Fermin
Canlas from liability under the promissory notes and reduced the award for damages and attorney's fees. The RTC decision, rendered on
June 20, 1985, is quoted hereunder:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the

plaintiff Republic Planters Bank, ordering defendant Pinch Manufacturing Corporation
(formerly Worldwide Garment Manufacturing, Inc.) and defendants Shozo
Yamaguchi and Fermin Canlas to pay, jointly and severally, the plaintiff bank the
following sums with interest thereon at 16% per annum from the dates indicated, to
wit:

Under the promissory note (Exhibit "A"), the sum of P300,000.00 with interest from
January 29, 1981 until fully paid; under promissory note (Exhibit "B"), the sum of
P40,000.00 with interest from November 27, 1980; under the promissory note
(Exhibit "C"), the sum of P166,466.00 which interest from January 29, 1981; under
the promissory note (Exhibit "E"), the sum of P86,130.31 with interest from January
29, 1981; under the promissory note (Exhibit "G"), the sum of P12,703.70 with
interest from November 27, 1980; under the promissory note (Exhibit "H"), the sum of
P281,875.91 with interest from January 29, 1981; and under the promissory note
(Exhibit "I"), the sum of P200,000.00 with interest from January 29, 1981.

Under the promissory note (Exhibit "D") defendants Pinch Manufacturing Corporation
(formerly named Worldwide Garment Manufacturing, Inc.), and Shozo Yamaguchi
are ordered to pay jointly and severally, the plaintiff bank the sum of P367,000.00
with interest of 16% per annum from January 29, 1980 until fully paid

Under the promissory note (Exhibit "F") defendant corporation Pinch (formerly
Worldwide) is ordered to pay the plaintiff bank the sum of P140,000.00 with interest
at 16% per annum from November 27, 1980 until fully paid.

Defendant Pinch (formely Worldwide) is hereby ordered to pay the plaintiff the sum of
P231,120.81 with interest at 12% per annum from July 1, 1981, until fully paid and
the sum of P331,870.97 with interest from March 28, 1981, until fully paid.

All the defendants are also ordered to pay, jointly and severally, the plaintiff the sum
of P100,000.00 as and for reasonable attorney's fee and the further sum equivalent

77
 to 3% per annum of the respective principal sums from the dates above stated as
penalty charge until fully paid, plus one percent (1%) of the principal sums as service
charge.

With costs against the defendants.

SO ORDERED. 1

From the above decision only defendant Fermin Canlas appealed to the then Intermediate Court
(now the Court Appeals). His contention was that inasmuch as he signed the promissory notes in his
capacity as officer of the defunct Worldwide Garment Manufacturing, Inc, he should not be held
personally liable for such authorized corporate acts that he performed. It is now the contention of the
petitioner Republic Planters Bank that having unconditionally signed the nine (9) promissory notes
with Shozo Yamaguchi, jointly and severally, defendant Fermin Canlas is solidarity liable with Shozo
Yamaguchi on each of the nine notes.

We find merit in this appeal.

From the records, these facts are established: Defendant Shozo Yamaguchi and private respondent
Fermin Canlas were President/Chief Operating Officer and Treasurer respectively, of Worldwide
Garment Manufacturing, Inc.. By virtue of Board Resolution No.1 dated August 1, 1979, defendant
Shozo Yamaguchi and private respondent Fermin Canlas were authorized to apply for credit
facilities with the petitioner Republic Planters Bank in the forms of export advances and letters of
credit/trust receipts accommodations. Petitioner bank issued nine promissory notes, marked as
Exhibits A to I inclusive, each of which were uniformly worded in the following manner:

___________, after date, for value received, I/we, jointly and severaIly promise to
pay to the ORDER of the REPUBLIC PLANTERS BANK, at its office in Manila,
Philippines, the sum of ___________ PESOS(....) Philippine Currency...

On the right bottom margin of the promissory notes appeared the signatures of Shozo Yamaguchi
and Fermin Canlas above their printed names with the phrase "and (in) his personal capacity"
typewritten below. At the bottom of the promissory notes appeared: "Please credit proceeds of this
note to:

________ Savings Account ______XX Current Account

No. 1372-00257-6

of WORLDWIDE GARMENT MFG. CORP.

These entries were separated from the text of the notes with a bold line which ran horizontally
across the pages.

In the promissory notes marked as Exhibits C, D and F, the name Worldwide Garment
Manufacturing, Inc. was apparently rubber stamped above the signatures of defendant and private
respondent.

On December 20, 1982, Worldwide Garment Manufacturing, Inc. noted to change its corporate
name to Pinch Manufacturing Corporation.

78
On February 5, 1982, petitioner bank filed a complaint for the recovery of sums of money covered
among others, by the nine promissory notes with interest thereon, plus attorney's fees and penalty
charges. The complainant was originally brought against Worldwide Garment Manufacturing,
Inc. inter alia, but it was later amended to drop Worldwide Manufacturing, Inc. as defendant and
substitute Pinch Manufacturing Corporation it its place. Defendants Pinch Manufacturing Corporation
and Shozo Yamaguchi did not file an Amended Answer and failed to appear at the scheduled pre-
trial conference despite due notice. Only private respondent Fermin Canlas filed an Amended
Answer wherein he, denied having issued the promissory notes in question since according to him,
he was not an officer of Pinch Manufacturing Corporation, but instead of Worldwide Garment
Manufacturing, Inc., and that when he issued said promissory notes in behalf of Worldwide Garment
Manufacturing, Inc., the same were in blank, the typewritten entries not appearing therein prior to the
time he affixed his signature.

In the mind of this Court, the only issue material to the resolution of this appeal is whether private
respondent Fermin Canlas is solidarily liable with the other defendants, namely Pinch Manufacturing
Corporation and Shozo Yamaguchi, on the nine promissory notes.

We hold that private respondent Fermin Canlas is solidarily liable on each of the promissory notes
bearing his signature for the following reasons:

The promissory motes are negotiable instruments and must be governed by the Negotiable
Instruments Law. 2

Under the Negotiable lnstruments Law, persons who write their names on the face of promissory
notes are makers and are liable as such.3 By signing the notes, the maker promises to pay to the
order of the payee or any holder 4 according to the tenor thereof.5 Based on the above provisions of
law, there is no denying that private respondent Fermin Canlas is one of the co-makers of the
promissory notes. As such, he cannot escape liability arising therefrom.

Where an instrument containing the words "I promise to pay" is signed by two or more persons, they
are deemed to be jointly and severally liable thereon.6 An instrument which begins" with "I" ,We" , or
"Either of us" promise to, pay, when signed by two or more persons, makes them solidarily
liable. 7 The fact that the singular pronoun is used indicates that the promise is individual as to each
other; meaning that each of the co-signers is deemed to have made an independent singular
promise to pay the notes in full.

In the case at bar, the solidary liability of private respondent Fermin Canlas is made clearer and
certain, without reason for ambiguity, by the presence of the phrase "joint and several" as describing
the unconditional promise to pay to the order of Republic Planters Bank. A joint and several note is
one in which the makers bind themselves both jointly and individually to the payee so that all may be
sued together for its enforcement, or the creditor may select one or more as the object of the suit. 8 A
joint and several obligation in common law corresponds to a civil law solidary obligation; that is, one of several debtors bound in such wise
that each is liable for the entire amount, and not merely for his proportionate share. 9 By making a joint and several promise to pay to the
order of Republic Planters Bank, private respondent Fermin Canlas assumed the solidary liability of a debtor and the payee may choose to
enforce the notes against him alone or jointly with Yamaguchi and Pinch Manufacturing Corporation as solidary debtors.

As to whether the interpolation of the phrase "and (in) his personal capacity" below the signatures of
the makers in the notes will affect the liability of the makers, We do not find it necessary to resolve
and decide, because it is immaterial and will not affect to the liability of private respondent Fermin
Canlas as a joint and several debtor of the notes. With or without the presence of said phrase,
private respondent Fermin Canlas is primarily liable as a co-maker of each of the notes and his
liability is that of a solidary debtor.

79
Finally, the respondent Court made a grave error in holding that an amendment in a corporation's
Articles of Incorporation effecting a change of corporate name, in this case from Worldwide Garment
manufacturing Inc to Pinch Manufacturing Corporation extinguished the personality of the original
corporation.

The corporation, upon such change in its name, is in no sense a new corporation, nor the successor
of the original corporation. It is the same corporation with a different name, and its character is in no
respect changed.10

A change in the corporate name does not make a new corporation, and whether effected by special
act or under a general law, has no affect on the identity of the corporation, or on its property, rights,
or liabilities. 11

The corporation continues, as before, responsible in its new name for all debts or other liabilities
which it had previously contracted or incurred.12

As a general rule, officers or directors under the old corporate name bear no personal liability for
acts done or contracts entered into by officers of the corporation, if duly authorized. Inasmuch as
such officers acted in their capacity as agent of the old corporation and the change of name meant
only the continuation of the old juridical entity, the corporation bearing the same name is still bound
by the acts of its agents if authorized by the Board. Under the Negotiable Instruments Law, the
liability of a person signing as an agent is specifically provided for as follows:

Sec. 20. Liability of a person signing as agent and so forth. Where the instrument
contains or a person adds to his signature words indicating that he signs for or on
behalf of a principal , or in a representative capacity, he is not liable on the
instrument if he was duly authorized; but the mere addition of words describing him
as an agent, or as filling a representative character, without disclosing his principal,
does not exempt him from personal liability.

Where the agent signs his name but nowhere in the instrument has he disclosed the fact that he is
acting in a representative capacity or the name of the third party for whom he might have acted as
agent, the agent is personally liable to take holder of the instrument and cannot be permitted to
prove that he was merely acting as agent of another and parol or extrinsic evidence is not admissible
to avoid the agent's personal liability. 13

On the private respondent's contention that the promissory notes were delivered to him in blank for
his signature, we rule otherwise. A careful examination of the notes in question shows that they are
the stereotype printed form of promissory notes generally used by commercial banking institutions to
be signed by their clients in obtaining loans. Such printed notes are incomplete because there are
blank spaces to be filled up on material particulars such as payee's name, amount of the loan, rate
of interest, date of issue and the maturity date. The terms and conditions of the loan are printed on
the note for the borrower-debtor 's perusal. An incomplete instrument which has been delivered to
the borrower for his signature is governed by Section 14 of the Negotiable Instruments Law which
provides, in so far as relevant to this case, thus:

Sec. 14. Blanks: when may be filled. — Where the instrument is wanting in any
material particular, the person in possesion thereof has a prima facie authority to
complete it by filling up the blanks therein. ... In order, however, that any such
instrument when completed may be enforced against any person who became a
party thereto prior to its completion, it must be filled up strictly in accordance with the
authority given and within a reasonable time...

80
Proof that the notes were signed in blank was only the self-serving testimony of private respondent
Fermin Canlas, as determined by the trial court, so that the trial court ''doubts the defendant (Canlas)
signed in blank the promissory notes". We chose to believe the bank's testimony that the notes were
filled up before they were given to private respondent Fermin Canlas and defendant Shozo
Yamaguchi for their signatures as joint and several promissors. For signing the notes above their
typewritten names, they bound themselves as unconditional makers. We take judicial notice of the
customary procedure of commercial banks of requiring their clientele to sign promissory notes
prepared by the banks in printed form with blank spaces already filled up as per agreed terms of the
loan, leaving the borrowers-debtors to do nothing but read the terms and conditions therein printed
and to sign as makers or co-makers. When the notes were given to private respondent Fermin
Canlas for his signature, the notes were complete in the sense that the spaces for the material
particular had been filled up by the bank as per agreement. The notes were not incomplete
instruments; neither were they given to private respondent Fermin Canlas in blank as he claims.
Thus, Section 14 of the NegotiabIe Instruments Law is not applicable.

The ruling in case of Reformina vs. Tomol relied upon by the appellate court in reducing the interest
rate on the promissory notes from 16% to 12% per annum does not squarely apply to the instant
petition. In the abovecited case, the rate of 12% was applied to forebearances of money, goods or
credit and court judgemets thereon, only in the absence of any stipulation between the parties.

In the case at bar however , it was found by the trial court that the rate of interest is 9% per annum,
which interest rate the plaintiff may at any time without notice, raise within the limits allowed law. And
so, as of February 16, 1984 , the plaintiff had fixed the interest at 16% per annum.

This Court has held that the rates under the Usury Law, as amended by Presidential Decree No.
116, are applicable only to interests by way of compensation for the use or forebearance of money.
Article 2209 of the Civil Code, on the other hand, governs interests by way of damages.15 This fine
distinction was not taken into consideration by the appellate court, which instead made a general
statement that the interest rate be at 12% per annum.

Inasmuch as this Court had declared that increases in interest rates are not subject to any ceiling
prescribed by the Usury Law, the appellate court erred in limiting the interest rates at 12% per
annum. Central Bank Circular No. 905, Series of 1982 removed the Usury Law ceiling on interest
rates. 16

In the 1ight of the foregoing analysis and under the plain language of the statute and jurisprudence
on the matter, the decision of the respondent: Court of Appeals absolving private respondent Fermin
Canlas is REVERSED and SET ASIDE. Judgement is hereby rendered declaring private respondent
Fermin Canlas jointly and severally liable on all the nine promissory notes with the following sums
and at 16% interest per annum from the dates indicated, to wit:

Under the promissory note marked as exhibit A, the sum of P300,000.00 with interest from January
29, 1981 until fully paid; under promissory note marked as Exhibit B, the sum of P40,000.00 with
interest from November 27, 1980: under the promissory note denominated as Exhibit C, the amount
of P166,466.00 with interest from January 29, 1981; under the promissory note denominated as
Exhibit D, the amount of P367,000.00 with interest from January 29, 1981 until fully paid; under the
promissory note marked as Exhibit E, the amount of P86,130.31 with interest from January 29, 1981;
under the promissory note marked as Exhibit F, the sum of P140,000.00 with interest from
November 27, 1980 until fully paid; under the promissory note marked as Exhibit G, the amount of
P12,703.70 with interest from November 27, 1980; the promissory note marked as Exhibit H, the
sum of P281,875.91 with interest from January 29, 1981; and the promissory note marked as Exhibit
I, the sum of P200,000.00 with interest on January 29, 1981.

81
The liabilities of defendants Pinch Manufacturing Corporation (formerly Worldwide Garment
Manufacturing, Inc.) and Shozo Yamaguchi, for not having appealed from the decision of the trial
court, shall be adjudged in accordance with the judgment rendered by the Court a quo.

With respect to attorney's fees, and penalty and service charges, the private respondent Fermin
Canlas is hereby held jointly and solidarity liable with defendants for the amounts found, by the
Court a quo. With costs against private respondent.

SO ORDERED.

82
SAMSUNG CONSTRUCTION VS FAR EAST BANK (2004)

G.R. No. 129015 August 13, 2004

SAMSUNG CONSTRUCTION COMPANY PHILIPPINES, INC., petitioner,

vs.
FAR EAST BANK AND TRUST COMPANY AND COURT OF APPEALS, respondents.

DECISION

TINGA, J.:

Called to fore in the present petition is a classic textbook question – if a bank pays out on a forged
check, is it liable to reimburse the drawer from whose account the funds were paid out? The Court of
Appeals, in reversing a trial court decision adverse to the bank, invoked tenuous reasoning to acquit
the bank of liability. We reverse, applying time-honored principles of law.

The salient facts follow.

Plaintiff Samsung Construction Company Philippines, Inc. ("Samsung Construction"), while based in
Biñan, Laguna, maintained a current account with defendant Far East Bank and Trust
Company1 ("FEBTC") at the latter’s Bel-Air, Makati branch.2 The sole signatory to Samsung
Construction’s account was Jong Kyu Lee ("Jong"), its Project Manager,3 while the checks remained
in the custody of the company’s accountant, Kyu Yong Lee ("Kyu").4

On 19 March 1992, a certain Roberto Gonzaga presented for payment FEBTC Check No. 432100 to
the bank’s branch in Bel-Air, Makati. The check, payable to cash and drawn against Samsung
Construction’s current account, was in the amount of Nine Hundred Ninety Nine Thousand Five
Hundred Pesos (P999,500.00). The bank teller, Cleofe Justiani, first checked the balance of
Samsung Construction’s account. After ascertaining there were enough funds to cover the
check,5 she compared the signature appearing on the check with the specimen signature of Jong as
contained in the specimen signature card with the bank. After comparing the two signatures, Justiani
was satisfied as to the authenticity of the signature appearing on the check. She then asked
Gonzaga to submit proof of his identity, and the latter presented three (3) identification cards.6

At the same time, Justiani forwarded the check to the branch Senior Assistant Cashier Gemma
Velez, as it was bank policy that two bank branch officers approve checks exceeding One Hundred
Thousand Pesos, for payment or encashment. Velez likewise counterchecked the signature on the
check as against that on the signature card. He too concluded that the check was indeed signed by
Jong. Velez then forwarded the check and signature card to Shirley Syfu, another bank officer, for
approval. Syfu then noticed that Jose Sempio III ("Sempio"), the assistant accountant of Samsung
Construction, was also in the bank. Sempio was well-known to Syfu and the other bank officers, he
being the assistant accountant of Samsung Construction. Syfu showed the check to Sempio, who

83
vouched for the genuineness of Jong’s signature. Confirming the identity of Gonzaga, Sempio said
that the check was for the purchase of equipment for Samsung Construction. Satisfied with the
genuineness of the signature of Jong, Syfu authorized the bank’s encashment of the check to
Gonzaga.

The following day, the accountant of Samsung Construction, Kyu, examined the balance of the bank
account and discovered that a check in the amount of Nine Hundred Ninety Nine Thousand Five
Hundred Pesos (P999,500.00) had been encashed. Aware that he had not prepared such a check
for Jong’s signature, Kyu perused the checkbook and found that the last blank check was
missing.7 He reported the matter to Jong, who then proceeded to the bank. Jong learned of the
encashment of the check, and realized that his signature had been forged. The Bank Manager
reputedly told Jong that he would be reimbursed for the amount of the check.8 Jong proceeded to the
police station and consulted with his lawyers.9 Subsequently, a criminal case for qualified theft was
filed against Sempio before the Laguna court.10

In a letter dated 6 May 1992, Samsung Construction, through counsel, demanded that FEBTC credit
to it the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00), with
interest.11 In response, FEBTC said that it was still conducting an investigation on the matter.
Unsatisfied, Samsung Construction filed a Complaint on 10 June 1992 for violation of Section 23 of
the Negotiable Instruments Law, and prayed for the payment of the amount debited as a result of the
questioned check plus interest, and attorney’s fees.12 The case was docketed as Civil Case No. 92-
61506 before the Regional Trial Court ("RTC") of Manila, Branch 9.13

During the trial, both sides presented their respective expert witnesses to testify on the claim that
Jong’s signature was forged. Samsung Corporation, which had referred the check for investigation to
the NBI, presented Senior NBI Document Examiner Roda B. Flores. She testified that based on her
examination, she concluded that Jong’s signature had been forged on the check. On the other hand,
FEBTC, which had sought the assistance of the Philippine National Police (PNP),14 presented
Rosario C. Perez, a document examiner from the PNP Crime Laboratory. She testified that her
findings showed that Jong’s signature on the check was genuine.15

Confronted with conflicting expert testimony, the RTC chose to believe the findings of the NBI
expert. In a Decision dated 25 April 1994, the RTC held that Jong’s signature on the check was
forged and accordingly directed the bank to pay or credit back to Samsung Construction’s account
the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00), together
with interest tolled from the time the complaint was filed, and attorney’s fees in the amount of Fifteen
Thousand Pesos (P15,000.00).

FEBTC timely appealed to the Court of Appeals. On 28 November 1996, the Special Fourteenth
Division of the Court of Appeals rendered a Decision,16 reversing the RTC Decision and absolving
FEBTC from any liability. The Court of Appeals held that the contradictory findings of the NBI and
the PNP created doubt as to whether there was forgery.17 Moreover, the appellate court also held that
assuming there was forgery, it occurred due to the negligence of Samsung Construction, imputing
blame on the accountant Kyu for lack of care and prudence in keeping the checks, which if observed
would have prevented Sempio from gaining access thereto.18 The Court of Appeals invoked the ruling
in PNB v. National City Bank of New York19 that, if a loss, which must be borne by one or two
innocent persons, can be traced to the neglect or fault of either, such loss would be borne by the
negligent party, even if innocent of intentional fraud.20

Samsung Construction now argues that the Court of Appeals had seriously misapprehended the
facts when it overturned the RTC’s finding of forgery. It also contends that the appellate court erred

84
in finding that it had been negligent in safekeeping the check, and in applying the equity principle
enunciated in PNB v. National City Bank of New York.

Since the trial court and the Court of Appeals arrived at contrary findings on questions of fact, the
Court is obliged to examine the record to draw out the correct conclusions. Upon examination of the
record, and based on the applicable laws and jurisprudence, we reverse the Court of Appeals.

Section 23 of the Negotiable Instruments Law states:

When a signature is forged or made without the authority of the person whose signature it
purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a
discharge therefor, or to enforce payment thereof against any party thereto, can be acquired
through or under such signature, unless the party against whom it is sought to enforce
such right is precluded from setting up the forgery or want of authority. (Emphasis supplied)

The general rule is to the effect that a forged signature is "wholly inoperative," and payment made
"through or under such signature" is ineffectual or does not discharge the instrument.21 If payment is
made, the drawee cannot charge it to the drawer’s account. The traditional justification for the result
is that the drawee is in a superior position to detect a forgery because he has the maker’s signature
and is expected to know and compare it.22 The rule has a healthy cautionary effect on banks by
encouraging care in the comparison of the signatures against those on the signature cards they
have on file. Moreover, the very opportunity of the drawee to insure and to distribute the cost among
its customers who use checks makes the drawee an ideal party to spread the risk to insurance.23

Brady, in his treatise The Law of Forged and Altered Checks, elucidates:

When a person deposits money in a general account in a bank, against which he has the
privilege of drawing checks in the ordinary course of business, the relationship between the
bank and the depositor is that of debtor and creditor. So far as the legal relationship between
the two is concerned, the situation is the same as though the bank had borrowed money
from the depositor, agreeing to repay it on demand, or had bought goods from the depositor,
agreeing to pay for them on demand. The bank owes the depositor money in the same
sense that any debtor owes money to his creditor. Added to this, in the case of bank and
depositor, there is, of course, the bank’s obligation to pay checks drawn by the depositor in
proper form and presented in due course. When the bank receives the deposit, it impliedly
agrees to pay only upon the depositor’s order. When the bank pays a check, on which the
depositor’s signature is a forgery, it has failed to comply with its contract in this respect.
Therefore, the bank is held liable.

The fact that the forgery is a clever one is immaterial. The forged signature may so closely
resemble the genuine as to defy detection by the depositor himself. And yet, if a bank pays
the check, it is paying out its own money and not the depositor’s.

The forgery may be committed by a trusted employee or confidential agent. The bank still
must bear the loss. Even in a case where the forged check was drawn by the depositor’s
partner, the loss was placed upon the bank. The case referred to is Robinson v. Security
Bank, Ark., 216 S. W. Rep. 717. In this case, the plaintiff brought suit against the defendant
bank for money which had been deposited to the plaintiff’s credit and which the bank had
paid out on checks bearing forgeries of the plaintiff’s signature.

xxx

85
 It was held that the bank was liable. It was further held that the fact that the plaintiff waited
eight or nine months after discovering the forgery, before notifying the bank, did not, as a
matter of law, constitute a ratification of the payment, so as to preclude the plaintiff from
holding the bank liable. xxx

This rule of liability can be stated briefly in these words: "A bank is bound to know its
depositors’ signature." The rule is variously expressed in the many decisions in which the
question has been considered. But they all sum up to the proposition that a bank must know
the signatures of those whose general deposits it carries.24

By no means is the principle rendered obsolete with the advent of modern commercial transactions.
Contemporary texts still affirm this well-entrenched standard. Nickles, in his book Negotiable
Instruments and Other Related Commercial Paper wrote, thus:

The deposit contract between a payor bank and its customer determines who can draw
against the customer’s account by specifying whose signature is necessary on checks that
are chargeable against the customer’s account. Therefore, a check drawn against the
account of an individual customer that is signed by someone other than the customer, and
without authority from her, is not properly payable and is not chargeable to the customer’s
account, inasmuch as any "unauthorized signature on an instrument is ineffective" as the
signature of the person whose name is signed.25

Under Section 23 of the Negotiable Instruments Law, forgery is a real or absolute defense by the
party whose signature is forged.26 On the premise that Jong’s signature was indeed forged, FEBTC is
liable for the loss since it authorized the discharge of the forged check. Such liability attaches even if
the bank exerts due diligence and care in preventing such faulty discharge. Forgeries often deceive
the eye of the most cautious experts; and when a bank has been so deceived, it is a harsh rule
which compels it to suffer although no one has suffered by its being deceived.27 The forgery may be
so near like the genuine as to defy detection by the depositor himself, and yet the bank is liable to
the depositor if it pays the check.28

Thus, the first matter of inquiry is into whether the check was indeed forged. A document formally
presented is presumed to be genuine until it is proved to be fraudulent. In a forgery trial, this
presumption must be overcome but this can only be done by convincing testimony and effective
illustrations.29

In ruling that forgery was not duly proven, the Court of Appeals held:

[There] is ground to doubt the findings of the trial court sustaining the alleged forgery in view
of the conflicting conclusions made by handwriting experts from the NBI and the PNP, both
agencies of the government.

xxx

These contradictory findings create doubt on whether there was indeed a forgery. In the case
of Tenio-Obsequio v. Court of Appeals, 230 SCRA 550, the Supreme Court held that forgery
cannot be presumed; it must be proved by clear, positive and convincing evidence.

This reasoning is pure sophistry. Any litigator worth his or her salt would never allow an opponent’s
expert witness to stand uncontradicted, thus the spectacle of competing expert witnesses is not
unusual. The trier of fact will have to decide which version to believe, and explain why or why not
such version is more credible than the other. Reliance therefore cannot be placed merely on the fact

86
that there are colliding opinions of two experts, both clothed with the presumption of official duty, in
order to draw a conclusion, especially one which is extremely crucial. Doing so is tantamount to a
jurisprudential cop-out.

Much is expected from the Court of Appeals as it occupies the penultimate tier in the judicial
hierarchy. This Court has long deferred to the appellate court as to its findings of fact in the
understanding that it has the appropriate skill and competence to plough through the minutiae that
scatters the factual field. In failing to thoroughly evaluate the evidence before it, and relying instead
on presumptions haphazardly drawn, the Court of Appeals was sadly remiss. Of course, courts, like
humans, are fallible, and not every error deserves a stern rebuke. Yet, the appellate court’s error in
this case warrants special attention, as it is absurd and even dangerous as a precedent. If this
rationale were adopted as a governing standard by every court in the land, barely any actionable
claim would prosper, defeated as it would be by the mere invocation of the existence of a contrary
"expert" opinion.

On the other hand, the RTC did adjudge the testimony of the NBI expert as more credible than that
of the PNP, and explained its reason behind the conclusion:

After subjecting the evidence of both parties to a crucible of analysis, the court arrived at the
conclusion that the testimony of the NBI document examiner is more credible because the
testimony of the PNP Crime Laboratory Services document examiner reveals that there are a
lot of differences in the questioned signature as compared to the standard specimen
signature. Furthermore, as testified to by Ms. Rhoda Flores, NBI expert, the manner of
execution of the standard signatures used reveals that it is a free rapid continuous execution
or stroke as shown by the tampering terminal stroke of the signatures whereas the
questioned signature is a hesitating slow drawn execution stroke. Clearly, the person who
executed the questioned signature was hesitant when the signature was made.30

During the testimony of PNP expert Rosario Perez, the RTC bluntly noted that "apparently, there
[are] differences on that questioned signature and the standard signatures."31 This Court, in
examining the signatures, makes a similar finding. The PNP expert excused the noted "differences"
by asserting that they were mere "variations," which are normal deviations found in writing.32 Yet the
RTC, which had the opportunity to examine the relevant documents and to personally observe the
expert witness, clearly disbelieved the PNP expert. The Court similarly finds the testimony of the
PNP expert as unconvincing. During the trial, she was confronted several times with apparent
differences between strokes in the questioned signature and the genuine samples. Each time, she
would just blandly assert that these differences were just "variations,"33 as if the mere conjuration of
the word would sufficiently disquiet whatever doubts about the deviations. Such conclusion, standing
alone, would be of little or no value unless supported by sufficiently cogent reasons which might
amount almost to a demonstration.34

The most telling difference between the questioned and genuine signatures examined by the PNP is
in the final upward stroke in the signature, or "the point to the short stroke of the terminal in the
capital letter ‘L,’" as referred to by the PNP examiner who had marked it in her comparison chart as
"point no. 6." To the plain eye, such upward final stroke consists of a vertical line which forms a
ninety degree (90º) angle with the previous stroke. Of the twenty one (21) other genuine samples
examined by the PNP, at least nine (9) ended with an upward stroke.35 However, unlike the
questioned signature, the upward strokes of eight (8) of these signatures are looped, while the
upward stroke of the seventh36 forms a severe forty-five degree (45º) with the previous stroke. The
difference is glaring, and indeed, the PNP examiner was confronted with the inconsistency in point
no. 6.

87
 Q: Now, in this questioned document point no. 6, the "s" stroke is directly upwards.

A: Yes, sir.

Q: Now, can you look at all these standard signature (sic) were (sic) point 6 is repeated or
the last stroke "s" is pointing directly upwards?

A: There is none in the standard signature, sir.37

Again, the PNP examiner downplayed the uniqueness of the final stroke in the questioned signature
as a mere variation,38 the same excuse she proffered for the other marked differences noted by the
Court and the counsel for petitioner.39

There is no reason to doubt why the RTC gave credence to the testimony of the NBI examiner, and
not the PNP expert’s. The NBI expert, Rhoda Flores, clearly qualifies as an expert witness. A
document examiner for fifteen years, she had been promoted to the rank of Senior Document
Examiner with the NBI, and had held that rank for twelve years prior to her testimony. She had
placed among the top five examinees in the Competitive Seminar in Question Document
Examination, conducted by the NBI Academy, which qualified her as a document examiner.40 She
had trained with the Royal Hongkong Police Laboratory and is a member of the International
Association for Identification.41 As of the time she testified, she had examined more than fifty to fifty-
five thousand questioned documents, on an average of fifteen to twenty documents a day.42 In
comparison, PNP document examiner Perez admitted to having examined only around five hundred
documents as of her testimony.43

In analyzing the signatures, NBI Examiner Flores utilized the scientific comparative examination
method consisting of analysis, recognition, comparison and evaluation of the writing habits with the
use of instruments such as a magnifying lense, a stereoscopic microscope, and varied lighting
substances. She also prepared enlarged photographs of the signatures in order to facilitate the
necessary comparisons.44 She compared the questioned signature as against ten (10) other sample
signatures of Jong. Five of these signatures were executed on checks previously issued by Jong,
while the other five contained in business letters Jong had signed.45 The NBI found that there were
significant differences in the handwriting characteristics existing between the questioned and the
sample signatures, as to manner of execution, link/connecting strokes, proportion characteristics,
and other identifying details.46

The RTC was sufficiently convinced by the NBI examiner’s testimony, and explained her reasons in
its Decisions. While the Court of Appeals disagreed and upheld the findings of the PNP, it failed to
convincingly demonstrate why such findings were more credible than those of the NBI expert. As a
throwaway, the assailed Decision noted that the PNP, not the NBI, had the opportunity to examine
the specimen signature card signed by Jong, which was relied upon by the employees of FEBTC in
authenticating Jong’s signature. The distinction is irrelevant in establishing forgery. Forgery can be
established comparing the contested signatures as against those of any sample signature duly
established as that of the persons whose signature was forged.

FEBTC lays undue emphasis on the fact that the PNP examiner did compare the questioned
signature against the bank signature cards. The crucial fact in question is whether or not the
check was forged, not whether the bank could have detected the forgery. The latter issue
becomes relevant only if there is need to weigh the comparative negligence between the bank
and the party whose signature was forged.

88
At the same time, the Court of Appeals failed to assess the effect of Jong’s testimony that the
signature on the check was not his.47 The assertion may seem self-serving at first blush, yet it cannot
be ignored that Jong was in the best position to know whether or not the signature on the check was
his. While his claim should not be taken at face value, any averments he would have on the matter, if
adjudged as truthful, deserve primacy in consideration. Jong’s testimony is supported by the findings
of the NBI examiner. They are also backed by factual circumstances that support the conclusion that
the assailed check was indeed forged. Judicial notice can be taken that is highly unusual in practice
for a business establishment to draw a check for close to a million pesos and make it payable to
cash or bearer, and not to order. Jong immediately reported the forgery upon its discovery. He filed
the appropriate criminal charges against Sempio, the putative forger.48

Now for determination is whether Samsung Construction was precluded from setting up the defense
of forgery under Section 23 of the Negotiable Instruments Law. The Court of Appeals concluded that
Samsung Construction was negligent, and invoked the doctrines that "where a loss must be borne
by one of two innocent person, can be traced to the neglect or fault of either, it is reasonable that it
would be borne by him, even if innocent of any intentional fraud, through whose means it has
succeeded49 or who put into the power of the third person to perpetuate the wrong."50 Applying these
rules, the Court of Appeals determined that it was the negligence of Samsung Construction that
allowed the encashment of the forged check.

In the case at bar, the forgery appears to have been made possible through the acts of one
Jose Sempio III, an assistant accountant employed by the plaintiff Samsung [Construction]
Co. Philippines, Inc. who supposedly stole the blank check and who presumably is
responsible for its encashment through a forged signature of Jong Kyu Lee. Sempio was
assistant to the Korean accountant who was in possession of the blank checks and who
through negligence, enabled Sempio to have access to the same. Had the Korean
accountant been more careful and prudent in keeping the blank checks Sempio would not
have had the chance to steal a page thereof and to effect the forgery. Besides, Sempio was
an employee who appears to have had dealings with the defendant Bank in behalf of the
plaintiff corporation and on the date the check was encashed, he was there to certify that it
was a genuine check issued to purchase equipment for the company.51

We recognize that Section 23 of the Negotiable Instruments Law bars a party from setting up the
defense of forgery if it is guilty of negligence.52 Yet, we are unable to conclude that Samsung
Construction was guilty of negligence in this case. The appellate court failed to explain precisely how
the Korean accountant was negligent or how more care and prudence on his part would have
prevented the forgery. We cannot sustain this "tar and feathering" resorted to without any basis.

The bare fact that the forgery was committed by an employee of the party whose signature was
forged cannot necessarily imply that such party’s negligence was the cause for the forgery.
Employers do not possess the preternatural gift of cognition as to the evil that may lurk within the
hearts and minds of their employees. The Court’s pronouncement in PCI Bank v. Court of
Appeals53 applies in this case, to wit:

[T]he mere fact that the forgery was committed by a drawer-payor’s confidential employee or
agent, who by virtue of his position had unusual facilities for perpetrating the fraud and
imposing the forged paper upon the bank, does not entitle the bank to shift the loss to the
drawer-payor, in the absence of some circumstance raising estoppel against the drawer.54

Admittedly, the record does not clearly establish what measures Samsung Construction employed to
safeguard its blank checks. Jong did testify that his accountant, Kyu, kept the checks inside a "safety
box,"55 and no contrary version was presented by FEBTC. However, such testimony cannot prove

89
that the checks were indeed kept in a safety box, as Jong’s testimony on that point is hearsay, since
Kyu, and not Jong, would have the personal knowledge as to how the checks were kept.

Still, in the absence of evidence to the contrary, we can conclude that there was no negligence on
Samsung Construction’s part. The presumption remains that every person takes ordinary care of his
concerns,56 and that the ordinary course of business has been followed.57 Negligence is not
presumed, but must be proven by him who alleges it.58 While the complaint was lodged at the
instance of Samsung Construction, the matter it had to prove was the claim it had alleged - whether
the check was forged. It cannot be required as well to prove that it was not negligent, because the
legal presumption remains that ordinary care was employed.

Thus, it was incumbent upon FEBTC, in defense, to prove the negative fact that Samsung
Construction was negligent. While the payee, as in this case, may not have the personal knowledge
as to the standard procedures observed by the drawer, it well has the means of disputing the
presumption of regularity. Proving a negative fact may be "a difficult office,"59 but necessarily so, as it
seeks to overcome a presumption in law. FEBTC was unable to dispute the presumption of ordinary
care exercised by Samsung Construction, hence we cannot agree with the Court of Appeals’ finding
of negligence.

The assailed Decision replicated the extensive efforts which FEBTC devoted to establish that there
was no negligence on the part of the bank in its acceptance and payment of the forged check.
However, the degree of diligence exercised by the bank would be irrelevant if the drawer is not
precluded from setting up the defense of forgery under Section 23 by his own negligence. The rule
of equity enunciated in PNB v. National City Bank of New York, 60 as relied upon by the Court of
Appeals, deserves careful examination.

The point in issue has sometimes been said to be that of negligence. The drawee who has
paid upon the forged signature is held to bear the loss, because he has been
negligent in failing to recognize that the handwriting is not that of his customer. But it
follows obviously that if the payee, holder, or presenter of the forged paper has himself been
in default, if he has himself been guilty of a negligence prior to that of the banker, or if by any
act of his own he has at all contributed to induce the banker's negligence, then he may lose
his right to cast the loss upon the banker.61 (Emphasis supplied)

Quite palpably, the general rule remains that the drawee who has paid upon the forged signature
bears the loss. The exception to this rule arises only when negligence can be traced on the part of
the drawer whose signature was forged, and the need arises to weigh the comparative negligence
between the drawer and the drawee to determine who should bear the burden of loss. The Court
finds no basis to conclude that Samsung Construction was negligent in the safekeeping of its
checks. For one, the settled rule is that the mere fact that the depositor leaves his check book lying
around does not constitute such negligence as will free the bank from liability to him, where a clerk
of the depositor or other persons, taking advantage of the opportunity, abstract some of the check
blanks, forges the depositor’s signature and collect on the checks from the bank.62 And for another, in
point of fact Samsung Construction was not negligent at all since it reported the forgery almost
immediately upon discovery.63

It is also worth noting that the forged signatures in PNB v. National City Bank of New York were not
of the drawer, but of indorsers. The same circumstance attends PNB v. Court of Appeals,64 which
was also cited by the Court of Appeals. It is accepted that a forged signature of the drawer differs in
treatment than a forged signature of the indorser.

90
 The justification for the distinction between forgery of the signature of the drawer and forgery
of an indorsement is that the drawee is in a position to verify the drawer’s signature by
comparison with one in his hands, but has ordinarily no opportunity to verify an
indorsement.65

Thus, a drawee bank is generally liable to its depositor in paying a check which bears either
a forgery of the drawer’s signature or a forged indorsement. But the bank may, as a general
rule, recover back the money which it has paid on a check bearing a forged indorsement,
whereas it has not this right to the same extent with reference to a check bearing a forgery of
the drawer’s signature.66

The general rule imputing liability on the drawee who paid out on the forgery holds in this case.

Since FEBTC puts into issue the degree of care it exercised before paying out on the forged check,
we might as well comment on the bank’s performance of its duty. It might be so that the bank
complied with its own internal rules prior to paying out on the questionable check. Yet, there are
several troubling circumstances that lead us to believe that the bank itself was remiss in its duty.

The fact that the check was made out in the amount of nearly one million pesos is unusual enough
to require a higher degree of caution on the part of the bank. Indeed, FEBTC confirms this through
its own internal procedures. Checks below twenty-five thousand pesos require only the approval of
the teller; those between twenty-five thousand to one hundred thousand pesos necessitate the
approval of one bank officer; and should the amount exceed one hundred thousand pesos, the
concurrence of two bank officers is required.67

In this case, not only did the amount in the check nearly total one million pesos, it was also payable
to cash. That latter circumstance should have aroused the suspicion of the bank, as it is not ordinary
business practice for a check for such large amount to be made payable to cash or to bearer,
instead of to the order of a specified person.68 Moreover, the check was presented for payment by
one Roberto Gonzaga, who was not designated as the payee of the check, and who did not carry
with him any written proof that he was authorized by Samsung Construction to encash the check.
Gonzaga, a stranger to FEBTC, was not even an employee of Samsung Construction.69 These
circumstances are already suspicious if taken independently, much more so if they are evaluated in
concurrence. Given the shadiness attending Gonzaga’s presentment of the check, it was not
sufficient for FEBTC to have merely complied with its internal procedures, but mandatory that all
earnest efforts be undertaken to ensure the validity of the check, and of the authority of Gonzaga to
collect payment therefor.

According to FEBTC Senior Assistant Cashier Gemma Velez, the bank tried, but failed, to contact
Jong over the phone to verify the check.70 She added that calling the issuer or drawer of the check to
verify the same was not part of the standard procedure of the bank, but an "extra effort."71 Even
assuming that such personal verification is tantamount to extraordinary diligence, it cannot be denied
that FEBTC still paid out the check despite the absence of any proof of verification from the drawer.
Instead, the bank seems to have relied heavily on the say-so of Sempio, who was present at the
bank at the time the check was presented.

