PRELIMINARY CONSIDERATIONS

Philippine Education Co. Inc. vs. Soriano [GR L-22405, 30 June

1971]
Facts: Enrique Montinola sought to purchase from the Manila Post
Office 10 money orders amounting to P200.00 each payable to E. P.
Montinola with address at Lucena, Quezon. After the postal teller
had made out money orders numbered 124685, 124687-124695,
Montinola offered to pay for them with a private check. The teller
advised Montinola to see the Chief of the Money Order Division,
but Montinola managed to leave the building with his own check
and the 10 money orders without the knowledge of the teller. On the
same date, upon discovery of the disappearance of the unpaid
money orders, an urgent message was sent to all postmasters, and
the following day notice was likewise served upon all banks
instructing them not to pay anyone of the money orders aforesaid if
presented for payment. The Bank of America received a copy of said
notice 3 days later. On April 1958 one of the above mentioned
money orders numbered 124688 was received by Philippine
Education Co. as part of its sales receipts. The following day it
deposited the same with the Bank of America, and the latter cleared
it with the Bureau of Posts and received from the latter its face value
of P200.00. On September 1961, Mauricio A. Soriano, Chief of the
Money Order Division of the Manila Post Office, notified the Bank
of America that money order 124688 attached to his letter had been
found to have been irregularly issued and that the amount it
represented had been deducted from the bank's clearing account. For
its part, the Bank of America debited Philippine Education Co.'s
account with the same amount and gave it advice thereof by means
of a debit memo. Philippine Education Co. requested the Postmaster
General to reconsider the action taken by his office deducting the
sum of P200.00 from the clearing account of the Bank of America,
but his request was denied. Philippine Education Co.'s subsequent
request that the matter be referred to the Secretary of Justice for
advice was also denied. Thereafter, Philippine Education Co.
elevated the matter to the Secretary of Public Works and
Communications, but the latter sustained the actions taken by the
postal officers. Montinola was charged with theft in the Court of
First Instance of Manila but after trial he was acquitted on the
ground of reasonable doubt. Philippine Education Co. filed an action
against Soriano, et al. in the Municipal Court of Manila. The
municipal court rendered judgment, ordering Soriano, et al. to
countermand the notice given to the Bank of America on 27
September 1961, deducting from said Bank's clearing account the
sum of P200.00 representing the amount of postal money order
124688, or in the alternative, to indemnify Philippine Education Co.
in the said sum of P200.00 with interest thereon at the rate of 81/2% per annum from 27 September 1961 until fully paid; without
any pronouncement as to costs and attorney's fees." The case was
appealed to the CFI of Manila where the appealed decision
dismissing the complaints with costs, was rendered. Hence,
Philippine Education Co. appealed.
Issue: Whether the postal money order is a negotiable instrument.
Held: Since Philippine postal statutes were patterned after similar
statutes in force in the United States, they are generally construed in
accordance with the construction given in the United States to their
own postal statutes. Postal money orders are not negotiable
instruments. In establishing and operating a postal money order
system, the government is not engaging in commercial transactions
but merely exercises a governmental power for the public benefit.
Some of the restrictions imposed upon money orders by postal laws
and regulations are inconsistent with the character of negotiable
instruments. For instance, such laws and regulations usually provide
for not more than one endorsement; payment of money orders may
be withheld under a variety of circumstances.

Sps TIBAJIA vs. COURT OF APPEALS & EDEN TAN

PADILLA, J.:
FACTS:
Eden Tan filed a suit for collection of a sum of money against the
Tibajia spouses. A writ of attachment was issued by the trial court,
the Deputy Sheriff filed a return stating that a deposit made by the
Tibajia spouses in the RTC of Kalookan City amounting to
P442,750.00 in another case, had been garnished by him. RTC of
Pasig rendered its decision in favor of Tan, ordering the Tibajia
spouses to pay Tan P300,000.00. On appeal, CA modified the
decision by reducing the award of damages. Tan filed a motion for
execution and the garnished funds which by then were on deposit
with the cashier of the RTC of Pasig were levied upon.
The Tibajia spouses delivered to Deputy Sheriff Bolima the total
money judgment in the following form:
Cashier's Check P262,750.00
Cash 135,733.70

Total P398,483.70
Tan refused to accept the payment made by the Tibajia spouses and
insisted that the garnished funds deposited with the cashier of the
RTC of Pasig be withdrawn to satisfy the judgment obligation.
Tibajias filed a motion to lift the writ of execution on the ground
that the judgment debt had already been paid. The motion was
denied on the ground that payment in cashier's check is not payment
in legal tender and that payment was made by a third party other
than the defendant. A motion for reconsideration was denied. The
spouses Tibajia filed a petition for certiorari, prohibition and
injunction in the CA, which the latter dismissed holding that
payment by cashier's check is not payment in legal tender as
required by RA. 529. The motion for reconsideration was denied,
hence, this appeal.
ISSUE: WHETHER OR NOT THE BPI CASHIER'S CHECK NO.
TENDERED BY PETITIONERS FOR PAYMENT OF THE
JUDGMENT DEBT, IS "LEGAL TENDER".
HELD: In accordance with Article 1249 of the Civil Code, Section
1 of RA 529 and Section 63 of RA 265, 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.
Section 1 of RA 529 provides: XXXX Every obligation heretofore
and hereafter incurred, whether or not any such provision as to
payment is contained therein or made with respect thereto, shall be
discharged upon payment in any coin or currency which at the time
of payment is legal tender for public and private debts.
Section 63 of RA 265 provides: Checks representing deposit money
do not have legal tender power and their acceptance in the 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 of cash in an amount equal to the amount credited to his
account.