FEBTC alleges that Sempio was well-known to the bank officers, as he had regularly transacted with
the bank in behalf of Samsung Construction. It was even claimed that everytime FEBTC would
contact Jong about problems with his account, Jong would hand the phone over to
Sempio.72 However, the only proof of such allegations is the testimony of Gemma Velez, who also
testified that she did not know Sempio personally,73 and had met Sempio for the first time only on the
day the check was encashed.74 In fact, Velez had to inquire with the other officers of the bank as to

91
whether Sempio was actually known to the employees of the bank.75 Obviously, Velez had no
personal knowledge as to the past relationship between FEBTC and Sempio, and any averments of
her to that effect should be deemed hearsay evidence. Interestingly, FEBTC did not present as a
witness any other employee of their Bel-Air branch, including those who supposedly had transacted
with Sempio before.

Even assuming that FEBTC had a standing habit of dealing with Sempio, acting in behalf of
Samsung Construction, the irregular circumstances attending the presentment of the forged check
should have put the bank on the highest degree of alert. The Court recently emphasized that the
highest degree of care and diligence is required of banks.

Banks are engaged in a business impressed with public interest, and it is their duty to protect
in return their many clients and depositors who transact business with them. They have the
obligation to treat their client’s account meticulously and with the highest degree of care,
considering the fiduciary nature of their relationship. The diligence required of banks,
therefore, is more than that of a good father of a family.76

Given the circumstances, extraordinary diligence dictates that FEBTC should have ascertained from
Jong personally that the signature in the questionable check was his.

Still, even if the bank performed with utmost diligence, the drawer whose signature was forged may
still recover from the bank as long as he or she is not precluded from setting up the defense of
forgery. After all, Section 23 of the Negotiable Instruments Law plainly states that no right to enforce
the payment of a check can arise out of a forged signature. Since the drawer, Samsung
Construction, is not precluded by negligence from setting up the forgery, the general rule should
apply. Consequently, if a bank pays a forged check, it must be considered as paying out of its funds
and cannot charge the amount so paid to the account of the depositor.77 A bank is liable, irrespective
of its good faith, in paying a forged check.78

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

SO ORDERED.

92
ASSOCIATED BANK VS COURT OF APPEALS (1996)

G.R. No. 107382/G.R. No. 107612 January 31, 1996

ASSOCIATED BANK, petitioner,

vs.
HON. COURT OF APPEALS, PROVINCE OF TARLAC and PHILIPPINE NATIONAL
BANK, respondents.

xxxxxxxxxxxxxxxxxxxxx

G.R. No. 107612 January 31, 1996

PHILIPPINE NATIONAL BANK, petitioner,

vs.
HONORABLE COURT OF APPEALS, PROVINCE OF TARLAC, and ASSOCIATED
BANK, respondents.

DECISION

ROMERO, J.:

Where thirty checks bearing forged endorsements are paid, who bears the loss, the drawer, the
drawee bank or the collecting bank?

This is the main issue in these consolidated petitions for review assailing the decision of the Court of
Appeals in "Province of Tarlac v. Philippine National Bank v. Associated Bank v. Fausto Pangilinan,
et. al." (CA-G.R. No. CV No. 17962). 1

The facts of the case are as follows:

The Province of Tarlac maintains a current account with the Philippine National Bank (PNB) Tarlac
Branch where the provincial funds are deposited. Checks issued by the Province are signed by the
Provincial Treasurer and countersigned by the Provincial Auditor or the Secretary of the
Sangguniang Bayan.

A portion of the funds of the province is allocated to the Concepcion Emergency Hospital. 2 The
allotment checks for said government hospital are drawn to the order of "Concepcion Emergency
Hospital, Concepcion, Tarlac" or "The Chief, Concepcion Emergency Hospital, Concepcion, Tarlac."
The checks are released by the Office of the Provincial Treasurer and received for the hospital by its
administrative officer and cashier.

In January 1981, the books of account of the Provincial Treasurer were post-audited by the
Provincial Auditor. It was then discovered that the hospital did not receive several allotment checks
drawn by the Province.

On February 19, 1981, the Provincial Treasurer requested the manager of the PNB to return all of its
cleared checks which were issued from 1977 to 1980 in order to verify the regularity of their
encashment. After the checks were examined, the Provincial Treasurer learned that 30 checks

93
amounting to P203,300.00 were encashed by one Fausto Pangilinan, with the Associated Bank
acting as collecting bank.

It turned out that Fausto Pangilinan, who was the administrative officer and cashier of payee hospital
until his retirement on February 28, 1978, collected the questioned checks from the office of the
Provincial Treasurer. He claimed to be assisting or helping the hospital follow up the release of the
checks and had official receipts. 3 Pangilinan sought to encash the first check 4 with Associated Bank.
However, the manager of Associated Bank refused and suggested that Pangilinan deposit the check
in his personal savings account with the same bank. Pangilinan was able to withdraw the money
when the check was cleared and paid by the drawee bank, PNB.

After forging the signature of Dr. Adena Canlas who was chief of the payee hospital, Pangilinan
followed the same procedure for the second check, in the amount of P5,000.00 and dated April 20,
1978, 5 as well as for twenty-eight other checks of various amounts and on various dates. The last
check negotiated by Pangilinan was for f8,000.00 and dated February 10, 1981. 6 All the checks bore
the stamp of Associated Bank which reads "All prior endorsements guaranteed ASSOCIATED
BANK."

Jesus David, the manager of Associated Bank testified that Pangilinan made it appear that the
checks were paid to him for certain projects with the hospital. 7 He did not find as irregular the fact
that the checks were not payable to Pangilinan but to the Concepcion Emergency Hospital. While he
admitted that his wife and Pangilinan's wife are first cousins, the manager denied having given
Pangilinan preferential treatment on this account. 8

On February 26, 1981, the Provincial Treasurer wrote the manager of the PNB seeking the
restoration of the various amounts debited from the current account of the Province. 9

In turn, the PNB manager demanded reimbursement from the Associated Bank on May 15, 1981. 10

As both banks resisted payment, the Province of Tarlac brought suit against PNB which, in turn,
impleaded Associated Bank as third-party defendant. The latter then filed a fourth-party complaint
against Adena Canlas and Fausto Pangilinan. 11

After trial on the merits, the lower court rendered its decision on March 21, 1988, disposing as
follows:

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

1. On the basic complaint, in favor of plaintiff Province of Tarlac and against defendant
Philippine National Bank (PNB), ordering the latter to pay to the former, the sum of Two
Hundred Three Thousand Three Hundred (P203,300.00) Pesos with legal interest thereon
from March 20, 1981 until fully paid;

2. On the third-party complaint, in favor of defendant/third-party plaintiff Philippine National

Bank (PNB) and against third-party defendant/fourth-party plaintiff Associated Bank ordering
the latter to reimburse to the former the amount of Two Hundred Three Thousand Three
Hundred (P203,300.00) Pesos with legal interests thereon from March 20, 1981 until fully
paid;.

94
 3. On the fourth-party complaint, the same is hereby ordered dismissed for lack of cause of
action as against fourth-party defendant Adena Canlas and lack of jurisdiction over the
person of fourth-party defendant Fausto Pangilinan as against the latter.

4. On the counterclaims on the complaint, third-party complaint and fourth-party complaint,

the same are hereby ordered dismissed for lack of merit.

SO ORDERED. 12

PNB and Associated Bank appealed to the Court of Appeals. 13 Respondent court affirmed the trial
court's decision in toto on September 30, 1992.

Hence these consolidated petitions which seek a reversal of respondent appellate court's decision.

PNB assigned two errors. First, the bank contends that respondent court erred in exempting the
Province of Tarlac from liability when, in fact, the latter was negligent because it delivered and
released the questioned checks to Fausto Pangilinan who was then already retired as the hospital's
cashier and administrative officer. PNB also maintains its innocence and alleges that as between
two innocent persons, the one whose act was the cause of the loss, in this case the Province of
Tarlac, bears the loss.

Next, PNB asserts that it was error for the court to order it to pay the province and then seek
reimbursement from Associated Bank. According to petitioner bank, respondent appellate Court
should have directed Associated Bank to pay the adjudged liability directly to the Province of Tarlac
to avoid circuity. 14

Associated Bank, on the other hand, argues that the order of liability should be totally reversed, with
the drawee bank (PNB) solely and ultimately bearing the loss.

Respondent court allegedly erred in applying Section 23 of the Philippine Clearing House Rules
instead of Central Bank Circular No. 580, which, being an administrative regulation issued pursuant
to law, has the force and effect of law. 15 The PCHC Rules are merely contractual stipulations among
and between member-banks. As such, they cannot prevail over the aforesaid CB Circular.

It likewise contends that PNB, the drawee bank, is estopped from asserting the defense of
guarantee of prior indorsements against Associated Bank, the collecting bank. In stamping the
guarantee (for all prior indorsements), it merely followed a mandatory requirement for clearing and
had no choice but to place the stamp of guarantee; otherwise, there would be no clearing. The bank
will be in a "no-win" situation and will always bear the loss as against the drawee bank. 16

Associated Bank also claims that since PNB already cleared and paid the value of the forged checks
in question, it is now estopped from asserting the defense that Associated Bank guaranteed prior
indorsements. The drawee bank allegedly has the primary duty to verify the genuineness of payee's
indorsement before paying the check. 17

While both banks are innocent of the forgery, Associated Bank claims that PNB was at fault and
should solely bear the loss because it cleared and paid the forged checks.

xxx xxx xxx

95
The case at bench concerns checks payable to the order of Concepcion Emergency Hospital or its
Chief. They were properly issued and bear the genuine signatures of the drawer, the Province of
Tarlac. The infirmity in the questioned checks lies in the payee's (Concepcion Emergency Hospital)
indorsements which are forgeries. At the time of their indorsement, the checks were order
instruments.

Checks having forged indorsements should be differentiated from forged checks or checks bearing
the forged signature of the drawer.

Section 23 of the Negotiable Instruments Law (NIL) provides:

Sec. 23. FORGED SIGNATURE, EFFECT OF. — When a signature is forged or made
without authority of the person whose signature it purports to be, it is wholly inoperative, and
no right to retain the instrument, or to give a discharge therefor, or to enforce payment
thereof against any party thereto, can be acquired through or under such signature unless
the party against whom it is sought to enforce such right is precluded from setting up the
forgery or want of authority.

A forged signature, whether it be that of the drawer or the payee, is wholly inoperative and no one
can gain title to the instrument through it. A person whose signature to an instrument was forged
was never a party and never consented to the contract which allegedly gave rise to such
instrument. 18 Section 23 does not avoid the instrument but only the forged signature. 19 Thus, a forged
indorsement does not operate as the payee's indorsement.

The exception to the general rule in Section 23 is where "a party against whom it is sought to
enforce a right is precluded from setting up the forgery or want of authority." Parties who warrant or
admit the genuineness of the signature in question and those who, by their acts, silence or
negligence are estopped from setting up the defense of forgery, are precluded from using this
defense. Indorsers, persons negotiating by delivery and acceptors are warrantors of the
genuineness of the signatures on the instrument. 20

In bearer instruments, the signature of the payee or holder is unnecessary to pass title to the
instrument. Hence, when the indorsement is a forgery, only the person whose signature is forged
can raise the defense of forgery against a holder in due course. 21

The checks involved in this case are order instruments, hence, the following discussion is made with
reference to the effects of a forged indorsement on an instrument payable to order.

Where the instrument is payable to order at the time of the forgery, such as the checks in this case,
the signature of its rightful holder (here, the payee hospital) is essential to transfer title to the same
instrument. When the holder's indorsement is forged, all parties prior to the forgery may raise the
real defense of forgery against all parties subsequent thereto. 22

An indorser of an order instrument warrants "that the instrument is genuine and in all respects what it
purports to be; that he has a good title to it; that all prior parties had capacity to contract; and that the
instrument is at the time of his indorsement valid and subsisting." 23 He cannot interpose the defense
that signatures prior to him are forged.

A collecting bank where a check is deposited and which indorses the check upon presentment with
the drawee bank, is such an indorser. So even if the indorsement on the check deposited by the
banks's client is forged, the collecting bank is bound by his warranties as an indorser and cannot set
up the defense of forgery as against the drawee bank.

96
The bank on which a check is drawn, known as the drawee bank, is under strict liability to pay the
check to the order of the payee. The drawer's instructions are reflected on the face and by the terms
of the check. Payment under a forged indorsement is not to the drawer's order. When the drawee
bank pays a person other than the payee, it does not comply with the terms of the check and
violates its duty to charge its customer's (the drawer) account only for properly payable items. Since
the drawee bank did not pay a holder or other person entitled to receive payment, it has no right to
reimbursement from the drawer. 24 The general rule then is that the drawee bank may not debit the
drawer's account and is not entitled to indemnification from the drawer. 25 The risk of loss must
perforce fall on the drawee bank.

However, if the drawee bank can prove a failure by the customer/drawer to exercise ordinary care
that substantially contributed to the making of the forged signature, the drawer is precluded from
asserting the forgery.

If at the same time the drawee bank was also negligent to the point of substantially contributing to
the loss, then such loss from the forgery can be apportioned between the negligent drawer and the
negligent bank. 26

In cases involving a forged check, where the drawer's signature is forged, the drawer can recover
from the drawee bank. No drawee bank has a right to pay a forged check. If it does, it shall have to
recredit the amount of the check to the account of the drawer. The liability chain ends with the
drawee bank whose responsibility it is to know the drawer's signature since the latter is its
customer. 27

In cases involving checks with forged indorsements, such as the present petition, the chain of liability
does not end with the drawee bank. The drawee bank may not debit the account of the drawer but
may generally pass liability back through the collection chain to the party who took from the forger
and, of course, to the forger himself, if available. 28 In other words, the drawee bank canseek
reimbursement or a return of the amount it paid from the presentor bank or person. 29 Theoretically,
the latter can demand reimbursement from the person who indorsed the check to it and so on. The
loss falls on the party who took the check from the forger, or on the forger himself.

In this case, the checks were indorsed by the collecting bank (Associated Bank) to the drawee bank
(PNB). The former will necessarily be liable to the latter for the checks bearing forged indorsements.
If the forgery is that of the payee's or holder's indorsement, the collecting bank is held liable, without
prejudice to the latter proceeding against the forger.

Since a forged indorsement is inoperative, the collecting bank had no right to be paid by the drawee
bank. The former must necessarily return the money paid by the latter because it was paid
wrongfully. 30

More importantly, by reason of the statutory warranty of a general indorser in section 66 of the
Negotiable Instruments Law, a collecting bank which indorses a check bearing a forged indorsement
and presents it to the drawee bank guarantees all prior indorsements, including the forged
indorsement. It warrants that the instrument is genuine, and that it is valid and subsisting at the time
of his indorsement. Because the indorsement is a forgery, the collecting bank commits a breach of
this warranty and will be accountable to the drawee bank. This liability scheme operates without
regard to fault on the part of the collecting/presenting bank. Even if the latter bank was not negligent,
it would still be liable to the drawee bank because of its indorsement.

The Court has consistently ruled that "the collecting bank or last endorser generally suffers the loss
because it has the duty to ascertain the genuineness of all prior endorsements considering that the

97
act of presenting the check for payment to the drawee is an assertion that the party making the
presentment has done its duty to ascertain the genuineness of the endorsements." 31

The drawee bank is not similarly situated as the collecting bank because the former makes no
warranty as to the genuineness. of any indorsement. 32 The drawee bank's duty is but to verify the
genuineness of the drawer's signature and not of the indorsement because the drawer is its client.

Moreover, the collecting bank is made liable because it is privy to the depositor who negotiated the
check. The bank knows him, his address and history because he is a client. It has taken a risk on his
deposit. The bank is also in a better position to detect forgery, fraud or irregularity in the
indorsement.

Hence, the drawee bank can recover the amount paid on the check bearing a forged indorsement
from the collecting bank. However, a drawee bank has the duty to promptly inform the presentor of
the forgery upon discovery. If the drawee bank delays in informing the presentor of the forgery,
thereby depriving said presentor of the right to recover from the forger, the former is deemed
negligent and can no longer recover from the presentor. 33

Applying these rules to the case at bench, PNB, the drawee bank, cannot debit the current account
of the Province of Tarlac because it paid checks which bore forged indorsements. However, if the
Province of Tarlac as drawer was negligent to the point of substantially contributing to the loss, then
the drawee bank PNB can charge its account. If both drawee bank-PNB and drawer-Province of
Tarlac were negligent, the loss should be properly apportioned between them.

The loss incurred by drawee bank-PNB can be passed on to the collecting bank-Associated Bank
which presented and indorsed the checks to it. Associated Bank can, in turn, hold the forger, Fausto
Pangilinan, liable.

If PNB negligently delayed in informing Associated Bank of the forgery, thus depriving the latter of
the opportunity to recover from the forger, it forfeits its right to reimbursement and will be made to
bear the loss.

After careful examination of the records, the Court finds that the Province of Tarlac was equally
negligent and should, therefore, share the burden of loss from the checks bearing a forged
indorsement.

The Province of Tarlac permitted Fausto Pangilinan to collect the checks when the latter, having
already retired from government service, was no longer connected with the hospital. With the
exception of the first check (dated January 17, 1978), all the checks were issued and released after
Pangilinan's retirement on February 28, 1978. After nearly three years, the Treasurer's office was
still releasing the checks to the retired cashier. In addition, some of the aid allotment checks were
released to Pangilinan and the others to Elizabeth Juco, the new cashier. The fact that there were
now two persons collecting the checks for the hospital is an unmistakable sign of an irregularity
which should have alerted employees in the Treasurer's office of the fraud being committed. There is
also evidence indicating that the provincial employees were aware of Pangilinan's retirement and
consequent dissociation from the hospital. Jose Meru, the Provincial Treasurer, testified:.

ATTY. MORGA:

Q Now, is it true that for a given month there were two releases of checks, one went to Mr.
Pangilinan and one went to Miss Juco?

98
 JOSE MERU:

A Yes, sir.

Q Will you please tell us how at the time (sic) when the authorized representative of
Concepcion Emergency Hospital is and was supposed to be Miss Juco?

A Well, as far as my investigation show (sic) the assistant cashier told me that Pangilinan
represented himself as also authorized to help in the release of these checks and we were
apparently misled because they accepted the representation of Pangilinan that he was
helping them in the release of the checks and besides according to them they were,
Pangilinan, like the rest, was able to present an official receipt to acknowledge these receipts
and according to them since this is a government check and believed that it will eventually go
to the hospital following the standard procedure of negotiating government checks, they
released the checks to Pangilinan aside from Miss Juco.34

The failure of the Province of Tarlac to exercise due care contributed to a significant degree to the
loss tantamount to negligence. Hence, the Province of Tarlac should be liable for part of the total
amount paid on the questioned checks.

The drawee bank PNB also breached its duty to pay only according to the terms of the check.
Hence, it cannot escape liability and should also bear part of the loss.

As earlier stated, PNB can recover from the collecting bank.

In the case of Associated Bank v. CA, 35 six crossed checks with forged indorsements were deposited
in the forger's account with the collecting bank and were later paid by four different drawee banks.
The Court found the collecting bank (Associated) to be negligent and held:

The Bank should have first verified his right to endorse the crossed checks, of which he was
not the payee, and to deposit the proceeds of the checks to his own account. The Bank was
by reason of the nature of the checks put upon notice that they were issued for deposit only
to the private respondent's account. . . .

The situation in the case at bench is analogous to the above case, for it was not the payee who
deposited the checks with the collecting bank. Here, the checks were all payable to Concepcion
Emergency Hospital but it was Fausto Pangilinan who deposited the checks in his personal savings
account.

Although Associated Bank claims that the guarantee stamped on the checks (All prior and/or lack of
endorsements guaranteed) is merely a requirement forced upon it by clearing house rules, it cannot
but remain liable. The stamp guaranteeing prior indorsements is not an empty rubric which a bank
must fulfill for the sake of convenience. A bank is not required to accept all the checks negotiated to
it. It is within the bank's discretion to receive a check for no banking institution would consciously or
deliberately accept a check bearing a forged indorsement. When a check is deposited with the
collecting bank, it takes a risk on its depositor. It is only logical that this bank be held accountable for
checks deposited by its customers.

A delay in informing the collecting bank (Associated Bank) of the forgery, which deprives it of the
opportunity to go after the forger, signifies negligence on the part of the drawee bank (PNB) and will
preclude it from claiming reimbursement.

99
It is here that Associated Bank's assignment of error concerning C.B. Circular No. 580 and Section
23 of the Philippine Clearing House Corporation Rules comes to fore. Under Section 4(c) of CB
Circular No. 580, items bearing a forged endorsement shall be returned within twenty-Sour (24)
hours after discovery of the forgery but in no event beyond the period fixed or provided by law for
filing of a legal action by the returning bank. Section 23 of the PCHC Rules deleted the requirement
that items bearing a forged endorsement should be returned within twenty-four hours. Associated
Bank now argues that the aforementioned Central Bank Circular is applicable. Since PNB did not
return the questioned checks within twenty-four hours, but several days later, Associated Bank
alleges that PNB should be considered negligent and not entitled to reimbursement of the amount it
paid on the checks.

The Court deems it unnecessary to discuss Associated Bank's assertions that CB Circular No. 580 is
an administrative regulation issued pursuant to law and as such, must prevail over the PCHC rule.
The Central Bank circular was in force for all banks until June 1980 when the Philippine Clearing
House Corporation (PCHC) was set up and commenced operations. Banks in Metro Manila were
covered by the PCHC while banks located elsewhere still had to go through Central Bank Clearing.
In any event, the twenty-four-hour return rule was adopted by the PCHC until it was changed in
1982. The contending banks herein, which are both branches in Tarlac province, are therefore not
covered by PCHC Rules but by CB Circular No. 580. Clearly then, the CB circular was applicable
when the forgery of the checks was discovered in 1981.

The rule mandates that the checks be returned within twenty-four hours after discovery of the forgery
but in no event beyond the period fixed by law for filing a legal action. The rationale of the rule is to
give the collecting bank (which indorsed the check) adequate opportunity to proceed against the
forger. If prompt notice is not given, the collecting bank maybe prejudiced and lose the opportunity to
go after its depositor.

The Court finds that even if PNB did not return the questioned checks to Associated Bank within
twenty-four hours, as mandated by the rule, PNB did not commit negligent delay. Under the
circumstances, PNB gave prompt notice to Associated Bank and the latter bank was not prejudiced
in going after Fausto Pangilinan. After the Province of Tarlac informed PNB of the forgeries, PNB
necessarily had to inspect the checks and conduct its own investigation. Thereafter, it requested the
Provincial Treasurer's office on March 31, 1981 to return the checks for verification. The Province of
Tarlac returned the checks only on April 22, 1981. Two days later, Associated Bank received the
checks from PNB. 36

Associated Bank was also furnished a copy of the Province's letter of demand to PNB dated March
20, 1981, thus giving it notice of the forgeries. At this time, however, Pangilinan's account with
Associated had only P24.63 in it. 37 Had Associated Bank decided to debit Pangilinan's account, it
could not have recovered the amounts paid on the questioned checks. In addition, while Associated
Bank filed a fourth-party complaint against Fausto Pangilinan, it did not present evidence against
Pangilinan and even presented him as its rebuttal witness. 38 Hence, Associated Bank was not
prejudiced by PNB's failure to comply with the twenty-four-hour return rule.

Next, Associated Bank contends that PNB is estopped from requiring reimbursement because the
latter paid and cleared the checks. The Court finds this contention unmeritorious. Even if PNB
cleared and paid the checks, it can still recover from Associated Bank. This is true even if the
payee's Chief Officer who was supposed to have indorsed the checks is also a customer of the
drawee bank. 39 PNB's duty was to verify the genuineness of the drawer's signature and not the
genuineness of payee's indorsement. Associated Bank, as the collecting bank, is the entity with the
duty to verify the genuineness of the payee's indorsement.

100
PNB also avers that respondent court erred in adjudging circuitous liability by directing PNB to return
to the Province of Tarlac the amount of the checks and then directing Associated Bank to reimburse
PNB. The Court finds nothing wrong with the mode of the award. The drawer, Province of Tarlac, is
a clientor customer of the PNB, not of Associated Bank. There is no privity of contract between the
drawer and the collecting bank.

The trial court made PNB and Associated Bank liable with legal interest from March 20, 1981, the
date of extrajudicial demand made by the Province of Tarlac on PNB. The payments to be made in
this case stem from the deposits of the Province of Tarlac in its current account with the PNB. Bank
deposits are considered under the law as loans. 40 Central Bank Circular No. 416 prescribes a twelve
percent (12%) interest per annum for loans, forebearance of money, goods or credits in the absence
of express stipulation. Normally, current accounts are likewise interest-bearing, by express contract,
thus excluding them from the coverage of CB Circular No. 416. In this case, however, the actual
interest rate, if any, for the current account opened by the Province of Tarlac with PNB was not given
in evidence. Hence, the Court deems it wise to affirm the trial court's use of the legal interest rate, or
six percent (6%) per annum. The interest rate shall be computed from the date of default, or the date
of judicial or extrajudicial demand. 41 The trial court did not err in granting legal interest from March
20, 1981, the date of extrajudicial demand.

The Court finds as reasonable, the proportionate sharing of fifty percent - fifty percent (50%-50%).
Due to the negligence of the Province of Tarlac in releasing the checks to an unauthorized person
(Fausto Pangilinan), in allowing the retired hospital cashier to receive the checks for the payee
hospital for a period close to three years and in not properly ascertaining why the retired hospital
cashier was collecting checks for the payee hospital in addition to the hospital's real cashier,
respondent Province contributed to the loss amounting to P203,300.00 and shall be liable to the
PNB for fifty (50%) percent thereof. In effect, the Province of Tarlac can only recover fifty percent
(50%) of P203,300.00 from PNB.

The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%) percent of P203,300.00.
It is liable on its warranties as indorser of the checks which were deposited by Fausto Pangilinan,
having guaranteed the genuineness of all prior indorsements, including that of the chief of the payee
hospital, Dr. Adena Canlas. Associated Bank was also remiss in its duty to ascertain the
genuineness of the payee's indorsement.

IN VIEW OF THE FOREGOING, the petition for review filed by the Philippine National Bank (G.R.
No. 107612) is hereby PARTIALLY GRANTED. The petition for review filed by the Associated Bank
(G.R. No. 107382) is hereby DENIED. The decision of the trial court is MODIFIED. The Philippine
National Bank shall pay fifty percent (50%) of P203,300.00 to the Province of Tarlac, with legal
interest from March 20, 1981 until the payment thereof. Associated Bank shall pay fifty percent
(50%) of P203,300.00 to the Philippine National Bank, likewise, with legal interest from March 20,
1981 until payment is made.

SO ORDERED.

101
WESTMONT BANK VS ONG (2002)

G.R. No. 132560 January 30, 2002

WESTMONT BANK (formerly ASSOCIATED BANKING CORP.), petitioner,

vs.
EUGENE ONG, respondent.

QUISUMBING, J.:

This is a petition for review of the decision1 dated January 13, 1998, of the Court of Appeals in CA-
G.R. CV No. 28304 ordering the petitioner to pay respondent ₱1,754,787.50 plus twelve percent
(12%) interest per annum computed from October 7, 1977, the date of the first extrajudicial demand,
plus damages.

The facts of this case are undisputed.

Respondent Eugene Ong maintained a current account with petitioner, formerly the Associated
Banking Corporation, but now known as Westmont Bank. Sometime in May 1976, he sold certain
shares of stocks through Island Securities Corporation. To pay Ong, Island Securities purchased two
(2) Pacific Banking Corporation manager’s checks,2 both dated May 4, 1976, issued in the name of
Eugene Ong as payee. Before Ong could get hold of the checks, his friend Paciano Tanlimco got
hold of them, forged Ong’s signature and deposited these with petitioner, where Tanlimco was also a
depositor. Even though Ong’s specimen signature was on file, petitioner accepted and credited both
checks to the account of Tanlimco, without verifying the ‘signature indorsements’ appearing at the
back thereof. Tanlimco then immediately withdrew the money and absconded.

Instead of going straight to the bank to stop or question the payment, Ong first sought the help of
Tanlimco’s family to recover the amount. Later, he reported the incident to the Central Bank, which
like the first effort, unfortunately proved futile.

It was only on October 7, 1977, about five (5) months from discovery of the fraud, did Ong cry foul
and demanded in his complaint that petitioner pay the value of the two checks from the bank on
whose gross negligence he imputed his loss. In his suit, he insisted that he did not "deliver,
negotiate, endorse or transfer to any person or entity" the subject checks issued to him and asserted
that the signatures on the back were spurious.3

The bank did not present evidence to the contrary, but simply contended that since plaintiff Ong
claimed to have never received the originals of the two (2) checks in question from Island Securities,
much less to have authorized Tanlimco to receive the same, he never acquired ownership of these
checks. Thus, he had no legal personality to sue as he is not a real party in interest. The bank then
filed a demurrer to evidence which was denied.

On February 8, 1989, after trial on the merits, the Regional Trial Court of Manila, Branch 38,
rendered a decision, thus:

102
IN VIEW OF THE FOREGOING, the court hereby renders judgment for the plaintiff and against the
defendant, and orders the defendant to pay the plaintiff:

1. The sum of P1,754,787.50 representing the total face value of the two checks in question,
exhibits "A" and "B", respectively, with interest thereon at the legal rate of twelve percent
(12%) per annum computed from October 7, 1977 (the date of the first extrajudicial demand)
up to and until the same shall have been paid in full;

2. Moral damages in the amount of P250,000.00;

3. Exemplary or corrective damages in the sum of P100,000.00 by way of example or

correction for the public good;

4. Attorney’s fees of P50,000.00 and costs of suit.

Defendant’s counterclaims are dismissed for lack of merit.

SO ORDERED.4

Petitioner elevated the case to the Court of Appeals without success. In its decision, the appellate
court held:

WHEREFORE, in view of the foregoing, the appealed decision is AFFIRMED in toto.5

Petitioner now comes before this Court on a petition for review, alleging that the Court of Appeals
erred:

... IN AFFIRMING THE TRIAL COURT’S CONCLUSION THAT RESPONDENT HAS A

CAUSE OF ACTION AGAINST THE PETITIONER.

II

... IN AFFIRMING THE TRIAL COURT’S DECISION FINDING PETITIONER LIABLE TO

RESPONDENT AND DECLARING THAT THE LATTER MAY RECOVER DIRECTLY FROM
THE FORMER; AND

III

... IN NOT ADJUDGING RESPONDENT GUILTY OF LACHES AND IN NOT ABSOLVING

PETITIONER FROM LIABILITY.

Essentially the issues in this case are: (1) whether or not respondent Ong has a cause of action
against petitioner Westmont Bank; and (2) whether or not Ong is barred to recover the money from
Westmont Bank due to laches.

Respondent admitted that he was never in actual or physical possession of the two (2) checks of the
Island Securities nor did he authorize Tanlimco or any of the latter’s representative to demand,
accept and receive the same. For this reason, petitioner argues, respondent cannot sue petitioner

103
because under Section 51 of the Negotiable Instruments Law6 it is only when a person becomes a
holder of a negotiable instrument can he sue in his own name. Conversely, prior to his becoming a
holder, he had no right or cause of action under such negotiable instrument. Petitioner further argues
that since Section 1917 of the Negotiable Instruments Law defines a "holder" as the ‘payee or
indorsee of a bill or note, who is in possession of it, or the bearer thereof,’ in order to be a holder, it
is a requirement that he be in possession of the instrument or the bearer thereof. Simply stated,
since Ong never had possession of the checks nor did he authorize anybody, he did not become a
holder thereof hence he cannot sue in his own name.8

Petitioner also cites Article 12499 of the Civil Code explaining that a check, even if it is a manager’s
check, is not legal tender. Hence, the creditor cannot be compelled to accept payment thru this
means.10 It is petitioner’s position that for all intents and purposes, Island Securities has not yet
tendered payment to respondent Ong, thus, any action by Ong should be directed towards collecting
the amount from Island Securities. Petitioner claims that Ong’s cause of action against it has not
ripened as of yet. It may be that petitioner would be liable to the drawee bank - - but that is a matter
between petitioner and drawee-bank, Pacific Banking Corporation.11

For its part, respondent Ong leans on the ruling of the trial court and the Court of Appeals which held
that the suit of Ong against the petitioner bank is a desirable shortcut to reach the party who ought in
any event to be ultimately liable.12 It likewise cites the ruling of the courts a quo which held that
according to the general rule, a bank who has obtained possession of a check upon an unauthorized
or forged indorsement of the payee’s signature and who collects the amount of the check from the
drawee is liable for the proceeds thereof to the payee. The theory of said rule is that the collecting
bank’s possession of such check is wrongful.13

Respondent also cites Associated Bank vs. Court of Appeals14 which held that the collecting bank or
last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all
prior endorsements. The collecting bank is also made liable because it is privy to the depositor who
negotiated the check. The bank knows him, his address and history because he is a client. Hence, it
is in a better position to detect forgery, fraud or irregularity in the indorsement.15

Anent Article 1249 of the Civil Code, Ong points out that bank checks are specifically governed by
the Negotiable Instruments Law which is a special law and only in the absence of specific provisions
or deficiency in the special law may the Civil Code be invoked.16

Considering the contentions of the parties and the evidence on record, we find no reversible error in
the assailed decisions of the appellate and trial courts, hence there is no justifiable reason to grant
the petition.

Petitioner’s claim that respondent has no cause of action against the bank is clearly misplaced. As
defined, a cause of action is the act or omission by which a party violates a right of another.17 The
essential elements of a cause of action are: (a) a legal right or rights of the plaintiff, (b) a correlative
obligation of the defendant, and (c) an act or omission of the defendant in violation of said legal
right.18

The complaint filed before the trial court expressly alleged respondent’s right as payee of the
manager’s checks to receive the amount involved, petitioner’s correlative duty as collecting bank to
ensure that the amount gets to the rightful payee or his order, and a breach of that duty because of a
blatant act of negligence on the part of petitioner which violated respondent’s rights.19

Under Section 23 of the Negotiable Instruments Law:

104
When a signature is forged or made without the authority of the person whose signature it purports
to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or
to enforce payment thereof against any party thereto, can be acquired through or under such
signature, unless the party against whom it is sought to enforce such right is precluded from setting
up the forgery or want of authority.

Since the signature of the payee, in the case at bar, was forged to make it appear that he had made
an indorsement in favor of the forger, such signature should be deemed as inoperative and
ineffectual. Petitioner, as the collecting bank, grossly erred in making payment by virtue of said
forged signature. The payee, herein respondent, should therefore be allowed to recover from the
collecting bank.

The collecting bank is liable to the payee and must bear the loss because it is its legal duty to
ascertain that the payee’s endorsement was genuine before cashing the check.20 As a general rule, a
bank or corporation who has obtained possession of a check upon an unauthorized or forged
indorsement of the payee’s signature and who collects the amount of the check from the drawee, is
liable for the proceeds thereof to the payee or other owner, notwithstanding that the amount has
been paid to the person from whom the check was obtained.21

The theory of the rule is that the possession of the check on the forged or unauthorized indorsement
is wrongful, and when the money had been collected on the check, the bank or other person or
corporation can be held as for moneys had and received, and the proceeds are held for the rightful
owners who may recover them. 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 the money without
indorsement at all and the act of the bank amounts to conversion of the check.22

Petitioner’s claim that since there was no delivery yet and respondent has never acquired
possession of the checks, respondent’s remedy is with the drawer and not with petitioner bank.
Petitioner relies on the view to the effect that where there is no delivery to the payee and no title
vests in him, he ought not to be allowed to recover on the ground that he lost nothing because he
never became the owner of the check and still retained his claim of debt against the
drawer.23 However, another view in certain cases holds that even if the absence of delivery is
considered, such consideration is not material. The rationale for this view is that in said cases the
plaintiff uses one action to reach, by a desirable short cut, the person who ought in any event to be
ultimately liable as among the innocent persons involved in the transaction. In other words, the
payee ought to be allowed to recover directly from the collecting bank, regardless of whether the
check was delivered to the payee or not.24

Considering the circumstances in this case, in our view, petitioner could not escape liability for its
negligent acts. Admittedly, respondent Eugene Ong at the time the fraudulent transaction took place
was a depositor of petitioner bank. Banks are engaged in a business impressed with public interest,
and it is their duty to protect in return their many clients and depositors who transact business with
them.25 They have the obligation to treat their client’s account meticulously and with the highest
degree of care, considering the fiduciary nature of their relationship. The diligence required of banks,
therefore, is more than that of a good father of a family.26 In the present case, petitioner was held to
be grossly negligent in performing its duties. As found by the trial court:

xxx (A)t the time the questioned checks were accepted for deposit to Paciano Tanlimco’s account by
defendant bank, defendant bank, admittedly had in its files specimen signatures of plaintiff who
maintained a current account with them (Exhibits "L-1" and "M-1"; testimony of Emmanuel Torio).
Given the substantial face value of the two checks, totalling P1,754,787.50, and the fact that they
were being deposited by a person not the payee, the very least defendant bank should have done,

105
as any reasonable prudent man would have done, was to verify the genuineness of the
indorsements thereon. The Court cannot help but note that had defendant conducted even the most
cursory comparison with plaintiff’s specimen signatures in its files (Exhibit "L-1" and "M-1") it would
have at once seen that the alleged indorsements were falsified and were not those of the plaintiff-
payee. However, defendant apparently failed to make such a verification or, what is worse did so
but, chose to disregard the obvious dissimilarity of the signatures. The first omission makes it guilty
of gross negligence; the second of bad faith. In either case, defendant is liable to plaintiff for the
proceeds of the checks in question.27

These findings are binding and conclusive on the appellate and the reviewing courts.

On the second issue, petitioner avers that respondent Ong is barred by laches for failing to assert
his right for recovery from the bank as soon as he discovered the scam. The lapse of five months
before he went to seek relief from the bank, according to petitioner, constitutes laches.

In turn, respondent contends that petitioner presented no evidence to support its claim of laches. On
the contrary, the established facts of the case as found by the trial court and affirmed by the Court of
Appeals are that respondent left no stone unturned to obtain relief from his predicament.

On the matter of delay in reporting the loss, respondent calls attention to the fact that the checks
were issued on May 4, 1976, and on the very next day, May 5, 1976, these were already credited to
the account of Paciano Tanlimco and presented for payment to Pacific Banking Corporation. So
even if the theft of the checks were discovered and reported earlier, respondent argues, it would not
have altered the situation as the encashment of the checks was consummated within twenty four
hours and facilitated by the gross negligence of the petitioner bank.28

Laches may be defined as the failure or neglect for an unreasonable and unexplained length of time,
to do that which, by exercising due diligence, could or should have been done earlier. It is
negligence or omission to assert a right within a reasonable time, warranting a presumption that the
party entitled thereto has either abandoned or declined to assert it.29 It concerns itself with whether or
not by reason of long inaction or inexcusable neglect, a person claiming a right should be barred
from asserting the same, because to allow him to do so would be unjust to the person against whom
such right is sought to be enforced.30

In the case at bar, it cannot be said that respondent sat on his rights. He immediately acted after
knowing of the forgery by proceeding to seek help from the Tanlimco family and later the Central
Bank, to remedy the situation and recover his money from the forger, Paciano Tanlimco. Only after
he had exhausted possibilities of settling the matter amicably with the family of Tanlimco and
through the CB, about five months after the unlawful transaction took place, did he resort to making
the demand upon the petitioner and eventually before the court for recovery of the money value of
the two checks. These acts cannot be construed as undue delay in or abandonment of the assertion
of his rights.

Moreover, the claim of petitioner that respondent should be barred by laches is clearly a vain attempt
to deflect responsibility for its negligent act. As explained by the appellate court, it is petitioner which
1âw phi 1

had the last clear chance to stop the fraudulent encashment of the subject checks had it exercised
due diligence and followed the proper and regular banking procedures in clearing checks.31 As we
had earlier ruled, the one who had the last clear opportunity to avoid the impending harm but failed
to do so is chargeable with the consequences thereof.32

WHEREFORE, the instant petition is DENIED for lack of merit. The assailed decision of the Court of
Appeals, sustaining the judgment of the Regional Trial Court of Manila, is AFFIRMED.

106
REPUBLIC BANK VS EBRADA (1975)

G.R. No. L-40796 July 31, 1975

REPUBLIC BANK, plaintiff-appellee,

vs.
MAURICIA T. EBRADA, defendant-appellant..

MARTIN, J.:

Appeal on a question of law of the decision of the Court of First Instance of Manila, Branch XXIII in
Civil Case No. 69288, entitled "Republic Bank vs. Mauricia T. Ebrada."

On or about February 27, 1963 defendant Mauricia T. Ebrada, encashed Back Pay Check No.
508060 dated January 15, 1963 for P1,246.08 at the main office of the plaintiff Republic Bank at
Escolta, Manila. The check was issued by the Bureau of Treasury.1 Plaintiff Bank was later advised
by the said bureau that the alleged indorsement on the reverse side of the aforesaid check by the
payee, "Martin Lorenzo" was a forgery2 since the latter had allegedly died as of July 14,
1952.3 Plaintiff Bank was then requested by the Bureau of Treasury to refund the amount of
P1,246.08.4 To recover what it had refunded to the Bureau of Treasury, plaintiff Bank made verbal
and formal demands upon defendant Ebrada to account for the sum of P1,246.08, but said
defendant refused to do so. So plaintiff Bank sued defendant Ebrada before the City Court of Manila.

On July 11, 1966, defendant Ebrada filed her answer denying the material allegations of the
complaint and as affirmative defenses alleged that she was a holder in due course of the check in
question, or at the very least, has acquired her rights from a holder in due course and therefore
entitled to the proceeds thereof. She also alleged that the plaintiff Bank has no cause of action
against her; that it is in estoppel, or so negligent as not to be entitled to recover anything from her.5

About the same day, July 11, 1966 defendant Ebrada filed a Third-Party complaint against Adelaida
Dominguez who, in turn, filed on September 14, 1966 a Fourth-Party complaint against Justina Tinio.

On March 21, 1967, the City Court of Manila rendered judgment for the plaintiff Bank against
defendant Ebrada; for Third-Party plaintiff against Third-Party defendant, Adelaida Dominguez, and
for Fourth-Party plaintiff against Fourth-Party defendant, Justina Tinio.

From the judgment of the City Court, defendant Ebrada took an appeal to the Court of First Instance
of Manila where the parties submitted a partial stipulation of facts as follows:

COME NOW the undersigned counsel for the plaintiff, defendant, Third-Party
defendant and Fourth-Party plaintiff and unto this Honorable Court most respectfully
submit the following:

PARTIAL STIPULATION OF FACTS

1. That they admit their respective capacities to sue and be sued;

107
 2. That on January 15, 1963 the Treasury of the Philippines issued its Check No. BP-
508060, payable to the order of one MARTIN LORENZO, in the sum of P1,246.08,
and drawn on the Republic Bank, plaintiff herein, which check will be marked as
Exhibit "A" for the plaintiff;

3. That the back side of aforementioned check bears the following signatures, in this
order:

1) MARTIN LORENZO;

2) RAMON R. LORENZO;

3) DELIA DOMINGUEZ; and

4) MAURICIA T. EBRADA;

4. That the aforementioned check was delivered to the defendant MAURICIA T. EBRADA by the
Third-Party defendant and Fourth-Party plaintiff ADELAIDA DOMINGUEZ, for the purpose of
encashment;

5. That the signature of defendant MAURICIA T. EBRADA was affixed on said check
on February 27, 1963 when she encashed it with the plaintiff Bank;

6. That immediately after defendant MAURICIA T. EBRADA received the cash

proceeds of said check in the sum of P1,246.08 from the plaintiff Bank, she
immediately turned over the said amount to the third-party defendant and fourth-party
plaintiff ADELAIDA DOMINGUEZ, who in turn handed the said amount to the fourth-
party defendant JUSTINA TINIO on the same date, as evidenced by the receipt
signed by her which will be marked as Exhibit "1-Dominguez"; and

7. That the parties hereto reserve the right to present evidence on any other fact not
covered by the foregoing stipulations,

Manila, Philippines, June 6, 1969.

Based on the foregoing stipulation of facts and the documentary evidence presented, the trial court
rendered a decision, the dispositive portion of which reads as follows:

WHEREFORE, the Court renders judgment ordering the defendant Mauricia T.

Ebrada to pay the plaintiff the amount of ONE THOUSAND TWO FORTY-SIX 08/100
(P1,246.08), with interest at the legal rate from the filing of the complaint on June 16,
1966, until fully paid, plus the costs in both instances against Mauricia T. Ebrada.

The right of Mauricia T. Ebrada to file whatever claim she may have against Adelaida
Dominguez in connection with this case is hereby reserved. The right of the estate of
Dominguez to file the fourth-party complaint against Justina Tinio is also reserved.

SO ORDERED.

In her appeal, defendant-appellant presses that the lower court erred:

108
 IN ORDERING THE APPELLANT TO PAY THE APPELLEE THE FACE VALUE OF
THE SUBJECT CHECK AFTER FINDING THAT THE DRAWER ISSUED THE
SUBJECT CHECK TO A PERSON ALREADY DECEASED FOR 11-½ YEARS AND
THAT THE APPELLANT DID NOT BENEFIT FROM ENCASHING SAID CHECK.

From the stipulation of facts it is admitted that the check in question was delivered to defendant-
appellant by Adelaida Dominguez for the purpose of encashment and that her signature was affixed
on said check when she cashed it with the plaintiff Bank. Likewise it is admitted that defendant-
appellant was the last indorser of the said check. As such indorser, she was supposed to have
warranted that she has good title to said check; for under Section 65 of the Negotiable Instruments
Law:6

Every person negotiating an instrument by delivery or by qualified indorsement,

warrants:

(a) That the instrument is genuine and in all respects what it purports to be.

(b) That she has good title to it.

xxx xxx xxx

and under Section 65 of the same Act:

Every indorser who indorses without qualification warrants to all subsequent holders
in due course:

(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next
preceding sections;

(b) That the instrument is at the time of his indorsement valid and subsisting.

It turned out, however, that the signature of the original payee of the check, Martin Lorenzo was a
forgery because he was already dead 7 almost 11 years before the check in question was issued by
the Bureau of Treasury. Under action 23 of the Negotiable Instruments Law (Act 2031):

When a signature is forged or made without the authority of the person whose
signature it purports to be, it is wholly inoperative, and no right to retain the
instruments, or to give a discharge thereof against any party thereto, can be acquired
through or under such signature unless the party against whom it is sought to
enforce such right is precluded from setting up the forgery or want of authority.

It is clear from the provision that where the signature on a negotiable instrument if forged, the
negotiation of the check is without force or effect. But does this mean that the existence of one
forged signature therein will render void all the other negotiations of the check with respect to the
other parties whose signature are genuine?

In the case of Beam vs. Farrel, 135 Iowa 670, 113 N.W. 590, where a check has several
indorsements on it, it was held that it is only the negotiation based on the forged or unauthorized
signature which is inoperative. Applying this principle to the case before Us, it can be safely
concluded that it is only the negotiation predicated on the forged indorsement that should be
declared inoperative. This means that the negotiation of the check in question from Martin Lorenzo,

109
the original payee, to Ramon R. Lorenzo, the second indorser, should be declared of no affect, but
the negotiation of the aforesaid check from Ramon R. Lorenzo to Adelaida Dominguez, the third
indorser, and from Adelaida Dominguez to the defendant-appellant who did not know of the forgery,
should be considered valid and enforceable, barring any claim of forgery.

What happens then, if, after the drawee bank has paid the amount of the check to the holder thereof,
it was discovered that the signature of the payee was forged? Can the drawee bank recover from the
one who encashed the check?

In the case of State v. Broadway Mut. Bank, 282 S.W. 196, 197, it was held that the drawee of a
check can recover from the holder the money paid to him on a forged instrument. It is not supposed
to be its duty to ascertain whether the signatures of the payee or indorsers are genuine or not. This
is because the indorser is supposed to warrant to the drawee that the signatures of the payee and
previous indorsers are genuine, warranty not extending only to holders in due course. One who
purchases a check or draft is bound to satisfy himself that the paper is genuine and that by indorsing
it or presenting it for payment or putting it into circulation before presentation he impliedly asserts
that he has performed his duty and the drawee who has paid the forged check, without actual
negligence on his part, may recover the money paid from such negligent purchasers. In such cases
the recovery is permitted because although the drawee was in a way negligent in failing to detect the
forgery, yet if the encasher of the check had performed his duty, the forgery would in all probability,
have been detected and the fraud defeated. The reason for allowing the drawee bank to recover
from the encasher is:

Every one with even the least experience in business knows that no business man
would accept a check in exchange for money or goods unless he is satisfied that the
check is genuine. He accepts it only because he has proof that it is genuine, or
because he has sufficient confidence in the honesty and financial responsibility of the
person who vouches for it. If he is deceived he has suffered a loss of his cash or
goods through his own mistake. His own credulity or recklessness, or misplaced
confidence was the sole cause of the loss. Why should he be permitted to shift the
loss due to his own fault in assuming the risk, upon the drawee, simply because of
the accidental circumstance that the drawee afterwards failed to detect the forgery
when the check was presented?8

Similarly, in the case before Us, the defendant-appellant, upon receiving the check in question from
Adelaida Dominguez, was duty-bound to ascertain whether the check in question was genuine
before presenting it to plaintiff Bank for payment. Her failure to do so makes her liable for the loss
and the plaintiff Bank may recover from her the money she received for the check. As reasoned out
above, had she performed the duty of ascertaining the genuineness of the check, in all probability
the forgery would have been detected and the fraud defeated.

In our jurisdiction We have a case of similar import. 9 The Great Eastern Life Insurance Company drew its check for
P2000.00 on the Hongkong and Shanghai Banking Corporation payable to the order of Lazaro Melicor. A certain E. M. Maasin fraudulently
obtained the check and forged the signature of Melicor, as an indorser, and then personally indorsed and presented the check to the
Philippine National Bank where the amount of the check was placed to his (Maasin's) credit. On the next day, the Philippine National Bank
indorsed the cheek to the Hongkong and Shanghai Banking Corporation which paid it and charged the amount of the check to the insurance
company. The Court held that the Hongkong and Shanghai Banking Corporation was liable to the insurance company for the amount of the
check and that the Philippine National Bank was in turn liable to the Hongkong and Shanghai Banking Corporation. Said the Court:

Where a check is drawn payable to the order of one person and is presented to a
bank by another and purports upon its face to have been duly indorsed by the payee
of the check, it is the duty of the bank to know that the check was duly indorsed by
the original payee, and where the bank pays the amount of the check to a third
person, who has forged the signature of the payee, the loss falls upon the bank who

110
 cashed the check, and its only remedy is against the person to whom it paid the
money.

With the foregoing doctrine We are to concede that the plaintiff Bank should suffer the loss when it
paid the amount of the check in question to defendant-appellant, but it has the remedy to recover
from the latter the amount it paid to her. Although the defendant-appellant to whom the plaintiff Bank
paid the check was not proven to be the author of the supposed forgery, yet as last indorser of the
check, she has warranted that she has good title to it 10 even if in fact she did not have it because the
payee of the check was already dead 11 years before the check was issued. The fact that
immediately after receiving title cash proceeds of the check in question in the amount of P1,246.08
from the plaintiff Bank, defendant-appellant immediately turned over said amount to Adelaida
Dominguez (Third-Party defendant and the Fourth-Party plaintiff) who in turn handed the amount to
Justina Tinio on the same date would not exempt her from liability because by doing so, she acted
as an accommodation party in the check for which she is also liable under Section 29 of the
Negotiable Instruments Law (Act 2031), thus: .An accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the
purpose of lending his name to some other person. Such a person is liable on the instrument to a
holder for value, notwithstanding such holder at the time of taking the instrument knew him to be
only an accommodation party.

IN VIEW OF THE FOREGOING, the judgment appealed from is hereby affirmed in toto with costs
against defendant-appellant.

SO ORDERED.

111
BANK OF P.I. VS CASA MONTESSORI INTERNATIONALE (2004)

G.R. No. 149454 May 28, 2004

BANK OF THE PHILIPPINE ISLANDS, petitioner,

vs.
CASA MONTESSORI INTERNATIONALE LEONARDO T. YABUT, respondents.

x ----------------------------- x

G.R. No. 149507 May 28, 2004

CASA MONTESSORI INTERNATIONALE, petitioner,

vs.
BANK OF THE PHILIPPINE ISLANDS, respondent.

DECISION

PANGANIBAN, J.:

By the nature of its functions, a bank is required to take meticulous care of the deposits of its clients,
who have the right to expect high standards of integrity and performance from it.

Among its obligations in furtherance thereof is knowing the signatures of its clients. Depositors are
not estopped from questioning wrongful withdrawals, even if they have failed to question those
errors in the statements sent by the bank to them for verification.

The Case

Before us are two Petitions for Review1 under Rule 45 of the Rules of Court, assailing the March 23,
2001 Decision2 and the August 17, 2001 Resolution3 of the Court of Appeals (CA) in CA-GR CV No.
63561. The decretal portion of the assailed Decision reads as follows:

"WHEREFORE, upon the premises, the decision appealed from is AFFIRMED with the
modification that defendant bank [Bank of the Philippine Islands (BPI)] is held liable only for
one-half of the value of the forged checks in the amount of ₱547,115.00 after deductions
subject to REIMBURSEMENT from third party defendant Yabut who is
likewise ORDERED to pay the other half to plaintiff corporation [Casa Montessori
Internationale (CASA)]."4

The assailed Resolution denied all the parties’ Motions for Reconsideration.

The Facts

The facts of the case are narrated by the CA as follows:

"On November 8, 1982, plaintiff CASA Montessori International5 opened Current Account No.
0291-0081-01 with defendant BPI[,] with CASA’s President Ms. Ma. Carina C. Lebron as one
of its authorized signatories.

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 "In 1991, after conducting an investigation, plaintiff discovered that nine (9) of its checks had
been encashed by a certain Sonny D. Santos since 1990 in the total amount of ₱782,000.00,
on the following dates and amounts:

‘Check No. Date Amount

1. 839700 April 24, 1990 ₱ 43,400.00
2. 839459 Nov. 2, 1990 110,500.00
3. 839609 Oct. 17, 1990 47,723.00
4. 839549 April 7, 1990 90,700.00
5. 839569 Sept. 23, 1990 52,277.00
6. 729149 Mar. 22, 1990 148,000.00
7. 729129 Mar. 16, 1990 51,015.00
8. 839684 Dec. 1, 1990 140,000.00
9. 729034 Mar. 2, 1990 98,985.00

Total -- ₱ 782,600.006

"It turned out that ‘Sonny D. Santos’ with account at BPI’s Greenbelt Branch [was] a fictitious
name used by third party defendant Leonardo T. Yabut who worked as external auditor of
CASA. Third party defendant voluntarily admitted that he forged the signature of Ms. Lebron
and encashed the checks. "The PNP Crime Laboratory conducted an examination of the
nine (9) checks and concluded that the handwritings thereon compared to the standard
signature of Ms. Lebron were not written by the latter.

"On March 4, 1991, plaintiff filed the herein Complaint for Collection with Damages against
defendant bank praying that the latter be ordered to reinstate the amount of ₱782,500.007 in
the current and savings accounts of the plaintiff with interest at 6% per annum.

"On February 16, 1999, the RTC rendered the appealed decision in favor of the plaintiff."8

Ruling of the Court of Appeals

Modifying the Decision of the Regional Trial Court (RTC), the CA apportioned the loss between BPI
and CASA. The appellate court took into account CASA’s contributory negligence that resulted in the
undetected forgery. It then ordered Leonardo T. Yabut to reimburse BPI half the total amount
claimed; and CASA, the other half. It also disallowed attorney’s fees and moral and exemplary
damages.

Hence, these Petitions.9

Issues

In GR No. 149454, Petitioner BPI submits the following issues for our consideration:

113
 "I. The Honorable Court of Appeals erred in deciding this case NOT in accord with the
applicable decisions of this Honorable Court to the effect that forgery cannot be
presumed; that it must be proved by clear, positive and convincing evidence; and that the
burden of proof lies on the party alleging the forgery.

"II. The Honorable Court of Appeals erred in deciding this case not in accord with
applicable laws, in particular the Negotiable Instruments Law (NIL) which precludes CASA,
on account of its own negligence, from asserting its forgery claim against BPI, specially
taking into account the absence of any negligence on the part of BPI."10

In GR No. 149507, Petitioner CASA submits the following issues:

"1. The Honorable Court of Appeals erred when it ruled that ‘there is no showing that [BPI],
although negligent, acted in bad faith x x x’ thus denying the prayer for the award of
attorney’s fees, moral damages and exemplary damages to [CASA]. The Honorable Court
also erred when it did not order [BPI] to pay interest on the amounts due to [CASA].

"2. The Honorable Court of Appeals erred when it declared that [CASA] was likewise
negligent in the case at bar, thus warranting its conclusion that the loss in the amount of
₱547,115.00 be ‘apportioned between [CASA] and [BPI] x x x.’"11

These issues can be narrowed down to three. First, was there forgery under the Negotiable
Instruments Law (NIL)? Second, were any of the parties negligent and therefore precluded from
setting up forgery as a defense? Third, should moral and exemplary damages, attorney’s fees, and
interest be awarded?

The Court’s Ruling

The Petition in GR No. 149454 has no merit, while that in GR No. 149507 is partly meritorious.

First Issue:

Forged Signature Wholly Inoperative

Section 23 of the NIL provides:

"Section 23. Forged signature; effect of. -- When a signature is forged or made without the
authority of the person whose signature it purports to be, it is wholly inoperative, and no right
x x x to enforce payment thereof against any party thereto, can be acquired through or under
such signature, unless the party against whom it is sought to enforce such right is precluded
from setting up the forgery or want of authority."12

Under this provision, a forged signature is a real13 or absolute defense,14 and a person whose
signature on a negotiable instrument is forged is deemed to have never become a party thereto and
to have never consented to the contract that allegedly gave rise to it.15

The counterfeiting of any writing, consisting in the signing of another’s name with intent to defraud, is
forgery.16

In the present case, we hold that there was forgery of the drawer’s signature on the check.

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First, both the CA17 and the RTC18 found that Respondent Yabut himself had voluntarily admitted,
through an Affidavit, that he had forged the drawer’s signature and encashed the checks.19 He never
refuted these findings.20 That he had been coerced into admission was not corroborated by any
evidence on record.21

Second, the appellate and the trial courts also ruled that the PNP Crime Laboratory, after its
examination of the said checks,22 had concluded that the handwritings thereon -- compared to the
standard signature of the drawer -- were not hers.23 This conclusion was the same as that in the
Report24 that the PNP Crime Laboratory had earlier issued to BPI -- the drawee bank -- upon the
latter’s request.

Indeed, we respect and affirm the RTC’s factual findings, especially when affirmed by the CA, since
these are supported by substantial evidence on record.25

Voluntary Admission Not Violative of Constitutional Rights

The voluntary admission of Yabut did not violate his constitutional rights (1) on custodial
investigation, and (2) against self-incrimination.

In the first place, he was not under custodial investigation.26 His Affidavit was executed in private and
before private individuals.27 The mantle of protection under Section 12 of Article III of the 1987
Constitution28 covers only the period "from the time a person is taken into custody for investigation of
his possible participation in the commission of a crime or from the time he is singled out as a suspect
in the commission of a crime although not yet in custody."29

Therefore, to fall within the ambit of Section 12, quoted above, there must be an arrest or a
deprivation of freedom, with "questions propounded on him by the police authorities for the purpose
of eliciting admissions, confessions, or any information."30 The said constitutional provision does "not
apply to spontaneous statements made in a voluntary manner"31 whereby an individual orally admits
to authorship of a crime.32 "What the Constitution proscribes is the compulsory or coercive disclosure
of incriminating facts."33

Moreover, the right against self-incrimination34 under Section 17 of Article III35 of the Constitution,
which is ordinarily available only in criminal prosecutions, extends to all other government
proceedings -- including civil actions, legislative investigations,36 and administrative proceedings that
possess a criminal or penal aspect37 -- but not to private investigations done by private individuals.
Even in such government proceedings, this right may be waived,38 provided the waiver is certain;
unequivocal; and intelligently, understandingly and willingly made.39

If in these government proceedings waiver is allowed, all the more is it so in private investigations. It
is of no moment that no criminal case has yet been filed against Yabut. The filing thereof is entirely
up to the appropriate authorities or to the private individuals upon whom damage has been caused.
As we shall also explain later, it is not mandatory for CASA -- the plaintiff below -- to implead Yabut
in the civil case before the lower court.

Under these two constitutional provisions, "[t]he Bill of Rights40 does not concern itself with the
relation between a private individual and another individual. It governs the relationship between the
individual and the State."41 Moreover, the Bill of Rights "is a charter of liberties for the individual and
a limitation upon the power of the [S]tate."42 These rights43 are guaranteed to preclude the slightest
coercion by the State that may lead the accused "to admit something false, not prevent him from
freely and voluntarily telling the truth."44

115
Yabut is not an accused here. Besides, his mere invocation of the aforesaid rights "does not
automatically entitle him to the constitutional protection."45 When he freely and voluntarily
executed46 his Affidavit, the State was not even involved. Such Affidavit may therefore be admitted
without violating his constitutional rights while under custodial investigation and against self-
incrimination.

Clear, Positive and Convincing Examination and Evidence

The examination by the PNP, though inconclusive, was nevertheless clear, positive and convincing.

Forgery "cannot be presumed."47 It must be established by clear, positive and convincing

evidence.48 Under the best evidence rule as applied to documentary evidence like the checks in
question, no secondary or substitutionary evidence may inceptively be introduced, as the original
writing itself must be produced in court.49 But when, without bad faith on the part of the offeror, the
original checks have already been destroyed or cannot be produced in court, secondary evidence
may be produced.50 Without bad faith on its part, CASA proved the loss or destruction of the original
checks through the Affidavit of the one person who knew of that fact51 -- Yabut. He clearly admitted
to discarding the paid checks to cover up his misdeed.52 In such a situation, secondary evidence like
microfilm copies may be introduced in court.

The drawer’s signatures on the microfilm copies were compared with the standard signature. PNP
Document Examiner II Josefina de la Cruz testified on cross-examination that two different persons
had written them.53 Although no conclusive report could be issued in the absence of the original
checks,54 she affirmed that her findings were 90 percent conclusive.55 According to her, even if the
microfilm copies were the only basis of comparison, the differences were evident.56 Besides, the
RTC explained that although the Report was inconclusive, no conclusive report could have been
given by the PNP, anyway, in the absence of the original checks.57 This explanation is valid;
otherwise, no such report can ever be relied upon in court.

Even with respect to documentary evidence, the best evidence rule applies only when the contents
of a document -- such as the drawer’s signature on a check -- is the subject of inquiry.58 As to
whether the document has been actually executed, this rule does not apply; and testimonial as well
as any other secondary evidence is admissible.59 Carina Lebron herself, the drawer’s authorized
signatory, testified many times that she had never signed those checks. Her testimonial evidence is
admissible; the checks have not been actually executed. The genuineness of her handwriting is
proved, not only through the court’s comparison of the questioned handwritings and admittedly
genuine specimens thereof,60 but above all by her.

The failure of CASA to produce the original checks neither gives rise to the presumption of
suppression of evidence61 nor creates an unfavorable inference against it.62 Such failure merely
authorizes the introduction of secondary evidence63 in the form of microfilm copies. Of no
consequence is the fact that CASA did not present the signature card containing the signatures with
which those on the checks were compared.64 Specimens of standard signatures are not limited to
such a card. Considering that it was not produced in evidence, other documents that bear the
drawer’s authentic signature may be resorted to.65 Besides, that card was in the possession of BPI --
the adverse party.

We have held that without the original document containing the allegedly forged signature, one
cannot make a definitive comparison that would establish forgery;66 and that a comparison based on
a mere reproduction of the document under controversy cannot produce reliable results.67 We have
also said, however, that a judge cannot merely rely on a handwriting expert’s testimony,68 but should
also exercise independent judgment in evaluating the authenticity of a signature under scrutiny.69 In

116
the present case, both the RTC and the CA conducted independent examinations of the evidence
presented and arrived at reasonable and similar conclusions. Not only did they admit secondary
evidence; they also appositely considered testimonial and other documentary evidence in the form of
the Affidavit.

The best evidence rule admits of exceptions and, as we have discussed earlier, the first of these has
been met.70 The result of examining a questioned handwriting, even with the aid of experts and
scientific instruments, may be inconclusive;71 but it is a non sequitur to say that such result is not
clear, positive and convincing. The preponderance of evidence required in this case has been
satisfied.72

Second Issue:

Negligence Attributable to BPI Alone

Having established the forgery of the drawer’s signature, BPI -- the drawee -- erred in making
payments by virtue thereof. The forged signatures are wholly inoperative, and CASA -- the drawer
whose authorized signatures do not appear on the negotiable instruments -- cannot be held liable
thereon. Neither is the latter precluded from setting up forgery as a real defense.

Clear Negligence in Allowing Payment Under a Forged Signature

We have repeatedly emphasized that, since the banking business is impressed with public interest,
of paramount importance thereto is the trust and confidence of the public in general. Consequently,
the highest degree of diligence73 is expected,74 and high standards of integrity and performance are
even required, of it.75 By the nature of its functions, a bank is "under obligation to treat the accounts
of its depositors with meticulous care,76 always having in mind the fiduciary nature of their
relationship."77

BPI contends that it has a signature verification procedure, in which checks are honored only when
the signatures therein are verified to be the same with or similar to the specimen signatures on the
signature cards. Nonetheless, it still failed to detect the eight instances of forgery. Its negligence
consisted in the omission of that degree of diligence required78 of a bank. It cannot now feign
ignorance, for very early on we have already ruled that a bank is "bound to know the signatures of its
customers; and if it pays a forged check, it must be considered as making the payment out of its own
funds, and cannot ordinarily charge the amount so paid to the account of the depositor whose name
was forged."79 In fact, BPI was the same bank involved when we issued this ruling seventy years
ago.

Neither Waiver nor Estoppel Results from Failure to Report Error in Bank Statement

The monthly statements issued by BPI to its clients contain a notice worded as follows: "If no error is
reported in ten (10) days, account will be correct."80 Such notice cannot be considered a waiver,
even if CASA failed to report the error. Neither is it estopped from questioning the mistake after the
lapse of the ten-day period.

This notice is a simple confirmation81 or "circularization" -- in accounting parlance -- that requests

client-depositors to affirm the accuracy of items recorded by the banks.82 Its purpose is to obtain
from the depositors a direct corroboration of the correctness of their account balances with their
respective banks.83 Internal or external auditors of a bank use it as a basic audit procedure84 -- the
results of which its client-depositors are neither interested in nor privy to -- to test the details of
transactions and balances in the bank’s records.85 Evidential matter obtained from independent

117
sources outside a bank only serves to provide greater assurance of reliability86 than that obtained
solely within it for purposes of an audit of its own financial statements, not those of its client-
depositors.

Furthermore, there is always the audit risk that errors would not be detected87 for various
reasons. One, materiality is a consideration in audit planning;88 and two, the information obtained
from such a substantive test is merely presumptive and cannot be the basis of a valid waiver.89 BPI
has no right to impose a condition unilaterally and thereafter consider failure to meet such condition
a waiver. Neither may CASA renounce a right90 it has never possessed.91

Every right has subjects -- active and passive. While the active subject is entitled to demand its
enforcement, the passive one is duty-bound to suffer such enforcement.92

On the one hand, BPI could not have been an active subject, because it could not have demanded
from CASA a response to its notice. Besides, the notice was a measly request worded as follows:
"Please examine x x x and report x x x."93 CASA, on the other hand, could not have been a passive
subject, either, because it had no obligation to respond. It could -- as it did -- choose not to respond.

Estoppel precludes individuals from denying or asserting, by their own deed or representation,
anything contrary to that established as the truth, in legal contemplation.94 Our rules on evidence
even make a juris et de jure presumption95 that whenever one has, by one’s own act or omission,
intentionally and deliberately led another to believe a particular thing to be true and to act upon that
belief, one cannot -- in any litigation arising from such act or omission -- be permitted to falsify that
supposed truth.96

In the instant case, CASA never made any deed or representation that misled BPI. The former’s
omission, if any, may only be deemed an innocent mistake oblivious to the procedures and
consequences of periodic audits. Since its conduct was due to such ignorance founded upon an
innocent mistake, estoppel will not arise.97 A person who has no knowledge of or consent to a
transaction may not be estopped by it.98 "Estoppel cannot be sustained by mere argument or
doubtful inference x x x."99 CASA is not barred from questioning BPI’s error even after the lapse of
the period given in the notice.

Loss Borne by Proximate Source of Negligence

For allowing payment100 on the checks to a wrongful and fictitious payee, BPI -- the drawee bank --
becomes liable to its depositor-drawer. Since the encashing bank is one of its branches,101 BPI can
easily go after it and hold it liable for reimbursement.102 It "may not debit the drawer’s account103 and
is not entitled to indemnification from the drawer."104 In both law and equity, when one of two
innocent persons "must suffer by the wrongful act of a third person, the loss must be borne by the
one whose negligence was the proximate cause of the loss or who put it into the power of the third
person to perpetrate the wrong."105

Proximate cause is determined by the facts of the case.106 "It is that cause which, in natural and
continuous sequence, unbroken by any efficient intervening cause, produces the injury, and without
which the result would not have occurred."107

Pursuant to its prime duty to ascertain well the genuineness of the signatures of its client-depositors
on checks being encashed, BPI is "expected to use reasonable business prudence."108 In the
performance of that obligation, it is bound by its internal banking rules and regulations that form part
of the contract it enters into with its depositors.109

118
Unfortunately, it failed in that regard. First, Yabut was able to open a bank account in one of its
branches without privity;110 that is, without the proper verification of his corresponding identification
papers. Second, BPI was unable to discover early on not only this irregularity, but also the marked
differences in the signatures on the checks and those on the signature card. Third, despite the
examination procedures it conducted, the Central Verification Unit111 of the bank even passed off
these evidently different signatures as genuine. Without exercising the required prudence on its part,
BPI accepted and encashed the eight checks presented to it. As a result, it proximately contributed
to the fraud and should be held primarily liable112 for the "negligence of its officers or agents when
acting within the course and scope of their employment."113 It must bear the loss.

CASA Not Negligent in Its Financial Affairs

In this jurisdiction, the negligence of the party invoking forgery is recognized as an exception114 to the
general rule that a forged signature is wholly inoperative.115 Contrary to BPI’s claim, however, we do
not find CASA negligent in handling its financial affairs. CASA, we stress, is not precluded from
setting up forgery as a real defense.

Role of Independent Auditor

The major purpose of an independent audit is to investigate and determine objectively if the financial
statements submitted for audit by a corporation have been prepared in accordance with the
appropriate financial reporting practices116 of private entities. The relationship that arises therefrom is
both legal and moral.117 It begins with the execution of the engagement letter118 that embodies the
terms and conditions of the audit and ends with the fulfilled expectation of the auditor’s ethical119 and
competent performance in all aspects of the audit.120

The financial statements are representations of the client; but it is the auditor who has the
responsibility for the accuracy in the recording of data that underlies their preparation, their form of
presentation, and the opinion121 expressed therein.122 The auditor does not assume the role of
employee or of management in the client’s conduct of operations123 and is never under the control or
supervision124 of the client.

Yabut was an independent auditor125 hired by CASA. He handled its monthly bank reconciliations
and had access to all relevant documents and checkbooks.126 In him was reposed the client’s127 trust
and confidence128 that he would perform precisely those functions and apply the appropriate
procedures in accordance with generally accepted auditing standards.129 Yet he did not meet these
expectations. Nothing could be more horrible to a client than to discover later on that the person
tasked to detect fraud was the same one who perpetrated it.

Cash Balances Open to Manipulation

It is a non sequitur to say that the person who receives the monthly bank statements, together with
the cancelled checks and other debit/credit memoranda, shall examine the contents and give notice
of any discrepancies within a reasonable time. Awareness is not equipollent with discernment.

Besides, in the internal accounting control system prudently installed by CASA,130 it was Yabut who
should examine those documents in order to prepare the bank reconciliations.131 He owned his
working papers,132 and his output consisted of his opinion as well as the client’s financial statements
and accompanying notes thereto. CASA had every right to rely solely upon his output -- based on
the terms of the audit engagement -- and could thus be unwittingly duped into believing that
everything was in order. Besides, "[g]ood faith is always presumed and it is the burden of the party
claiming otherwise to adduce clear and convincing evidence to the contrary."133

119
Moreover, there was a time gap between the period covered by the bank statement and the date of
its actual receipt. Lebron personally received the December 1990 bank statement only in January
1991134 -- when she was also informed of the forgery for the first time, after which she immediately
requested a "stop payment order." She cannot be faulted for the late detection of the forged
December check. After all, the bank account with BPI was not personal but corporate, and she could
not be expected to monitor closely all its finances. A preschool teacher charged with molding the
minds of the youth cannot be burdened with the intricacies or complexities of corporate existence.

There is also a cutoff period such that checks issued during a given month, but not presented for
payment within that period, will not be reflected therein.135 An experienced auditor with intent to
defraud can easily conceal any devious scheme from a client unwary of the accounting processes
involved by manipulating the cash balances on record -- especially when bank transactions are
numerous, large and frequent. CASA could only be blamed, if at all, for its unintelligent choice in the
selection and appointment of an auditor -- a fault that is not tantamount to negligence.

Negligence is not presumed, but proven by whoever alleges it.136 Its mere existence "is not sufficient
without proof that it, and no other cause,"137 has given rise to damages.138 In addition, this fault is
common to, if not prevalent among, small and medium-sized business entities, thus leading the
Professional Regulation Commission (PRC), through the Board of Accountancy (BOA), to require
today not only accreditation for the practice of public accountancy,139 but also the registration of firms
in the practice thereof. In fact, among the attachments now required upon registration are the code
of good governance140 and a sworn statement on adequate and effective training.141

The missing checks were certainly reported by the bookkeeper142 to the accountant143 -- her
immediate supervisor -- and by the latter to the auditor. However, both the accountant and the
auditor, for reasons known only to them, assured the bookkeeper that there were no irregularities.

The bookkeeper144 who had exclusive custody of the checkbooks145 did not have to go directly to
CASA’s president or to BPI. Although she rightfully reported the matter, neither an investigation was
conducted nor a resolution of it was arrived at, precisely because the person at the top of the helm
was the culprit. The vouchers, invoices and check stubs in support of all check disbursements could
be concealed or fabricated -- even in collusion -- and management would still have no way to verify
its cash accountabilities.

Clearly then, Yabut was able to perpetrate the wrongful act through no fault of CASA. If auditors may
be held liable for breach of contract and negligence,146 with all the more reason may they be charged
with the perpetration of fraud upon an unsuspecting client. CASA had the discretion to pursue BPI
alone under the NIL, by reason of expediency or munificence or both. Money paid under a mistake
may rightfully be recovered,147 and under such terms as the injured party may choose.

Third Issue:

Award of Monetary Claims

Moral Damages Denied

We deny CASA’s claim for moral damages.

In the absence of a wrongful act or omission,148 or of fraud or bad faith,149 moral damages cannot be
awarded.150 The adverse result of an action does not per se make the action wrongful, or the party
liable for it. One may err, but error alone is not a ground for granting such damages.151 While no
proof of pecuniary loss is necessary therefor -- with the amount to be awarded left to the court’s

120
discretion152 -- the claimant must nonetheless satisfactorily prove the existence of its factual
basis153 and causal relation154 to the claimant’s act or omission.155

Regrettably, in this case CASA was unable to identify the particular instance -- enumerated in the
Civil Code -- upon which its claim for moral damages is predicated.156 Neither bad faith nor
negligence so gross that it amounts to malice157 can be imputed to BPI. Bad faith, under the law,
"does not simply connote bad judgment or negligence;158 it imports a dishonest purpose or some
moral obliquity and conscious doing of a wrong, a breach of a known duty through some motive or
interest or ill will that partakes of the nature of fraud."159

As a general rule, a corporation -- being an artificial person without feelings, emotions and senses,
and having existence only in legal contemplation -- is not entitled to moral damages,160 because it
cannot experience physical suffering and mental anguish.161 However, for breach of the fiduciary
duty required of a bank, a corporate client may claim such damages when its good reputation is
besmirched by such breach, and social humiliation results therefrom.162 CASA was unable to prove
that BPI had debased the good reputation of,163 and consequently caused incalculable
embarrassment to, the former. CASA’s mere allegation or supposition thereof, without any sufficient
evidence on record,164 is not enough.

Exemplary Damages Also Denied

We also deny CASA’s claim for exemplary damages.

Imposed by way of correction165 for the public good,166 exemplary damages cannot be recovered as a
matter of right.167 As we have said earlier, there is no bad faith on the part of BPI for paying the
checks of CASA upon forged signatures. Therefore, the former cannot be said to have acted in a
wanton, fraudulent, reckless, oppressive or malevolent manner.168 The latter, having no right to moral
damages, cannot demand exemplary damages.169

Attorney’s Fees Granted

Although it is a sound policy not to set a premium on the right to litigate,170 we find that CASA is
entitled to reasonable attorney’s fees based on "factual, legal, and equitable justification."171

When the act or omission of the defendant has compelled the plaintiff to incur expenses to protect
the latter’s interest,172 or where the court deems it just and equitable,173 attorney’s fees may be
recovered. In the present case, BPI persistently denied the claim of CASA under the NIL to recredit
the latter’s account for the value of the forged checks. This denial constrained CASA to incur
expenses and exert effort for more than ten years in order to protect its corporate interest in its bank
account. Besides, we have already cautioned BPI on a similar act of negligence it had committed
seventy years ago, but it has remained unrelenting. Therefore, the Court deems it just and equitable
to grant ten percent (10%)174 of the total value adjudged to CASA as attorney’s fees.

Interest Allowed

For the failure of BPI to pay CASA upon demand and for compelling the latter to resort to the courts
to obtain payment, legal interest may be adjudicated at the discretion of the Court, the same to run
from the filing175 of the Complaint.176 Since a court judgment is not a loan or a forbearance of
recovery, the legal interest shall be at six percent (6%) per annum.177 "If the obligation consists in the
payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being
no stipulation to the contrary, shall be the payment of x x x legal interest, which is six percent per

121
annum."178 The actual base for its computation shall be "on the amount finally
adjudged,"179 compounded180 annually to make up for the cost of money181 already lost to CASA.

Moreover, the failure of the CA to award interest does not prevent us from granting it upon damages
awarded for breach of contract.182 Because BPI evidently breached its contract of deposit with
CASA, we award interest in addition to the total amount adjudged. Under Section 196 of the NIL, any
case not provided for shall be "governed by the provisions of existing legislation or, in default
thereof, by the rules of the law merchant."183 Damages are not provided for in the NIL. Thus, we
resort to the Code of Commerce and the Civil Code. Under Article 2 of the Code of Commerce, acts
of commerce shall be governed by its provisions and, "in their absence, by the usages of commerce
generally observed in each place; and in the absence of both rules, by those of the civil law."184 This
law being silent, we look at Article 18 of the Civil Code, which states: "In matters which are governed
by the Code of Commerce and special laws, their deficiency shall be supplied" by its provisions. A
perusal of these three statutes unmistakably shows that the award of interest under our civil law is
justified.

WHEREFORE, the Petition in GR No. 149454 is hereby DENIED, and that in GR No.
149507 PARTLY GRANTED. The assailed Decision of the Court of Appeals is AFFIRMED with
modification: BPI is held liable for ₱547,115, the total value of the forged checks less the amount
already recovered by CASA from Leonardo T. Yabut, plus interest at the legal rate of six percent
(6%) per annum -- compounded annually, from the filing of the complaint until paid in full; and
attorney’s fees of ten percent (10%) thereof, subject to reimbursement from Respondent Yabut for
the entire amount, excepting attorney’s fees. Let a copy of this Decision be furnished the Board of
Accountancy of the Professional Regulation Commission for such action as it may deem appropriate
against Respondent Yabut. No costs.

SO ORDERED.

122
PNB VS COURT OF APPEALS (1968)

G.R. No. L-26001 October 29, 1968

PHILIPPINE NATIONAL BANK, petitioner,

vs.
THE COURT OF APPEALS and PHILIPPINE COMMERCIAL AND INDUSTRIAL
BANK, respondents.

Tomas Besa, Jose B. Galang and Juan C. Jimenez for petitioner.

San Juan, Africa & Benedicto for respondents.

CONCEPCION, C.J.:

The Philippine National Bank — hereinafter referred to as the PNB — seeks the review
by certiorari of a decision of the Court of Appeals, which affirmed that of the Court of First Instance
of Manila, dismissing plaintiff's complaint against the Philippine Commercial and Industrial Bank —
hereinafter referred to as the PCIB — for the recovery of P57,415.00.

A partial stipulation of facts entered into by the parties and the decision of the Court of Appeals show
that, on about January 15, 1962, one Augusto Lim deposited in his current account with the PCIB
branch at Padre Faura, Manila, GSIS Check No. 645915- B, in the sum of P57,415.00, drawn
against the PNB; that, following an established banking practice in the Philippines, the check was,
on the same date, forwarded, for clearing, through the Central Bank, to the PNB, which did not
return said check the next day, or at any other time, but retained it and paid its amount to the PCIB,
as well as debited it against the account of the GSIS in the PNB; that, subsequently, or on January
31, 1962, upon demand from the GSIS, said sum of P57,415.00 was re-credited to the latter's
account, for the reason that the signatures of its officers on the check were forged; and that,
thereupon, or on February 2, 1962, the PNB demanded from the PCIB the refund of said sum, which
the PCIB refused to do. Hence, the present action against the PCIB, which was dismissed by the
Court of First Instance of Manila, whose decision was, in turn, affirmed by the Court of Appeals.

It is not disputed that the signatures of the General Manager and the Auditor of the GSIS on the
check, as drawer thereof, are forged; that the person named in the check as its payee was one
Mariano D. Pulido, who purportedly indorsed it to one Manuel Go; that the check purports to have
been indorsed by Manuel Go to Augusto Lim, who, in turn, deposited it with the PCIB, on January
15, 1962; that, thereupon, the PCIB stamped the following on the back of the check: "All prior
indorsements and/or Lack of Endorsement Guaranteed, Philippine Commercial and Industrial Bank,"
Padre Faura Branch, Manila; that, on the same date, the PCIB sent the check to the PNB, for
clearance, through the Central Bank; and that, over two (2) months before, or on November 13,
1961, the GSIS had notified the PNB, which acknowledged receipt of the notice, that said check had
been lost, and, accordingly, requested that its payment be stopped.

In its brief, the PNB maintains that the lower court erred: (1) in not finding the PCIB guilty of
negligence; (2) in not finding that the indorsements at the back of the check are forged; (3) in not
finding the PCIB liable to the PNB by virtue of the former's warranty on the back of the check; (4) in
not holding that "clearing" is not "acceptance", in contemplation of the Negotiable Instruments law;
(5) in not finding that, since the check had not been accepted by the PNB, the latter is entitled to
reimbursement therefor; and (6) in denying the PNB's right to recover from the PCIB.