Philippine Airlines vs. Court of Appeals [GR 49188, 30 January

1990]
Gutierrez Jr. J:
Facts: On 8 November 1967, Amelia Tan, under the name and style
of Able Printing Press commenced a complaint for damages before
the Court of First Instance (CFI) of Manila against Philippine
Airlines, Inc. (PAL) because PAL did not issue the checks intended
for her. After trial, the CFI of Manila rendered judgment on 29 June
1972, in favor of Tan. PAL filed its appeal with the Court of Appeals
(CA). The appellate court rendered its decision ordering PAL to pay
the sum of P25,000.00 as damages and P5,000.00 as attorney's fee.
A motion for reconsideration filed by Tan was denied by CA for lack
of merit. The case was remanded to the trial court for execution. The
trial court issued its order of execution with the corresponding writ
of execution of the judgment in favor of Tan. The writ was duly
referred to Deputy Sheriff Emilio Z. Reyes for enforcement. Tan
moved for the issuance of an alias writ of execution stating that the
judgment rendered by the lower court remained unsatisfied. PAL
filed an opposition stating that it had already fully paid its obligation
to Tan through the deputy sheriff of the court, Reyes, as evidenced
by cash vouchers properly signed and receipted by said Emilio Z.
Reyes.
CA ordered the executing sheriff Reyes to appear with his return and
explain the reason for his failure to surrender the amounts paid to
him by PAL but the order could not be served because he absconded
or disappeared. Tan filed a Motion for Alias Writ of Execution
which the Judge issued thereafter. PAL received a copy of the first
alias writ of execution directing Special Sheriff Jaime del Rosario to
levy on execution. PAL filed an urgent motion to quash the alias writ
stating that no return of the writ had as yet been made by Sheriff
Reyes and that the judgment debt had already been fully satisfied as
evidenced by the cash vouchers signed and receipted by Sheriff
Reyes. Special Sheriff del Rosario served a notice of garnishment on
the depository bank of PAL, Far East Bank and Trust Company,
through its manager and garnished PAL's deposit in the said bank in
the total amount of P64,408.00. PAL filed the petition for certiorari.
Issue: Whether the payment made to the absconding sheriff by
check in his name operate to satisfy the judgment debt.
Held: The payment to the absconding sheriff by check in his name
did not operate as a satisfaction of the judgment debt. As Article
1240 of the Civil Code provides, a payment, in order to be effective
to discharge an obligation, must be made to the proper person.
Further, Article 1249 of the Civil Code provides that "XXXX 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 absence of an agreement,
either express or implied, payment means the discharge of a debt or
obligation in money and unless the parties so agree, a debtor has no
rights, except at his own peril, to substitute something in lieu of cash
as medium of payment of his debt. Consequently, a public officer
has no authority to accept anything other than money in payment of
an obligation under a judgment being executed. The acceptance by
the sheriff of PAL's checks does not, per se, operate as a discharge
of the judgment debt. 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. 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. 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.

FORM AND INTERPRETATION OF NEGOTIABLE

INSTRUMENTS
Metropolitan Bank & Trust Company vs. Court of Appeals [GR
88866, 18 February 1991]
Facts: The Metropolitan Bank and Trust Co. (MetroBank) is a
commercial bank with branches throughout the Philippines and even
abroad. Golden Savings and Loan Association was operating in
Calapan, Mindoro, with Lucia Castillo, Magno Castillo and Gloria
Castillo as its principal officers. In January 1979, a certain Eduardo
Gomez opened an account with Golden Savings and deposited over
a period of 2 months 38 treasury warrants with a total value of
P1,755,228.37. They were all drawn by the Philippine Fish
Marketing Authority and purportedly signed by its General Manager
and counter-signed by its Auditor. 6 of these were directly payable
to Gomez while the others appeared to have been indorsed by their
respective payees, followed by Gomez as second indorser. On
various dates between June 25 and July 16, 1979, all these warrants
were subsequently indorsed by Gloria Castillo as Cashier of Golden
Savings and deposited to its Savings Account in the Metrobank
branch in Calapan, Mindoro. They were then sent for clearing to
Metrobank, which forwarded them to the Bureau of Treasury for
special clearing. More than 2 weeks after the deposits, Gloria
Castillo was told to wait when she asked whether the warrants had
been cleared. Gomez was meanwhile not allowed to withdraw from
his account. MetroBank says it finally decided to allow Golden
Savings to withdraw from the proceeds of the warrants. Three
withdrawals were made with the total amount of P968,000.00.
Golden Savings subsequently allowed Gomez to make withdrawals
from his own account, eventually collecting the total amount of
P1,167,500.00 from the proceeds of the apparently cleared warrants.
Metrobank informed Golden Savings that 32 of the warrants had
been dishonored by the Bureau of Treasury and demanded the
refund by Golden Savings of the amount it had previously
withdrawn, to make up the deficit in its account. The demand was
rejected. Metrobank then sued Golden Savings in the RTC of
Mindoro. Judgment was rendered in favor of Golden Savings.The
lower court modified its decision, by dismissing the complaint; by
dissolving and lifting the writ of attachment of the properties of
Golden Savings and Spouses Castillo; directing Metrobank to
reverse its action of debiting the sum of P1,754,089.00 and to
reinstate and credit to such account the amount existing before the
debit was made, to allow Golden Savings to withdraw the amount
outstanding thereon before the debit; by ordering Metrobank to pay
Golden Savings attorney's fees and expenses of litigation; and by
ordering Metrobank to pay the Spouses Castillo attorney's fees and
expenses of litigation. On appeal to the appellate court, the decision
was affirmed, prompting Metrobank to file the petition for review.
Issue: Whether the treasury warrants in question are negotiable
instruments.
Held: Clearly stamped on the treasury warrants' face is the word
"non-negotiable." Moreover, and this is of equal significance, it is
indicated that they are payable from a particular fund, to wit, Fund
501. Section 1 of the Negotiable Instruments Law, provides that "An
instrument to be negotiable must conform to the following
requirements: XXXX; (b) Must contain an unconditional promise or
order to pay a sum certain in money; XXX." Section 3 provides that
"An unqualified order or promise to pay is unconditional within the
meaning of this Act though coupled with (a) An indication of a
particular fund out of which reimbursement is to be made or a
particular account to be debited with the amount; XXX." The
indication of Fund 501 as the source of the payment to be made on
the treasury warrants makes the order or promise to pay "not
unconditional" and the warrants themselves non-negotiable.