123
The first assignment of error will be discussed later, together with the last,with which it is interrelated.

As regards the second assignment of error, the PNB argues that, since the signatures of the drawer
are forged, so must the signatures of the supposed indorsers be; but this conclusion does not
necessarily follow from said premise. Besides, there is absolutely no evidence, and the PNB has not
even tried to prove that the aforementioned indorsements are spurious. Again, the PNB refunded the
amount of the check to the GSIS, on account of the forgery in the signatures, not of the indorsers or
supposed indorsers, but of the officers of the GSIS as drawer of the instrument. In other words, the
question whether or not the indorsements have been falsified is immaterial to the PNB's liability as a
drawee, or to its right to recover from the PCIB,1 for, as against the drawee, the indorsement of an
intermediate bank does not guarantee the signature of the drawer,2 since the forgery of the
indorsement is not the cause of the loss.3

With respect to the warranty on the back of the check, to which the third assignment of error refers, it
should be noted that the PCIB thereby guaranteed "all prior indorsements," not the authenticity of the
signatures of the officers of the GSIS who signed on its behalf, because the GSIS is not an indorser
of the check, but its drawer.4 Said warranty is irrelevant, therefore, to the PNB's alleged right to
recover from the PCIB. It could have been availed of by a subsequent indorsee5 or a holder in due
course6 subsequent to the PCIB, but, the PNB is neither.7 Indeed, upon payment by the PNB, as
drawee, the check ceased to be a negotiable instrument, and became a mere voucher or proof of
payment.8

Referring to the fourth and fifth assignments of error, we must bear in mind that, in general,
"acceptance", in the sense in which this term is used in the Negotiable Instruments Law9 is not
required for checks, for the same are payable on demand.10 Indeed, "acceptance" and "payment"
are, within the purview of said Law, essentially different things, for the former is "a promise to
perform an act," whereas the latter is the "actual performance" thereof.11 In the words of the
Law,12 "the acceptance of a bill is the signification by the drawee of his assent to the order of the
drawer," which, in the case of checks, is the payment, on demand, of a given sum of money. Upon
the other hand, actual payment of the amount of a check implies not only an assent to said order of
the drawer and a recognition of the drawer's obligation to pay the aforementioned sum, but, also,
a compliance with such obligation.

Let us now consider the first and the last assignments of error. The PNB maintains that the lower
court erred in not finding that the PCIB had been guilty of negligence in not discovering that the
check was forged. Assuming that there had been such negligence on the part of the PCIB, it is
undeniable, however, that the PNB has, also, been negligent, with the particularity that the PNB had
been guilty of a greater degree of negligence, because it had a previous and formal notice from the
GSIS that the check had been lost, with the request that payment thereof be stopped. Just as
important, if not more important and decisive, is the fact that the PNB's negligence was the main or
proximate cause for the corresponding loss.

In this connection, it will be recalled that the PCIB did not cash the check upon its presentation by
Augusto Lim; that the latter had merely deposited it in his current account with the PCIB; that, on the
same day, the PCIB sent it, through the Central Bank, to the PNB, for clearing; that the PNB
did not return the check to the PCIB the next day or at any other time; that said failure to return the
check to the PCIB implied, under the current banking practice, that the PNB considered the check
good and would honor it; that, in fact, the PNB honored the check and paid its amount to the PCIB;
and that only then did the PCIB allow Augusto Lim to draw said amount from his aforementioned
current account.

124
Thus, by not returning the check to the PCIB, by thereby indicating that the PNB had found nothing
wrong with the check and would honor the same, and by actually paying its amount to the PCIB, the
PNB induced the latter, not only to believe that the check was genuine and good in every respect,
but, also, to pay its amount to Augusto Lim. In other words, the PNB was the primary or proximate
cause of the loss, and, hence, may not recover from the PCIB.13

It is a well-settled maxim of law and equity that when one of two (2) innocent persons must suffer by
the wrongful act of a third person, the loss must be borne by the one whose negligence was the
proximate cause of the loss or who put it into the power of the third person to perpetrate the wrong.14

Then, again, it has, likewise, been held that, where the collecting (PCIB) and the drawee (PNB)
banks are equally at fault, the court will leave the parties where it finds them.15

Lastly, Section 62 of Act No. 2031 provides:

The acceptor by accepting the instrument engages that he will pay it according to the tenor
of his acceptance; and admits:

(a) The existence of the drawer, the genuineness of his signature, and his capacity and
authority to draw the instrument; and

(b) The existence of the payee and his then capacity to indorse.

The prevailing view is that the same rule applies in the case of a drawee who pays a bill without
having previously accepted it.16

WHEREFORE, the decision appealed from is hereby affirmed, with costs against the Philippine
National Bank. It is so ordered.

125
INTERNATIONAL CORPORATE BANK VS COURT OF APPEALS

G.R. No. 129910 September 5, 2006

THE INTERNATIONAL CORPORATE BANK, INC., petitioner,

vs.
COURT OF APPEALS and PHILIPPINE NATIONAL BANK, respondents.

DECISION

CARPIO, J.:

The Case

Before the Court is a petition for review1 assailing the 9 August 1994 Amended Decision2 and the 16
July 1997 Resolution3 of the Court of Appeals in CA-G.R. CV No. 25209.

The Antecedent Facts

The case originated from an action for collection of sum of money filed on 16 March 1982 by the
International Corporate Bank, Inc.4 ("petitioner") against the Philippine National Bank ("respondent").
The case was raffled to the then Court of First Instance (CFI) of Manila, Branch 6. The complaint
was amended on 19 March 1982. The case was eventually re-raffled to the Regional Trial Court of
Manila, Branch 52 ("trial court").

The Ministry of Education and Culture issued 15 checks5 drawn against respondent which petitioner
accepted for deposit on various dates. The checks are as follows:

Check Number Date Payee Amount

7-3694621-4 7-20-81 Trade Factors, Inc. P 97,500.00
7-3694609-6 7-27-81 Romero D. Palmares 98,500.50
7-3666224-4 8-03-81 Trade Factors, Inc. 99,800.00
7-3528348-4 8-07-81 Trade Factors, Inc. 98,600.00
7-3666225-5 8-10-81 Antonio Lisan 98,900.00
7-3688945-6 8-10-81 Antonio Lisan 97,700.00
7-4535674-1 8-21-81 Golden City Trading 95,300.00
7-4535675-2 8-21-81 Red Arrow Trading 96,400.00
7-4535699-5 8-24-81 Antonio Lisan 94,200.00
7-4535700-6 8-24-81 Antonio Lisan 95,100.00
7-4697902-2 9-18-81 Ace Enterprises, Inc. 96,000.00
7-4697925-6 9-18-81 Golden City Trading 93,030.00
7-4697011-6 10-02-81 Wintrade Marketing 90,960.00
7-4697909-4 10-02-81 ABC Trading, Inc. 99,300.00
7-4697922-3 10-05-81 Golden Enterprises 96,630.00

The checks were deposited on the following dates for the following accounts:

126
 Check Number Date Deposited Account Deposited
7-3694621-4 7-23-81 CA 0060 02360 3
7-3694609-6 7-28-81 CA 0060 02360 3
7-3666224-4 8-4-81 CA 0060 02360 3
7-3528348-4 8-11-81 CA 0060 02360 3
7-3666225-5 8-11-81 SA 0061 32331 7
7-3688945-6 8-17-81 CA 0060 30982 5
7-4535674-1 8-26-81 CA 0060 02360 3
7-4535675-2 8-27-81 CA 0060 02360 3
7-4535699-5 8-31-81 CA 0060 30982 5
7-4535700-6 8-24-81 SA 0061 32331 7
7-4697902-2 9-23-81 CA 0060 02360 3
7-4697925-6 9-23-81 CA 0060 30982 5
7-4697011-6 10-7-81 CA 0060 02360 3
7-4697909-4 10-7-81 CA 0060 30982 56

After 24 hours from submission of the checks to respondent for clearing, petitioner paid the value of
the checks and allowed the withdrawals of the deposits. However, on 14 October 1981, respondent
returned all the checks to petitioner without clearing them on the ground that they were materially
altered. Thus, petitioner instituted an action for collection of sums of money against respondent to
recover the value of the checks.

The Ruling of the Trial Court

The trial court ruled that respondent is expected to use reasonable business practices in accepting
and paying the checks presented to it. Thus, respondent cannot be faulted for the delay in clearing
the checks considering the ingenuity in which the alterations were effected. The trial court observed
that there was no attempt from petitioner to verify the status of the checks before petitioner paid the
value of the checks or allowed withdrawal of the deposits. According to the trial court, petitioner, as
collecting bank, could have inquired by telephone from respondent, as drawee bank, about the
status of the checks before paying their value. Since the immediate cause of petitioner’s loss was
the lack of caution of its personnel, the trial court held that petitioner is not entitled to recover the
value of the checks from respondent.

The dispositive portion of the trial court’s Decision reads:

WHEREFORE, judgment is hereby rendered dismissing both the complaint and the
counterclaim. Costs shall, however be assessed against the plaintiff.

SO ORDERED.7

Petitioner appealed the trial court’s Decision before the Court of Appeals.

The Ruling of the Court of Appeals

In its 10 October 1991 Decision,8 the Court of Appeals reversed the trial court’s Decision. Applying
Section 4(c) of Central Bank Circular No. 580, series of 1977,9 the Court of Appeals held that checks
that have been materially altered shall be returned within 24 hours after discovery of the alteration.
However, the Court of Appeals ruled that even if the drawee bank returns a check with material
alterations after discovery of the alteration, the return would not relieve the drawee bank from any

127
liability for its failure to return the checks within the 24-hour clearing period. The Court of Appeals
explained:

Does this mean that, as long as the drawee bank returns a check with material alteration
within 24 hour[s] after discovery of such alteration, such return would have the effect of
relieving the bank of any liability whatsoever despite its failure to return the check within the
24- hour clearing house rule?

We do not think so.

Obviously, such bank cannot be held liable for its failure to return the check in question not
later than the next regular clearing. However, this Court is of the opinion and so holds that it
could still be held liable if it fails to exercise due diligence in verifying the alterations made. In
other words, such bank would still be expected, nay required, to make the proper verification
before the 24-hour regular clearing period lapses, or in cases where such lapses may be
deemed inevitable, that the required verification should be made within a reasonable time.

The implication of the rule that a check shall be returned within the 24-hour clearing period is
that if the collecting bank paid the check before the end of the aforesaid 24-hour clearing
period, it would be responsible therefor such that if the said check is dishonored and
returned within the 24-hour clearing period, the drawee bank cannot be held liable. Would
such an implication apply in the case of materially altered checks returned within 24 hours
after discovery? This Court finds nothing in the letter of the above-cited C.B. Circular that
would justify a negative answer. Nonetheless, the drawee bank could still be held liable in
certain instances. Even if the return of the check/s in question is done within 24 hours after
discovery, if it can be shown that the drawee bank had been patently negligent in the
performance of its verification function, this Court finds no reason why the said bank should
be relieved of liability.

Although banking practice has it that the presumption of clearance is conclusive when it
comes to the application of the 24-hour clearing period, the same principle may not be
applied to the 24-hour period vis-a-vis material alterations in the sense that the drawee bank
which returns materially altered checks within 24 hours after discovery would be conclusively
relieved of any liability thereon. This is because there could well be various intervening
events or factors that could affect the rights and obligations of the parties in cases such as
the instant one including patent negligence on the part of the drawee bank resulting in an
unreasonable delay in detecting the alterations. While it is true that the pertinent proviso in
C.B. Circular No. 580 allows the drawee bank to return the altered check within the period
"provided by law for filing a legal action", this does not mean that this would entitle or allow
the drawee bank to be grossly negligent and, inspite thereof, avail itself of the maximum
period allowed by the above-cited Circular. The discovery must be made within a reasonable
time taking into consideration the facts and circumstances of the case. In other words, the
aforementioned C.B. Circular does not provide the drawee bank the license to be grossly
negligent on the one hand nor does it preclude the collecting bank from raising available
defenses even if the check is properly returned within the 24-hour period after discovery of
the material alteration.10

The Court of Appeals rejected the trial court’s opinion that petitioner could have verified the status of
the checks by telephone call since such imposition is not required under Central Bank rules. The
dispositive portion of the 10 October 1991 Decision reads:

128
 PREMISES CONSIDERED, the decision appealed from is hereby REVERSED and the
defendant-appellee Philippine National Bank is declared liable for the value of the fifteen
checks specified and enumerated in the decision of the trial court (page 3) in the amount
of P1,447,920.00

SO ORDERED.11

Respondent filed a motion for reconsideration of the 10 October 1991 Decision. In its 9 August 1994
Amended Decision, the Court of Appeals reversed itself and affirmed the Decision of the trial court
dismissing the complaint.

In reversing itself, the Court of Appeals held that its 10 October 1991 Decision failed to appreciate
that the rule on the return of altered checks within 24 hours from the discovery of the alteration had
been duly passed by the Central Bank and accepted by the members of the banking system. Until
the rule is repealed or amended, the rule has to be applied.

Petitioner moved for the reconsideration of the Amended Decision. In its 16 July 1997 Resolution,
the Court of Appeals denied the motion for lack of merit.

Hence, the recourse to this Court.

The Issues

Petitioner raises the following issues in its Memorandum:

1. Whether the checks were materially altered;

2. Whether respondent was negligent in failing to recognize within a reasonable period the
altered checks and in not returning the checks within the period; and

3. Whether the motion for reconsideration filed by respondent was out of time thus making
the 10 October 1991 Decision final and executory.12

The Ruling of This Court

Filing of the Petition under both Rules 45 and 65

Respondent asserts that the petition should be dismissed outright since petitioner availed of a wrong
mode of appeal. Respondent cites Ybañez v. Court of Appeals13 where the Court ruled that "a
petition cannot be subsumed simultaneously under Rule 45 and Rule 65 of the Rules of Court, and
neither may petitioners delegate upon the court the task of determining under which rule the petition
should fall."

The remedies of appeal and certiorari are mutually exclusive and not alternative or
successive.14 However, this Court may set aside technicality for justifiable reasons. The petition
before the Court is clearly meritorious. Further, the petition was filed on time both under Rules 45
and 65.15 Hence, in accordance with the liberal spirit which pervades the Rules of Court and in the
interest of justice,16 we will treat the petition as having been filed under Rule 45.

Alteration of Serial Number Not Material

129
The alterations in the checks were made on their serial numbers.

Sections 124 and 125 of Act No. 2031, otherwise known as the Negotiable Instruments Law,
provide:

SEC. 124. Alteration of instrument; effect of. ― Where a negotiable instrument is materially
altered without the assent of all parties liable thereon, it is avoided, except as against a party
who has himself made, authorized, or assented to the alteration and subsequent indorsers.

But when an instrument has been materially altered and is in the hands of a holder in due
course, not a party to the alteration, he may enforce payment thereof according to its original
tenor.

SEC. 125. What constitutes a material alteration. ― Any alteration which changes:

(a) The date;

(b) The sum payable, either for principal or interest;

(c) The time or place of payment;

(d) The number or the relations of the parties;

(e) The medium or currency in which payment is to be made;

or which adds a place of payment where no place of payment is specified, or any other
change or addition which alters the effect of the instrument in any respect, is a material
alteration.

The question on whether an alteration of the serial number of a check is a material alteration under
the Negotiable Instruments Law is already a settled matter. In Philippine National Bank v. Court of
Appeals, this Court ruled that the alteration on the serial number of a check is not a material
alteration. Thus:

An alteration is said to be material if it alters the effect of the instrument. It means an

unauthorized change in an instrument that purports to modify in any respect the obligation of
a party or an unauthorized addition of words or numbers or other change to an incomplete
instrument relating to the obligation of a party. In other words, a material alteration is one
which changes the items which are required to be stated under Section 1 of the Negotiable
Instrument[s] Law.

Section 1 of the Negotiable Instruments Law provides:

Section 1. ― Form of negotiable instruments. An instrument to be negotiable must conform

to the following requirements:

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;

130
 (c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwise

indicated therein with reasonable certainty.

In his book entitled "Pandect of Commercial Law and Jurisprudence," Justice Jose C. Vitug
opines that "an innocent alteration (generally, changes on items other than those required to
be stated under Sec. 1, N.I.L.) and spoliation (alterations done by a stranger) will not avoid
the instrument, but the holder may enforce it only according to its original tenor.

xxxx

The case at the bench is unique in the sense that what was altered is the serial number of
the check in question, an item which, it can readily be observed, is not an essential requisite
for negotiability under Section 1 of the Negotiable Instruments Law. The aforementioned
alteration did not change the relations between the parties. The name of the drawer and the
drawee were not altered. The intended payee was the same. The sum of money due to the
payee remained the same. x x x

xxxx

The check’s serial number is not the sole indication of its origin. As succinctly found by the
Court of Appeals, the name of the government agency which issued the subject check was
prominently printed therein. The check’s issuer was therefore sufficiently identified, rendering
the referral to the serial number redundant and inconsequential. x x x

xxxx

Petitioner, thus cannot refuse to accept the check in question on the ground that the serial
number was altered, the same being an immaterial or innocent one.17

Likewise, in the present case the alterations of the serial numbers do not constitute material
alterations on the checks.

Incidentally, we agree with the petitioner’s observation that the check in the PNB case appears to
belong to the same batch of checks as in the present case. The check in the PNB case was also
issued by the Ministry of Education and Culture. It was also drawn against PNB, respondent in this
case. The serial number of the check in the PNB case is 7-3666-223-3 and it was issued on 7
August 1981.

Timeliness of Filing of Respondent’s Motion for Reconsideration

Respondent filed its motion for reconsideration of the 10 October 1991 Decision on 6 November
1991. Respondent’s motion for reconsideration states that it received a copy of the 10 October 1991
Decision on 22 October 1991.18 Thus, it appears that the motion for reconsideration was filed on
time. However, the Registry Return Receipt shows that counsel for respondent or his agent received
a copy of the 10 October 1991 Decision on 16 October 1991,19 not on 22 October 1991 as
respondent claimed. Hence, the Court of Appeals is correct when it noted that the motion for

131
reconsideration was filed late. Despite its late filing, the Court of Appeals resolved to admit the
motion for reconsideration "in the interest of substantial justice."20

There are instances when rules of procedure are relaxed in the interest of justice. However, in this
case, respondent did not proffer any explanation for the late filing of the motion for reconsideration.
Instead, there was a deliberate attempt to deceive the Court of Appeals by claiming that the copy of
the 10 October 1991 Decision was received on 22 October 1991 instead of on 16 October 1991. We
find no justification for the posture taken by the Court of Appeals in admitting the motion for
reconsideration. Thus, the late filing of the motion for reconsideration rendered the 10 October 1991
Decision final and executory.

The 24-Hour Clearing Time

The Court will not rule on the proper application of Central Bank Circular No. 580 in this case. Since
there were no material alterations on the checks, respondent as drawee bank has no right to
dishonor them and return them to petitioner, the collecting bank.21 Thus, respondent is liable to
petitioner for the value of the checks, with legal interest from the time of filing of the complaint on 16
March 1982 until full payment.22 Further, considering that respondent’s motion for reconsideration
was filed late, the 10 October 1991 Decision, which held respondent liable for the value of the
checks amounting to P1,447,920, had become final and executory.

WHEREFORE, we SET ASIDE the 9 August 1994 Amended Decision and the 16 July 1997
Resolution of the Court of Appeals. We rule that respondent Philippine National Bank is liable to
petitioner International Corporate Bank, Inc. for the value of the checks amounting to P1,447,920,
with legal interest from 16 March 1982 until full payment. Costs against respondent.

SO ORDERED.

132
TRAVEL-ON INC. VS COURT OF APPEALS (1992)

G.R. No. L-56169 June 26, 1992

TRAVEL-ON, INC., petitioner,

vs.
COURT OF APPEALS and ARTURO S. MIRANDA, respondents.

RESOLUTION

FELICIANO, J.:

Petitioner Travel-On. Inc. ("Travel-On") is a travel agency selling airline tickets on commission basis
for and in behalf of different airline companies. Private respondent Arturo S. Miranda had a revolving
credit line with petitioner. He procured tickets from petitioner on behalf of airline passengers and
derived commissions therefrom.

On 14 June 1972, Travel-On filed suit before the Court of First Instance ("CFI") of Manila to collect
on six (6) checks issued by private respondent with a total face amount of P115,000.00. The
complaint, with a prayer for the issuance of a writ of preliminary attachment and attorney's fees,
averred that from 5 August 1969 to 16 January 1970, petitioner sold and delivered various airline
tickets to respondent at a total price of P278,201.57; that to settle said account, private respondent
paid various amounts in cash and in kind, and thereafter issued six (6) postdated checks amounting
to P115,000.00 which were all dishonored by the drawee banks. Travel-On further alleged that in
March 1972, private respondent made another payment of P10,000.00 reducing his indebtedness to
P105,000.00. The writ of attachment was granted by the court a quo.

In his answer, private respondent admitted having had transactions with Travel-On during the period
stipulated in the complaint. Private respondent, however, claimed that he had already fully paid and
even overpaid his obligations and that refunds were in fact due to him. He argued that he had issued
the postdated checks for purposes of accommodation, as he had in the past accorded similar favors
to petitioner. During the proceedings, private respondent contested several tickets alleged to have
been erroneously debited to his account. He claimed reimbursement of his alleged over payments,
plus litigation expenses, and exemplary and moral damages by reason of the allegedly improper
attachment of his properties.

In support of his theory that the checks were issued for accommodation, private respondent testified
that he bad issued the checks in the name of Travel-On in order that its General Manager, Elita
Montilla, could show to Travel-On's Board of Directors that the accounts receivable of the company
were still good. He further stated that Elita Montilla tried to encash the same, but that these were
dishonored and were subsequently returned to him after the accommodation purpose had been
attained.

Travel-On's witness, Elita Montilla, on the other hand explained that the "accommodation" extended
to Travel-On by private respondent related to situations where one or more of its passengers needed
money in Hongkong, and upon request of Travel-On respondent would contact his friends in
Hongkong to advance Hongkong money to the passenger. The passenger then paid Travel-On upon

133
his return to Manila and which payment would be credited by Travel-On to respondent's running
account with it.

In its decision dated 31 January 1975, the court a quo ordered Travel-On to pay private respondent
the amount of P8,894.91 representing net overpayments by private respondent, moral damages of
P10,000.00 for the wrongful issuance of the writ of attachment and for the filing of this case,
P5,000.00 for attorney's fees and the costs of the suit.

The trial court ruled that private respondent's indebtedness to petitioner was not satisfactorily
established and that the postdated checks were issued not for the purpose of encashment to pay his
indebtedness but to accommodate the General Manager of Travel-On to enable her to show to the
Board of Directors that Travel-On was financially stable.

Petitioner filed a motion for reconsideration that was, however, denied by the trial court, which in fact
then increased the award of moral damages to P50,000.00.

On appeal, the Court of Appeals affirmed the decision of the trial court, but reduced the award of
moral damages to P20,000.00, with interest at the legal rate from the date of the filing of the Answer
on 28 August 1972.

Petitioner moved for reconsideration of the Court of Appeal's' decision, without success.

In the instant Petition for Review, it is urged that the postdated checks are per se evidence of liability
on the part of private respondent. Petitioner further argues that even assuming that the checks were
for accommodation, private respondent is still liable thereunder considering that petitioner is a holder
for value.

Both the trial and appellate courts had rejected the checks as evidence of indebtedness on the
ground that the various statements of account prepared by petitioner did not show that Private
respondent had an outstanding balance of P115,000.00 which is the total amount of the checks he
issued. It was pointed out that while the various exhibits of petitioner showed various accountabilities
of private respondent, they did not satisfactorily establish the amount of the outstanding
indebtedness of private respondent. The appellate court made much of the fact that the figures
representing private respondent's unpaid accounts found in the "Schedule of Outstanding Account"
dated 31 January 1970 did not tally with the figures found in the statement which showed private
respondent's transactions with petitioner for the years 1969 and 1970; that there was no satisfactory
explanation as to why the total outstanding amount of P278,432.74 was still used as basis in the
accounting of 7 April 1972 considering that according to the table of transactions for the year 1969
and 1970, the total unpaid account of private respondent amounted to P239,794.57.

We have, however, examined the record and it shows that the 7 April 1972 Statement of Account
had simply not been updated; that if we use as basis the figure as of 31 January 1970 which is
P278,432.74 and from it deduct P38,638.17 which represents some of the payments subsequently
made by private respondent, the figure — P239,794.57 will be obtained.

Also, the fact alone that the various statements of account had variances in figures, simply did not
mean that private respondent had no more financial obligations to petitioner. It must be stressed that
private respondent's account with petitioner was a running or open one, which explains the varying
figures in each of the statements rendered as of a given date.

The appellate court erred in considering only the statements of account in determining whether
private respondent was indebted to petitioner under the checks. By doing so, it failed to give due

134
importance to the most telling piece of evidence of private respondent's indebtedness — the checks
themselves which he had issued.

Contrary to the view held by the Court of Appeals, this Court finds that the checks are the all
important evidence of petitioner's case; that these checks clearly established private respondent's
indebtedness to petitioner; that private respondent was liable thereunder.

It is important to stress that a check which is regular on its face is deemed prima facie to have been
issued for a valuable consideration and every person whose signature appears thereon is deemed to
have become a party thereto for value. 1 Thus, the mere introduction of the instrument sued on in
evidence prima facie entitles the plaintiff to recovery. Further, the rule is quite settled that a
negotiable instrument is presumed to have been given or indorsed for a sufficient consideration
unless otherwise contradicted and overcome by other competent evidence. 2

In the case at bar, the Court of Appeals, contrary to these established rules, placed the burden of
proving the existence of valuable consideration upon petitioner. This cannot be countenanced; it was
up to private respondent to show that he had indeed issued the checks without sufficient
consideration. The Court considers that Private respondent was unable to rebut satisfactorily this
legal presumption. It must also be noted that those checks were issued immediately after a letter
demanding payment had been sent to private respondent by petitioner Travel-On.

The fact that all the checks issued by private respondent to petitioner were presented for payment by
the latter would lead to no other conclusion than that these checks were intended for encashment.
There is nothing in the checks themselves (or in any other document for that matter) that states
otherwise.

We are unable to accept the Court of Appeals' conclusion that the checks here involved were issued
for "accommodation" and that accordingly private respondent maker of those checks was not liable
thereon to petitioner payee of those checks.

In the first place, while the Negotiable Instruments Law does refer to accommodation transactions,
no such transaction was here shown. Section 29 of the Negotiable Instruments Law provides as
follows:

Sec. 29. Liability of accommodation party. — An accommodation party is one who

has signed the instrument as maker, drawer, acceptor, or indorser, without receiving
value therefor, and for the purpose of lending his name to some other person. Such a
person is liable on the instrument to a holder for value, notwithstanding such holder,
at the time of taking the instrument, knew him to be only an accommodation party.

In accommodation transactions recognized by the Negotiable Instruments Law, an

accommodating party lends his credit to the accommodated party, by issuing or indorsing a
check which is held by a payee or indorsee as a holder in due course, who gave full value
therefor to the accommodated party. The latter, in other words, receives or realizes full value
which the accommodated party then must repay to the accommodating party, unless of
course the accommodating party intended to make a donation to the accommodated
party. But the accommodating party is bound on the check to the holder in due course who is
necessarily a third party and is not the accommodated party. Having issued or indorsed the
check, the accommodating party has warranted to the holder in due course that he will pay
the same according to its tenor. 3

135
In the case at bar, Travel-On was payee of all six (6) checks, it presented these checks for payment
at the drawee bank but the checks bounced. Travel-On obviously was not an accommodated party;
it realized no value on the checks which bounced.

Travel-On was entitled to the benefit of the statutory presumption that it was a holder in due
course, 4 that the checks were supported by valuable consideration. 5 Private respondent maker of
the checks did not successfully rebut these presumptions. The only evidence aliunde that private
respondent offered was his own self-serving uncorroborated testimony. He claimed that he had
issued the checks to Travel-On as payee to "accommodate" its General Manager who allegedly
wished to show those checks to the Board of Directors of Travel-On to "prove" that Travel-On's
account receivables were somehow "still good." It will be seen that this claim was in fact a claim that
the checks were merely simulated, that private respondent did not intend to bind himself thereon.
Only evidence of the clearest and most convincing kind will suffice for that purpose; 6 no such
evidence was submitted by private respondent. The latter's explanation was denied by Travel-On's
General Manager; that explanation, in any case, appears merely contrived and quite hollow to us.
Upon the other hand, the "accommodation" or assistance extended to Travel-On's passengers
abroad as testified by petitioner's General Manager involved, not the accommodation transactions
recognized by the NIL, but rather the circumvention of then existing foreign exchange regulations by
passengers booked by Travel-On, which incidentally involved receipt of full consideration by private
respondent.

Thus, we believe and so hold that private respondent must be held liable on the six (6) checks here
involved. Those checks in themselves constituted evidence of indebtedness of private respondent,
evidence not successfully overturned or rebutted by private respondent.

Since the checks constitute the best evidence of private respondent's liability to petitioner Travel-On,
the amount of such liability is the face amount of the checks, reduced only by the P10,000.00 which
Travel-On admitted in its complaint to have been paid by private respondent sometime in March
1992.

The award of moral damages to Private respondent must be set aside, for the reason that
Petitioner's application for the writ of attachment rested on sufficient basis and no bad faith was
shown on the part of Travel-On. If anyone was in bad faith, it was private respondent who issued
bad checks and then pretended to have "accommodated" petitioner's General Manager by assisting
her in a supposed scheme to deceive petitioner's Board of Directors and to misrepresent Travel-On's
financial condition.

ACCORDINGLY, the Court Resolved to GRANT due course to the Petition for Review
on Certiorari and to REVERSE and SET ASIDE the Decision dated 22 October 1980 and the
Resolution of 23 January 1981 of the Court of Appeals, as well as the Decision dated 31 January
1975 of the trial court, and to enter a new decision requiring private respondent Arturo S. Miranda to
pay to petitioner Travel-On the amount of P105,000.00 with legal interest thereon from 14 June
1972, plus ten percent (10%) of the total amount due as attorney's fees. Costs against Private
respondent.

136
ANG VS ASSOCIATED BANK (2007)

G.R. No. 146511 September 5, 2007

TOMAS ANG, petitioner,

vs.
ASSOCIATED BANK AND ANTONIO ANG ENG LIONG, respondents.

DECISION

AZCUNA, J.:

This petition for certiorari under Rule 45 of the Rules on Civil Procedure seeks to review the October
9, 2000 Decision1 and December 26, 2000 Resolution2 of the Court of Appeals in CA-G.R. CV No.
53413 which reversed and set aside the January 5, 1996 Decision3 of the Regional Trial Court,
Branch 16, Davao City, in Civil Case No. 20,299-90, dismissing the complaint filed by respondents
for collection of a sum of money.

On August 28, 1990, respondent Associated Bank (formerly Associated Banking Corporation and
now known as United Overseas Bank Philippines) filed a collection suit against Antonio Ang Eng
Liong and petitioner Tomas Ang for the two (2) promissory notes that they executed as principal
debtor and co-maker, respectively.

In the Complaint,4 respondent Bank alleged that on October 3 and 9, 1978, the defendants obtained
a loan of P50,000, evidenced by a promissory note bearing PN-No. DVO-78-382, and P30,000,
evidenced by a promissory note bearing PN-No. DVO-78-390. As agreed, the loan would be
payable, jointly and severally, on January 31, 1979 and December 8, 1978, respectively. In addition,
subsequent amendments5 to the promissory notes as well as the disclosure statements6 stipulated
that the loan would earn 14% interest rate per annum, 2% service charge per annum, 1% penalty
charge per month from due date until fully paid, and attorney's fees equivalent to 20% of the
outstanding obligation.

Despite repeated demands for payment, the latest of which were on September 13, 1988 and
September 9, 1986, on Antonio Ang Eng Liong and Tomas Ang, respectively, respondent Bank
claimed that the defendants failed and refused to settle their obligation, resulting in a total
indebtedness of P539,638.96 as of July 31, 1990, broken down as follows:

PN-No. DVO-78-382 PN-No. DVO-78-390

Outstanding Balance P50,000.00 P30,000.00
Add Past due charges for 4,199 days Past due charges for 4,253 days
(from 01-31-79 to 07-31-90) (from 12-8-78 to 07-31-90)
14% Interest P203,538.98 P125,334.41
2% Service Charge P11,663.89 P7,088.34
12% Overdue Charge P69,983.34 P42,530.00
Total P285,186.21 P174,952.75
Less: Charges paid P500.00 None
Amount Due P334,686.21 P204,952.75

137
In his Answer,7 Antonio Ang Eng Liong only admitted to have secured a loan amounting to P80,000.
He pleaded though that the bank "be ordered to submit a more reasonable computation" considering
that there had been "no correct and reasonable statement of account" sent to him by the bank, which
was allegedly collecting excessive interest, penalty charges, and attorney's fees despite knowledge
that his business was destroyed by fire, hence, he had no source of income for several years.

For his part, petitioner Tomas Ang filed an Answer with Counterclaim and Cross-claim.8 He
interposed the affirmative defenses that: the bank is not the real party in interest as it is not the
holder of the promissory notes, much less a holder for value or a holder in due course; the bank
knew that he did not receive any valuable consideration for affixing his signatures on the notes but
merely lent his name as an accommodation party; he accepted the promissory notes in blank, with
only the printed provisions and the signature of Antonio Ang Eng Liong appearing therein; it was the
bank which completed the notes upon the orders, instructions, or representations of his co-
defendant; PN-No. DVO-78-382 was completed in excess of or contrary to the authority given by him
to his co-defendant who represented that he would only borrow P30,000 from the bank; his signature
in PN-No. DVO-78-390 was procured through fraudulent means when his co-defendant claimed that
his first loan did not push through; the promissory notes did not indicate in what capacity he was
intended to be bound; the bank granted his co-defendant successive extensions of time within which
to pay, without his (Tomas Ang) knowledge and consent; the bank imposed new and additional
stipulations on interest, penalties, services charges and attorney's fees more onerous than the terms
of the notes, without his knowledge and consent, in the absence of legal and factual basis and in
violation of the Usury Law; the bank caused the inclusion in the promissory notes of stipulations
such as waiver of presentment for payment and notice of dishonor which are against public policy;
and the notes had been impaired since they were never presented for payment and demands were
made only several years after they fell due when his co-defendant could no longer pay them.

Regarding his counterclaim, Tomas Ang argued that by reason of the bank's acts or omissions, it
should be held liable for the amount of P50,000 for attorney's fees and expenses of litigation.
Furthermore, on his cross-claim against Antonio Ang Eng Liong, he averred that he should be
reimbursed by his co-defendant any and all sums that he may be adjudged liable to pay,
plus P30,000, P20,000 and P50,000 for moral and exemplary damages, and attorney's fees,
respectively.

In its Reply,9 respondent Bank countered that it is the real party in interest and is the holder of the
notes since the Associated Banking Corporation and Associated Citizens Bank are its predecessors-
in-interest. The fact that Tomas Ang never received any moneys in consideration of the two (2) loans
and that such was known to the bank are immaterial because, as an accommodation maker, he is
considered as a solidary debtor who is primarily liable for the payment of the promissory notes.
Citing Section 29 of the Negotiable Instruments Law (NIL), the bank posited that absence or failure
of consideration is not a matter of defense; neither is the fact that the holder knew him to be only an
accommodation party.

Respondent Bank likewise retorted that the promissory notes were completely filled up at the time of
their delivery. Assuming that such was not the case, Sec. 14 of the NIL provides that the bank has
the prima facie authority to complete the blank form. Moreover, it is presumed that one who has
signed as a maker acted with care and had signed the document with full knowledge of its content.
The bank noted that Tomas Ang is a prominent businessman in Davao City who has been engaged
in the auto parts business for several years, hence, certainly he is not so naïve as to sign the notes
without knowing or bothering to verify the amounts of the loans covered by them. Further, he is
already in estoppel since despite receipt of several demand letters there was not a single protest
raised by him that he signed for only one note in the amount of P30,000.

138
It was denied by the bank that there were extensions of time for payment accorded to Antonio Ang
Eng Liong. Granting that such were the case, it said that the same would not relieve Tomas Ang
from liability as he would still be liable for the whole obligation less the share of his co-debtor who
received the extended term.

The bank also asserted that there were no additional or new stipulations imposed other than those
agreed upon. The penalty charge, service charge, and attorney's fees were reflected in the
amendments to the promissory notes and disclosure statements. Reference to the Usury Law was
misplaced as usury is legally non-existent; at present, interest can be charged depending on the
agreement of the lender and the borrower.

Lastly, the bank contended that the provisions on presentment for payment and notice of dishonor
were expressly waived by Tomas Ang and that such waiver is not against public policy pursuant to
Sections 82 (c) and 109 of the NIL. In fact, there is even no necessity therefor since being a solidary
debtor he is absolutely required to pay and primarily liable on both promissory notes.

On October 19, 1990, the trial court issued a preliminary pre-trial order directing the parties to submit
their respective pre-trial guide.10 When Antonio Ang Eng Liong failed to submit his brief, the bank
filed an ex-parte motion to declare him in default.11 Per Order of November 23, 1990, the court
granted the motion and set the ex-parte hearing for the presentation of the bank's
evidence.12 Despite Tomas Ang's motion13 to modify the Order so as to exclude or cancel the ex-
parte hearing based on then Sec. 4, Rule 18 of the old Rules of Court (now Sec. 3[c.], Rule 9 of the
Revised Rules on Civil Procedure), the hearing nonetheless proceeded.14

Eventually, a decision15 was rendered by the trial court on February 21, 1991. For his supposed bad
faith and obstinate refusal despite several demands from the bank, Antonio Ang Eng Liong was
ordered to pay the principal amount of P80,000 plus 14% interest per annum and 2% service charge
per annum. The overdue penalty charge and attorney's fees were, however, reduced for being
excessive, thus:

WHEREFORE, judgment is rendered against defendant Antonio Ang Eng Liong and in favor
of plaintiff, ordering the former to pay the latter:

On the first cause of action:

1) the amount of P50,000.00 representing the principal obligation with 14% interest
per annum from June 27, 1983 with 2% service charge and 6% overdue penalty
charges per annum until fully paid;

2) P11,663.89 as accrued service charge; and

3) P34,991.67 as accrued overdue penalty charge.

On the second cause of action:

1) the amount of P50,000.00 (sic) representing the principal account with 14%
interest from June 27, 1983 with 2% service charge and 6% overdue penalty charges
per annum until fully paid;

2) P7,088.34 representing accrued service charge;

139
 3) P21,265.00 as accrued overdue penalty charge;

4) the amount of P10,000.00 as attorney's fees; and

5) the amount of P620.00 as litigation expenses and to pay the costs.

SO ORDERED.16

The decision became final and executory as no appeal was taken therefrom. Upon the bank's ex-
parte motion, the court accordingly issued a writ of execution on April 5, 1991.17

Thereafter, on June 3, 1991, the court set the pre-trial conference between the bank and Tomas
Ang,18 who, in turn, filed a Motion to Dismiss19 on the ground of lack of jurisdiction over the case in
view of the alleged finality of the February 21, 1991 Decision. He contended that Sec. 4, Rule 18 of
the old Rules sanctions only one judgment in case of several defendants, one of whom is declared in
default. Moreover, in his Supplemental Motion to Dismiss,20 Tomas Ang maintained that he is
released from his obligation as a solidary guarantor and accommodation party because, by the
bank's actions, he is now precluded from asserting his cross-claim against Antonio Ang Eng Liong,
upon whom a final and executory judgment had already been issued.

The court denied the motion as well as the motion for reconsideration thereon.21 Tomas Ang
subsequently filed a petition for certiorari and prohibition before this Court, which, however, resolved
to refer the same to the Court of Appeals.22 In accordance with the prayer of Tomas Ang, the
appellate court promulgated its Decision on January 29, 1992 in CA G.R. SP No. 26332, which
annulled and set aside the portion of the Order dated November 23, 1990 setting the ex-
parte presentation of the bank's evidence against Antonio Ang Eng Liong, the Decision dated
February 21, 1991 rendered against him based on such evidence, and the Writ of Execution issued
on April 5, 1991.23

Trial then ensued between the bank and Tomas Ang. Upon the latter's motion during the pre-trial
conference, Antonio Ang Eng Liong was again declared in default for his failure to answer the cross-
claim within the reglementary period.24

When Tomas Ang was about to present evidence in his behalf, he filed a Motion for Production of
Documents,25 reasoning:

xxx

2. That corroborative to, and/or preparatory or incident to his testimony[,] there is [a] need for
him to examine original records in the custody and possession of plaintiff, viz:

a. original Promissory Note (PN for brevity) # DVO-78-382 dated October 3, 1978[;]

b. original of Disclosure Statement in reference to PN # DVO-78-382;

c. original of PN # DVO-78-390 dated October 9, 1978;

d. original of Disclosure Statement in reference to PN # DVO-78-390;

e. Statement or Record of Account with the Associated Banking Corporation or its

successor, of Antonio Ang in CA No. 470 (cf. Exh. O) including bank records,

140
 withdrawal slips, notices, other papers and relevant dates relative to the overdraft of
Antonio Eng Liong in CA No. 470;

f. Loan Applications of Antonio Ang Eng Liong or borrower relative to PN Nos. DVO-
78-382 and DVO-78-390 (supra);

g. Other supporting papers and documents submitted by Antonio Ang Eng Liong
relative to his loan application vis-à-vis PN. Nos. DVO-78-382 and DVO-78-390 such
as financial statements, income tax returns, etc. as required by the Central Bank or
bank rules and regulations.

3. That the above matters are very material to the defenses of defendant Tomas Ang, viz:

- the bank is not a holder in due course when it accepted the [PNs] in blank.

- The real borrower is Antonio Ang Eng Liong which fact is known to the bank.

- That the PAYEE not being a holder in due course and knowing that defendant
Tomas Ang is merely an accommodation party, the latter may raise against such
payee or holder or successor-in-interest (of the notes) PERSONAL and EQUITABLE
DEFENSES such as FRAUD in INDUCEMENT, DISCHARGE ON NOTE, Application
of [Articles] 2079, 2080 and 1249 of the Civil Code, NEGLIGENCE in delaying
collection despite Eng Liong's OVERDRAFT in C.A. No. 470, etc.26

In its Order dated May 16, 1994,27 the court denied the motion stating that the promissory notes and
the disclosure statements have already been shown to and inspected by Tomas Ang during the trial,
as in fact he has already copies of the same; the Statements or Records of Account of Antonio Ang
Eng Liong in CA No. 470, relative to his overdraft, are immaterial since, pursuant to the previous
ruling of the court, he is being sued for the notes and not for the overdraft which is personal to
Antonio Ang Eng Liong; and besides its non-existence in the bank's records, there would be legal
obstacle for the production and inspection of the income tax return of Antonio Ang Eng Liong if done
without his consent.

When the motion for reconsideration of the aforesaid Order was denied, Tomas Ang filed a petition
for certiorari and prohibition with application for preliminary injunction and restraining order before
the Court of Appeals docketed as CA G.R. SP No. 34840.28 On August 17, 1994, however, the Court
of Appeals denied the issuance of a Temporary Restraining Order.29

Meanwhile, notwithstanding its initial rulings that Tomas Ang was deemed to have waived his right to
present evidence for failure to appear during the pendency of his petition before the Court of
Appeals, the trial court decided to continue with the hearing of the case.30

After the trial, Tomas Ang offered in evidence several documents, which included a copy of the Trust
Agreement between the Republic of the Philippines and the Asset Privatization Trust, as certified by
the notary public, and news clippings from the Manila Bulletin dated May 18, 1994 and May 30,
1994.31 All the documentary exhibits were admitted for failure of the bank to submit its comment to
the formal offer.32 Thereafter, Tomas Ang elected to withdraw his petition in CA G.R. SP No. 34840
before the Court of Appeals, which was then granted.33

On January 5, 1996, the trial court rendered judgment against the bank, dismissing the complaint for
lack of cause of action.34 It held that:

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 Exh. "9" and its [sub-markings], the Trust Agreement dated 27 February 1987 for the
defense shows that: the Associated Bank as of June 30, 1986 is one of DBP's or
Development Bank of the [Philippines'] non-performing accounts for transfer; on February
27, 1987 through Deeds of Transfer executed by and between the Philippine National Bank
and Development Bank of the Philippines and the National Government, both financial
institutions assigned, transferred and conveyed their non-performing assets to the National
Government; the National Government in turn and as TRUSTOR, transferred, conveyed and
assigned by way of trust unto the Asset Privatization Trust said non-performing assets,
[which] took title to and possession of, [to] conserve, provisionally manage and dispose[,] of
said assets identified for privatization or disposition; one of the powers and duties of the APT
with respect to trust properties consisting of receivables is to handle the administration,
collection and enforcement of the receivables; to bring suit to enforce payment of the
obligations or any installment thereof or to settle or compromise any of such obligations, or
any other claim or demand which the government may have against any person or persons[.]

The Manila Bulletin news clippings dated May 18, 1994 and May 30, 1994, Exh. "9-A", "9-B",
"9-C", and "9-D", show that the Monetary Board of the Bangko Sentral ng Pilipinas approved
the rehabilitation plan of the Associated Bank. One main feature of the rehabilitation plan
included the financial assistance for the bank by the Philippine Deposit Insurance
Corporation (PDIC) by way of the purchase of AB Assets worth P1.3945 billion subject to a
buy-back arrangement over a 10 year period. The PDIC had approved of the rehab scheme,
which included the purchase of AB's bad loans worth P1.86 at 25% discount. This will then
be paid by AB within a 10-year period plus a yield comparable to the prevailing market rates
x x x.

Based then on the evidence presented by the defendant Tomas Ang, it would readily appear
that at the time this suit for Sum of Money was filed which was on August [28], 1990, the
notes were held by the Asset Privatization Trust by virtue of the Deeds of Transfer and Trust
Agreement, which was empowered to bring suit to enforce payment of the obligations.
Consequently, defendant Tomas Ang has sufficiently established that plaintiff at the time this
suit was filed was not the holder of the notes to warrant the dismissal of the complaint.35

Respondent Bank then elevated the case to the Court of Appeals. In the appellant's brief
captioned, "ASSOCIATED BANK, Plaintiff-Appellant versus ANTONIO ANG ENG LIONG and
TOMAS ANG, Defendants, TOMAS ANG, Defendant-Appellee," the following errors were alleged:

I.

THE LOWER COURT ERRED IN NOT HOLDING DEFENDANT ANTONIO ANG ENG
LIONG AND DEFENDANT-APPELLEE TOMAS ANG LIABLE TO PLAINTIFF-APPELLANT
ON THEIR UNPAID LOANS DESPITE THE LATTER'S DOCUMENTARY EXHIBITS
PROVING THE SAID OBLIGATIONS.

II.

THE LOWER COURT ERRED IN DISMISSING PLAINTIFF-APPELLANT'S COMPLAINT ON

THE BASIS OF NEWSPAPER CLIPPINGS WHICH WERE COMPLETELY HEARSAY IN
CHARACTER AND IMPROPER FOR JUDICIAL NOTICE.36

The bank stressed that it has established the causes of action outlined in its Complaint by a
preponderance of evidence. As regards the Deed of Transfer and Trust Agreement, it contended
that the same were never authenticated by any witness in the course of the trial; the Agreement,

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which was not even legible, did not mention the promissory notes subject of the Complaint; the bank
is not a party to the Agreement, which showed that it was between the Government of the
Philippines, acting through the Committee on Privatization represented by the Secretary of Finance
as trustor and the Asset Privatization Trust, which was created by virtue of Proclamation No. 50; and
the Agreement did not reflect the signatures of the contracting parties. Lastly, the bank averred that
the news items appearing in the Manila Bulletin could not be the subject of judicial notice since they
were completely hearsay in character.37

On October 9, 2000, the Court of Appeals reversed and set aside the trial court's ruling. The
dispositive portion of the Decision38 reads:

WHEREFORE, premises considered, the Decision of the Regional Trial Court of Davao City,
Branch 16, in Civil Case No. 20,299-90 is hereby REVERSED AND SET ASIDE and another
one entered ordering defendant-appellee Tomas Ang to pay plaintiff-appellant Associated
Bank the following:

1. P50,000.00 representing the principal amount of the loan under PN-No. DVO-78-382 plus
14% interest thereon per annum computed from January 31, 1979 until the full amount
thereof is paid;

2. P30,000.00 representing the principal amount of the loan under PN-No. DVO-78-390 plus
14% interest thereon per annum computed from December 8, 1978 until the full amount
thereof is paid;

All other claims of the plaintiff-appellant are DISMISSED for lack of legal basis. Defendant-
appellee's counterclaim is likewise DISMISSED for lack of legal and factual bases.

No pronouncement as to costs.

SO ORDERED.39

The appellate court disregarded the bank's first assigned error for being "irrelevant in the final
determination of the case" and found its second assigned error as "not meritorious." Instead, it
posed for resolution the issue of whether the trial court erred in dismissing the complaint for
collection of sum of money for lack of cause of action as the bank was said to be not the "holder" of
the notes at the time the collection case was filed.

In answering the lone issue, the Court of Appeals held that the bank is a "holder" under Sec. 191 of
the NIL. It concluded that despite the execution of the Deeds of Transfer and Trust Agreement, the
Asset Privatization Trust cannot be declared as the "holder" of the subject promissory notes for the
reason that it is neither the payee or indorsee of the notes in possession thereof nor is it the bearer
of said notes. The Court of Appeals observed that the bank, as the payee, did not indorse the notes
to the Asset Privatization Trust despite the execution of the Deeds of Transfer and Trust Agreement
and that the notes continued to remain with the bank until the institution of the collection suit.

With the bank as the "holder" of the promissory notes, the Court of Appeals held that Tomas Ang is
accountable therefor in his capacity as an accommodation party. Citing Sec. 29 of the NIL, he is
liable to the bank in spite of the latter's knowledge, at the time of taking the notes, that he is only an
accommodation party. Moreover, as a co-maker who agreed to be jointly and severally liable on the
promissory notes, Tomas Ang cannot validly set up the defense that he did not receive any
consideration therefor as the fact that the loan was granted to the principal debtor already
constitutes a sufficient consideration.

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Further, the Court of Appeals agreed with the bank that the experience of Tomas Ang in business
rendered it implausible that he would just sign the promissory notes as a co-maker without even
checking the real amount of the debt to be incurred, or that he merely acted on the belief that the
first loan application was cancelled. According to the appellate court, it is apparent that he was
negligent in falling for the alibi of Antonio Ang Eng Liong and such fact would not serve to exonerate
him from his responsibility under the notes.

Nonetheless, the Court of Appeals denied the claims of the bank for service, penalty and overdue
charges as well as attorney's fees on the ground that the promissory notes made no mention of such
charges/fees.

In his motion for reconsideration,40 Tomas Ang raised for the first time the assigned errors as follows:

xxx

2) Related to the above jurisdictional issues, defendant-appellee Tomas Ang has recently
discovered that upon the filing of the complaint on August 28, 1990, under the jurisdictional
rule laid down in BP Blg. 129, appellant bank fraudulently failed to specify the amount
of compounded interest at 14% per annum, service charges at 2% per annum and overdue
penalty charges at 12% per annum in the prayer of the complaint as of the time of its filing,
paying a total of only P640.00(!!!) as filing and court docket fees although the total sum
involved as of that time was P647,566.75 including 20% attorney's fees. In fact, the stated
interest in the body of the complaint alone amount to P328,373.39 (which is
actually compounded and capitalized) in both causes of action and the total service and
overdue penalties and charges and attorney's fees further amount to P239,193.36 in both
causes of action, as of July 31, 1990, the time of filing of the complaint. Significantly,
appellant fraudulently misled the Court, describing the 14% imposition as interest, when in
fact the same was capitalized as principal by appellant bank every month to earn more
interest, as stated in the notes. In view thereof, the trial court never acquired jurisdiction over
the case and the same may not be now corrected by the filing of deficiency fees because the
causes of action had already prescribed and more importantly, the jurisdiction of the
Municipal Trial Court had been increased to P100,000.00 in principal claims last March 20,
1999, pursuant to SC Circular No. 21-99, section 5 of RA No. 7691, and section 31, Book I of
the 1987 Administrative Code. In other words, as of today, jurisdiction over the subject falls
within the exclusive jurisdiction of the MTC, particularly if the bank foregoes capitalization of
the stipulated interest.

3) BY FAILING TO GIVE NOTICE OF ITS APPEAL AND APPEAL BRIEF TO APPELLEE

ANG ENG LIONG, THE APPEALED JUDGMENT OF THE TRIAL COURT WHICH LEFT
OUT TOMAS ANG'S CROSS-CLAIM AGAINST ENG LIONG (BECAUSE IT DISMISSED
THE MAIN CLAIM), HAD LONG BECOME FINAL AND EXECUTORY, AS AGAINST ENG
LIONG. Accordingly, Tomas Ang's right of subrogation against Ang Eng Liong, expressed in
his cross-claim, is now SEVERAL TIMES foreclosed because of the fault or negligence of
appellant bank since 1979 up to its insistence of an ex-parte trial, and now when it failed to
serve notice of appeal and appellant's brief upon him. Accordingly, appellee Tomas Ang
should be released from his suretyship obligation pursuant to Art. 2080 of the Civil Code.
The above is related to the issues above-stated.

4) This Court may have erred in ADDING or ASSIGNING its own bill of error for the benefit of
appellant bank which defrauded the judiciary by the payment of deficient docket fees.41

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Finding no cogent or compelling reason to disturb the Decision, the Court of Appeals denied the
motion in its Resolution dated December 26, 2000.42

Petitioner now submits the following issues for resolution:

1. Is [A]rticle 2080 of the Civil Code applicable to discharge petitioner Tomas Ang as
accommodation maker or surety because of the failure of [private] respondent bank to serve
its notice of appeal upon the principal debtor, respondent Eng Liong?

2. Did the trial court have jurisdiction over the case at all?

3. Did the Court of Appeals [commit] error in assigning its own error and raising its own
issue?

4. Are petitioner's other real and personal defenses such as successive extensions coupled
with fraudulent collusion to hide Eng Liong's default, the payee's grant of additional burdens,
coupled with the insolvency of the principal debtor, and the defense of incomplete but
delivered instrument, meritorious?43

Petitioner allegedly learned after the promulgation of the Court of Appeals' decision that, pursuant to
the parties' agreement on the compounding of interest with the principal amount (per month in case
of default), the interest on the promissory notes as of July 31, 1990 should have been
only P81,647.22 for PN No. DVO-78-382 (instead of P203,538.98) and P49,618.33 for PN No. DVO-
78-390 (instead of P125,334.41) while the principal debt as of said date should increase
to P647,566.75 (instead of P539,638.96). He submits that the bank carefully and shrewdly hid the
fact by describing the amounts as interest instead of being part of either the principal or penalty in
order to pay a lesser amount of docket fees. According to him, the total fees that should have been
paid at the time of the filing of the complaint on August 28, 1990 was P2,216.30 and not P614.00 or
a shortage of 71%. Petitioner contends that the bank may not now pay the deficiency because the
last demand letter sent to him was dated September 9, 1986, or more than twenty years have
elapsed such that prescription had already set in. Consequently, the bank's claim must be dismissed
as the trial court loses jurisdiction over the case.

Petitioner also argues that the Court of Appeals should not have assigned its own error and raised it
as an issue of the case, contending that no question should be entertained on appeal unless it has
been advanced in the court below or is within the issues made by the parties in the pleadings. At any
rate, he opines that the appellate court's decision that the bank is the real party in interest because it
is the payee named in the note or the holder thereof is too simplistic since: (1) the power and control
of Asset Privatization Trust over the bank are clear from the explicit terms of the duly certified trust
documents and deeds of transfer and are confirmed by the newspaper clippings; (2) even under
P.D. No. 902-A or the General Banking Act, where a corporation or a bank is under receivership,
conservation or rehabilitation, it is only the representative (liquidator, receiver, trustee or
conservator) who may properly act for said entity, and, in this case, the bank was held by Asset
Privatization Trust as trustee; and (3) it is not entirely accurate to say that the payee who has not
indorsed the notes in all cases is the real party in interest because the rights of the payee may be
subject of an assignment of incorporeal rights under Articles 1624 and 1625 of the Civil Code.

Lastly, petitioner maintains that when respondent Bank served its notice of appeal and appellant's
brief only on him, it rendered the judgment of the trial court final and executory with respect to
Antonio Ang Eng Liong, which, in effect, released him (Antonio Ang Eng Liong) from any and all
liability under the promissory notes and, thereby, foreclosed petitioner's cross-claims. By such act,
the bank, even if it be the "holder" of the promissory notes, allegedly discharged a simple contract for

145
the payment of money (Sections 119 [d] and 122, NIL [Act No. 2031]), prevented a surety like
petitioner from being subrogated in the shoes of his principal (Article 2080, Civil Code), and impaired
the notes, producing the effect of payment (Article 1249, Civil Code).

The petition is unmeritorious.

Procedurally, it is well within the authority of the Court of Appeals to raise, if it deems proper under
the circumstances obtaining, error/s not assigned on an appealed case. In Mendoza v.
Bautista,44 this Court recognized the broad discretionary power of an appellate court to waive the
lack of proper assignment of errors and to consider errors not assigned, thus:

As a rule, no issue may be raised on appeal unless it has been brought before the lower
tribunal for its consideration. Higher courts are precluded from entertaining matters neither
alleged in the pleadings nor raised during the proceedings below, but ventilated for the first
time only in a motion for reconsideration or on appeal.

However, as with most procedural rules, this maxim is subject to exceptions. Indeed, our
rules recognize the broad discretionary power of an appellate court to waive the lack of
proper assignment of errors and to consider errors not assigned. Section 8 of Rule 51 of the
Rules of Court provides:

SEC. 8. Questions that may be decided. — No error which does not affect the jurisdiction
over the subject matter or the validity of the judgment appealed from or the proceedings
therein will be considered, unless stated in the assignment of errors, or closely related to or
dependent on an assigned error and properly argued in the brief, save as the court may pass
upon plain errors and clerical errors.

Thus, an appellate court is clothed with ample authority to review rulings even if they are not
assigned as errors in the appeal in these instances: (a) grounds not assigned as errors but
affecting jurisdiction over the subject matter; (b) matters not assigned as errors on appeal but
are evidently plain or clerical errors within contemplation of law; (c) matters not assigned as
errors on appeal but consideration of which is necessary in arriving at a just decision and
complete resolution of the case or to serve the interests of justice or to avoid dispensing
piecemeal justice; (d) matters not specifically assigned as errors on appeal but raised in the
trial court and are matters of record having some bearing on the issue submitted which the
parties failed to raise or which the lower court ignored; (e) matters not assigned as errors on
appeal but closely related to an error assigned; and (f) matters not assigned as errors on
appeal but upon which the determination of a question properly assigned is dependent.
(Citations omitted)45

To the Court's mind, even if the Court of Appeals regarded petitioner's two assigned errors as
"irrelevant" and "not meritorious," the issue of whether the trial court erred in dismissing the
complaint for collection of sum of money for lack of cause of action (on the ground that the bank was
not the "holder" of the notes at the time of the filing of the action) is in reality closely related
to and determinant of the resolution of whether the lower court correctly ruled in not holding Antonio
Ang Eng Liong and petitioner Tomas Ang liable to the bank on their unpaid loans despite
documentary exhibits allegedly proving their obligations and in dismissing the complaint based on
newspaper clippings. Hence, no error could be ascribed to the Court of Appeals on this point.

Now, the more relevant question is: who is the real party in interest at the time of the institution of the
complaint, is it the bank or the Asset Privatization Trust?

146
To answer the query, a brief history on the creation of the Asset Privatization Trust is proper.

Taking into account the imperative need of formally launching a program for the rationalization of the
government corporate sector, then President Corazon C. Aquino issued Proclamation No. 5046 on
December 8, 1986. As one of the twin cornerstones of the program was to establish the privatization
of a good number of government corporations, the proclamation created the Asset Privatization
Trust, which would, for the benefit of the National Government, take title to and possession of,
conserve, provisionally manage and dispose of transferred assets that were identified for
privatization or disposition.47

In accordance with the provisions of Section 2348 of the proclamation, then President Aquino
subsequently issued Administrative Order No. 14 on February 3, 1987, which approved the
identification of and transfer to the National Government of certain assets (consisting of loans, equity
investments, accrued interest receivables, acquired assets and other assets) and liabilities
(consisting of deposits, borrowings, other liabilities and contingent guarantees) of the Development
Bank of the Philippines (DBP) and the Philippine National Bank (PNB). The transfer of assets was
implemented through a Deed of Transfer executed on February 27, 1987 between the National
Government, on one hand, and the DBP and PNB, on the other. In turn, the National Government
designated the Asset Privatization Trust to act as its trustee through a Trust Agreement, whereby the
non-performing accounts of DBP and PNB, including, among others, the DBP's equity with
respondent Bank, were entrusted to the Asset Privatization Trust.49 As provided for in the
Agreement, among the powers and duties of the Asset Privatization Trust with respect to the trust
properties consisting of receivables was to handle their administration and collection by bringing suit
to enforce payment of the obligations or any installment thereof or settling or compromising any of
such obligations or any other claim or demand which the Government may have against any person
or persons, and to do all acts, institute all proceedings, and to exercise all other rights, powers, and
privileges of ownership that an absolute owner of the properties would otherwise have the right to
do.50

Incidentally, the existence of the Asset Privatization Trust would have expired five (5) years from the
date of issuance of Proclamation No. 50.51 However, its original term was extended from December
8, 1991 up to August 31, 1992,52 and again from December 31, 1993 until June 30, 1995,53 and then
from July 1, 1995 up to December 31, 1999,54 and further from January 1, 2000 until December 31,
2000.55 Thenceforth, the Privatization and Management Office was established and took over,
among others, the powers, duties and functions of the Asset Privatization Trust under the
proclamation.56

Based on the above backdrop, respondent Bank does not appear to be the real party in interest
when it instituted the collection suit on August 28, 1990 against Antonio Ang Eng Liong and
petitioner Tomas Ang. At the time the complaint was filed in the trial court, it was the Asset
Privatization Trust which had the authority to enforce its claims against both debtors. In fact, during
the pre-trial conference, Atty. Roderick Orallo, counsel for the bank, openly admitted that it was
under the trusteeship of the Asset Privatization Trust.57 The Asset Privatization Trust, which should
have been represented by the Office of the Government Corporate Counsel, had the authority to file
and prosecute the case.

The foregoing notwithstanding, this Court can not, at present, readily subscribe to petitioner's
insistence that the case must be dismissed. Significantly, it stands without refute, both in the
pleadings as well as in the evidence presented during the trial and up to the time this case reached
the Court, that the issue had been rendered moot with the occurrence of a supervening event – the
"buy-back" of the bank by its former owner, Leonardo Ty, sometime in October 1993. By such re-
acquisition from the Asset Privatization Trust when the case was still pending in the lower court, the

147
bank reclaimed its real and actual interest over the unpaid promissory notes; hence, it could rightfully
qualify as a "holder"58 thereof under the NIL.

Notably, Section 29 of the NIL defines an accommodation party as a person "who has signed the
instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the
purpose of lending his name to some other person." As gleaned from the text, an accommodation
party is one who meets all the three requisites, viz: (1) he must be a party to the instrument, signing
as maker, drawer, acceptor, or indorser; (2) he must not receive value therefor; and (3) he must sign
for the purpose of lending his name or credit to some other person.59 An accommodation party lends
his name to enable the accommodated party to obtain credit or to raise money; he receives no part
of the consideration for the instrument but assumes liability to the other party/ies thereto.60 The
accommodation party is liable on the instrument to a holder for value even though the holder, at the
time of taking the instrument, knew him or her to be merely an accommodation party, as if the
contract was not for accommodation.61

As petitioner acknowledged it to be, the relation between an accommodation party and the
accommodated party is one of principal and surety – the accommodation party being the surety.62 As
such, he is deemed an original promisor and debtor from the beginning;63 he is considered in law as
the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter
since their liabilities are interwoven as to be inseparable.64 Although a contract of suretyship is in
essence accessory or collateral to a valid principal obligation, the surety's liability to the creditor
is immediate, primary and absolute; he is directly and equally bound with the principal.65 As an
equivalent of a regular party to the undertaking, a surety becomes liable to the debt and duty of the
principal obligor even without possessing a direct or personal interest in the obligations nor does he
receive any benefit therefrom.66

Contrary to petitioner's adamant stand, however, Article 208067 of the Civil Code does not apply in a
contract of suretyship.68 Art. 2047 of the Civil Code states that if a person binds himself solidarily with
the principal debtor, the provisions of Section 4, Chapter 3, Title I, Book IV of the Civil Code must be
observed. Accordingly, Articles 1207 up to 1222 of the Code (on joint and solidary obligations) shall
govern the relationship of petitioner with the bank.

The case of Inciong, Jr. v. CA69 is illuminating:

Petitioner also argues that the dismissal of the complaint against Naybe, the principal debtor,
and against Pantanosas, his co-maker, constituted a release of his obligation, especially
because the dismissal of the case against Pantanosas was upon the motion of private
respondent itself. He cites as basis for his argument, Article 2080 of the Civil Code which
provides that:

"The guarantors, even though they be solidary, are released from their obligation whenever
by come act of the creditor, they cannot be subrogated to the rights, mortgages, and
preferences of the latter."

It is to be noted, however, that petitioner signed the promissory note as a solidary co-maker
and not as a guarantor. This is patent even from the first sentence of the promissory note
which states as follows:

"Ninety one (91) days after date, for value received, I/we, JOINTLY and SEVERALLY
promise to pay to the PHILIPPINE BANK OF COMMUNICATIONS at its office in the City of
Cagayan de Oro, Philippines the sum of FIFTY THOUSAND ONLY (P50,000.00) Pesos,

148
 Philippine Currency, together with interest x x x at the rate of SIXTEEN (16) per cent per
annum until fully paid."

A solidary or joint and several obligation is one in which each debtor is liable for the entire
obligation, and each creditor is entitled to demand the whole obligation. On the other hand,
Article 2047 of the Civil Code states:

"By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section 4,
Chapter 3, Title I of this Book shall be observed. In such a case the contract is called a
suretyship." (Italics supplied.)

While a guarantor may bind himself solidarily with the principal debtor, the liability of a
guarantor is different from that of a solidary debtor. Thus, Tolentino explains:

"A guarantor who binds himself in solidum with the principal debtor under the provisions of
the second paragraph does not become a solidary co-debtor to all intents and purposes.
There is a difference between a solidary co-debtor, and a fiador in solidum (surety). The
later, outside of the liability he assumes to pay the debt before the property of the principal
debtor has been exhausted, retains all the other rights, actions and benefits which pertain to
him by reason of rights of the fiansa; while a solidary co-debtor has no other rights than
those bestowed upon him in Section 4, Chapter 3, title I, Book IV of the Civil Code."

Section 4, Chapter 3, Title I, Book IV of the Civil Code states the law on joint and several
obligations. Under Art. 1207 thereof, when there are two or more debtors in one and the
same obligation, the presumption is that obligation is joint so that each of the debtors is liable
only for a proportionate part of the debt. There is a solidarily liability only when the obligation
expressly so states, when the law so provides or when the nature of the obligation so
requires.

Because the promissory note involved in this case expressly states that the three signatories
therein are jointly and severally liable, any one, some or all of them may be proceeded
against for the entire obligation. The choice is left to the solidary creditor to determine
against whom he will enforce collection. (Citations omitted)70

In the instant case, petitioner agreed to be "jointly and severally" liable under the two promissory
notes that he co-signed with Antonio Ang Eng Liong as the principal debtor. This being so, it is
completely immaterial if the bank would opt to proceed only against petitioner or Antonio Ang Eng
Liong or both of them since the law confers upon the creditor the prerogative to choose whether to
enforce the entire obligation against any one, some or all of the debtors. Nonetheless, petitioner, as
an accommodation party, may seek reimbursement from Antonio Ang Eng Liong, being the party
accommodated.71

It is plainly mistaken for petitioner to say that just because the bank failed to serve the notice of
appeal and appellant's brief to Antonio Ang Eng Liong, the trial court's judgment, in effect, became
final and executory as against the latter and, thereby, bars his (petitioner's) cross-claims against
him: First, although no notice of appeal and appellant's brief were served to Antonio Ang Eng Liong,
he was nonetheless impleaded in the case since his name appeared in the caption of both the notice
and the brief as one of the defendants-appellees;72 Second, despite including in the caption of the
appellee's brief his co-debtor as one of the defendants-appellees, petitioner did not also serve him a

149
copy thereof;73 Third, in the caption of the Court of Appeals' decision, Antonio Ang Eng Liong was
expressly named as one of the defendants-appellees;74 and Fourth, it was only in his motion for
reconsideration from the adverse judgment of the Court of Appeals that petitioner belatedly chose to
serve notice to the counsel of his co-defendant-appellee.75

Likewise, this Court rejects the contention of Antonio Ang Eng Liong, in his "special appearance"
through counsel, that the Court of Appeals, much less this Court, already lacked jurisdiction over his
person or over the subject matter relating to him because he was not a party in CA-G.R. CV No.
53413. Stress must be laid of the fact that he had twice put himself in default – one, in not filing a
pre-trial brief and another, in not filing his answer to petitioner's cross-claims. As a matter of course,
Antonio Ang Eng Liong, being a party declared in default, already waived his right to take part in the
trial proceedings and had to contend with the judgment rendered by the court based on the evidence
presented by the bank and petitioner. Moreover, even without considering these default judgments,
Antonio Ang Eng Liong even categorically admitted having secured a loan totaling P80,000. In his
Answer to the complaint, he did not deny such liability but merely pleaded that the bank "be ordered
to submit a more reasonable computation" instead of collecting excessive interest, penalty charges,
and attorney's fees. For failing to tender an issue and in not denying the material allegations stated
in the complaint, a judgment on the pleadings76 would have also been proper since not a single issue
was generated by the Answer he filed.

As the promissory notes were not discharged or impaired through any act or omission of the bank,
Sections 119 (d)77 and 12278 of the NIL as well as Art. 124979 of the Civil Code would necessarily find
no application. Again, neither was petitioner's right of reimbursement barred nor was the bank's right
to proceed against Antonio Ang Eng Liong expressly renounced by the omission to serve notice of
appeal and appellant's brief to a party already declared in default.

Consequently, in issuing the two promissory notes, petitioner as accommodating party warranted to
the holder in due course that he would pay the same according to its tenor.80 It is no defense to state
on his part that he did not receive any value therefor81 because the phrase "without receiving value
therefor" used in Sec. 29 of the NIL means "without receiving value by virtue of the instrument" and
not as it is apparently supposed to mean, "without receiving payment for lending his name."82 Stated
differently, when a third person advances the face value of the note to the accommodated party at
the time of its creation, the consideration for the note as regards its maker is the money advanced to
the accommodated party. It is enough that value was given for the note at the time of its
creation.83 As in the instant case, a sum of money was received by virtue of the notes, hence, it is
immaterial so far as the bank is concerned whether one of the signers, particularly petitioner, has or
has not received anything in payment of the use of his name.84

Under the law, upon the maturity of the note, a surety may pay the debt, demand the collateral
security, if there be any, and dispose of it to his benefit, or, if applicable, subrogate himself in the
place of the creditor with the right to enforce the guaranty against the other signers of the note for
the reimbursement of what he is entitled to recover from them.85 Regrettably, none of these were
prudently done by petitioner. When he was first notified by the bank sometime in 1982 regarding his
accountabilities under the promissory notes, he lackadaisically relied on Antonio Ang Eng Liong,
who represented that he would take care of the matter, instead of directly communicating with the
bank for its settlement.86 Thus, petitioner cannot now claim that he was prejudiced by the supposed
"extension of time" given by the bank to his co-debtor.

Furthermore, since the liability of an accommodation party remains not only primary but
also unconditional to a holder for value, even if the accommodated party receives an extension of
the period for payment without the consent of the accommodation party, the latter is still liable for the

150
whole obligation and such extension does not release him because as far as a holder for value is
concerned, he is a solidary co-debtor.87 In Clark v. Sellner,88 this Court held:

x x x The mere delay of the creditor in enforcing the guaranty has not by any means impaired
his action against the defendant. It should not be lost sight of that the defendant's signature
on the note is an assurance to the creditor that the collateral guaranty will remain good, and
that otherwise, he, the defendant, will be personally responsible for the payment.

True, that if the creditor had done any act whereby the guaranty was impaired in its value, or
discharged, such an act would have wholly or partially released the surety; but it must be
born in mind that it is a recognized doctrine in the matter of suretyship that with respect to
the surety, the creditor is under no obligation to display any diligence in the enforcement of
his rights as a creditor. His mere inaction indulgence, passiveness, or delay in proceeding
against the principal debtor, or the fact that he did not enforce the guaranty or apply on the
payment of such funds as were available, constitute no defense at all for the surety, unless
the contract expressly requires diligence and promptness on the part of the creditor, which is
not the case in the present action. There is in some decisions a tendency toward holding that
the creditor's laches may discharge the surety, meaning by laches a negligent forbearance.
This theory, however, is not generally accepted and the courts almost universally consider it
essentially inconsistent with the relation of the parties to the note. (21 R.C.L., 1032-1034)89

Neither can petitioner benefit from the alleged "insolvency" of Antonio Ang Eng Liong for want of
clear and convincing evidence proving the same. Assuming it to be true, he also did not exercise
diligence in demanding security to protect himself from the danger thereof in the event that he
(petitioner) would eventually be sued by the bank. Further, whether petitioner may or may not obtain
security from Antonio Ang Eng Liong cannot in any manner affect his liability to the bank; the said
remedy is a matter of concern exclusively between themselves as accommodation party and
accommodated party. The fact that petitioner stands only as a surety in relation to Antonio Ang Eng
Liong is immaterial to the claim of the bank and does not a whit diminish nor defeat the rights of the
latter as a holder for value. To sanction his theory is to give unwarranted legal recognition to the
patent absurdity of a situation where a co-maker, when sued on an instrument by a holder in due
course and for value, can escape liability by the convenient expedient of interposing the defense that
he is a merely an accommodation party.90

In sum, as regards the other issues and errors alleged in this petition, the Court notes that these
were the very same questions of fact raised on appeal before the Court of Appeals, although at
times couched in different terms and explained more lengthily in the petition. Suffice it to say that the
same, being factual, have been satisfactorily passed upon and considered both by the trial and
appellate courts. It is doctrinal that only errors of law and not of fact are reviewable by this Court in
petitions for review on certiorari under Rule 45 of the Rules of Court. Save for the most cogent and
compelling reason, it is not our function under the rule to examine, evaluate or weigh the probative
value of the evidence presented by the parties all over again.91

WHEREFORE, the October 9, 2000 Decision and December 26, 2000 Resolution of the Court of
Appeals in CA-G.R. CV No. 53413 are AFFIRMED. The petition is DENIED for lack of merit.

No costs.

SO ORDERED.

151
GONZALES VS RCBC (2006)

G.R. No. 156294 November 29, 2006

MELVA THERESA ALVIAR GONZALES, Petitioner,

vs.
RIZAL COMMERCIAL BANKING CORPORATION, Respondent.

DECISION

GARCIA, J.:

An action for a sum of money originating from the Regional Trial Court (RTC) of Makati City, Branch
61, thereat docketed as Civil Case No. 88-1502, was decided in favor of therein plaintiff, now
respondent Rizal Commercial Banking Corporation (RCBC). On appeal to the Court of Appeals (CA)
in CA-G.R. CV No. 48596, that court, in a decision1 dated August 30, 2002, affirmed the RTC minus
the award of attorney’s fees. Upon the instance of herein petitioner Melva Theresa Alviar Gonzales,
the case is now before this Court via this petition for review on certiorari, based on the following
undisputed facts as unanimously found by the RTC and the CA, which the latter summarized as
follows:

Gonzales was an employee of Rizal Commercial Banking Corporation (or RCBC) as New Accounts
Clerk in the Retail Banking Department at its Head Office.

A foreign check in the amount of $7,500 was drawn by Dr. Don Zapanta of the Ade Medical Group
with address at 569 Western Avenue, Los Angeles, California, against the drawee bank Wilshire
Center Bank, N.A., of Los Angeles, California, U.S.A., and payable to Gonzales’ mother, defendant
Eva Alviar (or Alviar). Alviar then endorsed this check. Since RCBC gives special accommodations
to its employees to receive the check’s value without awaiting the clearing period, Gonzales
presented the foreign check to Olivia Gomez, the RCBC’s Head of Retail Banking. After examining
this, Olivia Gomez requested Gonzales to endorse it which she did. Olivia Gomez then acquiesced
to the early encashment of the check and signed the check but indicated thereon her authority of "up
to ₱17,500.00 only". Afterwards, Olivia Gomez directed Gonzales to present the check to RCBC
employee Carlos Ramos and procure his signature. After inspecting the check, Carlos Ramos also
signed it with an "ok" annotation. After getting the said signatures Gonzales presented the check to
Rolando Zornosa, Supervisor of the Remittance section of the Foreign Department of the RCBC
Head Office, who after scrutinizing the entries and signatures therein authorized its encashment.
Gonzales then received its peso equivalent of ₱155,270.85.

RCBC then tried to collect the amount of the check with the drawee bank by the latter through its
correspondent bank, the First Interstate Bank of California, on two occasions dishonored the check
because of "END. IRREG" or irregular indorsement. Insisting, RCBC again sent the check to the
drawee bank, but this time the check was returned due to "account closed". Unable to collect, RCBC
demanded from Gonzales the payment of the peso equivalent of the check that she received.
Gonzales settled the matter by agreeing that payment be made thru salary deduction. This
temporary arrangement for salary deductions was communicated by Gonzales to RCBC through a
letter dated November 27, 1987 xxx

xxx xxx xxx

152
The deductions was implemented starting October 1987. On March 7, 1988 RCBC sent a demand
letter to Alviar for the payment of her obligation but this fell on deaf ears as RCBC did not receive
any response from Alviar. Taking further action to collect, RCBC then conveyed the matter to its
counsel and on June 16, 1988, a letter was sent to Gonzales reminding her of her liability as an
indorser of the subject check and that for her to avoid litigation she has to fulfill her commitment to
settle her obligation as assured in her said letter. On July 1988 Gonzales resigned from RCBC.
What had been deducted from her salary was only ₱12,822.20 covering ten months.

It was against the foregoing factual backdrop that RCBC filed a complaint for a sum of money
against Eva Alviar, Melva Theresa Alviar-Gonzales and the latter’s husband Gino Gonzales. The
spouses Gonzales filed an Answer with Counterclaim praying for the dismissal of the complaint as
well as payment of ₱10,822.20 as actual damages, ₱20,000.00 as moral damages, ₱20,000.00 as
exemplary damages, and ₱20,000.00 as attorney’s fees and litigation expenses. Defendant Eva
Alviar, on the other hand, was declared in default for having filed her Answer out of time.

After trial, the RTC, in its three-page decision,2 held two of the three defendants liable as follows:

WHEREFORE, premises above considered and plaintiff having established its case against the
defendants as above stated, judgment is hereby rendered for plaintiff and as against defendant EVA.
P. ALVIAR as principal debtor and defendants MELVA THERESA ALVIAR GONZLAES as guarantor
as follows:

1. To pay plaintiff the amount of ₱142,648.65 (₱155,270.85 less the amount of ₱12,622.20,
as salary deduction of [Gonzales]), representing the outstanding obligation of the defendants
with interest of 12% per annum starting February 1987 until fully paid;

2. To pay the amount of ₱40,000.00 as and for attorney’s fees; and to

3. Pay the costs of this suit.

SO ORDERED.

On appeal, the CA, except for the award of attorney’s fees, affirmed the RTC judgment.

Hence, this recourse by the petitioner on her submission that the CA erred ̶

XXX IN FINDING [PETITIONER], AN ACCOMMODATION PARTY TO A CHECK

SUBSEQUENTLY ENDORSED PARTIALLY, LIABLE TO RCBC AS GUARANTOR;

XXX IN FINDING THAT THE SIGNATURE OF GOMEZ, AN RCBC EMPLOYEE, DOES

NOT CONSTITUTE AS AN ENDORSEMENT BUT ONLY AN INTER-BANK APPROVAL OF
SIGNATURE NECESSARY FOR THE ENCASHMENT OF THE CHECK;

XXX IN NOT FINDING RCBC LIABLE ON THE COUNTERCLAIMS OF [THE PETITIONER].

The recourse is impressed with merit.

The dollar-check3 in question in the amount of $7,500.00 drawn by Don Zapanta of Ade Medical
Group (U.S.A.) against a Los Angeles, California bank, Wilshire Center Bank N.A., was dishonored
because of "End. Irregular," i.e., an irregular endorsement. While the foreign drawee bank did not
specifically state which among the four signatures found on the dorsal portion of the check made the

153
check irregularly endorsed, it is absolutely undeniable that only the signature of Olivia Gomez, an
RCBC employee, was a qualified endorsement because of the phrase "up to ₱17,500.00 only."
There can be no other acceptable explanation for the dishonor of the foreign check than this
signature of Olivia Gomez with the phrase "up to ₱17,500.00 only" accompanying it. This Court
definitely agrees with the petitioner that the foreign drawee bank would not have dishonored the
check had it not been for this signature of Gomez with the same phrase written by her.

The foreign drawee bank, Wilshire Center Bank N.A., refused to pay the bearer of this dollar-check
drawn by Don Zapanta because of the defect introduced by RCBC, through its employee, Olivia
Gomez. It is, therefore, a useless piece of paper if returned in that state to its original payee, Eva
Alviar.

There is no doubt in the mind of the Court that a subsequent party which caused the defect in the
instrument cannot have any recourse against any of the prior endorsers in good faith. Eva Alviar’s
and the petitioner’s liability to subsequent holders of the foreign check is governed by the Negotiable
Instruments Law as follows:

Sec. 66. Liability of general indorser. - Every indorser who indorses without qualification, warrants to
all subsequent holders in due course;

(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding
section; and

(b) That the instrument is, at the time of his indorsement, valid and subsisting;

And, in addition, he engages that, on due presentment, it shall be accepted or paid, or both, as the
case may be, according to its tenor, and that if it be dishonored and the necessary proceedings on
dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser
who may be compelled to pay it.