Caltex (Philippines) vs CA
212 SCRA 448 August 10, 1992

Ang Tek Lian vs. Court of Appeals [GR L-2516, 25 September

1950]

Facts:
On various dates, Security Bank, through its Sucat Branch issued
280 certificates of time deposit (CTDs) in favor of one Angel dela
Cruz who is tasked to deposit aggregate amounts. Mr. dela Cruz
delivered the CTDs to Caltex Philippines in connection with his
purchased of fuel products from the latter. However, he 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 bank's procedure, if he desired replacement of said lost
CTDs.

Facts: Knowing he had no funds therefor, Ang Tek Lian drew on

Saturday, 16 November 1946, a check upon the China Banking
Corporation for the sum of P4,000, payable to the order of "cash".
He delivered it to Lee Hua Hong in exchange for money which the
latter handed in the act. On 18 November 1946, the next business
day, the check was presented by Lee Hua Hong to the drawee bank
for payment, but it was dishonored for insufficiency of funds, the
balance of the deposit of Ang Tek Lian on both dates being P335
only. Ang Tek Lian was charged and was convicted of estafa in the
Court of First Instance of Manila. The Court of Appeals affirmed the
verdict.

Angel dela Cruz negotiated and obtained a loan from defendant

bank and executed a notarized Deed of Assignment of Time Deposit,
which stated, among others, that he 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.

Issue: Whether indorsement is necessary for the presentation of a

bearer instrument for payment.

In 1982, Mr. Aranas, Credit Manager of Caltex, went to the Security

Bank Sucat and presented for verification the CTDs declared lost by
dela Cruz alleging that the same were delivered to herein plaintiff
"as security for purchases made with Caltex Philippines, Inc." by
said depositor. Dela Cruz received a letter from the Caltex formally
informing of its possession of the CTDs in question and of its
decision to pre-terminate the same. Security Bank rejected Caltexs
demand and claim for payment of the value of the CTDs in a letter
dated February 7, 1983. The loan of Angel dela Cruz matured and
fell due and he set-off and applied the time deposits in question to
the payment of the matured loan. However, Caltex 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 interest and damages. On appeal, CA affirmed the lower court's
dismissal of the complaint, and ruled (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.
Issues:
a) Whether certificates of time deposit (CTDs) are negotiable
instruments?
b) Is the depositor also the bearer of the document?
Held: (a) The CTDs in question are not negotiable instruments. 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. 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.
(b) 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, and a holder may be the payee or indorsee of a bill or
note, who is in possession of it, or the bearer thereof. In the present
case, there was no negotiation in the sense of a transfer of the legal
title to the CTDs in favor of petitioner in which situation mere
delivery of the CTDs would have sufficed. Here, the delivery as
security for the purchases of Angel de la Cruz could at the most
constitute Caltex only as a holder for value by reason of his lien.

Held: Under Section 9(d) of the Negotiable Instruments Law, a

check drawn payable to the order of "cash" is a check payable to
bearer, and the bank may pay it to the person presenting it for
payment without the drawer's indorsement. A check payable to the
order of cash is a bearer instrument. Where a check is made payable
to the order of cash, the word cash does not purport to be the
name of any person, and hence the instrument is payable to bearer.
The drawee bank need not obtain any indorsement of the check, but
may pay it to the person presenting it without any indorsement." Of
course, if the bank is not sure of the bearer's identity or financial
solvency, it has the right to demand identification and/or assurance
against possible complications, for instance, (a) forgery of drawer's
signature, (b) loss of the check by the rightful owner, (c) raising of
the amount payable, etc. The bank may therefore require, for its
protection, that the indorsement of the drawer or of some other
person known to it be obtained. But where the Bank is satisfied of
the identity and/or the economic standing of the bearer who tenders
the check for collection, it will pay the instrument without further
question; and it would incur no liability to the drawer in thus acting.
A check payable to bearer is authority for payment to the holder.
Where a check is in the ordinary form, and is payable to bearer, so
that no indorsement is required, a bank, to which it is presented for
payment, need not have the holder identified, and is not negligent in
failing to do so. Consequently, a drawee bank to which a bearer
check is presented for payment need not necessarily have the older
identified and ordinarily may not be charged with negligence in
failing to do so. If the bank has no reasonable cause for suspecting
any irregularity, it will be protected in paying a bearer check, no
matter what facts unknown to it may have occurred prior to the
presentment. Although a bank is entitled to pay the amount of a
bearer check without further inquiry, it is entirely reasonable for the
bank to insist that the holder give satisfactory proof of his identity.
Herein anyway, it is significant, and conclusive, that the form of the
check was totally unconnected with its dishonor. It was returned
unsatisfied because the drawer had insufficient funds not because
the drawer's indorsement was lacking.

PHILIPPINE NATIONAL BANK vs.

RODRIGUEZ and NORMA RODRIGUEZ

ERLANDO

T.

FACTS
Respondents-Spouses Erlando and Norma Rodriguez, engaged in
the informal lending business, maintained savings and
demand/checking accounts with Philippine National Bank (PNB).
In line with their business, they had a discounting arrangement with
the Philnabank Employees Savings and Loan Association
(PEMSLA), an association of PNB employees. Naturally, PEMSLA
regularly granted loans to its members. Spouses Rodriguez would
rediscount the postdated checks issued to members whenever the
association was short of funds and then replace the postdated checks
with their own checks issued in the name of the members.
To subvert PEMSLAs policy not to approve applications for loans
of members with outstanding debts, some PEMSLA 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 in the
name of the members and delivered the checks to an officer of
PEMSLA and were deposited by the spouses to their account.
The checks were deposited directly by PEMSLA to its savings
account without any indorsement from the named payees. This was
made possible through the facilitation of Edmundo Palermo, Jr.,
treasurer of PEMSLA and bank teller in the PNB Branch.
When PNB found out about these fraudulent acts, PNB closed the
current account of PEMSLA and the PEMSLA checks deposited by
the spouses were returned or dishonored. Because the PEMSLA
checks given as payment were returned, spouses Rodriguez incurred
losses from the rediscounting transactions. RTC ruled that PNB is
liable to return the value of the checks. The CA concluded that the
checks were obviously meant by the spouses to be really paid to
PEMSLA. CA also found that the checks were bearer instruments,
and 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.
ISSUE
Whether the subject checks are payable to order or to bearer and
who bears the loss.
HELD
The checks are order instruments. 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. 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.
Verily, the subject checks are presumed order instruments because
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.