The matters and things mentioned in subdivisions (a), (b) and (c) of Section 65 are the following:

(a) That the instrument is genuine and in all respects what it purports to be;

(b) That he has a good title to it;

(c) That all prior parties had capacity to contract;

Under Section 66, the warranties for which Alviar and Gonzales are liable as general endorsers in
favor of subsequent endorsers extend only to the state of the instrument at the time of their
endorsements, specifically, that the instrument is genuine and in all respects what it purports to be;
that they have good title thereto; that all prior parties had capacity to contract; and that the
instrument, at the time of their endorsements, is valid and subsisting. This provision, however,
cannot be used by the party which introduced a defect on the instrument, such as respondent RCBC
in this case, which qualifiedly endorsed the same, to hold prior endorsers liable on the instrument
because it results in the absurd situation whereby a subsequent party may render an instrument
useless and inutile and let innocent parties bear the loss while he himself gets away scot-free. It
cannot be over-stressed that had it not been for the qualified endorsement ("up to ₱17,500.00 only")
of Olivia Gomez, who is the employee of RCBC, there would have been no reason for the dishonor
of the check, and full payment by drawee bank therefor would have taken place as a matter of
course.

154
Section 66 of the Negotiable Instruments Law which further states that the general endorser
additionally engages that, on due presentment, the instrument shall be accepted or paid, or both, as
the case may be, according to its tenor, and that if it be dishonored and the necessary proceedings
on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent
endorser who may be compelled to pay it, must be read in the light of the rule in equity requiring that
those who come to court should come with clean hands. The holder or subsequent endorser who
tries to claim under the instrument which had been dishonored for "irregular endorsement" must not
be the irregular endorser himself who gave cause for the dishonor. Otherwise, a clear injustice
results when any subsequent party to the instrument may simply make the instrument defective and
later claim from prior endorsers who have no knowledge or participation in causing or introducing
said defect to the instrument, which thereby caused its dishonor.

Courts in this jurisdiction are not only courts of law but also of equity, and therefore cannot
unqualifiedly apply a provision of law so as to cause clear injustice which the framers of the law
could not have intended to so deliberately cause. In Carceller v. Court of Appeals,4 this Court had
occasion to stress:

Courts of law, being also courts of equity, may not countenance such grossly unfair results without
doing violence to its solemn obligation to administer fair and equal justice for all.

RCBC, which caused the dishonor of the check upon presentment to the drawee bank, through the
qualified endorsement of its employee, Olivia Gomez, cannot hold prior endorsers, Alviar and
Gonzales in this case, liable on the instrument.

Moreover, it is a well-established principle in law that as between two parties, he who, by his acts,
caused the loss shall bear the same.5 RCBC, in this instance, should therefore bear the loss.

Relative to the petitioner’s counterclaim against RCBC for the amount of ₱12,822.20 which it
admittedly deducted from petitioner’s salary, the Court must order the return thereof to the petitioner,
with legal interest of 12% per annum, notwithstanding the petitioner’s apparent acquiescence to
such an arrangement. It must be noted that petitioner is not any ordinary client or depositor with
whom RCBC had this isolated transaction. Petitioner was a rank-and-file employee of RCBC, being
a new accounts clerk thereat. It is easy to understand how a vulnerable Gonzales, who is financially
dependent upon RCBC, would rather bite the bullet, so to speak, and expectedly opt for salary
deduction rather than lose her job and her entire salary altogether. In this sense, we cannot take
petitioner’s apparent acquiescence to the salary deduction as being an entirely free and voluntary
act on her part. Additionally, under the obtaining facts and circumstances surrounding the present
complaint for collection of sum of money by RCBC against its employee, which may be deemed
tantamount to harassment, and the fact that RCBC itself was the one, acting through its employee,
Olivia Gomez, which gave reason for the dishonor of the dollar-check in question, RCBC may
likewise be held liable for moral and exemplary damages and attorney’s fees by way of damages, in
the amount of ₱20,000.00 for each.

WHEREFORE, the assailed CA Decision dated August 30, 2002 is REVERSED and SET ASIDE
and the Complaint in this case DISMISSED for lack of merit. Petitioner’s counterclaim is GRANTED,
ordering the respondent RCBC to reimburse petitioner the amount ₱12,822.20, with legal interest
computed from the time of salary deduction up to actual payment, and to pay petitioner the total
amount of ₱60,000.00 as moral and exemplary damages, and attorney’s fees.

Costs against the respondent.

SO ORDERED.

155
METROPOLITAN BANK AND TRUST CO. VS BA FINANCE CORP. (2009)

G.R. No. 179952 December 4, 2009

METROPOLITAN BANK AND TRUST COMPANY (formerly ASIANBANK

CORPORATION), Petitioner,
vs.
BA FINANCE CORPORATION and MALAYAN INSURANCE CO., INC., Respondents.

DECISION

CARPIO MORALES, J.:

Lamberto Bitanga (Bitanga) obtained from respondent BA Finance Corporation (BA Finance) a
₱329,2801 loan to secure which, he mortgaged his car to respondent BA Finance.2 The mortgage
contained the following stipulation:

The MORTGAGOR covenants and agrees that he/it will cause the property(ies) hereinabove
mortgaged to be insured against loss or damage by accident, theft and fire for a period of one year
from date hereof with an insurance company or companies acceptable to the MORTGAGEE in an
amount not less than the outstanding balance of mortgage obligations and that he/it will make all
loss, if any, under such policy or policies, payable to the MORTGAGEE or its assigns as its interest
may appear x x x.3 (emphasis and underscoring supplied)

Bitanga thus had the mortgaged car insured by respondent Malayan Insurance Co., Inc. (Malayan
Insurance)4 which issued a policy stipulating that, inter alia,

Loss, if any shall be payable to BA FINANCE CORP. as its interest may appear. It is hereby
expressly understood that this policy or any renewal thereof, shall not be cancelled without prior
notification and conformity by BA FINANCE CORPORATION.5 (emphasis and underscoring
supplied)

The car was stolen. On Bitanga’s claim, Malayan Insurance issued a check payable to the order of
"B.A. Finance Corporation and Lamberto Bitanga" for ₱224,500, drawn against China Banking
Corporation (China Bank). The check was crossed with the notation "For Deposit Payees’ Account
Only."6

Without the indorsement or authority of his co-payee BA Finance, Bitanga deposited the check to his
account with the Asianbank Corporation (Asianbank), now merged with herein petitioner
Metropolitan Bank and Trust Company (Metrobank). Bitanga subsequently withdrew the entire
proceeds of the check.

In the meantime, Bitanga’s loan became past due, but despite demands, he failed to settle it.

BA Finance eventually learned of the loss of the car and of Malayan Insurance’s issuance of a
crossed check payable to it and Bitanga, and of Bitanga’s depositing it in his account at Asianbank
and withdrawing the entire proceeds thereof.

156
BA Finance thereupon demanded the payment of the value of the check from Asianbank7 but to no
avail, prompting it to file a complaint before the Regional Trial Court (RTC) of Makati for sum of
money and damages against Asianbank and Bitanga,8 alleging that, inter alia, it is entitled to the
entire proceeds of the check.

In its Answer with Counterclaim,9 Asianbank alleged that BA Finance "instituted [the] complaint in
bad faith to coerce [it] into paying the whole amount of the CHECK knowing fully well that its rightful
claim, if any, is against Malayan [Insurance]."10

Asianbank thereafter filed a cross-claim against Bitanga,11 alleging that he fraudulently induced its
personnel to release to him the full amount of the check; and that on being later informed that the
entire amount of the check did not belong to Bitanga, it took steps to get in touch with him but he had
changed residence without leaving any forwarding address.12

And Asianbank filed a third-party complaint against Malayan Insurance,13 alleging that Malayan
Insurance was grossly negligent in issuing the check payable to both Bitanga and BA Finance and
delivering it to Bitanga without the consent of BA Finance.14

Bitanga was declared in default in Asianbank’s cross-claim.15

Branch 137 of the Makati RTC, finding that Malayan Insurance was not privy to the contract between
BA Finance and Bitanga, and noting the claim of Malayan Insurance that it is its policy to issue
checks to both the insured and the financing company, held that Malayan Insurance cannot be
faulted for negligence for issuing the check payable to both BA Finance and Bitanga.

The trial court, holding that Asianbank was negligent in allowing Bitanga to deposit the check to his
account and to withdraw the proceeds thereof, without his co-payee BA Finance having either
indorsed it or authorized him to indorse it in its behalf,16 found Asianbank and Bitanga jointly and
severally liable to BA Finance following Section 41 of the Negotiable Instruments Law and
Associated Bank v. Court of Appeals.17

Thus the trial court disposed:

WHEREFORE, premises considered, judgment is hereby rendered ordering defendants Asian Bank
Corporation and Lamberto Bitanga:

1) To pay plaintiff jointly and severally the sum of P224,500.00 with interest thereon at the
rate of 12% from September 25, 1992 until fully paid;

2) To pay plaintiff the sum of P50,000.00 as exemplary damages; P20,000.00 as actual

damages; P30,000.00 as attorney’s fee; and

3) To pay the costs of suit.

Asianbank’s and Bitanga’s [sic] counterclaims are dismissed.

The third party complaint of defendant/third party plaintiff against third-party defendant Malayan
Insurance, Co., Inc. is hereby dismissed. Asianbank is ordered to pay Malayan attorney’s fee of
P50,000.00 and a per appearance fee of P500.00.

157
On the cross-claim of defendant Asianbank, co-defendant Lamberto Bitanga is ordered to pay
the former the amounts the latter is ordered to pay the plaintiff in Nos. 1, 2 and 3 above-
mentioned.

SO ORDERED.18 (emphasis and underscoring supplied)

Before the Court of Appeals, Asianbank, in its Appellant’s Brief, submitted the following issues for
consideration:

3.01.1.1 Whether BA Finance has a cause of action against Asianbank.

3.01.1.2 Assuming that BA Finance has a valid cause of action, may it claim from Asianbank more
than one-half of the value of the check considering that it is a mere co-payee or joint payee of the
check?

3.01.1.3 Whether BA Finance is liable to Asianbank for actual and exemplary damages for
wrongfully bringing the case to court.

3.01.1.4 Whether Malayan is liable to Asianbank for reimbursement of any sum of money which this
Honorable Court may award to BA Finance in this case.19 (underscoring supplied)

And it proffered the following arguments:

A. BA Finance has no cause of action against Asianbank as it has no legal right and title to
the check considering that the check was not delivered to BA Finance. Hence, BA Finance is
not a holder thereof under the Negotiable Instruments Law.

B. Asianbank, as collecting bank, is not liable to BA Finance as there was no privity of

contract between them.

C. Asianbank, as collecting bank, is not liable to BA Finance, considering that, as the

intermediary between the payee and the drawee Chinabank, it merely acted on the
instructions of drawee Chinabank to pay the amount of the check to Bitanga, hence, the
consequent damage to BA Finance was due to the negligence of Chinabank.

D. Malayan’s act of issuing and delivering the check solely to Bitanga in violation of the "loss
payee" clause in the Policy, is the proximate cause of the alleged damage to BA Finance.

E. Assuming Asianbank is liable, BA Finance can claim only his proportionate interest on the
check as it is a joint payee thereof.

F. Bitanga alone is liable for the amount to BA Finance on the ground of unjust enrichment or
solutio indebiti.

G. BA Finance is liable to pay Asianbank actual and exemplary damages.20 (underscoring

supplied)

The appellate court, "summarizing" the errors attributed to the trial court by Asianbank to be
"whether…BA Finance has a cause of action against [it] even if the subject check had not been
delivered to…BA Finance by the issuer itself," held in the affirmative and accordingly affirmed the
trial court’s decision but deleted the award of ₱20,000 as actual damages.21

158
Hence, the present Petition for Review on Certiorari22 filed by Metrobank (hereafter petitioner) to
which Asianbank was, as earlier stated, merged, faulting the appellate court

I. x x x in applying the case of Associated Bank v. Court of Appeals, in the absence of factual
similarity and of the legal relationships necessary for the application of the desirable shortcut
rule. x x x

II. x x x in not finding that x x x the general rule that the payee has no cause of action against
the collecting bank absent delivery to him must be applied.

III. x x x in finding that all the elements of a cause of action by BA Finance Corporation
against Asianbank Corporation are present.

IV. x x x in finding that Article 1208 of the Civil Code is not applicable.

V. x x x in awarding of exemplary damages even in the absence of moral, temperate,

liquidated or compensatory damages and a finding of fact that Asianbank acted in a wanton,
fraudulent, reckless, oppressive or malevolent manner.

xxxx

VII. x x x in dismissing Asianbank’s counterclaim and Third Party complaint [against Malayan
Insurance].23 (italics in the original; underscoring supplied)

Petitioner proffers the following arguments against the application of Associated Bank v. CA to the
case:

x x x [T]he rule established in the Associated Bank case has provided a speedier remedy for the
payee to recover from erring collecting banks despite the absence of delivery of the negotiable
instrument. However, the application of the rule demands careful consideration of the factual settings
and issues raised in the case x x x.

One of the relevant circumstances raised in Associated Bank is the existence of forgery or
unauthorized indorsement. x x x

xxxx

In the case at bar, Bitanga is authorized to indorse the check as the drawer names him as one of the
payees. Moreover, his signature is not a forgery nor has he or anyone forged the signature of the
representative of BA Finance Corporation. No unauthorized indorsement appears on the check.

xxxx

Absent the indispensable fact of forgery or unauthorized indorsement, the desirable shortcut rule
cannot be applied,24 (underscoring supplied)

The petition fails.

Section 41 of the Negotiable Instruments Law provides:

159
Where an instrument is payable to the order of two or more payees or indorsees who are not
partners, all must indorse unless the one indorsing has authority to indorse for the others. (emphasis
and underscoring supplied)

Bitanga alone endorsed the crossed check, and petitioner allowed the deposit and release of the
proceeds thereof, despite the absence of authority of Bitanga’s co-payee BA Finance to endorse it
on its behalf.25

Denying any irregularity in accepting the check, petitioner maintains that it followed normal banking
procedure. The testimony of Imelda Cruz, Asianbank’s then accounting head, shows otherwise,
however, viz:

Q Now, could you be familiar with a particular policy of the bank with respect to checks with
joined (sic) payees?

A Yes, sir.

Q And what would be the particular policy of the bank regarding this transaction?

A The bank policy and procedure regarding the joint checks. Once it is deposited to a
single account, we are not accepting joint checks for single account, depositing to a
single account (sic).

Q What happened to the bank employee who allowed this particular transaction to occur?

A Once the branch personnel, the bank personnel (sic) accepted it, he is liable.

Q What do you mean by the branch personnel being held liable?

A Because since (sic) the bank policy, we are not supposed to accept joint checks to a
[single] account, so we mean that personnel would be held liable in the sense that
(sic) once it is withdrawn or encashed, it will not be allowed.

Q In your experience, have you encountered any bank employee who was subjected to
disciplinary action by not following bank policies?

A The one that happened in that case, since I really don’t know who that personnel is, he is
no longer connected with the bank.

Q What about in general, do you know of any disciplinary action, Madam witness?

A Since there’s a negligence on the part of the bank personnel, it will be a ground for
his separation [from] the bank.26 (emphasis, italics and underscoring supplied)

Admittedly, petitioner dismissed the employee who allowed the deposit of the check in Bitanga’s
account.

Petitioner’s argument that since there was neither forgery, nor unauthorized indorsement because
Bitanga was a co-payee in the subject check, the dictum in Associated Bank v. CA does not apply in
the present case fails. The payment of an instrument over a missing indorsement is the equivalent of

160
payment on a forged indorsement27 or an unauthorized indorsement in itself in the case of joint
payees.28

Clearly, petitioner, through its employee, was negligent when it allowed the deposit of the crossed
check, despite the lone endorsement of Bitanga, ostensibly ignoring the fact that the check did not, it
bears repeating, carry the indorsement of BA Finance.29

As has been repeatedly emphasized, the banking business is imbued with public interest such that
the highest degree of diligence and highest standards of integrity and performance are expected of
banks in order to maintain the trust and confidence of the public in general in the banking
sector.30 Undoubtedly, BA Finance has a cause of action against petitioner.

Is petitioner liable to BA Finance for the full value of the check?

Petitioner, at all events, argue that its liability to BA Finance should only be one-half of the amount
covered by the check as there is no indication in the check that Bitanga and BA Finance are solidary
creditors to thus make them presumptively joint creditors under Articles 1207 and 1208 of the Civil
Code which respectively provide:

Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and the same
obligation does not imply that each one of the former has a right to demand, or that each one of the
latter is bound to render, entire compliance with the prestations. There is a solidary liability only
when the obligation expressly so states, or when the law or the nature of the obligation requires
solidarity.

Art. 1208. If from the law, or the nature or wording of the obligations to which the preceding article
refers to the contrary does not appear, the credit or debt shall be presumed to be divided into as
many equal shares as there are creditors or debtors, the debts or credits being considered distinct
from one another, subject to the Rules of Court governing the multiplicity of suits.

Petitioner’s argument is flawed.

The provisions of the Negotiable Instruments Law and underlying jurisprudential teachings on the
black-letter law provide definitive justification for petitioner’s full liability on the value of the check.

To be sure, a collecting bank, Asianbank in this case, where a check is deposited and which
indorses the check upon presentment with the drawee bank, is an indorser.[31] This is because in
indorsing a check to the drawee bank, a collecting bank stamps the back of the check with the
phrase "all prior endorsements and/or lack of endorsement guaranteed"32 and, for all intents and
purposes, treats the check as a negotiable instrument, hence, assumes the warranty of an
indorser.33 Without Asianbank’s warranty, the drawee bank (China Bank in this case) would not have
paid the value of the subject check.

Petitioner, as the collecting bank or last indorser, generally suffers the loss because it has the duty
to ascertain the genuineness of all prior indorsements considering that the act of presenting the
check for payment to the drawee is an assertion that the party making the presentment has done its
duty to ascertain the genuineness of prior indorsements.34

Accordingly, one who credits the proceeds of a check to the account of the indorsing payee is liable
in conversion to the non-indorsing payee for the entire amount of the check.35

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It bears noting that in petitioner’s cross-claim against Bitanga, the trial court ordered Bitanga to
return to petitioner the entire value of the check ─ ₱224,500.00 ─ with interest as well as damages
and cost of suit. Petitioner never questioned this aspect of the trial court’s disposition, yet it now
prays for the modification of its liability to BA Finance to only one-half of said amount. To pander to
petitioner’s supplication would certainly amount to unjust enrichment at BA Finance’s expense.
Petitioner’s remedy—which is the reimbursement for the full amount of the check from the
perpetrator of the irregularity — lies with Bitanga.

Articles 1207 and 1208 of the Civil Code cannot be applied to the present case as these are
completely irrelevant. The drawer, Malayan Insurance in this case, issued the check to answer for an
underlying contractual obligation (payment of insurance proceeds). The obligation is merely reflected
in the instrument and whether the payees would jointly share in the proceeds or not is beside the
point.

Moreover, granting petitioner’s appeal for partial liability would run counter to the existing principles
on the liabilities of parties on negotiable instruments, particularly on Section 68 of the Negotiable
Instruments Law which instructs that joint payees who indorse are deemed to indorse jointly and
severally.36 Recall that when the maker dishonors the instrument, the holder thereof can turn to
those secondarily liable — the indorser — for recovery.37 And since the law explicitly mandates a
solidary liability on the part of the joint payees who indorse the instrument, the holder thereof
(assuming the check was further negotiated) can turn to either Bitanga or BA Finance for full
recompense.

Respecting petitioner’s challenge to the award by the appellate court of exemplary damages to BA
Finance, the same fails. Contrary to petitioner’s claim that no moral, temperate, liquidated or
compensatory damages were awarded by the trial court,38 the RTC did in fact award compensatory
or actual damages of ₱224,500, the value of the check, plus interest thereon.

Petitioner argues, however, that assuming arguendo that compensatory damages had been
awarded, the same contravened Article 2232 of the Civil Code which provides that in contracts or
quasi-contracts, the court may award exemplary damages only if the defendant acted in a wanton,
fraudulent, reckless, oppressive, or malevolent manner. Since, so petitioner concludes, there was no
finding that it acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner,39 it is not
liable for exemplary damages.

The argument fails. To reiterate, petitioner’s liability is based not on contract or quasi-contract but
on quasi-delict since there is no pre-existing contractual relation between the parties.40 Article 2231
of the Civil Code, which provides that in quasi-delict, exemplary damages may be granted if the
defendant acted with gross negligence, thus applies. For "gross negligence" implies a want or
absence of or failure to exercise even slight care or diligence, or the entire absence of
care,41 evincing a thoughtless disregard of consequences without exerting any effort to avoid them.42

x x x The law allows the grant of exemplary damages to set an example for the public good. The
business of a bank is affected with public interest; thus it makes a sworn profession of diligence and
meticulousness in giving irreproachable service. For this reason, the bank should guard against in
injury attributable to negligence or bad faith on its part. The award of exemplary damages is proper
as a warning to [the petitioner] and all concerned not to recklessly disregard their obligation to
exercise the highest and strictest diligence in serving their depositors.43 (Italics and underscoring
supplied)

As for the dismissal by the appellate court of petitioner’s third-party complaint against Malayan
Insurance, the same is well-taken. Petitioner based its third-party complaint on Malayan Insurance’s

162
alleged gross negligence in issuing the check payable to both BA Finance and Bitanga, despite the
stipulation in the mortgage and in the insurance policy that liability for loss shall be payable to BA
Finance.44 Malayan Insurance countered, however, that it

x x x paid the amount of ₱224,500 to ‘BA Finance Corporation and Lamberto Bitanga’ in compliance
with the decision in the case of "Lamberto Bitanga versus Malayan Insurance Co., Inc., Civil Case
No. 88-2802, RTC-Makati Br. 132, and affirmed on appeal by the Supreme Court [3rd Division], G.R.
no. 101964, April 8, 1992 x x x.45 (underscoring supplied)

It is noted that Malayan Insurance, which stated that it was a matter of company policy to issue
checks in the name of the insured and the financing company, presented a witness to rebut its
supposed negligence. 46 Perforce, it thus wrote a crossed check with joint payees so as to serve
warning that the check was issued for a definite purpose.47 Petitioner never ever disputed these
assertions.

The Court takes exception, however, to the appellate court’s affirmance of the trial court’s grant of
legal interest of 12% per annum on the value of the check. For the obligation in this case did not
arise out of a loan or forbearance of money, goods or credit. While Article 1980 of the Civil Code
provides that:

Fixed savings, and current deposits of money in banks and similar institutions shall be governed by
the provisions concerning simple loan,

said provision does not find application in this case since the nature of the relationship between BA
Finance and petitioner is one of agency whereby petitioner, as collecting bank, is to collect for BA
Finance the corresponding proceeds from the check.48 Not being a loan or forbearance of money,
the interest should be 6% per annum computed from the date of extrajudicial demand on September
25, 1992 until finality of judgment; and 12% per annum from finality of judgment until payment,
conformably with Eastern Shipping Lines, Inc. v. Court of Appeals.[49]

WHEREFORE, the Decision of the Court of Appeals dated May 18, 2007 is AFFIRMED with
MODIFICATION in that the rate of interest on the judgment obligation of ₱224,500 should be 6% per
annum, computed from the time of extrajudicial demand on September 25, 1992 until its full payment
before finality of judgment; thereafter, if the amount adjudged remains unpaid, the interest rate shall
be 12% per annum computed from the time the judgment becomes final and executory until fully
satisfied.

Costs against petitioner.

SO ORDERED.

163
YANG VS COURT OF APPEALS (2003)

G.R. No. 138074 August 15, 2003

CELY YANG, Petitioner,

vs.
HON. COURT OF APPEALS, PHILIPPINE COMMERCIAL INTERNATIONAL BANK, FAR EAST
BANK & TRUST CO., EQUITABLE BANKING CORPORATION, PREM CHANDIRAMANI and
FERNANDO DAVID, Respondents.

DECISION

QUISUMBING, J.:

For review on certiorari is the decision1 of the Court of Appeals, dated March 25, 1999, in CA-G.R.
CV No. 52398, which affirmed with modification the joint decision of the Regional Trial Court (RTC)
of Pasay City, Branch 117, dated July 4, 1995, in Civil Cases Nos. 54792 and 5492.3 The trial court
dismissed the complaint against herein respondents Far East Bank & Trust Company (FEBTC),
Equitable Banking Corporation (Equitable), and Philippine Commercial International Bank (PCIB)
and ruled in favor of respondent Fernando David as to the proceeds of the two cashier’s checks,
including the earnings thereof pendente lite. Petitioner Cely Yang was ordered to pay David moral
damages of ₱100,000.00 and attorney’s fees also in the amount of ₱100,000.00.

The facts of this case are not disputed, to wit:

On or before December 22, 1987, petitioner Cely Yang and private respondent Prem Chandiramani
entered into an agreement whereby the latter was to give Yang a PCIB manager’s check in the
amount of ₱4.2 million in exchange for two (2) of Yang’s manager’s checks, each in the amount of
₱2.087 million, both payable to the order of private respondent Fernando David. Yang and
Chandiramani agreed that the difference of ₱26,000.00 in the exchange would be their profit to be
divided equally between them.

Yang and Chandiramani also further agreed that the former would secure from FEBTC a dollar draft
in the amount of US$200,000.00, payable to PCIB FCDU Account No. 4195-01165-2, which
Chandiramani would exchange for another dollar draft in the same amount to be issued by Hang
Seng Bank Ltd. of Hong Kong.

Accordingly, on December 22, 1987, Yang procured the following:

a) Equitable Cashier’s Check No. CCPS 14-009467 in the sum of ₱2,087,000.00, dated
December 22, 1987, payable to the order of Fernando David;

b) FEBTC Cashier’s Check No. 287078, in the amount of ₱2,087,000.00, dated December
22, 1987, likewise payable to the order of Fernando David; and

c) FEBTC Dollar Draft No. 4771, drawn on Chemical Bank, New York, in the amount of
US$200,000.00, dated December 22, 1987, payable to PCIB FCDU Account No. 4195-
01165-2.

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At about one o’clock in the afternoon of the same day, Yang gave the aforementioned cashier’s
checks and dollar drafts to her business associate, Albert Liong, to be delivered to Chandiramani by
Liong’s messenger, Danilo Ranigo. Ranigo was to meet Chandiramani at Philippine Trust Bank,
Ayala Avenue, Makati City, Metro Manila where he would turn over Yang’s cashier’s checks and
dollar draft to Chandiramani who, in turn, would deliver to Ranigo a PCIB manager’s check in the
sum of P4.2 million and a Hang Seng Bank dollar draft for US$200,000.00 in exchange.

Chandiramani did not appear at the rendezvous and Ranigo allegedly lost the two cashier’s checks
and the dollar draft bought by petitioner. Ranigo reported the alleged loss of the checks and the
dollar draft to Liong at half past four in the afternoon of December 22, 1987. Liong, in turn, informed
Yang, and the loss was then reported to the police.

It transpired, however, that the checks and the dollar draft were not lost, for Chandiramani was able
to get hold of said instruments, without delivering the exchange consideration consisting of the PCIB
manager’s check and the Hang Seng Bank dollar draft.

At three o’clock in the afternoon or some two (2) hours after Chandiramani and Ranigo were to meet
in Makati City, Chandiramani delivered to respondent Fernando David at China Banking Corporation
branch in San Fernando City, Pampanga, the following: (a) FEBTC Cashier’s Check No. 287078,
dated December 22, 1987, in the sum of ₱2.087 million; and (b) Equitable Cashier’s Check No.
CCPS 14-009467, dated December 22, 1987, also in the amount of ₱2.087 million. In exchange,
Chandiramani got US$360,000.00 from David, which Chandiramani deposited in the savings
account of his wife, Pushpa Chandiramani; and his mother, Rani Reynandas, who held FCDU
Account No. 124 with the United Coconut Planters Bank branch in Greenhills, San Juan, Metro
Manila. Chandiramani also deposited FEBTC Dollar Draft No. 4771, dated December 22, 1987,
drawn upon the Chemical Bank, New York for US$200,000.00 in PCIB FCDU Account No. 4195-
01165-2 on the same date.

Meanwhile, Yang requested FEBTC and Equitable to stop payment on the instruments she believed
to be lost. Both banks complied with her request, but upon the representation of PCIB, FEBTC
subsequently lifted the stop payment order on FEBTC Dollar Draft No. 4771, thus enabling the
holder of PCIB FCDU Account No. 4195-01165-2 to receive the amount of US$200,000.00.

On December 28, 1987, herein petitioner Yang lodged a Complaint4 for injunction and damages
against Equitable, Chandiramani, and David, with prayer for a temporary restraining order, with the
Regional Trial Court of Pasay City. The Complaint was docketed as Civil Case No. 5479. The
Complaint was subsequently amended to include a prayer for Equitable to return to Yang the
amount of P2.087 million, with interest thereon until fully paid.5

On January 12, 1988, Yang filed a separate case for injunction and damages, with prayer for a writ
of preliminary injunction against FEBTC, PCIB, Chandiramani and David, with the RTC of Pasay
City, docketed as Civil Case No. 5492. This complaint was later amended to include a prayer that
defendants therein return to Yang the amount of P2.087 million, the value of FEBTC Dollar Draft No.
4771, with interest at 18% annually until fully paid.6

On February 9, 1988, upon the filing of a bond by Yang, the trial court issued a writ of preliminary
injunction in Civil Case No. 5479. A writ of preliminary injunction was subsequently issued in Civil
Case No. 5492 also.

Meanwhile, herein respondent David moved for dismissal of the cases against him and for
reconsideration of the Orders granting the writ of preliminary injunction, but these motions were

165
denied. David then elevated the matter to the Court of Appeals in a special civil action for certiorari
docketed as CA-G.R. SP No. 14843, which was dismissed by the appellate court.

As Civil Cases Nos. 5479 and 5492 arose from the same set of facts, the two cases were
consolidated. The trial court then conducted pre-trial and trial of the two cases, but the proceedings
had to be suspended after a fire gutted the Pasay City Hall and destroyed the records of the courts.

After the records were reconstituted, the proceedings resumed and the parties agreed that the
money in dispute be invested in Treasury Bills to be awarded in favor of the prevailing side. It was
also agreed by the parties to limit the issues at the trial to the following:

1. Who, between David and Yang, is legally entitled to the proceeds of Equitable Banking
Corporation (EBC) Cashier’s Check No. CCPS 14-009467 in the sum of ₱2,087,000.00
dated December 22, 1987, and Far East Bank and Trust Company (FEBTC) Cashier’s
Check No. 287078 in the sum of ₱2,087,000.00 dated December 22, 1987, together with the
earnings derived therefrom pendente lite?

2. Are the defendants FEBTC and PCIB solidarily liable to Yang for having allowed the
encashment of FEBTC Dollar Draft No. 4771, in the sum of US$200,000.00 plus interest
thereon despite the stop payment order of Cely Yang?7

On July 4, 1995, the trial court handed down its decision in Civil Cases Nos. 5479 and 5492, to wit:

WHEREFORE, the Court renders judgment in favor of defendant Fernando David against the
plaintiff Cely Yang and declaring the former entitled to the proceeds of the two (2) cashier’s checks,
together with the earnings derived therefrom pendente lite; ordering the plaintiff to pay the defendant
Fernando David moral damages in the amount of ₱100,000.00; attorney’s fees in the amount of
₱100,000.00 and to pay the costs. The complaint against Far East Bank and Trust Company
(FEBTC), Philippine Commercial International Bank (PCIB) and Equitable Banking Corporation
(EBC) is dismissed. The decision is without prejudice to whatever action plaintiff Cely Yang will file
against defendant Prem Chandiramani for reimbursement of the amounts received by him from
defendant Fernando David.

SO ORDERED.8

In finding for David, the trial court ratiocinated:

The evidence shows that defendant David was a holder in due course for the reason that the
cashier’s checks were complete on their face when they were negotiated to him. They were not yet
overdue when he became the holder thereof and he had no notice that said checks were previously
dishonored; he took the cashier’s checks in good faith and for value. He parted some $200,000.00
for the two (2) cashier’s checks which were given to defendant Chandiramani; he had also no notice
of any infirmity in the cashier’s checks or defect in the title of the drawer. As a matter of fact, he
asked the manager of the China Banking Corporation to inquire as to the genuineness of the
cashier’s checks (tsn, February 5, 1988, p. 21, September 20, 1991, pp. 13-14). Another proof that
defendant David is a holder in due course is the fact that the stop payment order on [the] FEBTC
cashier’s check was lifted upon his inquiry at the head office (tsn, September 20, 1991, pp. 24-25).
The apparent reason for lifting the stop payment order was because of the fact that FEBTC realized
that the checks were not actually lost but indeed reached the payee defendant David.9

Yang then moved for reconsideration of the RTC judgment, but the trial court denied her motion in its
Order of September 20, 1995.

166
In the belief that the trial court misunderstood the concept of a holder in due course and
misapprehended the factual milieu, Yang seasonably filed an appeal with the Court of Appeals,
docketed as CA-G.R. CV No. 52398.

On March 25, 1999, the appellate court decided CA-G.R. CV No. 52398 in this wise:

WHEREFORE, this court AFFIRMS the judgment of the lower court with modification and
hereby orders the plaintiff-appellant to pay defendant-appellant PCIB the amount of Twenty-Five
Thousand Pesos (₱25,000.00).

SO ORDERED.10

In affirming the trial court’s judgment with respect to herein respondent David, the appellate court
found that:

In this case, defendant-appellee had taken the necessary precautions to verify, through his bank,
China Banking Corporation, the genuineness of whether (sic) the cashier’s checks he received from
Chandiramani. As no stop payment order was made yet (at) the time of the inquiry, defendant-
appellee had no notice of what had transpired earlier between the plaintiff-appellant and
Chandiramani. All he knew was that the checks were issued to Chandiramani with whom he was he
had (sic) a transaction. Further on, David received the checks in question in due course because
Chandiramani, who at the time the checks were delivered to David, was acting as Yang’s agent.

David had no notice, real or constructive, cogent for him to make further inquiry as to any infirmity in
the instrument(s) and defect of title of the holder. To mandate that each holder inquire about every
aspect on how the instrument came about will unduly impede commercial transactions,
Although negotiable instruments do not constitute legal tender, they often take the place of
money as a means of payment.

The mere fact that David and Chandiramani knew one another for a long time is not sufficient to
establish that they connived with each other to defraud Yang. There was no concrete proof
presented by Yang to support her theory.11

The appellate court awarded ₱25,000.00 in attorney’s fees to PCIB as it found the action filed by
Yang against said bank to be "clearly unfounded and baseless." Since PCIB was compelled to
litigate to protect itself, then it was entitled under Article 220812 of the Civil Code to attorney’s fees
and litigation expenses.

Hence, the instant recourse wherein petitioner submits the following issues for resolution:

a - WHETHER THE CHECKS WERE ISSUED TO PREM CHANDIRAMANI BY

PETITIONER;

b - WHETHER THE ALLEGED TRANSACTION BETWEEN PREM CHANDIRAMANI AND

FERNANDO DAVID IS LEGITIMATE OR A SCHEME BY BOTH PRIVATE RESPONDENTS
TO SWINDLE PETITIONER;

c - WHETHER FERNANDO DAVID GAVE PREM CHANDIRAMANI US$360,000.00 OR

JUST A FRACTION OF THE AMOUNT REPRESENTING HIS SHARE OF THE LOOT;

167
 d - WHETHER PRIVATE RESPONDENTS FERNANDO DAVID AND PCIB ARE ENTITLED
TO DAMAGES AND ATTORNEY’S FEES.13

At the outset, we must stress that this is a petition for review under Rule 45 of the 1997 Rules of Civil
Procedure. It is basic that in petitions for review under Rule 45, the jurisdiction of this Court is limited
to reviewing questions of law, questions of fact are not entertained absent a showing that the factual
findings complained of are totally devoid of support in the record or are glaringly erroneous.14 Given
the facts in the instant case, despite petitioner’s formulation, we find that the following are the
pertinent issues to be resolved:

a) Whether the Court of Appeals erred in holding herein respondent Fernando David to be a
holder in due course; and

b) Whether the appellate court committed a reversible error in awarding damages and
attorney’s fees to David and PCIB.

On the first issue, petitioner Yang contends that private respondent Fernando David is not a holder
in due course of the checks in question. While it is true that he was named the payee thereof, David
failed to inquire from Chandiramani about how the latter acquired possession of said checks. Given
his failure to do so, it cannot be said that David was unaware of any defect or infirmity in the title of
Chandiramani to the checks at the time of their negotiation. Moreover, inasmuch as the checks were
crossed, then David should have, pursuant to our ruling in Bataan Cigar & Cigarette Factory, Inc. v.
Court of Appeals, G.R. No. 93048, March 3, 1994, 230 SCRA 643, been put on guard that the
checks were issued for a definite purpose and accordingly, made inquiries to determine if he
received the checks pursuant to that purpose. His failure to do so negates the finding in the
proceedings below that he was a holder in due course.

Finally, the petitioner argues that there is no showing whatsoever that David gave Chandiramani any
consideration of value in exchange for the aforementioned checks.

Private respondent Fernando David counters that the evidence on record shows that when he
received the checks, he verified their genuineness with his bank, and only after said verification did
he deposit them. David stresses that he had no notice of previous dishonor or any infirmity that
would have aroused his suspicions, the instruments being complete and regular upon their face.
David stresses that the checks in question were cashier’s checks. From the very nature of cashier’s
checks, it is highly unlikely that he would have suspected that something was amiss. David also
stresses negotiable instruments are presumed to have been issued for valuable consideration, and
he who alleges otherwise must controvert the presumption with sufficient evidence. The petitioner
failed to discharge this burden, according to David. He points out that the checks were delivered to
him as the payee, and he took them as holder and payee thereof. Clearly, he concludes, he should
be deemed to be their holder in due course.

We shall now resolve the first issue.

Every holder of a negotiable instrument is deemed prima facie a holder in due course. However, this
presumption arises only in favor of a person who is a holder as defined in Section 191 of the
Negotiable Instruments Law,15 meaning a "payee or indorsee of a bill or note, who is in possession of
it, or the bearer thereof."

In the present case, it is not disputed that David was the payee of the checks in question. The weight
of authority sustains the view that a payee may be a holder in due course.16 Hence, the presumption
that he is a prima facie holder in due course applies in his favor. However, said presumption may be

168
rebutted. Hence, what is vital to the resolution of this issue is whether David took possession of the
checks under the conditions provided for in Section 5217 of the Negotiable Instruments Law. All the
requisites provided for in Section 52 must concur in David’s case, otherwise he cannot be deemed a
holder in due course.

We find that the petitioner’s challenge to David’s status as a holder in due course hinges on two
arguments: (1) the lack of proof to show that David tendered any valuable consideration for the
disputed checks; and (2) David’s failure to inquire from Chandiramani as to how the latter acquired
possession of the checks, thus resulting in David’s intentional ignorance tantamount to bad faith. In
sum, petitioner posits that the last two requisites of Section 52 are missing, thereby preventing David
from being considered a holder in due course. Unfortunately for the petitioner, her arguments on this
score are less than meritorious and far from persuasive.

First, with respect to consideration, Section 2418 of the Negotiable Instruments Law creates a
presumption that every party to an instrument acquired the same for a consideration19 or for
value.20 Thus, the law itself creates a presumption in David’s favor that he gave valuable
consideration for the checks in question. In alleging otherwise, the petitioner has the onus to prove
that David got hold of the checks absent said consideration. In other words, the petitioner must
present convincing evidence to overthrow the presumption. Our scrutiny of the records, however,
shows that the petitioner failed to discharge her burden of proof. The petitioner’s averment that
David did not give valuable consideration when he took possession of the checks is unsupported,
devoid of any concrete proof to sustain it. Note that both the trial court and the appellate court found
that David did not receive the checks gratis, but instead gave Chandiramani US$360,000.00 as
consideration for the said instruments. Factual findings of the Court of Appeals are conclusive on the
parties and not reviewable by this Court; they carry great weight when the factual findings of the trial
court are affirmed by the appellate court.21

Second, petitioner fails to point any circumstance which should have put David on inquiry as to the
why and wherefore of the possession of the checks by Chandiramani. David was not privy to the
transaction between petitioner and Chandiramani. Instead, Chandiramani and David had a separate
dealing in which it was precisely Chandiramani’s duty to deliver the checks to David as payee. The
evidence shows that Chandiramani performed said task to the letter. Petitioner admits that David
took the step of asking the manager of his bank to verify from FEBTC and Equitable as to the
genuineness of the checks and only accepted the same after being assured that there was nothing
wrong with said checks. At that time, David was not aware of any "stop payment" order. Under these
circumstances, David thus had no obligation to ascertain from Chandiramani what the nature of the
latter’s title to the checks was, if any, or the nature of his possession. Thus, we cannot hold him
guilty of gross neglect amounting to legal absence of good faith, absent any showing that there was
something amiss about Chandiramani’s acquisition or possession of the checks. David did not close
his eyes deliberately to the nature or the particulars of a fraud allegedly committed by Chandiramani
upon the petitioner, absent any knowledge on his part that the action in taking the instruments
amounted to bad faith.22

Belatedly, and we say belatedly since petitioner did not raise this matter in the proceedings below,
petitioner now claims that David should have been put on alert as the instruments in question were
crossed checks. Pursuant to Bataan Cigar & Cigarette Factory, Inc. v. Court of Appeals, David
should at least have inquired as to whether he was acquiring said checks for the purpose for which
they were issued, according to petitioner’s submission.

Petitioner’s reliance on the Bataan Cigar case, however, is misplaced. The facts in the present case
are not on all fours with Bataan Cigar. In the latter case, the crossed checks were negotiated and

169
sold at a discount by the payee, while in the instant case, the payee did not negotiate further the
checks in question but promptly deposited them in his bank account.

The Negotiable Instruments Law is silent with respect to crossed checks, although the Code of
Commerce23 makes reference to such instruments. Nonetheless, this Court has taken judicial
cognizance of the practice that a check with two parallel lines in the upper left hand corner means
that it could only be deposited and not converted into cash.24 The effects of crossing a check, thus,
relates to the mode of payment, meaning that the drawer had intended the check for deposit only by
the rightful person, i.e., the payee named therein. In Bataan Cigar, the rediscounting of the check by
the payee knowingly violated the avowed intention of crossing the check. Thus, in accepting the
cross checks and paying cash for them, despite the warning of the crossing, the subsequent holder
could not be considered in good faith and thus, not a holder in due course. Our ruling in Bataan
Cigar reiterates that in De Ocampo & Co. v. Gatchalian.25

The factual circumstances in De Ocampo and in Bataan Cigar are not present in this case. For here,
there is no dispute that the crossed checks were delivered and duly deposited by David, the payee
named therein, in his bank account. In other words, the purpose behind the crossing of the checks
was satisfied by the payee.

Proceeding to the issue of damages, petitioner merely argues that respondents David and PCIB are
not entitled to damages, attorney’s fees, and costs of suit as both acted in bad faith towards her, as
shown by her version of the facts which gave rise to the instant case.

Respondent David counters that he was maliciously and unceremoniously dragged into this suit for
reasons which have nothing to do with him at all, but which arose from petitioner’s failure to receive
her share of the profit promised her by Chandiramani. Moreover, in filing this suit which has lasted
1âwphi1

for over a decade now, the petitioner deprived David of the rightful enjoyment of the two checks, to
which he is entitled, under the law, compelled him to hire the services of counsel to vindicate his
rights, and subjected him to social humiliation and besmirched reputation, thus harming his standing
as a person of good repute in the business community of Pampanga. David thus contends that it is
but proper that moral damages, attorney’s fees, and costs of suit be awarded him.

For its part, respondent PCIB stresses that it was established by both the trial court and the
appellate court that it was needlessly dragged into this case. Hence, no error was committed by the
appellate court in declaring PCIB entitled to attorney’s fees as it was compelled to litigate to protect
itself.

We have thoroughly perused the records of this case and find no reason to disagree with the finding
of the trial court, as affirmed by the appellate court, that:

[D]efendant David is entitled to [the] award of moral damages as he has been needlessly and
unceremoniously dragged into this case which should have been brought only between the plaintiff
and defendant Chandiramani.26

A careful reading of the findings of facts made by both the trial court and appellate court clearly
shows that the petitioner, in including David as a party in these proceedings, is barking up the wrong
tree. It is apparent from the factual findings that David had no dealings with the petitioner and was
not privy to the agreement of the latter with Chandiramani. Moreover, any loss which the petitioner
incurred was apparently due to the acts or omissions of Chandiramani, and hence, her recourse
should have been against him and not against David. By needlessly dragging David into this case all
because he and Chandiramani knew each other, the petitioner not only unduly delayed David from
obtaining the value of the checks, but also caused him anxiety and injured his business reputation

170
while waiting for its outcome. Recall that under Article 221727 of the Civil Code, moral damages
include mental anguish, serious anxiety, besmirched reputation, wounded feelings, social
humiliation, and similar injury. Hence, we find the award of moral damages to be in order.

The appellate court likewise found that like David, PCIB was dragged into this case on unfounded
and baseless grounds. Both were thus compelled to litigate to protect their interests, which makes
an award of attorney’s fees justified under Article 2208 (2)28 of the Civil Code. Hence, we rule that the
award of attorney’s fees to David and PCIB was proper.

WHEREFORE, the instant petition is DENIED. The assailed decision of the Court of Appeals, dated
March 25, 1999, in CA-G.R. CV No. 52398 is AFFIRMED. Costs against the petitioner.

SO ORDERED.

171
DINO VS JUDAL-LOOT (2010)

G.R. No. 170912 April 19, 2010

ROBERT DINO, Petitioner,

vs.
MARIA LUISA JUDAL-LOOT, joined by her husband VICENTE LOOT, Respondents.

DECISION

CARPIO, J.:

The Case

This is a petition for review1 of the 16 August 2005 Decision2 and 30 November 2005 Resolution3 of
the Court of Appeals in CA-G.R. CV No. 57994. The Court of Appeals affirmed the decision of the
Regional Trial Court, 7th Judicial Region, Branch 56, Mandaue City (trial court), with the deletion of
the award of interest, moral damages, attorney’s fees and litigation expenses. The trial court ruled
that respondents Maria Luisa Judal-Loot and Vicente Loot are holders in due course of Metrobank
Check No. C-MA 142119406 CA and ordered petitioner Robert Dino as drawer, together with co-
defendant Fe Lobitana as indorser, to solidarily pay respondents the face value of the check, among
others.

The Facts

Sometime in December 1992, a syndicate, one of whose members posed as an owner of several
parcels of land situated in Canjulao, Lapu-lapu City, approached petitioner and induced him to lend
the group ₱3,000,000.00 to be secured by a real estate mortgage on the properties. A member of
the group, particularly a woman pretending to be a certain Vivencia Ompok Consing, even offered to
execute a Deed of Absolute Sale covering the properties, instead of the usual mortgage
contract.4 Enticed and convinced by the syndicate’s offer, petitioner issued three Metrobank checks
totaling ₱3,000,000.00, one of which is Check No. C-MA-142119406-CA postdated 13 February
1993 in the amount of ₱1,000,000.00 payable to Vivencia Ompok Consing and/or Fe Lobitana.5

Upon scrutinizing the documents involving the properties, petitioner discovered that the documents
covered rights over government properties. Realizing he had been deceived, petitioner advised
Metrobank to stop payment of his checks. However, only the payment of Check No. C-MA-
142119406-CA was ordered stopped. The other two checks were already encashed by the payees.

Meanwhile, Lobitana negotiated and indorsed Check No. C-MA- 142119406-CA to respondents in
exchange for cash in the sum of ₱948,000.00, which respondents borrowed from Metrobank and
charged against their credit line. Before respondents accepted the check, they first inquired from the
drawee bank, Metrobank, Cebu-Mabolo Branch which is also their depositary bank, if the subject
check was sufficiently funded, to which Metrobank answered in the positive. However, when
respondents deposited the check with Metrobank, Cebu-Mabolo Branch, the same was dishonored
by the drawee bank for reason "PAYMENT STOPPED."

Respondents filed a collection suit6 against petitioner and Lobitana before the trial court. In their
Complaint, respondents alleged, among other things, that they are holders in due course and for

172
value of Metrobank Check No. C-MA-142119406-CA and that they had no prior information
concerning the transaction between defendants.

In his Answer, petitioner denied respondents’ allegations that "on the face of the subject check, no
condition or limitation was imposed" and that respondents are holders in due course and for value of
the check. For her part, Lobitana denied the allegations in the complaint and basically claimed that
the transaction leading to the issuance of the subject check is a sale of a parcel of land by Vivencia
Ompok Consing to petitioner and that she was made a payee of the check only to facilitate its
discounting.

The trial court ruled in favor of respondents and declared them due course holders of the subject
check, since there was no privity between respondents and defendants. The dispositive portion of
the 14 March 1996 Decision of the trial court reads:

In summation, this Court rules for the Plaintiff and against the Defendants and hereby orders:

1.) defendants to pay to Plaintiff, and severally, the amount of ₱1,000,000.00 representing
the face value of subject Metrobank check;

2.) to pay to Plaintiff herein, jointly and severally, the sum of ₱101,748.00 for accrued and
paid interest;

3.) to pay to Plaintiff, jointly and severally, moral damages in the amount of ₱100,000.00;

4.) to pay to Plaintiff, jointly and severally, the sum of ₱200,000.00 for attorney’s fees; and

5.) to pay to Plaintiff, jointly and severally, litigation expenses in the sum of ₱10,000.00 and
costs of the suit.

SO ORDERED.7

Only petitioner filed an appeal. Lobitana did not appeal the trial court’s judgment.

The Ruling of the Court of Appeals

The Court of Appeals affirmed the trial court’s finding that respondents are holders in due course of
Metrobank Check No. C-MA- 142119406-CA. The Court of Appeals pointed out that petitioner’s own
admission that respondents were never parties to the transaction among petitioner, Lobitana,
Concordio Toring, Cecilia Villacarlos, and Consing, proved respondents’ lack of knowledge of any
infirmity in the instrument or defect in the title of the person negotiating it. Moreover, respondents
verified from Metrobank whether the check was sufficiently funded before they accepted it.
Therefore, respondents must be excluded from the ambit of petitioner’s stop payment order.

The Court of Appeals modified the trial court’s decision by deleting the award of interest, moral
damages, attorney’s fees and litigation expenses. The Court of Appeals opined that petitioner "was
only exercising (although incorrectly), what he perceived to be his right to stop the payment of the
check which he rediscounted." The Court of Appeals ruled that petitioner acted in good faith in
ordering the stoppage of payment of the subject check and thus, he must not be made liable for
those amounts.

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In its 16 August 2005 Decision, the Court of Appeals affirmed the trial court’s decision with
modifications, thus:

WHEREFORE, premises considered, finding no reversible error in the decision of the lower court,
WE hereby DISMISS the appeal and AFFIRM the decision of the court a quo with modifications that
the award of interest, moral damages, attorney’s fees and litigation expenses be deleted.

No pronouncement as to costs.

SO ORDERED.8

In its 30 November 2005 Resolution, the Court of Appeals denied petitioner’s motion for
reconsideration.

In denying the petitioner’s motion for reconsideration, the Court of Appeals noted that petitioner
raised the defense that the check is a crossed check for the first time on appeal (particularly in the
motion for reconsideration). The Court of Appeals rejected such defense considering that to
entertain the same would be offensive to the basic rules of fair play, justice, and due process.

Hence, this petition.

The Issues

Petitioner raises the following issues:

I. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RESPONDENTS WERE

HOLDERS IN DUE COURSE. THE FACT THAT METROBANK CHECK NO. 142119406 IS
A CROSSED CHECK CONSTITUTES SUFFICIENT WARNING TO THE RESPONDENTS
TO EXERCISE EXTRAORDINARY DILIGENCE TO DETERMINE THE TITLE OF THE
INDORSER.

II. THE COURT OF APPEALS ERRED IN DENYING PETITIONER’S MOTION FOR

RECONSIDERATION UPON THE GROUND THAT THE ARGUMENTS RELIED UPON
HAVE ONLY BEEN RAISED FOR THE FIRST TIME. EQUITY DEMANDS THAT THE
COURT OF APPEALS SHOULD HAVE MADE AN EXCEPTION TO PREVENT THE
COMMISSION OF MANIFEST WRONG AND INJUSTICE UPON THE PETITIONER.9

The Ruling of this Court

The petition is meritorious.

Respondents point out that petitioner raised the defense that Metrobank Check No. C-MA-
142119406-CA is a crossed check for the first time in his motion for reconsideration before the Court
of Appeals. Respondents insist that issues not raised during the trial cannot be raised for the first
time on appeal as it would be offensive to the elementary rules of fair play, justice and due process.
Respondents further assert that a change of theory on appeal is improper.

In his Answer, petitioner specifically denied, among others, (1) Paragraph 4 of the Complaint,
concerning the allegation that on the face of the subject check, no condition or limitation was
imposed, and (2) Paragraph 8 of the Complaint, regarding the allegation that respondents were
holders in due course and for value of the subject check. In his "Special Affirmative Defenses,"

174
petitioner claimed that "for want or lack of the prestation," he could validly stop the payment of his
check, and that by rediscounting petitioner’s check, respondents "took the risk of what might happen
on the check." Essentially, petitioner maintained that respondents are not holders in due course of
the subject check, and as such, respondents could not recover any liability on the check from
petitioner.

Indeed, petitioner did not expressly state in his Answer or raise during the trial that Metrobank Check
No. C-MA-142119406-CA is a crossed check. It must be stressed, however, that petitioner
consistently argues that respondents are not holders in due course of the subject check, which is
one of the possible effects of crossing a check. The act of crossing a check serves as a warning to
the holder that the check has been issued for a definite purpose so that the holder thereof must
inquire if he has received the check pursuant to that purpose; otherwise, he is not a holder in due
course.10 Contrary to respondents’ view, petitioner never changed his theory, that respondents are
not holders in due course of the subject check, as would violate fundamental rules of justice, fair
play, and due process. Besides, the subject check was presented and admitted as evidence during
the trial and respondents did not and in fact cannot deny that it is a crossed check.

In any event, the Court is clothed with ample authority to entertain issues or matters not raised in the
lower courts in the interest of substantial justice.11 In Casa Filipina Realty v. Office of the
President,12 the Court held:

[T]he trend in modern-day procedure is to accord the courts broad discretionary power such that the
appellate court may consider matters bearing on the issues submitted for resolution which the
parties failed to raise or which the lower court ignored. Since rules of procedure are mere tools
designed to facilitate the attainment of justice, their strict and rigid application which would result in
technicalities that tend to frustrate rather than promote substantial justice, must always be avoided.
Technicality should not be allowed to stand in the way of equitably and completely resolving the
rights and obligations of the parties.13

Having disposed of the procedural issue, the Court shall now proceed to the merits of the case. The
main issue is whether respondents are holders in due course of Metrobank Check No. C-MA
142119406 CA as to entitle them to collect the face value of the check from its drawer or petitioner
herein.

Section 52 of the Negotiable Instruments Law defines a holder in due course, thus:

A holder in due course is a holder who has taken the instrument under the following conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice that it has been
previously dishonored, if such was the fact;

(c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him, he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.

In the case of a crossed check, as in this case, the following principles must additionally be
considered: A crossed check (a) may not be encashed but only deposited in the bank; (b) may be
negotiated only once — to one who has an account with a bank; and (c) warns the holder that it has

175
been issued for a definite purpose so that the holder thereof must inquire if he has received the
check pursuant to that purpose; otherwise, he is not a holder in due course.14

Based on the foregoing, respondents had the duty to ascertain the indorser’s, in this case
Lobitana’s, title to the check or the nature of her possession. This respondents failed to do.
Respondents’ verification from Metrobank on the funding of the check does not amount to
determination of Lobitana’s title to the check. Failing in this respect, respondents are guilty of gross
negligence amounting to legal absence of good faith,15 contrary to Section 52(c) of the Negotiable
Instruments Law. Hence, respondents are not deemed holders in due course of the subject check.16

State Investment House v. Intermediate Appellate Court17 squarely applies to this case. There, New
Sikatuna Wood Industries, Inc. sold at a discount to State Investment House three post-dated
crossed checks, issued by Anita Peña Chua naming as payee New Sikatuna Wood Industries, Inc.
The Court found State Investment House not a holder in due course of the checks. The Court also
expounded on the effect of crossing a check, thus:

Under usual practice, crossing a check is done by placing two parallel lines diagonally on the left top
portion of the check. The crossing may be special wherein between the two parallel lines is written
the name of a bank or a business institution, in which case the drawee should pay only with the
intervention of that bank or company, or crossing may be general wherein between two parallel
diagonal lines are written the words "and Co." or none at all as in the case at bar, in which case the
drawee should not encash the same but merely accept the same for deposit.

The effect therefore of crossing a check relates to the mode of its presentment for payment. Under
Section 72 of the Negotiable Instruments Law, presentment for payment to be sufficient must be
made (a) by the holder, or by some person authorized to receive payment on his behalf x x x As to
who the holder or authorized person will be depends on the instructions stated on the face of the
check.

The three subject checks in the case at bar had been crossed generally and issued payable to New
Sikatuna Wood Industries, Inc. which could only mean that the drawer had intended the same for
deposit only by the rightful person, i.e., the payee named therein. Apparently, it was not the payee
who presented the same for payment and therefore, there was no proper presentment, and the
liability did not attach to the drawer.

Thus, in the absence of due presentment, the drawer did not become liable. Consequently, no right
of recourse is available to petitioner against the drawer of the subject checks, private respondent
wife, considering that petitioner is not the proper party authorized to make presentment of the
checks in question.

In this case, there is no question that the payees of the check, Lobitana or Consing, were not the
ones who presented the check for payment. Lobitana negotiated and indorsed the check to
respondents in exchange for ₱948,000.00. It was respondents who presented the subject check for
payment; however, the check was dishonored for reason "PAYMENT STOPPED." In other words, it
was not the payee who presented the check for payment; and thus, there was no proper
presentment. As a result, liability did not attach to the drawer. Accordingly, no right of recourse is
available to respondents against the drawer of the check, petitioner herein, since respondents are
not the proper party authorized to make presentment of the subject check.

However, the fact that respondents are not holders in due course does not automatically mean that
they cannot recover on the check.18 The Negotiable Instruments Law does not provide that a holder
who is not a holder in due course may not in any case recover on the instrument. The only

176
disadvantage of a holder who is not in due course is that the negotiable instrument is subject to
defenses as if it were non-negotiable.19 Among such defenses is the absence or failure of
consideration,20 which petitioner sufficiently established in this case. Petitioner issued the subject
check supposedly for a loan in favor of Consing’s group, who turned out to be a syndicate
defrauding gullible individuals. Since there is in fact no valid loan to speak of, there is no
consideration for the issuance of the check. Consequently, petitioner cannot be obliged to pay the
face value of the check.1avv phi 1

Respondents can collect from the immediate indorser,21 in this case Lobitana. Significantly, Lobitana
did not appeal the trial court’s decision, finding her solidarily liable to pay, among others, the face
value of the subject check. Therefore, the trial court’s judgment has long become final and executory
as to Lobitana.

WHEREFORE, we GRANT the petition. We SET ASIDE the 16 August 2005 Decision and 30
November 2005 Resolution of the Court of Appeals in CA-G.R. CV No. 57994.

SO ORDERED.

177
DE OCAMPO VS GATCHALIAN (1961)

G.R. No. L-15126 November 30, 1961

VICENTE R. DE OCAMPO & CO., plaintiff-appellee,

vs.
ANITA GATCHALIAN, ET AL., defendants-appellants.

Vicente Formoso, Jr. for plaintiff-appellee.

Reyes and Pangalañgan for defendants-appellants.

LABRADOR, J.:

Appeal from a judgment of the Court of First Instance of Manila, Hon. Conrado M. Velasquez,
presiding, sentencing the defendants to pay the plaintiff the sum of P600, with legal interest from
September 10, 1953 until paid, and to pay the costs.

The action is for the recovery of the value of a check for P600 payable to the plaintiff and drawn by
defendant Anita C. Gatchalian. The complaint sets forth the check and alleges that plaintiff received
it in payment of the indebtedness of one Matilde Gonzales; that upon receipt of said check, plaintiff
gave Matilde Gonzales P158.25, the difference between the face value of the check and Matilde
Gonzales' indebtedness. The defendants admit the execution of the check but they allege in their
answer, as affirmative defense, that it was issued subject to a condition, which was not fulfilled, and
that plaintiff was guilty of gross negligence in not taking steps to protect itself.

At the time of the trial, the parties submitted a stipulation of facts, which reads as follows:

Plaintiff and defendants through their respective undersigned attorney's respectfully submit
the following Agreed Stipulation of Facts;

First. — That on or about 8 September 1953, in the evening, defendant Anita C. Gatchalian
who was then interested in looking for a car for the use of her husband and the family, was
shown and offered a car by Manuel Gonzales who was accompanied by Emil Fajardo, the
latter being personally known to defendant Anita C. Gatchalian;

Second. — That Manuel Gonzales represented to defend Anita C. Gatchalian that he was
duly authorized by the owner of the car, Ocampo Clinic, to look for a buyer of said car and to
negotiate for and accomplish said sale, but which facts were not known to plaintiff;

Third. — That defendant Anita C. Gatchalian, finding the price of the car quoted by Manuel
Gonzales to her satisfaction, requested Manuel Gonzales to bring the car the day following
together with the certificate of registration of the car, so that her husband would be able to
see same; that on this request of defendant Anita C. Gatchalian, Manuel Gonzales advised
her that the owner of the car will not be willing to give the certificate of registration unless
there is a showing that the party interested in the purchase of said car is ready and willing to
make such purchase and that for this purpose Manuel Gonzales requested defendant Anita
C. Gatchalian to give him (Manuel Gonzales) a check which will be shown to the owner as
evidence of buyer's good faith in the intention to purchase the said car, the said check to be
for safekeeping only of Manuel Gonzales and to be returned to defendant Anita C.

178
Gatchalian the following day when Manuel Gonzales brings the car and the certificate of
registration, but which facts were not known to plaintiff;

Fourth. — That relying on these representations of Manuel Gonzales and with his assurance
that said check will be only for safekeeping and which will be returned to said defendant the
following day when the car and its certificate of registration will be brought by Manuel
Gonzales to defendants, but which facts were not known to plaintiff, defendant Anita C.
Gatchalian drew and issued a check, Exh. "B"; that Manuel Gonzales executed and issued a
receipt for said check, Exh. "1";

Fifth. — That on the failure of Manuel Gonzales to appear the day following and on his failure
to bring the car and its certificate of registration and to return the check, Exh. "B", on the
following day as previously agreed upon, defendant Anita C. Gatchalian issued a "Stop
Payment Order" on the check, Exh. "3", with the drawee bank. Said "Stop Payment Order"
was issued without previous notice on plaintiff not being know to defendant, Anita C.
Gatchalian and who furthermore had no reason to know check was given to plaintiff;

Sixth. — That defendants, both or either of them, did not know personally Manuel Gonzales
or any member of his family at any time prior to September 1953, but that defendant Hipolito
Gatchalian is personally acquainted with V. R. de Ocampo;

Seventh. — That defendants, both or either of them, had no arrangements or agreement with
the Ocampo Clinic at any time prior to, on or after 9 September 1953 for the hospitalization
of the wife of Manuel Gonzales and neither or both of said defendants had assumed,
expressly or impliedly, with the Ocampo Clinic, the obligation of Manuel Gonzales or his wife
for the hospitalization of the latter;

Eight. — That defendants, both or either of them, had no obligation or liability, directly or
indirectly with the Ocampo Clinic before, or on 9 September 1953;

Ninth. — That Manuel Gonzales having received the check Exh. "B" from defendant Anita C.
Gatchalian under the representations and conditions herein above specified, delivered the
same to the Ocampo Clinic, in payment of the fees and expenses arising from the
hospitalization of his wife;

Tenth. — That plaintiff for and in consideration of fees and expenses of hospitalization and
the release of the wife of Manuel Gonzales from its hospital, accepted said check, applying
P441.75 (Exhibit "A") thereof to payment of said fees and expenses and delivering to Manuel
Gonzales the amount of P158.25 (as per receipt, Exhibit "D") representing the balance on
the amount of the said check, Exh. "B";

Eleventh. — That the acts of acceptance of the check and application of its proceeds in the
manner specified above were made without previous inquiry by plaintiff from defendants:

Twelfth. — That plaintiff filed or caused to be filed with the Office of the City Fiscal of Manila,
a complaint for estafa against Manuel Gonzales based on and arising from the acts of said
Manuel Gonzales in paying his obligations with plaintiff and receiving the cash balance of the
check, Exh. "B" and that said complaint was subsequently dropped;

Thirteenth. — That the exhibits mentioned in this stipulation and the other exhibits submitted
previously, be considered as parts of this stipulation, without necessity of formally offering
them in evidence;

179
 WHEREFORE, it is most respectfully prayed that this agreed stipulation of facts be admitted
and that the parties hereto be given fifteen days from today within which to submit
simultaneously their memorandum to discuss the issues of law arising from the facts,
reserving to either party the right to submit reply memorandum, if necessary, within ten days
from receipt of their main memoranda. (pp. 21-25, Defendant's Record on Appeal).

No other evidence was submitted and upon said stipulation the court rendered the judgment already
alluded above.

In their appeal defendants-appellants contend that the check is not a negotiable instrument, under
the facts and circumstances stated in the stipulation of facts, and that plaintiff is not a holder in due
course. In support of the first contention, it is argued that defendant Gatchalian had no intention to
transfer her property in the instrument as it was for safekeeping merely and, therefore, there was no
delivery required by law (Section 16, Negotiable Instruments Law); that assuming for the sake of
argument that delivery was not for safekeeping merely, delivery was conditional and the condition
was not fulfilled.

In support of the contention that plaintiff-appellee is not a holder in due course, the appellant argues
that plaintiff-appellee cannot be a holder in due course because there was no negotiation prior to
plaintiff-appellee's acquiring the possession of the check; that a holder in due course presupposes a
prior party from whose hands negotiation proceeded, and in the case at bar, plaintiff-appellee is the
payee, the maker and the payee being original parties. It is also claimed that the plaintiff-appellee is
not a holder in due course because it acquired the check with notice of defect in the title of the
holder, Manuel Gonzales, and because under the circumstances stated in the stipulation of facts
there were circumstances that brought suspicion about Gonzales' possession and negotiation, which
circumstances should have placed the plaintiff-appellee under the duty, to inquire into the title of the
holder. The circumstances are as follows:

The check is not a personal check of Manuel Gonzales. (Paragraph Ninth, Stipulation of
Facts). Plaintiff could have inquired why a person would use the check of another to pay his
own debt. Furthermore, plaintiff had the "means of knowledge" inasmuch as defendant
Hipolito Gatchalian is personally acquainted with V. R. de Ocampo (Paragraph Sixth,
Stipulation of Facts.).

The maker Anita C. Gatchalian is a complete stranger to Manuel Gonzales and Dr. V. R. de
Ocampo (Paragraph Sixth, Stipulation of Facts).

The maker is not in any manner obligated to Ocampo Clinic nor to Manuel Gonzales. (Par. 7,
Stipulation of Facts.)

The check could not have been intended to pay the hospital fees which amounted only to
P441.75. The check is in the amount of P600.00, which is in excess of the amount due
plaintiff. (Par. 10, Stipulation of Facts).

It was necessary for plaintiff to give Manuel Gonzales change in the sum P158.25 (Par. 10,
Stipulation of Facts). Since Manuel Gonzales is the party obliged to pay, plaintiff should have
been more cautious and wary in accepting a piece of paper and disbursing cold cash.

The check is payable to bearer. Hence, any person who holds it should have been subjected
to inquiries. EVEN IN A BANK, CHECKS ARE NOT CASHED WITHOUT INQUIRY FROM
THE BEARER. The same inquiries should have been made by plaintiff. (Defendants-
appellants' brief, pp. 52-53)

180
Answering the first contention of appellant, counsel for plaintiff-appellee argues that in accordance
with the best authority on the Negotiable Instruments Law, plaintiff-appellee may be considered as a
holder in due course, citing Brannan's Negotiable Instruments Law, 6th edition, page 252. On this
issue Brannan holds that a payee may be a holder in due course and says that to this effect is the
greater weight of authority, thus:

Whether the payee may be a holder in due course under the N. I. L., as he was at common
law, is a question upon which the courts are in serious conflict. There can be no doubt that a
proper interpretation of the act read as a whole leads to the conclusion that a payee may be
a holder in due course under any circumstance in which he meets the requirements of Sec.
52.

The argument of Professor Brannan in an earlier edition of this work has never been
successfully answered and is here repeated.

Section 191 defines "holder" as the payee or indorsee of a bill or note, who is in possession
of it, or the bearer thereof. Sec. 52 defendants defines a holder in due course as "a holder
who has taken the instrument under the following conditions: 1. That it is complete and
regular on its face. 2. That he became the holder of it before it was overdue, and without
notice that it had been previously dishonored, if such was the fact. 3. That he took it in good
faith and for value. 4. 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."

Since "holder", as defined in sec. 191, includes a payee who is in possession the word
holder in the first clause of sec. 52 and in the second subsection may be replaced by the
definition in sec. 191 so as to read "a holder in due course is a payee or indorsee who is in
possession," etc. (Brannan's on Negotiable Instruments Law, 6th ed., p. 543).

The first argument of the defendants-appellants, therefore, depends upon whether or not the
plaintiff-appellee is a holder in due course. If it is such a holder in due course, it is immaterial that it
was the payee and an immediate party to the instrument.

The other contention of the plaintiff is that there has been no negotiation of the instrument, because
the drawer did not deliver the instrument to Manuel Gonzales with the intention of negotiating the
same, or for the purpose of giving effect thereto, for as the stipulation of facts declares the check
was to remain in the possession Manuel Gonzales, and was not to be negotiated, but was to serve
merely as evidence of good faith of defendants in their desire to purchase the car being sold to
them. Admitting that such was the intention of the drawer of the check when she delivered it to
Manuel Gonzales, it was no fault of the plaintiff-appellee drawee if Manuel Gonzales delivered the
check or negotiated it. As the check was payable to the plaintiff-appellee, and was entrusted to
Manuel Gonzales by Gatchalian, the delivery to Manuel Gonzales was a delivery by the drawer to
his own agent; in other words, Manuel Gonzales was the agent of the drawer Anita Gatchalian
insofar as the possession of the check is concerned. So, when the agent of drawer Manuel
Gonzales negotiated the check with the intention of getting its value from plaintiff-appellee,
negotiation took place through no fault of the plaintiff-appellee, unless it can be shown that the
plaintiff-appellee should be considered as having notice of the defect in the possession of the holder
Manuel Gonzales. Our resolution of this issue leads us to a consideration of the last question
presented by the appellants, i.e., whether the plaintiff-appellee may be considered as a holder in due
course.

Section 52, Negotiable Instruments Law, defines holder in due course, thus:

181
 A holder in due course is a holder who has taken the instrument under the following
conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice that it had been
previously dishonored, if such was the fact;

(c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.

The stipulation of facts expressly states that plaintiff-appellee was not aware of the circumstances
under which the check was delivered to Manuel Gonzales, but we agree with the defendants-
appellants that the circumstances indicated by them in their briefs, such as the fact that appellants
had no obligation or liability to the Ocampo Clinic; that the amount of the check did not correspond
exactly with the obligation of Matilde Gonzales to Dr. V. R. de Ocampo; and that the check had two
parallel lines in the upper left hand corner, which practice means that the check could only be
deposited but may not be converted into cash — all these circumstances should have put the
plaintiff-appellee to inquiry as to the why and wherefore of the possession of the check by Manuel
Gonzales, and why he used it to pay Matilde's account. It was payee's duty to ascertain from the
holder Manuel Gonzales what the nature of the latter's title to the check was or the nature of his
possession. Having failed in this respect, we must declare that plaintiff-appellee was guilty of gross
neglect in not finding out the nature of the title and possession of Manuel Gonzales, amounting to
legal absence of good faith, and it may not be considered as a holder of the check in good faith. To
such effect is the consensus of authority.

In order to show that the defendant had "knowledge of such facts that his action in taking the
instrument amounted to bad faith," it is not necessary to prove that the defendant knew the
exact fraud that was practiced upon the plaintiff by the defendant's assignor, it being
sufficient to show that the defendant had notice that there was something wrong about his
assignor's acquisition of title, although he did not have notice of the particular wrong that was
committed. Paika v. Perry, 225 Mass. 563, 114 N.E. 830.

It is sufficient that the buyer of a note had notice or knowledge that the note was in some
way tainted with fraud. It is not necessary that he should know the particulars or even the
nature of the fraud, since all that is required is knowledge of such facts that his action in
taking the note amounted bad faith. Ozark Motor Co. v. Horton (Mo. App.), 196 S.W. 395.
Accord. Davis v. First Nat. Bank, 26 Ariz. 621, 229 Pac. 391.

Liberty bonds stolen from the plaintiff were brought by the thief, a boy fifteen years old, less
than five feet tall, immature in appearance and bearing on his face the stamp a degenerate,
to the defendants' clerk for sale. The boy stated that they belonged to his mother. The
defendants paid the boy for the bonds without any further inquiry. Held, the plaintiff could
recover the value of the bonds. The term 'bad faith' does not necessarily involve furtive
motives, but means bad faith in a commercial sense. The manner in which the defendants
conducted their Liberty Loan department provided an easy way for thieves to dispose of their
plunder. It was a case of "no questions asked." Although gross negligence does not of itself
constitute bad faith, it is evidence from which bad faith may be inferred. The circumstances
thrust the duty upon the defendants to make further inquiries and they had no right to shut
their eyes deliberately to obvious facts. Morris v. Muir, 111 Misc. Rep. 739, 181 N.Y. Supp.

182
 913, affd. in memo., 191 App. Div. 947, 181 N.Y. Supp. 945." (pp. 640-642, Brannan's
Negotiable Instruments Law, 6th ed.).

The above considerations would seem sufficient to justify our ruling that plaintiff-appellee should not
be allowed to recover the value of the check. Let us now examine the express provisions of the
Negotiable Instruments Law pertinent to the matter to find if our ruling conforms thereto. Section 52
(c) provides that a holder in due course is one who takes the instrument "in good faith and for value;"
Section 59, "that every holder is deemed prima facie to be a holder in due course;" and Section 52
(d), that in order that one may be a holder in due course it is necessary that "at the time the
instrument was negotiated to him "he had no notice of any . . . defect in the title of the person
negotiating it;" and lastly Section 59, that every holder is deemed prima facieto be a holder in due
course.

In the case at bar the rule that a possessor of the instrument is prima faciea holder in due course
does not apply because there was a defect in the title of the holder (Manuel Gonzales), because the
instrument is not payable to him or to bearer. On the other hand, the stipulation of facts indicated by
the appellants in their brief, like the fact that the drawer had no account with the payee; that the
holder did not show or tell the payee why he had the check in his possession and why he was using
it for the payment of his own personal account — show that holder's title was defective or suspicious,
to say the least. As holder's title was defective or suspicious, it cannot be stated that the payee
acquired the check without knowledge of said defect in holder's title, and for this reason the
presumption that it is a holder in due course or that it acquired the instrument in good faith does not
exist. And having presented no evidence that it acquired the check in good faith, it (payee) cannot be
considered as a holder in due course. In other words, under the circumstances of the case, instead
of the presumption that payee was a holder in good faith, the fact is that it acquired possession of
the instrument under circumstances that should have put it to inquiry as to the title of the holder who
negotiated the check to it. The burden was, therefore, placed upon it to show that notwithstanding
the suspicious circumstances, it acquired the check in actual good faith.

The rule applicable to the case at bar is that described in the case of Howard National Bank v.
Wilson, et al., 96 Vt. 438, 120 At. 889, 894, where the Supreme Court of Vermont made the following
disquisition:

Prior to the Negotiable Instruments Act, two distinct lines of cases had developed in this
country. The first had its origin in Gill v. Cubitt, 3 B. & C. 466, 10 E. L. 215, where the rule
was distinctly laid down by the court of King's Bench that the purchaser of negotiable paper
must exercise reasonable prudence and caution, and that, if the circumstances were such as
ought to have excited the suspicion of a prudent and careful man, and he made no inquiry,
he did not stand in the legal position of a bona fide holder. The rule was adopted by the
courts of this country generally and seem to have become a fixed rule in the law of
negotiable paper. Later in Goodman v. Harvey, 4 A. & E. 870, 31 E. C. L. 381, the English
court abandoned its former position and adopted the rule that nothing short of actual bad
faith or fraud in the purchaser would deprive him of the character of a bona fide purchaser
and let in defenses existing between prior parties, that no circumstances of suspicion merely,
or want of proper caution in the purchaser, would have this effect, and that even gross
negligence would have no effect, except as evidence tending to establish bad faith or fraud.
Some of the American courts adhered to the earlier rule, while others followed the change
inaugurated in Goodman v. Harvey. The question was before this court in Roth v. Colvin, 32
Vt. 125, and, on full consideration of the question, a rule was adopted in harmony with that
announced in Gill v. Cubitt, which has been adhered to in subsequent cases, including those
cited above. Stated briefly, one line of cases including our own had adopted the test of the
reasonably prudent man and the other that of actual good faith. It would seem that it was the
intent of the Negotiable Instruments Act to harmonize this disagreement by adopting the

183
 latter test. That such is the view generally accepted by the courts appears from a recent
review of the cases concerning what constitutes notice of defect. Brannan on Neg. Ins. Law,
187-201. To effectuate the general purpose of the act to make uniform the Negotiable
Instruments Law of those states which should enact it, we are constrained to hold (contrary
to the rule adopted in our former decisions) that negligence on the part of the plaintiff, or
suspicious circumstances sufficient to put a prudent man on inquiry, will not of themselves
prevent a recovery, but are to be considered merely as evidence bearing on the question of
bad faith. See G. L. 3113, 3172, where such a course is required in construing other uniform
acts.

It comes to this then: When the case has taken such shape that the plaintiff is called upon to
prove himself a holder in due course to be entitled to recover, he is required to establish the
conditions entitling him to standing as such, including good faith in taking the instrument. It
devolves upon him to disclose the facts and circumstances attending the transfer, from which
good or bad faith in the transaction may be inferred.

In the case at bar as the payee acquired the check under circumstances which should have put it to
inquiry, why the holder had the check and used it to pay his own personal account, the duty
devolved upon it, plaintiff-appellee, to prove that it actually acquired said check in good faith. The
stipulation of facts contains no statement of such good faith, hence we are forced to the conclusion
that plaintiff payee has not proved that it acquired the check in good faith and may not be deemed a
holder in due course thereof.

For the foregoing considerations, the decision appealed from should be, as it is hereby, reversed,
and the defendants are absolved from the complaint. With costs against plaintiff-appellee.

184
BANK OF AMERICA, NT & SA VS ASSOCIATED CITIZENS BANK (2009)

G.R. No. 141001 May 21, 2009

BANK OF AMERICA, NT & SA, Petitioner,

vs.
ASSOCIATED CITIZENS BANK, BA-FINANCE CORPORATION, MILLER OFFSET PRESS, INC.,
UY KIAT CHUNG, CHING UY SENG, UY CHUNG GUAN SENG, and COURT OF
APPEALS, Respondents.

x - - - - - - - - - - - - - - - - - - - - - - -x

G.R. No. 141018 May 21, 2009

ASSOCIATED CITIZENS BANK (now UNITED OVERSEAS BANK PHILS.), Petitioner,

vs.
BA-FINANCE CORPORATION, MILLER OFFSET PRESS, INC., UY KIAT CHUNG, CHING UY
SENG, UY CHUNG GUAN SENG, and BANK OF AMERICA, NT & SA, Respondents.

DECISION

CARPIO, J.:

The Case

Before the Court are consolidated cases docketed as G.R. No. 141001 and G.R. No. 141018. These
two cases are petitions for review on certiorari1 of the Decision2 dated 26 February 1999 and the
Resolution dated 6 December 1999 of the Court of Appeals in CA-G.R. CV No. 48821. The Court of
Appeals affirmed with modifications the Decision of the Regional Trial Court of Makati, Branch 64
(RTC).

The Antecedent Facts

On 6 October 1978, BA-Finance Corporation (BA-Finance) entered into a transaction with Miller
Offset Press, Inc. (Miller), through the latter’s authorized representatives, i.e., Uy Kiat Chung, Ching
Uy Seng, and Uy Chung Guan Seng. BA-Finance granted Miller a credit line facility through which
the latter could assign or discount its trade receivables with the former. On 20 October 1978, Uy Kiat
Chung, Ching Uy Seng, and Uy Chung Guan Seng executed a Continuing Suretyship Agreement
with BA-Finance whereby they jointly and severally guaranteed the full and prompt payment of any
and all indebtedness which Miller may incur with BA-Finance.

Miller discounted and assigned several trade receivables to BA-Finance by executing Deeds of
Assignment in favor of the latter. In consideration of the assignment, BA-Finance issued four checks
payable to the "Order of Miller Offset Press, Inc." with the notation "For Payee’s Account Only."
These checks were drawn against Bank of America and had the following details:3

Check No. Date Amount

128274 13 February 1981 ₱222,363.33

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 129067 26 February 1981 252,551.16
132133 20 April 1981 206,450.57
133057 7 May 1981 59,862.72

Total ₱741,227.78

The four checks were deposited by Ching Uy Seng (a.k.a. Robert Ching), then the corporate
secretary of Miller, in Account No. 989 in Associated Citizens Bank (Associated Bank). Account No.
989 is a joint bank account under the names of Ching Uy Seng and Uy Chung Guan Seng.
Associated Bank stamped the checks with the notation "all prior endorsements and/or lack of
endorsements guaranteed," and sent them through clearing. Later, the drawee bank, Bank of
America, honored the checks and paid the proceeds to Associated Bank as the collecting bank.

Miller failed to deliver to BA-Finance the proceeds of the assigned trade receivables. Consequently,
BA-Finance filed a Complaint against Miller for collection of the amount of ₱731,329.63 which BA-
Finance allegedly paid in consideration of the assignment, plus interest at the rate of 16% per
annum and penalty charges.4 Likewise impleaded as party defendants in the collection case were Uy
Kiat Chung, Ching Uy Seng, and Uy Chung Guan Seng.

Miller, Uy Kiat Chung, and Uy Chung Guan Seng filed a Joint Answer (to the BA-Finance’s
Complaint) with Cross-Claim against Ching Uy Seng, wherein they denied that (1) they received the
amount covered by the four Bank of America checks, and (2) they authorized their co-defendant
Ching Uy Seng to transact business with BA-Finance on behalf of Miller. Uy Kiat Chung and Uy
Chung Guan Seng also denied having signed the Continuing Suretyship Agreement with BA-
Finance. In view thereof, BA-Finance filed an Amended Complaint impleading Bank of America as
additional defendant for allegedly allowing encashment and collection of the checks by person or
persons other than the payee named thereon. Ching Uy Seng, on the other hand, did not file his
Answer to the complaint.