PHILIPPINE NATIONAL BANK, vs MANILA OIL REFINING

& BY-PRODUCTS COMPANY, INC.,
MALCOLM, J.:
FACTS: On May 8, 1920, the manager and the treasurer of the
Manila Oil Refining & By-Products Company, Inc., executed and
delivered to the Philippine National Bank, a written instrument
promising to pay to the order of the PNB P60,000.00. The Manila
Oil Refining and By-Products Company, Inc. failed to pay the
promissory note on demand. PNB brought action in the Court of
First Instance of Manila, to recover P61,000, the amount of the note,
together with interest and costs. Mr. Elias N. Rector, an attorney
associated with PNB filed a motion confessing judgment. Later,
attorney Antonio Gonzalez appeared for Manila Oil and presented
an answer. The trial judge rendered judgment on the motion of
attorney Recto in the terms of the complaint. In the Supreme Court,
the question of first impression raised in the case concerns the
validity in this jurisdiction of a provision in a promissory note
whereby incase the same is not paid at maturity, the maker
authorizes any attorney to appear and confess judgment thereon for
the principal amount, with interest, costs, and attorney's fees, and
waives all errors, rights to inquisition, and appeal, and all property
exemptions.
ISSUES: Whether the Negotiable Instruments Law recognizes
judgment notes enforceable under the regular procedure.
RULING: Section 5 of the Negotiable Instruments Law provides
that "The negotiable character of an instrument otherwise negotiable
is not affected by a provision which (b)Authorizes confession of
judgment if the instrument be not paid at maturity"; but this
provision of law cannot be taken to sanction judgments by
confession, because it is a portion of a uniform law which merely
provides that, in jurisdictions where judgments notes are recognized,
such clauses shall not affect the negotiable character of the
instrument. A warrant of attorney given as security to a creditor
accompanying a promissory note confers a valid power, and
authorizes a confession of judgment in any court of competent
jurisdiction in an action to be brought upon said note. Judgments by
confession as appeared at common law were considered an
amicable, easy, and cheap way to settle and secure debts. They are a
quick remedy and serve to save the court's time. In one sense,
instruments of this character may be considered as special
agreements, with power to enter up judgments on them, binding the
parties to the result as they themselves viewed it.
On the other hand, such warrants of attorney are void as against
public policy, because they enlarge the field for fraud, because under
these instruments the promissor bargains away his right to a day in
court, and because the effect of the instrument is to strike down the
right of appeal accorded by statute. The recognition of such a form
of obligation would bring about a complete reorganization of
commercial customs and practices, with reference to short-term
obligations. It can readily be seen that judgment notes, instead of
resulting to the advantage of commercial life in the Philippines
might be the source of abuse and oppression, and make the courts
involuntary parties thereto. If the bank has a meritorious case, the
judgment is ultimately certain in the courts. Also, provisions in notes
authorizing attorneys to appear and confess judgments against
makers should not be recognized in this jurisdiction by implication
and should only be considered as valid when given express
legislative sanction.

Republic Planters Bank vs. Court of Appeals [GR 93073, 21

December 1992]
Facts: Shozo Yamaguchi and Fermin Canlas were President/Chief
Operating Officer and Treasurer respectively, of Worldwide
Garment Manufacturing, Inc. By virtue of a Board Resolution,
Shozo Yamaguchi and Fermin Canlas were authorized to apply for
credit facilities with the petitioner Republic Planters Bank (RPB) in
the forms of export advances and letters of credit/trust receipts
accommodations. RPB issued nine promissory notes where
Yamaguchi and Canlas jointly and severally promised to pay to the
ORDER of the REPUBLIC PLANTERS BANK. On the right
bottom margin of the promissory notes appeared the signatures of
Yamaguchi and Canlas above their printed names. In three
promissory notes, the name Worldwide Garment Manufacturing,
Inc. was apparently rubber stamped above the signatures of
Yamaguchi and Canlas. Worldwide Garment Manufacturing, Inc.
(WGMI) noted to change its corporate name to Pinch Manufacturing
Corporation (PMC). RPB filed a complaint for the recovery of sums
of money covered among others, by the nine promissory notes with
interest plus attorney's fees and penalty charges. The complainant
was originally brought against WGMI but was later substituted by
PMC. PMC and Yamaguchi did not file an Amended Answer and
failed to appear at the scheduled pre-trial conference despite due
notice. Canlas, in his Answer, denied having issued the promissory
notes in question since according to him, he was not an officer of
PMC, but instead of WGMI, and that when he issued said
promissory notes in behalf of WGMI, the same were in blank, the
typewritten entries not appearing therein prior to the time he affixed
his signature. Regional Trial Court rendered a decision holding PMC
(formerly WGMI),Yamaguchi and Canlas liable to pay, jointly and
severally, RPB. Canlas appealed to IAC (now Court of Appeals)
contending that he should not be held personally liable for such
authorized corporate acts that he performed. The appellate court
completely absolved Canlas from liability under the promissory
notes and reduced the award for damages and attorney's fees. RPB
appealed with the contention that having unconditionally signed the
9 promissory notes with Yamaguchi, jointly and severally, Canlas is
solidarity liable with Yamaguchi on each of the nine notes.
Issue [1]: Whether Fermin Canlas is solidarily liable on each of the
promissory notes bearing his signature.
Held [1]: Fermin Canlas is solidarily liable on each of the
promissory notes bearing his signature. Under the Negotiable
lnstruments Law, persons who write their names on the face of
promissory notes are makers and are liable as such. By signing the
notes, the maker promises to pay to the order of the payee or any
holder according to the tenor thereof. Based on the above provisions
of law, there is no denying that 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. 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. Herein, the solidary
liability of 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 RPB. By
making a joint and several promise to pay to the order of RPB,
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 PMC as solidary debtors.. With or without the
presence of the phrase "and (in) his personal capacity" below the
signatures, Canlas is primarily liable as a co-maker of each of the
notes and his liability is that of a solidary debtor.

Evangelista vs. Mercator Finance Corp. [GR 148864, 21 August

2003]
Facts: Spouses Eduardo B. Evangelista and Epifania C. Evangelista
filed a complaint for annulment of titles against Mercator Finance
Corp. Lydia P. Salazar, Lamecs Realty and Development
Corporation, and the Register of Deeds of Bulacan. The spouses
Evangelista, claiming to be the registered owners of 5 parcels of
land contained in the Real Estate Mortgage executed by them and
Embassy Farms, Inc, alleged that they executed the mortgage in
favor of Mercator only as officers of Embassy Farms. They contend
that the mortgage is void due to lack of any consideration as they
did not receive the proceeds of the loan evidenced by a promissory
note, as all of it went to Embassy Farms. With the void mortgage,
they assailed the validity of the foreclosure proceedings conducted
by Mercator, the sale to it as the highest bidder in the public auction,
the issuance of the TCT to it, and the subsequent sales to Lydia P.
Salazar, and Lamecs Realty & Development Corporation. Mercator
contends that the mortgage was in consideration of certain loans,
and/or other forms of credit accommodations and to secure the
payment of the same and those others that the Mortgagee may
extend to the mortgagor. It contended that since the spouses and
Embassy Farms signed the promissory note as co-makers, the
spouses are jointly and severally liable with Embassy Farms. Due to
their failure to pay the obligation, the foreclosure and subsequent
sale of the mortgaged properties are valid. Salazar and Lamecs
asserted that they are innocent purchasers for value and in good
faith, relying on the validity of the title of Mercator. Lamecs alleged
that they are the present registered owner. Salazar and Lamecs
likewise assailed the long silence and inaction by the spouses as it
was only after a lapse of almost 10 years from the foreclosure of the
property and the subsequent sales that they made their claim. Thus,
Salazar and Lamecs averred that petitioners are in estoppel and
guilty of laches. Mercator moved for summary judgment and argued
that petitioners had admitted in their pre-trial brief the existence of
the promissory note, hence, there is no genuine issue regarding their
liability. The spouses opposed the motion claiming that because
their personal liability to Mercator is at issue, there is a need for a
full-blown trial. The RTC granted the motion for summary judgment
and dismissed the complaint. The spouses motion for
reconsideration was denied for lack of merit. The spouses went up to
the Court of Appeals, but were unsuccessful. A motion for
reconsideration was likewise denied for lack of merit. The spouses
filed the Petition for Review on Certiorari. The spouses allege that
there is an ambiguity in the wording of the promissory note and
claim that since it was Mercator who provided the form, then the
ambiguity should be resolved against it.
Issue: Whether the spouses are solidarily liable with Embassy
Farms, in light of the promissory note signed by them.
Held: The promissory note and the Continuing Suretyship
Agreement prove that the spouses are solidary obligors with
Embassy Farms. Section 17 of the Negotiable Instruments Law
states that "Where the language of the instrument is ambiguous or
there are omissions therein, the following rules of construction
apply: (g) Where an instrument containing the word 'I promise to
pay' is signed by two or more persons, they are deemed to be jointly
and severally liable thereon." Further, even if the spouses intended
to sign the note merely as officers of Embassy Farms, still this does
not erase the fact that they subsequently executed a continuing
suretyship agreement. A surety is one who is solidarily liable with
the principal. The spouses cannot claim that they did not personally
receive any consideration for the contract for well-entrenched is the
rule that the consideration necessary to support a surety obligation
need not pass directly to the surety, a consideration moving to the
principal alone being sufficient. Having executed the suretyship
agreement, there can be no dispute on the personal liability of the

spouses.
VICTORIA J. ILANO vs HON. DOLORES L.
ESPAOL, et.al.

RAUL H. SESBREO vs. CA, et.al

FACTS: AMELIA O. ALONZO, is a trusted employee of petitioner.

She has been with them for several years already, and through the
years, defendant ALONZO was able to gain the trust and confidence
of petitioner and her family; That due to these trust and confidence
reposed upon defendant ALONZO by [petitioner], there were
occasions when defendant ALONZO was entrusted with
[petitioners] METROBANK Check Book containing either signed
or unsigned blank checks, especially in those times when
[petitioner] left for the United States for medical check-up;
Defendant Alonzo was able to succeed in inducing the petitioner to
sign a promissory note through fraud and deceit; defendant
ALONZO in collusion with her co-defendants, ESTELA
CAMACLANG, ALLAN CAMACLANG and ESTELITA
LEGASPI likewise was able to induce plaintiff to sign several
undated blank checks. The named defendants-herein respondents
filed their respective answers invoking lack of cause of action, for
while the checks subject of the complaint had been issued on
account and for value, and without a date and had been dishonored
due to ACCOUNT CLOSED. The trial court dismissed petitioners
complaint for failure to allege the ultimate facts-bases of petitioners
claim that her right was violated and that she suffered damages
thereby. The Court of Appeals affirmed the trial courts decision and
held that the elements of a cause of action are absent in the case and
petitioner did not deny the genuineness or authenticity of her
signature on the subject promissory notes and the allegedly signed
blank

For review is the Decision[1] of the Court of Appeals (CA) dated

July 23, 2003 and its Resolution[2] dated January 12, 2004 in CAG.R. CV No. 43287. The assailed decision reversed the
decision[3] of the Regional Trial Court (RTC), Branch 6, Cebu City
in Civil Case R-19022 insofar as the RTC held the Province of Cebu
liable for damages to petitioner Raul H. Sesbreo. The assailed
resolution denied petitioner's motion for reconsideration.