Bank of America filed a Third Party Complaint against Associated Bank. In its Answer to the Third
Party Complaint, Associated Bank admitted having received the four checks for deposit in the joint
account of Ching Uy Seng (a.k.a. Robert Ching) and Uy Chung Guan Seng, but alleged that Robert
Ching, being one of the corporate officers of Miller, was duly authorized to act for and on behalf of
Miller.

On 28 September 1994, the RTC rendered a Decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered against defendant Bank of
America to pay plaintiff BA Finance Corporation the sum of ₱741,277.78, the value of the four (4)
checks subject matter of this case, with legal interest thereon from the time of the filing of this
complaint until payment is made and attorney’s fees corresponding to 15% of the amount due and to
pay the costs of the suit.

Judgment is likewise rendered ordering the third-party defendant Associated Citizens Bank to
reimburse Bank of America, the defendant third-party plaintiff, of the aforestated amount.

SO ORDERED.5

The Court of Appeals’ Ruling

186
On appeal, the Court of Appeals rendered judgment,6 affirming with modifications the decision of the
RTC, thus:

WHEREFORE, judgment is hereby rendered, as follows:

(1) Defendant and third-party plaintiff-appellant, Bank of America, NT & SA, is ordered to pay
plaintiff-appellee BA-Finance Corporation the sum of ₱741,277.78, with legal interest thereon
from the time of the filing of the complaint until the whole amount is fully paid;

(2) Third-party defendant-appellant Associated Citizens Bank is likewise ordered to

reimburse Bank of America the aforestated amount;

(3) Defendants Ching Uy Seng and/or Uy Chung Guan Seng are also ordered to pay
Associated Citizens Bank the aforestated amount; and

(4) The award of attorney’s fees is ordered deleted.

SO ORDERED.7

Associated Bank and Bank of America filed their respective Motions for Reconsideration, but these
were denied by the Court of Appeals in its Resolution of 6 December 1999.8

Hence, these petitions.

The Issue

The issues raised in these consolidated cases may be summarized as follows:

Whether the Court of Appeals erred in rendering judgment finding (1) Bank of America liable to pay
BA-Finance the amount of the four checks; (2) Associated Bank liable to reimburse Bank of America
the amount of the four checks; and (3) Ching Uy Seng and/or Uy Chung Guan Seng liable to pay
Associated Bank the amount of the four checks.

The Court’s Ruling

We find the petitions unmeritorious.

The Court of Appeals did not err in finding Bank of America

liable to pay BA-Finance the amount of the four checks.

Bank of America denies liability for paying the amount of the four checks issued by BA-Finance to
Miller, alleging that it (Bank of America) relied on the stamps made by Associated Bank stating that
"all prior endorsement and/or lack of endorsement guaranteed," through which Associated Bank
assumed the liability of a general endorser under Section 66 of the Negotiable Instruments Law.
Moreover, Bank of America contends that the proximate cause of BA-Finance’s injury, if any, is the
gross negligence of Associated Bank which allowed Ching Uy Seng (Robert Ching) to deposit the
four checks issued to Miller in the personal joint bank account of Ching Uy Seng and Uy Chung
Guan Seng.

We are not convinced.

187
The bank on which a check is drawn, known as the drawee bank, is under strict liability, based on
the contract between the bank and its customer (drawer), to pay the check only to the payee or the
payee’s order. The drawer’s instructions are reflected on the face and by the terms of the check.
When the drawee bank pays a person other than the payee named on the check, it does not comply
with the terms of the check and violates its duty to charge the drawer’s account only for properly
payable items.9 Thus, we ruled in Philippine National Bank v. Rodriguez10 that a drawee should
charge to the drawer’s accounts only the payables authorized by the latter; otherwise, the drawee
will be violating the instructions of the drawer and shall be liable for the amount charged to the
drawer’s account.

Among the different types of checks issued by a drawer is the crossed check. The Negotiable
Instruments Law is silent with respect to crossed checks, although the Code of Commerce11 makes
reference to such instruments.12 This Court has taken judicial cognizance of the practice that a check
with two parallel lines in the upper left hand corner means that it could only be deposited and could
not be converted into cash.13 Thus, the effect of crossing a check relates to the mode of payment,
meaning that the drawer had intended the check for deposit only by the rightful person, i.e., the
payee named therein.14 The crossing may be "special" wherein between the two parallel lines is
written the name of a bank or a business institution, in which case the drawee should pay only with
the intervention of that bank or company, or "general" wherein between two parallel diagonal lines
are written the words "and Co." or none at all, in which case the drawee should not encash the same
but merely accept the same for deposit.15 In Bataan Cigar v. Court of Appeals,16 we enumerated the
effects of crossing a check as follows: (a) the check may not be encashed but only deposited in the
bank; (b) the check may be negotiated only once – to one who has an account with a bank; and (c)
the act of crossing the check serves as a warning to the holder that the check has been issued for a
definite purpose so that he must inquire if he has received the check pursuant to that purpose;
otherwise, he is not a holder in due course.17

In this case, the four checks were drawn by BA-Finance and made payable to the "Order of Miller
Offset Press, Inc." The checks were also crossed and issued "For Payee’s Account Only." Clearly,
the drawer intended the check for deposit only by Miller Offset Press, Inc. in the latter’s bank
account. Thus, when a person other than Miller, i.e., Ching Uy Seng, a.k.a. Robert Ching, presented
and deposited the checks in his own personal account (Ching Uy Seng’s joint account with Uy
Chung Guan Seng), and the drawee bank, Bank of America, paid the value of the checks and
charged BA-Finance’s account therefor, the drawee Bank of America is deemed to have violated the
instructions of the drawer, and therefore, is liable for the amount charged to the drawer’s account.

The Court of Appeals did not err in finding Associated

Bank liable to reimburse Bank of America the
amount of the four checks.

A collecting bank where a check is deposited, and which endorses the check upon presentment with
the drawee bank, is an endorser.18 Under Section 66 of the Negotiable Instruments Law, an endorser
warrants "that the instrument is genuine and in all respects what it purports to be; that he has good
title to it; that all prior parties had capacity to contract; and that the instrument is at the time of his
endorsement valid and subsisting." This Court has repeatedly held that in check transactions, the
collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the
genuineness of all prior endorsements considering that the act of presenting the check for payment
to the drawee is an assertion that the party making the presentment has done its duty to ascertain
the genuineness of the endorsements.19

When Associated Bank stamped the back of the four checks with the phrase "all prior endorsements
and/or lack of endorsement guaranteed," that bank had for all intents and purposes treated the

188
checks as negotiable instruments and, accordingly, assumed the warranty of an endorser. Being so,
Associated Bank cannot deny liability on the checks. In Banco de Oro Savings and Mortgage Bank
v. Equitable Banking Corporation,20 we held that:

x x x the law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with it
for the purpose of determining their genuineness and regularity. The collecting bank being primarily
engaged in banking holds itself out to the public as the expert and the law holds it to a high standard
of conduct. x x x In presenting the checks for clearing and for payment, the defendant [collecting
bank] made an express guarantee on the validity of "all prior endorsements." Thus, stamped at the
back of the checks are the defendant’s clear warranty: ALL PRIOR ENDORSEMENTS AND/OR
LACK OF ENDORSEMENTS GUARANTEED. Without such warranty, plaintiff [drawee] would not
have paid on the checks. No amount of legal jargon can reverse the clear meaning of defendant’s
warranty. As the warranty has proven to be false and inaccurate, the defendant is liable for any
damage arising out of the falsity of its representation.

Associated Bank was also clearly negligent in disregarding established banking rules and
regulations by allowing the four checks to be presented by, and deposited in the personal bank
account of, a person who was not the payee named in the checks. The checks were issued to the
"Order of Miller Offset Press, Inc.," but were deposited, and paid by Associated Bank, to the
personal joint account of Ching Uy Seng (a.k.a. Robert Ching) and Uy Chung Guan Seng. It could
not have escaped Associated Bank’s attention that the payee of the checks is a corporation while
the person who deposited the checks in his own account is an individual. Verily, when the bank
allowed its client to collect on crossed checks issued in the name of another, the bank is guilty of
negligence.21 As ruled by this Court in Jai-Alai Corporation of the Philippines v. Bank of the
Philippine Islands,22 one who accepts and encashes a check from an individual knowing that the
payee is a corporation does so at his peril. Accordingly, we hold that Associated Bank is liable for
the amount of the four checks and should reimburse the amount of the checks to Bank of America.

The Court of Appeals did not err in finding Ching Uy Seng

and/or Uy Chung Guan Seng liable to pay Associated
Bank the amount of the four checks.

It is well-settled that a person who had not given value for the money paid to him has no right to
retain the money he received.23 This Court, therefore, quotes with approval the ruling of the Court of
Appeals in its decision:

It appearing, however, from the evidence on record that since Ching Uy Seng and/or Uy Chung
Guan Seng received the proceeds of the checks as they were deposited in their personal joint
account with Associated Bank, they should, therefore, be obliged to reimburse Associated Bank for
the amount it has to pay to Bank of America, in line with the rule that no person should be allowed to
unjustly enrich himself at the expense of another.24 1avvphi1

As regards the trial court’s grant of attorney’s fees to BA-Finance, the Court of Appeals found that
there was no sufficient justification therefor; hence, the deletion of the award is proper. An award of
attorney’s fees necessitates a factual, legal, or equitable justification. Without such justification, the
award is a conclusion without a premise, its basis being improperly left to speculation and
conjecture.25

We note that the Decision of the Court of Appeals provides for the amount of ₱741,277.78 as the
sum of the four checks subject of this case.26 This amount should be modified as records show that
the total value of the four checks is ₱741,227.78.27

189
WHEREFORE, we DENY the petitions. We AFFIRM the Court of Appeals’ Decision dated 26
February 1999 in CA-G.R. CV No. 48821 with the MODIFICATION that Bank of America, NT & SA is
ordered to pay BA-Finance Corporation the amount of ₱741,227.78, with legal interest from the time
of filing of the complaint until the amount is fully paid. Associated Citizens Bank is ordered to
reimburse Bank of America the abovementioned amount. Ching Uy Seng and/or Uy Chung Guan
Seng are also ordered to pay Associated Citizens Bank the abovementioned amount.

SO ORDERED.

190
FAR EAST BANK AND TRUST CO. VS GOLD PALACE JEWELLERY CO. (2008)

G.R. No. 168274 August 20, 2008

FAR EAST BANK & TRUST COMPANY, petitioner,

vs.
GOLD PALACE JEWELLERY CO., as represented by Judy L. Yang, Julie Yang-Go and Kho Soon
Huat, respondent.

DECISION

NACHURA, J.:

For the review of the Court through a Rule 45 petition are the following issuances of the Court of Appeals
(CA) in CA-G.R. CV No. 71858: (1) the March 15, 2005 Decision1 which reversed the trial court's ruling,
and (2) the May 26, 2005 Resolution2 which denied the motion for reconsideration of the said CA
decision.

The instant controversy traces its roots to a transaction consummated sometime in June 1998, when a
foreigner, identified as Samuel Tagoe, purchased from the respondent Gold Palace Jewellery Co.'s (Gold
Palace's) store at SM-North EDSA several pieces of jewelry valued at P258,000.00.3 In payment of the
same, he offered Foreign Draft No. M-069670 issued by the United Overseas Bank (Malaysia) BHD
Medan Pasar, Kuala Lumpur Branch (UOB), addressed to the Land Bank of the Philippines, Manila
(LBP), and payable to the respondent company for P380,000.00.4

Before receiving the draft, respondent Judy Yang, the assistant general manager of Gold Palace, inquired
from petitioner Far East Bank & Trust Company's (Far East's) SM North EDSA Branch, its neighbor mall
tenant, the nature of the draft. The teller informed her that the same was similar to a manager's check, but
advised her not to release the pieces of jewelry until the draft had been cleared. 5 Following the bank's
advice, Yang issued Cash Invoice No. 16096 to the foreigner, asked him to come back, and informed him
that the pieces of jewelry would be released when the draft had already been cleared.7 Respondent Julie
Yang-Go, the manager of Gold Palace, consequently deposited the draft in the company's account with
the aforementioned Far East branch on June 2, 1998.8

When Far East, the collecting bank, presented the draft for clearing to LBP, the drawee bank, the latter
cleared the same9-UOB's account with LBP was debited,10 and Gold Palace's account with Far East was
credited with the amount stated in the draft.11

The foreigner eventually returned to respondent's store on June 6, 1998 to claim the purchased goods.
After ascertaining that the draft had been cleared, respondent Yang released the pieces of jewelry to
Samuel Tagoe; and because the amount in the draft was more than the value of the goods purchased,
she issued, as his change, Far East Check No. 173088112 for P122,000.00.13 This check was later
presented for encashment and was, in fact, paid by the said bank.14

On June 26, 1998, or after around three weeks, LBP informed Far East that the amount in Foreign Draft
No. M-069670 had been materially altered from P300.00 to P380,000.00 and that it was returning the
same. Attached to its official correspondence were Special Clearing Receipt No. 002593 and the duly
notarized and consul-authenticated affidavit of a corporate officer of the drawer, UOB. 15 It is noted at this
point that the material alteration was discovered by UOB after LBP had informed it that its funds were
being depleted following the encashment of the subject draft.16 Intending to debit the amount from
respondent's account, Far East subsequently refunded the P380,000.00 earlier paid by LBP.

191
Gold Palace, in the meantime, had already utilized portions of the amount. Thus, on July 20, 1998, as the
outstanding balance of its account was already inadequate, Far East was able to debit
only P168,053.36,17 but this was done without a prior written notice to the account holder. 18 Far East only
notified by phone the representatives of the respondent company.19

On August 12, 1998, petitioner demanded from respondents the payment of P211,946.64 or the
difference between the amount in the materially altered draft and the amount debited from the respondent
company's account.20 Because Gold Palace did not heed the demand, Far East consequently instituted
Civil Case No. 99-296 for sum of money and damages before the Regional Trial Court (RTC), Branch 64
of Makati City.21

In their Answer, respondents specifically denied the material allegations in the complaint and interposed
as a defense that the complaint states no cause of action-the subject foreign draft having been cleared
and the respondent not being the party who made the material alteration. Respondents further
counterclaimed for actual damages, moral and exemplary damages, and attorney's fees considering,
among others, that the petitioner had confiscated without basis Gold Palace's balance in its account
resulting in operational loss, and had maliciously imputed to the latter the act of alteration. 22

After trial on the merits, the RTC rendered its July 30, 2001 Decision23 in favor of Far East, ordering Gold
Palace to pay the former P211,946.64 as actual damages and P50,000.00 as attorney's fees.24 The trial
court ruled that, on the basis of its warranties as a general indorser, Gold Palace was liable to Far East. 25

On appeal, the CA, in the assailed March 15, 2005 Decision,26 reversed the ruling of the trial court and
awarded respondents' counterclaim. It ruled in the main that Far East failed to undergo the proceedings
on the protest of the foreign draft or to notify Gold Palace of the draft's dishonor; thus, Far East could not
charge Gold Palace on its secondary liability as an indorser. 27 The appellate court further ruled that the
drawee bank had cleared the check, and its remedy should be against the party responsible for the
alteration. Considering that, in this case, Gold Palace neither altered the draft nor knew of the alteration, it
could not be held liable.28 The dispositive portion of the CA decision reads:

WHEREFORE, premises considered, the appeal is GRANTED; the assailed Decision dated 30
July 2001 of the Regional Trial Court of Makati City, Branch 64 is hereby REVERSED and SET
ASIDE; the Complaint dated January 1999 is DISMISSED; and appellee Far East Bank and Trust
Company is hereby ordered to pay appellant Gold Palace Jewellery Company the amount of
Php168,053.36 for actual damages plus legal interest of 12% per annum from 20 July 1998,
Php50,000.00 for exemplary damages, and Php50,000.00 for attorney's fees. Costs against
appellee Far East Bank and Trust Company.29

The appellate court, in the further challenged May 26, 2005 Resolution, 30 denied petitioner's Motion for
Reconsideration,31 which prompted the petitioner to institute before the Court the instant Petition for
Review on Certiorari.32

We deny the petition.

Act No. 2031, or the Negotiable Instruments Law (NIL), explicitly provides that the acceptor, by accepting
the instrument, engages that he will pay it according to the tenor of his acceptance.33 This provision
applies with equal force in case the drawee pays a bill without having previously accepted it. His actual
payment of the amount in the check implies not only his assent to the order of the drawer and a
recognition of his corresponding obligation to pay the aforementioned sum, but also, his clear compliance
with that obligation.34 Actual payment by the drawee is greater than his acceptance, which is merely a
promise in writing to pay. The payment of a check includes its acceptance. 35

Unmistakable herein is the fact that the drawee bank cleared and paid the subject foreign draft and
forwarded the amount thereof to the collecting bank. The latter then credited to Gold Palace's account the

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payment it received. Following the plain language of the law, the drawee, by the said payment,
recognized and complied with its obligation to pay in accordance with the tenor of his acceptance.
The tenor of the acceptance is determined by the terms of the bill as it is when the drawee
accepts.36 Stated simply, LBP was liable on its payment of the check according to the tenor of the check
at the time of payment, which was the raised amount.

Because of that engagement, LBP could no longer repudiate the payment it erroneously made to a due
course holder. We note at this point that Gold Palace was not a participant in the alteration of the draft,
was not negligent, and was a holder in due course-it received the draft complete and regular on its face,
before it became overdue and without notice of any dishonor, in good faith and for value, and absent any
knowledge of any infirmity in the instrument or defect in the title of the person negotiating it. 37 Having
relied on the drawee bank's clearance and payment of the draft and not being negligent (it delivered the
purchased jewelry only when the draft was cleared and paid), respondent is amply protected by the said
Section 62. Commercial policy favors the protection of any one who, in due course, changes his position
on the faith of the drawee bank's clearance and payment of a check or draft. 38

This construction and application of the law gives effect to the plain language of the NIL 39 and is in line
with the sound principle that where one of two innocent parties must suffer a loss, the law will leave the
loss where it finds it.40 It further reasserts the usefulness, stability and currency of negotiable paper
without seriously endangering accepted banking practices. Indeed, 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. 41 This is not to
mention, but we state nevertheless for emphasis, that the drawee bank, in most cases, is in a better
position, compared to the holder, to verify with the drawer the matters stated in the instrument. As we
have observed in this case, were it not for LBP's communication with the drawer that its account in the
Philippines was being depleted after the subject foreign draft had been encashed, then, the alteration
would not have been discovered. What we cannot understand is why LBP, having the most convenient
means to correspond with UOB, did not first verify the amount of the draft before it cleared and paid the
same. Gold Palace, on the other hand, had no facility to ascertain with the drawer, UOB Malaysia, the
true amount in the draft. It was left with no option but to rely on the representations of LBP that the draft
was good.

In arriving at this conclusion, the Court is not closing its eyes to the other view espoused in common law
jurisdictions that a drawee bank, having paid to an innocent holder the amount of an uncertified, altered
check in good faith and without negligence which contributed to the loss, could recover from the person to
whom payment was made as for money paid by mistake.42 However, given the foregoing discussion, we
find no compelling reason to apply the principle to the instant case.

The Court is also aware that under the Uniform Commercial Code in the United States of America, if an
unaccepted draft is presented to a drawee for payment or acceptance and the drawee pays or accepts
the draft, the person obtaining payment or acceptance, at the time of presentment, and a previous
transferor of the draft, at the time of transfer, warrant to the drawee making payment or accepting the
draft in good faith that the draft has not been altered.43 Nonetheless, absent any similar provision in our
law, we cannot extend the same preferential treatment to the paying bank.

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.44 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,45 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. 46

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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. Neither can petitioner be
considered to have acted as the representative of the drawee bank when it debited respondent's account,
because, as already explained, the drawee bank had no right to recover what it paid. 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. 47 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, 48 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. Far
East's remedy under the law is not against Gold Palace but against the drawee-bank or the person
responsible for the alteration. That, however, is another issue which we do not find necessary to discuss
in this case.

However, we delete the exemplary damages awarded by the appellate court. Respondents have not
shown that they are entitled to moral, temperate or compensatory damages.49 Neither was petitioner
impelled by malice or bad faith in debiting the account of the respondent company and in pursuing its
cause.50 On the contrary, petitioner was honestly convinced of the propriety of the debit. We also delete
the award of attorney's fees for, in a plethora of cases, we have ruled that 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.51

WHEREFORE, premises considered, the March 15, 2005 Decision and the May 26, 2005 Resolution of
the Court of Appeals in CA-G.R. CV No. 71858 are AFFIRMED WITH THE MODIFICATION that the
award of exemplary damages and attorney's fees is DELETED.

SO ORDERED.

194
VILLANUEVA VS NITE (2006)

G.R. No. 148211 July 25, 2006

SINCERE Z. VILLANUEVA, petitioner,

vs.
MARLYN P. NITE,* respondent.

CORONA, J.:

In this petition for review on certiorari under Rule 45, petitioner submits that the Court of Appeals
(CA) erred in annulling and setting aside the Regional Trial Court (RTC) decision on the ground of
extrinsic fraud.

The facts follow.1

Respondent allegedly took out a loan of P409,000 from petitioner. To secure the loan, respondent
issued petitioner an Asian Bank Corporation (ABC) check (Check No. AYA 020195) in the amount
of P325,500 dated February 8, 1994. The date was later changed to June 8, 1994 with the consent
and concurrence of petitioner.

The check was, however, dishonored due to a material alteration when petitioner deposited the
check on due date. On August 24, 1994, respondent, through her representative Emily P. Abojada,
remitted P235,000 to petitioner as partial payment of the loan. The balance of P174, 000 was due on
or before December 8, 1994.

On August 24, 1994, however, petitioner filed an action for a sum of money and damages (Civil
Case No. Q-94-21495) against ABC for the full amount of the dishonored check. And in a decision
dated May 23, 1997, the RTC of Quezon City, Branch 101 ruled in his favor.2 When respondent went
to ABC Salcedo Village Branch on June 30, 1997 to withdraw money from her account, she was
unable to do so because the trial court had ordered ABC to pay petitioner the value of respondent’s
ABC check.

On August 25, 1997, ABC remitted to the sheriff a manager’s check amounting to P325,500 drawn
on respondent’s account. The check was duly received by petitioner on the same date.

Respondent then filed a petition in the CA seeking to annul and set aside the trial court’s decision
ordering ABC to pay petitioner the value of the ABC check.3 The CA ruled:

WHEREFORE, premises considered, the petition is GRANTED and the Decision dated May
23, 1997 of the public respondent is hereby ANNULLED and SET ASIDE for extrinsic fraud.

[Petitioner] Villanueva is hereby ordered to pay [Nite] —

1) the sum of [P146,500] as actual damages plus interest at 12% per annum from August 25,
1997 until full payment;

2) the sum of [P75,000] as moral damages;

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 3) the sum of [P50,000] as exemplary damages; and

4) the sum of [P50,000] as attorney’s fees and cost of suit.

SO ORDERED.4

Thus, this petition. We find for respondent.

Annulment of judgment is a remedy in law independent of the case where the judgment sought to be
annulled is promulgated. It can be filed by one who was not a party to the case in which the assailed
judgment was rendered. Section 1 of Rule 47 provides:

Section 1. Coverage. – This Rule shall govern the annulment by the Court of Appeals of
judgments or final orders and resolutions in civil actions of Regional Trial Courts for which
the ordinary remedies of new trial, appeal, petition for relief or other appropriate remedies
are no longer available through no fault of the petitioner.

Respondent may avail of the remedy of annulment of judgment under Rule 47. The ordinary
remedies of new trial, appeal and petition for relief were not available to her for the simple reason
that she was not made a party to the suit against ABC. Thus, she was neither able to participate in
the original proceedings nor resort to the other remedies because the case was filed when she was
abroad.

Annulment of judgment may be based only on extrinsic fraud and lack of jurisdiction.5 Extrinsic or
collateral fraud pertains to such fraud which prevents the aggrieved party from having a trial or
presenting his case to the court, or is used to procure the judgment without fair submission of
the controversy.6 This refers to acts intended to keep the unsuccessful party away from the courts as
when there is a false promise of compromise or when one is kept in ignorance of the suit.7

We uphold the appellate court’s finding of extrinsic fraud:

Barely 6 days after receipt of the partial payment of P235,000.00 and agreeing that the
balance of P174,000.00 shall be paid on or before December 8, 1994, [Sincere] filed his
complaint against [ABC] for the full amount of the dishonored check in the sum of
P320,500.00 without impleading petitioner. The apparent haste by which [Sincere] filed his
complaint and his failure to implead [Marlyn] clearly shows his intent to prevent [Marlyn] from
opposing his action.

[A]t the time news about [Marlyn] having left the country was widespread, appearing even in
print media as early as May 1994, [Marlyn] paid [Sincere] the amount of P235,000.00 as
partial payment on [August 18, 1994], through a representative.

Notwithstanding the foregoing, SIX (6) days later or on [August 24, 1994, Sincere] instituted
an action for collection with damages for the whole amount of the issued check.

[Sincere] does not deny knowledge of such payment neither of the fact that he concurred in
settling the balance of P174,000.00 on December 8, 1994.

[His] actuation and pronouncement shows not only bad faith on his part but also of his
fraudulent intention to completely exclude [Marlyn] from the proceedings in the court a

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 quo. By doing what he did he prevented the [trial court] from fully appreciating the particulars
of the case.8

In any event, the RTC decision may be annulled for lack of jurisdiction over the person of
respondent. The pertinent provisions of the Negotiable Instruments Law are enlightening:

SEC. 185. Check, defined. – A check is a bill of exchange drawn on a bank payable on
demand. Except as herein otherwise provided, the provisions of this Act applicable to a bill of
exchange payable on demand apply to a check.9 (emphasis ours)

SEC. 189. When check operates as an assignment. – A check of itself does not operate as
an assignment of any part of the funds to the credit of the drawer with the bank, and the
bank is not liable to the holder, unless and until it accepts or certifies the
check. (emphasis ours)

If a bank refuses to pay a check (notwithstanding the sufficiency of funds), the payee-holder cannot,
in view of the cited sections, sue the bank. The payee should instead sue the drawer who might in
turn sue the bank. Section 189 is sound law based on logic and established legal principles: no
privity of contract exists between the drawee-bank and the payee. Indeed, in this case, there was no
such privity of contract between ABC and petitioner.

Petitioner should not have sued ABC. Contracts take effect only between the parties, their assigns
and heirs, except in cases where the rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by provision of law.10 None of the foregoing
exceptions to the relativity of contracts applies in this case.

The contract of loan was between petitioner and respondent. No collection suit could prosper without
respondent who was an indispensable party. Rule 3, Sec. 7 of the Rules of Court states:

Sec. 7. Compulsory joinder of indispensable parties. – Parties in interest without whom no

final determination can be had of an action shall be joined either as plaintiffs or
defendants. (emphasis ours)

An indispensable party is one whose interest in the controversy is such that a final decree will
necessarily affect his rights. The court cannot proceed without his presence.11 If an indispensable
party is not impleaded, any judgment is ineffective.12 On this, Aracelona v. Court of
Appeals13 declared:

Rule 3, Section 7 of the Rules of Court defines indispensable parties as parties-in-interest

without whom there can be no final determination of an action. As such, they must be joined
either as plaintiffs or as defendants. The general rule with reference to the making of parties
in a civil action requires, of course, the joinder of all necessary parties where possible, and
the joinder of all indispensable parties under any and all conditions, their presence
being sine qua non for the exercise of judicial power. It is precisely "when an indispensable
party is not before the court (that) the action should be dismissed." The absence of an
indispensable party renders all subsequent actions of the court null and void for want of
authority to act, not only as to the absent parties but even as to those present.

WHEREFORE, the petition is hereby DENIED. The decision of the Court of Appeals in CA-G.R. SP
No. 44971 is AFFIRMED in toto. Costs against petitioner. SO ORDERED.

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BANK OF P.I VS ROYECA (2008)

G.R. No. 176664 July 21, 2008

BANK OF THE PHILIPPINE ISLANDS, Petitioner,

vs.
SPOUSES REYNALDO AND VICTORIA ROYECA, Respondents.

DECISION

NACHURA, J.:

Bank of the Philippine Islands (BPI) seeks a review of the Court of Appeals (CA) Decision 1 dated
July 12, 2006, and Resolution2 dated February 13, 2007, which dismissed its complaint for replevin
and damages and granted the respondents’ counterclaim for damages.

The case stems from the following undisputed facts:

On August 23, 1993, spouses Reynaldo and Victoria Royeca (respondents) executed and delivered
to Toyota Shaw, Inc. a Promissory Note3 for ₱577,008.00 payable in 48 equal monthly installments
of ₱12,021.00, with a maturity date of August 18, 1997. The Promissory Note provides for a penalty
of 3% for every month or fraction of a month that an installment remains unpaid.

To secure the payment of said Promissory Note, respondents executed a Chattel Mortgage4 in favor
of Toyota over a certain motor vehicle, more particularly described as follows:

<
p>Make and Type 1993 Toyota Corolla 1.3 XL

Motor No. 2E-2649879

Serial No. EE100-9512571

Color D.B. Gray Met.

Toyota, with notice to respondents, executed a Deed of Assignment5 transferring all its rights, title,
and interest in the Chattel Mortgage to Far East Bank and Trust Company (FEBTC).

Claiming that the respondents failed to pay four (4) monthly amortizations covering the period from
May 18, 1997 to August 18, 1997, FEBTC sent a formal demand to respondents on March 14, 2000
asking for the payment thereof, plus penalty.6 The respondents refused to pay on the ground that
they had already paid their obligation to FEBTC.

On April 19, 2000, FEBTC filed a Complaint for Replevin and Damages against the respondents with
the Metropolitan Trial Court (MeTC) of Manila praying for the delivery of the vehicle, with an
alternative prayer for the payment of ₱48,084.00 plus interest and/or late payment charges at the
rate of 36% per annum from May 18, 1997 until fully paid. The complaint likewise prayed for the
payment of ₱24,462.73 as attorney’s fees, liquidated damages, bonding fees and other expenses

198
incurred in the seizure of the vehicle. The complaint was later amended to substitute BPI as plaintiff
when it merged with and absorbed FEBTC.7

In their Answer, respondents alleged that on May 20, 1997, they delivered to the Auto Financing
Department of FEBTC eight (8) postdated checks in different amounts totaling ₱97,281.78. The
Acknowledgment Receipt,8 which they attached to the Answer, showed that FEBTC received the
following checks:

DATE BANK CHECK NO. AMOUNT

26 May 97 Landbank #610945 ₱13,824.15
6 June 97 Head Office #610946 12,381.63
30 May 97 FEBTC #17A00-11550P 12,021.00
15 June 97 Shaw Blvd. #17A00-11549P 12,021.00
30 June 97 " #17A00-11551P 12,021.00
18 June 97 Landbank #610947 11,671.00
18 July 97 Head Office #610948 11,671.00
18 August 97 #610949 11,671.00

The respondents further averred that they did not receive any notice from the drawee banks or from
FEBTC that these checks were dishonored. They explained that, considering this and the fact that
the checks were issued three years ago, they believed in good faith that their obligation had already
been fully paid. They alleged that the complaint is frivolous and plainly vexatious. They then prayed
that they be awarded moral and exemplary damages, attorney’s fees and costs of suit.9

During trial, Mr. Vicente Magpusao testified that he had been connected with FEBTC since 1994 and
had assumed the position of Account Analyst since its merger with BPI. He admitted that they had,
in fact, received the eight checks from the respondents. However, two of these checks (Landbank
Check No. 0610947 and FEBTC Check No. 17A00-11551P) amounting to ₱23,692.00 were
dishonored. He recalled that the remaining two checks were not deposited anymore due to the
previous dishonor of the two checks. He said that after deducting these payments, the total
outstanding balance of the obligation was ₱48,084.00, which represented the last four monthly
installments.

On February 23, 2005, the MeTC dismissed the case and granted the respondents’ counterclaim for
damages, thus:

WHEREFORE, judgment is hereby rendered dismissing the complaint for lack of cause of action,
and on the counterclaim, plaintiff is ordered to indemnify the defendants as follows:

a) The sum of PhP30,000.00 as and by way of moral damages;

b) The sum of PhP30,000.00 as and by way of exemplary damages;

c) The sum of PhP20,000.00 as and by way of attorney’s fees; and

d) To pay the costs of the suit.

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SO ORDERED.10

On appeal, the Regional Trial Court (RTC) set aside the MeTC Decision and ordered the
respondents to pay the amount claimed by the petitioner. The dispositive portion of its
Decision11 dated August 11, 2005 reads:

WHEREFORE, premises considered, the Decision of the Metropolitan Trial Court, Branch 9 dated
February 23, 2005 is REVERSED and a new one entered directing the defendants-appellees to pay
the plaintiff-appellant, jointly and severally,

1. The sum of ₱48,084.00 plus interest and/or late payment charges thereon at the rate of
36% per annum from May 18, 1997 until fully paid;

2. The sum of ₱10,000.00 as attorney’s fees; and

3. The costs of suit.

SO ORDERED.12

The RTC denied the respondents’ motion for reconsideration.13

The respondents elevated the case to the Court of Appeals (CA) through a petition for review. They
succeeded in obtaining a favorable judgment when the CA set aside the RTC’s Decision and
reinstated the MeTC’s Decision on July 12, 2006.14 On February 13, 2007, the CA denied the
petitioner’s motion for reconsideration.15

The issues submitted for resolution in this petition for review are as follows:

I. WHETHER OR NOT RESPONDENTS WERE ABLE TO PROVE FULL PAYMENT OF

THEIR OBLIGATION AS ONE OF THEIR AFFIRMATIVE DEFENSES.

II. WHETHER OR NOT TENDER OF CHECKS CONSTITUTES PAYMENT.

III. WHETHER OR NOT RESPONDENTS ARE ENTITLED TO MORAL AND EXEMPLARY

DAMAGES AND ATTORNEY’S FEES.16

The petitioner insists that the respondents did not sufficiently prove the alleged payment. It avers
that, under the law and existing jurisprudence, delivery of checks does not constitute payment. It
points out that this principle stands despite the fact that there was no notice of dishonor of the two
checks and the demand to pay was made three years after default.

On the other hand, the respondents postulate that they have established payment of the amount
being claimed by the petitioner and, unless the petitioner proves that the checks have been
dishonored, they should not be made liable to pay the obligation again.17

The petition is partly meritorious.

In civil cases, the party having the burden of proof must establish his case by a preponderance of
evidence, or evidence which is more convincing to the court as worthy of belief than that which is
offered in opposition thereto.18 Thus, the party, whether plaintiff or defendant, who asserts the
affirmative of an issue has the onus to prove his assertion in order to obtain a favorable judgment.

200
For the plaintiff, the burden to prove its positive assertions never parts. For the defendant, an
affirmative defense is one which is not a denial of an essential ingredient in the plaintiff’s cause of
action, but one which, if established, will be a good defense – i.e. an "avoidance" of the claim.19

In Jimenez v. NLRC,20 cited by both the RTC and the CA, the Court elucidated on who, between the
plaintiff and defendant, has the burden to prove the affirmative defense of payment:

As a general rule, one who pleads payment has the burden of proving it. Even where the plaintiff
must allege non-payment, the general rule is that the burden rests on the defendant to prove
payment, rather than on the plaintiff to prove non-payment. The debtor has the burden of showing
with legal certainty that the obligation has been discharged by payment.

When the existence of a debt is fully established by the evidence contained in the record, the burden
of proving that it has been extinguished by payment devolves upon the debtor who offers such a
defense to the claim of the creditor. Where the debtor introduces some evidence of payment, the
burden of going forward with the evidence - as distinct from the general burden of proof - shifts to the
creditor, who is then under a duty of producing some evidence to show non-payment.21

In applying these principles, the CA and the RTC, however, arrived at different conclusions. While
both agreed that the respondents had the burden of proof to establish payment, the two courts did
not agree on whether the respondents were able to present sufficient evidence of payment —
enough to shift the burden of evidence to the petitioner. The RTC found that the respondents failed
to discharge this burden because they did not introduce evidence of payment, considering that mere
delivery of checks does not constitute payment.22 On the other hand, the CA concluded that the
respondents introduced sufficient evidence of payment, as opposed to the petitioner, which failed to
produce evidence that the checks were in fact dishonored. It noted that the petitioner could have
easily presented the dishonored checks or the advice of dishonor and required respondents to
replace the dishonored checks but none was presented. Further, the CA remarked that it is absurd
for a bank, such as petitioner, to demand payment of a failed amortization only after three years from
the due date.

The divergence in this conflict of opinions can be narrowed down to the issue of whether the
Acknowledgment Receipt was sufficient proof of payment. As correctly observed by the RTC, this is
only proof that respondents delivered eight checks in payment of the amount due. Apparently, this
will not suffice to establish actual payment.

Settled is the rule that payment must be made in legal tender. A check is not legal tender and,
therefore, cannot constitute a valid tender of payment.23 Since a negotiable instrument is only a
substitute for money and not money, the delivery of such an instrument does not, by itself, operate
as payment. Mere delivery of checks does not discharge the obligation under a judgment. The
obligation is not extinguished and remains suspended until the payment by commercial document is
actually realized.24

To establish their defense, the respondents therefore had to present proof, not only that they
delivered the checks to the petitioner, but also that the checks were encashed. The respondents
failed to do so. Had the checks been actually encashed, the respondents could have easily
produced the cancelled checks as evidence to prove the same. Instead, they merely averred that
they believed in good faith that the checks were encashed because they were not notified of the
dishonor of the checks and three years had already lapsed since they issued the checks. 1avv phi 1

Because of this failure of the respondents to present sufficient proof of payment, it was no longer
necessary for the petitioner to prove non-payment, particularly proof that the checks were

201
dishonored. The burden of evidence is shifted only if the party upon whom it is lodged was able to
adduce preponderant evidence to prove its claim.25

To stress, the obligation to prove that the checks were not dishonored, but were in fact encashed,
fell upon the respondents who would benefit from such fact. That payment was effected through the
eight checks was the respondents’ affirmative allegation that they had to establish with legal
certainty. If the petitioner were seeking to enforce liability upon the check, the burden to prove that a
notice of dishonor was properly given would have devolved upon it.26 The fact is that the petitioner’s
cause of action was based on the original obligation as evidenced by the Promissory Note and the
Chattel Mortgage, and not on the checks issued in payment thereof.

Further, it should be noted that the petitioner, as payee, did not have a legal obligation to inform the
respondents of the dishonor of the checks. A notice of dishonor is required only to preserve the right
of the payee to recover on the check. It preserves the liability of the drawer and the indorsers on the
check. Otherwise, if the payee fails to give notice to them, they are discharged from their liability
thereon, and the payee is precluded from enforcing payment on the check. The respondents,
therefore, cannot fault the petitioner for not notifying them of the non-payment of the checks because
whatever rights were transgressed by such omission belonged only to the petitioner.

In all, we find that the evidence at hand preponderates in favor of the petitioner. The petitioner’s
possession of the documents pertaining to the obligation strongly buttresses its claim that the
obligation has not been extinguished. The creditor’s possession of the evidence of debt is proof that
the debt has not been discharged by payment.27 A promissory note in the hands of the creditor is a
proof of indebtedness rather than proof of payment.28 In an action for replevin by a mortgagee, it is
prima facie evidence that the promissory note has not been paid.29 Likewise, an uncanceled
mortgage in the possession of the mortgagee gives rise to the presumption that the mortgage debt is
unpaid.30

Finally, the respondents posit that the petitioner’s claim is barred by laches since it has been three
years since the checks were issued. We do not agree. Laches is a recourse in equity. Equity,
however, is applied only in the absence, never in contravention, of statutory law. Thus, laches
cannot, as a rule, abate a collection suit filed within the prescriptive period mandated by the New
Civil Code.31 The petitioner’s action was filed within the ten-year prescriptive period provided under
Article 1144 of the New Civil Code. Hence, there is no room for the application of laches.

Nonetheless, the Court cannot ignore what the respondents have consistently raised — that they
were not notified of the non-payment of the checks. Reasonable banking practice and prudence
dictates that, when a check given to a creditor bank in payment of an obligation is dishonored, the
bank should immediately return it to the debtor and demand its replacement or payment lest it
causes any prejudice to the drawer. In light of this and the fact that the obligation has been partially
paid, we deem it just and equitable to reduce the 3% per month penalty charge as stipulated in the
Promissory Note to 12% per annum.32 Although a court is not at liberty to ignore the freedom of the
parties to agree on such terms and conditions as they see fit, as long as they contravene no law,
morals, good customs, public order or public policy, a stipulated penalty, nevertheless, may be
equitably reduced by the courts if it is iniquitous or unconscionable, or if the principal obligation has
been partly or irregularly complied with.33

WHEREFORE, premises considered, the petition is PARTIALLY GRANTED. The Court of Appeals
Decision dated July 12, 2006, and Resolution dated February 13, 2007, are REVERSED and SET
ASIDE. The Decision of the Regional Trial Court, dated August 11, 2005, is REINSTATED with the
MODIFICATION that respondents are ordered to deliver the possession of the subject vehicle, or in

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the alternative, pay the petitioner ₱48,084.00 plus late penalty charges/interest thereon at the rate of
12% per annum from May 18, 1997 until fully paid.

SO ORDERED.

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