ISSUE: Whether the checks are negotiable despite it being not dated
RULING: While some of the allegations may lack particulars, and
are in the form of conclusions of law, the elements of a cause of
action are present. For even if some are not stated with particularity,
petitioner alleged 1) her legal right not to be bound by the
instruments which were bereft of consideration and to which her
consent was vitiated; 2) the correlative obligation on the part of the
defendants-respondents to respect said right; and 3) the act of the
defendants-respondents in procuring her signature on the
instruments through deceit, abuse of confidence machination, fraud,
falsification, forgery, defraudation, and bad faith, and with malice,
malevolence and selfish intent. With respect to above-said Check
No. 0084078, however, which was drawn against another account of
petitioner, albeit the date of issue bears only the year 1999, its
validity and negotiable character at the time the complaint was filed
on March 28, 2000 was not affected. For Section 6 of the Negotiable
Instruments Law provides: The validity and negotiable character of
an instrument are not affected by the fact that (a) It is not dated
XXXX. However, even if the holder of Check No. 0084078 would
have filled up the month and day of issue thereon to be
December and 31, respectively, it would have, as it did, become
stale six (6) months or 180 days thereafter, following current
banking practice. It is, however, with respect to the questioned
promissory notes that the present petition assumes merit. For,
petitioners allegations in the complaint relative thereto, even if
lacking particularity, does not as priorly stated call for the dismissal
of the complaint.

NACHURA, J.:

On January 26, 1970, Mrs. Rosario Sen and

other camineros[4] hired the petitioner to prosecute Civil Cases Nos.
R-10933[5] and R-11214,[6] evidenced by anAgreement,[7] the
terms of which read as follows:
AGREEMENT
WE, the undersigned, hereby agree to pay Atty. Raul H. Sesbreo,
thirty (30%) percent of whatever back salaries, damages, etc. that
we may recover in the mandamus and other cases that we are filing
or have filed against the Province of Cebu, the Provincial Governor,
etc., whether or not the said cases will be amicably settled or
decided by the courts by final judgment. We shall take care of all
expenses in connection with the said cases.[8]
During the pendency of the aforesaid cases or on April 17, 1979,
petitioner registered his charging/retaining lien based on the
Agreement.[9]
The camineros obtained favorable judgment when the Court of First
Instance (now RTC) of Cebu ordered that they be reinstated to their
original positions with back salaries, together with all privileges and
salary adjustments or increases.[10] Aggrieved, the Commissioner
of Public Highways and the District Engineer filedcertiorari cases
before this Court where the petitioner willingly rendered further
legal assistance and represented the camineros.
When respondent Eduardo R. Gullas (Gov. Gullas) assumed the
position of governor of Cebu, he proposed the compromise
settlement of all mandamus cases then pending against the province
which included Civil Cases Nos. R-10933 and R-11214 handled by
the petitioner.
On April 21, 1979, the camineros, represented by the petitioner, and
the province of Cebu, through then Gov. Gullas, forged
a Compromise Agreement,[11] with the following terms and
conditions:
1. The respondent Province of Cebu represented in this act by Gov.
Eduardo R. Gullas, duly authorized by proper resolution of the
Sanguniang Panlalawigan, hereby agrees to immediately appropriate
and pay full backwages and salaries as awarded by the trial court in
its decision to all the private respondents-employees from and after
July 1, 1968, the date of their termination, up to the date of the
approval of the herein Compromise Agreement by the Honorable
Supreme Court, except for those who are qualified for compulsory
retirement whose back salaries and wages shall be limited up to the
effective date of their retirement.
xxxx
9. That the amounts payable to the employees concerned
represented by Atty. Raul H. Sesbreo is subject to said lawyer's
charging and retaining liens as registered in the trial court and in the
Honorable Court of Appeals.
xxxx
11. That upon request of the employees concerned, most of whom
are in dire actual financial straits, the Province of Cebu is agreeable

to paying an advance of P5,000.00 to each employee payable

through their counsel, Atty. Raul H. Sesbreo, deductible from the
total amount that each will receive from the Province of Cebu,
effective upon confirmation by the Honorable Solicitor General, the
Supreme Court and the Philippine National Bank where the JJ (now
infrastructure funds) are now in deposit under trust.[12]
Apparently, the camineros waived their right to reinstatement
embodied in the CFI decision and the province agreed that it
immediately pay them their back salaries and other claims. This
Court adopted said compromise agreement in our decision[13]dated
December 18, 1979.[14]

However, it did not give credence to the petitioner's claim that the
respondent public officials induced the camineros to violate their
contract, and thus, absolved them from liability.

In view of the finality of the above decision, the camineros, through

their new counsel (who substituted for the petitioner), moved for its
execution. The court then ordered the issuance of a partial writ of
execution directing the payment of only 45% of the amount due
them based on the computation of the provincial engineering office
as audited by the authority concerned.[15] The court did not release
the remaining 55%, thus holding in abeyance the payment of the
lawyer's fees pending the determination of the final amount of such
fees.[16] However, instead of complying with the court order
directing partial payment, the province of Cebu directly paid
the camineros the full amount of their adjudicated claims.[17]

Hence, the instant petition. In his Memorandum, petitioner raises

the following issues:

Thus, petitioner filed the complaint for Damages (Thru Breach of

Contract) and Attorney's Fees against the Province of Cebu, the
provincial governor, treasurer, auditor, and engineer in their official
and personal capacities, as well as against his former clients
(the camineros).[18]
Petitioner anchored his claim on the provision of the Civil Code,
specifically Article 19[19] thereof. He alleged that by directly
paying the camineros the amounts due them, the respondents
induced the camineros to violate their written contract for attorney's
fees.[20] He likewise claimed that they violated the compromise
agreement approved by the Court by computing the camineros'
money claims based on the provincial instead of the national wage
rate which, consequently, yielded a lower amount.[21] Petitioner
went on to say that although he was not a party to the above
contracts, by virtue of the registration of his charging lien, he was a
quasi-party and thus, had legal standing to institute the case below.
[22]
On August 23, 1982, petitioner moved to dismiss the case against
the camineros after he had entered into an agreement with them and
settled their differences.[23] The case, however, proceeded against
the respondents.
On October 18, 1992, the RTC rendered a decision in favor of the
petitioner and against the respondent province of Cebu, the pertinent
portion of which reads:
Wherefore, for all the foregoing, judgment is rendered, ordering the
defendant Province of Cebu to pay the plaintiff the following sums:
(a) P669,336.51 in actual damages; with interest of 12% per annum
from date of demand until fully paid;
(b) P20,000.00 in moral damages;
(c) P5,000.00 in litigation expenses; and
(d) To pay the costs.[24]
While maintaining the validity of the compromise agreement, the
trial court found that the petitioner's money claims should have been
computed based on the national and not the provincial rate of wages
paid the camineros. Accordingly, the court declared that the
petitioner was prejudiced to the extent of the difference between
these two rates. The court further upheld the petitioner's status as a
quasi-party considering that he had a registered charging lien.

On appeal, the CA reversed the trial court's decision and dismissed

the complaint.[25] The appellate court concluded that petitioner
failed to sufficiently establish his allegation that the respondents
induced the camineros to violate the agreement for attorney's fees
and the compromise agreement, and that he suffered damage due to
respondents' act of directly paying the camineros the amounts due
them.[26]

1.

RESPONDENT COURT OF APPEALS ERRED IN NOT

AFFIRMING THE TRIAL COURT DECISION DUE TO LONG
DELAY IN DECIDING CA-G.R. CV NO. 43287.

2.

RESPONDENT COURT OF APPEALS ERRED IN NOT

DISMISSING THE APPEAL IN CA-G.R. CV NO. 43287 FOR
FAILURE TO PROSECUTE AND DUE TO THE FATALLYDEFECTIVE APPELLANT'S BRIEF.

3.

RESPONDENT COURT OF APPEALS ERRED IN

REVERSING THE TRIAL COURT DECISION BY DECLARING
THAT THE TRIAL COURT SHOULD NOT FIX THE
ATTORNEY'S FEES OF PETITIONER DESPITE THE FACT
THAT THE TRIAL COURT DECISION IS CLEAR THAT WHAT
WAS ADJUDGED WAS THE DECLARATION THAT THERE
WAS BREACH OF THE COMPROMISE CONTRACT AND
DAMAGES ARE TO BE AWARDED THE PETITIONER.

4.

RESPONDENT COURT OF APPEALS ERRED IN NOT

DECLARING RESPONDENTS GULLAS, RESENTES,
SANCHEZ AND BACAY AS PERSONALLY LIABLE AND
THAT THEIR PERSONAL LIABILITY IS SOLIDARY WITH
THAT OF RESPONDENT PROVINCE OF CEBU.

5.

RESPONDENT COURT OF APPEALS ERRED IN NOT

DECLARING THAT PRIVATE RESPONDENTS ARE
SOLIDARILY LIABLE TO PAY TO PETITIONER ACTUAL OR
COMPENSATORY, MORAL, EXEMPLARY, NOMINAL,
TEMPERATE DAMAGES, LITIGATION EXPENSES AND LOSS
OF EARNINGS AND INTERESTS.[27]
The petition is bereft of merit.
Petitioner insists that the CA should have affirmed the trial court's
decision in view of the delay in resolving the case, and should have
denied the appeal because of the formal defects in the appellant's
brief.[28] Petitioner cites the cases of Malacora v. Court of
Appeals[29] and Flora v. Pajarillaga[30] where this Court held that
an appealed case which had been pending beyond the time fixed by
the Constitution should be "deemed affirmed."
We cannot apply the cited cases to the one at bench because they
were decided on the basis of Section 11 (2), Article X of the 1973
Constitution, which reads:
SEC. 11. x x x
(2) With respect to the Supreme Court and other collegiate appellate
courts, when the applicable maximum period shall have lapsed
without the rendition of the corresponding decision or resolution
because the necessary vote cannot be had, the judgment, order, or
resolution appealed from shall be deemed affirmed x x x.
That provision is not found in the present Constitution. The court,
under the 1987 Constitution, is now mandated to decide or resolve

the case or matter submitted to it for determination within specified

periods.[31] Even when there is delay and no decision or resolution
is made within the prescribed period, there is no automatic
affirmance of the appealed decision. The appellate court, therefore,
cannot be faulted in not affirming the RTC's decision. While we do
not tolerate delay in the disposition of cases, we cannot dismiss
appealed cases solely because they had been pending in court for a
long period, especially when the appeal is highly meritorious as in
the present case.

petitioner to question anew the compromise agreement on the

pretext that he suffered damage. As long as he was given the agreed
percentage of the amount received by the camineros, then, the
agreement is deemed complied with, and petitioner cannot claim to
have suffered damage.

Likewise, we cannot agree with the petitioner that the appealed case
be dismissed on account of the formal defects in respondent's
appellant's brief filed before the CA. The requirements laid down
by the Rules of Court on the contents of the brief are intended to aid
the appellate court in arriving at a just and proper conclusion of the
case.[32] However, despite its deficiencies, respondent's appellant's
brief is sufficient in form and substance as to apprise the appellate
court of the essential facts and nature of the case, as well as the
issues raised and the laws necessary for the disposition of the same.
[33] Thus, we sustain the CA's decision to rule on the merits of the
appeal instead of dismissing it on mere technicality.

To insure payment of his professional fees and reimbursement of his

lawful disbursements in keeping with his dignity as an officer of the
court, the law creates in favor of a lawyer a lien, not only upon the
funds, documents and papers of his client which have lawfully come
into his possession until what is due him has been paid, but also a
lien upon all judgments for the payment of money and executions
issued pursuant to such judgments rendered in the case wherein his
services have been retained by the client.[37] Section 37, Rule 138
of the Rules of Court specifically provides:
Section 37. Attorney's liens. - An attorney shall have a lien upon the
funds, documents and papers of his client, which have lawfully
come into his possession and may retain the same until his lawful
fees and disbursements have been paid, and may apply such funds to
the satisfaction thereof. He shall also have a lien to the same extent
upon all judgments for the payment of money, and executions issued
in pursuance of such judgments, which he has secured in a litigation
of his client, from and after the time when he shall have caused a
statement of his claim of such lien to be entered upon the records of
the court rendering such judgment, or issuing such execution, and
shall have caused written notice thereof to be delivered to his client
and to the adverse party; and he shall have the same right and
power over such judgments and executions as his client would have
to enforce his lien and secure the payment of his just fees and
disbursements.
A charging lien is an equitable right to have the fees and costs due to
the lawyer for services in a suit secured to him out of the judgment
or recovery in that particular suit. It is based on the natural equity
that the plaintiff should not be allowed to appropriate the whole of a
judgment in his favor without paying thereout for the services of his
attorney in obtaining such judgment.[38]

Now, on the main issue of whether or not respondents are liable for
damages for breach of contract.
Petitioner clarifies that he instituted the instant case for breach of the
compromise agreement and not for violation of the agreement for
attorney's fees as mistakenly concluded by the appellate court. He
also cites Calalang v. De Borja[34] in support of his right to collect
the amounts due him against the judgment debtor (the respondents).
[35] Lastly, petitioner argues that the respondent public officials
acted beyond the scope of their authority when they directly paid
the camineros their money claims and failed to withhold the
petitioner's fees. There is, according to the petitioner, a showing of
bad faith on the part of the province and the public officials
concerned.
After a careful scrutiny of the record of the case, we find no
compelling reason to disturb the appellate court's conclusion. We
would like to stress at this point that the compromise agreement had
been validly entered into by the respondents and thecamineros and
the same became the basis of the judgment rendered by this Court.
Its validity, therefore, had been laid to rest as early as 1979 when the
Court promulgated its decision in Commissioner of Public
Highways v. Burgos.[36] In fact, the judgment had already been
fully satisfied by the respondents. It was precisely this full
satisfaction of judgment that gave rise to the instant controversy,
based primarily on the petitioner's claim that he was prejudiced
because of the following: 1) the wrong computation in
the camineros' money claims by using the provincial and not the
national wage rate; and 2) the mode of satisfying the judgment
through direct payment which impaired his registered charging lien.
Petitioner's claim for attorney's fees was evidenced by an agreement
for attorney's fees voluntarily executed by the camineros where the
latter agreed to pay the former "thirty (30%) percent
of whatever back salaries, damages, etc. that they might recover in
the mandamus and other cases that they were filing or have filed."
Clearly, no fixed amount was specifically provided for in their
contract nor was a specified rate agreed upon on how the money
claims were to be computed. The use of the
word "whatever" shows that the basis for the computation would be
the amount that the court would award in favor of the camineros.
Considering that the parties agreed to a compromise, the payment
would have to be based on the amount agreed upon by them in the
compromise agreement approved by the court. And since the
compromise agreement had assumed finality, this Court can no
longer delve into its substance, especially at this time when the
judgment had already been fully satisfied. We cannot allow the

Petitioner likewise claims that he was prejudiced by respondents' act

in directly paying the camineros the amounts due them, as it
rendered inutile the charging lien duly registered for his protection.

In this case, the existence of petitioner's charging lien is undisputed

since it was properly registered in the records. The parties even
acknowledged its existence in their compromise agreement.
However, a problem arose when the respondents directly paid in full
the camineros' money claims and did not withhold that portion
which corresponds to petitioner's fees.
When the judgment debt was fully satisfied, petitioner could have
enforced his lien either against his clients (the camineros herein) or
against the judgment debtor (the respondents herein). The clients,
upon receiving satisfaction of their claims without paying their
lawyer, should have held the proceeds in trust for him to the extent
of the amount of his recorded lien, because after the charging lien
had attached, the attorney is, to the extent of said lien, regarded as
an equitable assignee of the judgment or funds produced by his
efforts.[39] The judgment debtors may likewise be held responsible
for their failure to withhold from the camineros the amount of
attorney's fees due the petitioner.
In the instant case, the petitioner rightly commenced an action
against both his clients and the judgment debtors. However, at the
instance of the petitioner himself, the complaint against his clients
was withdrawn on the ground that he had settled his differences with
them. He maintained the case against respondents because,
according to him, the computation of the camineros' money claims
should have been based on the national and not the provincial wage
rate. Thus, petitioner insists that the respondents should be made
liable for the difference.

While the respondents may have impaired the petitioner's charging

lien by satisfying the judgment without regard for the lawyer's right
to attorney's fees, we cannot apply the doctrine enunciated
in Calalang v. Judge de Borja,[40] because of the peculiar
circumstances obtaining in this case. In Calalang, this Court
stressed that the judgment debtor may be held responsible for his
failure to withhold the amount of attorney's fees in accordance with
the duly registered charging lien.[41] However, there is a disparity
between the two cases, because, in this case, the petitioner had
withdrawn his complaint against the camineros with whom he had a
contract for legal services. The withdrawal was premised on a
settlement, which indicates that his former clients already paid their
obligations. This is bolstered by the certification of the clerk of court
that his former clients had deposited their passbooks to ensure
payment of the agreed fees. Having been paid by his clients in
accordance with the agreement, his claim against the respondents,
therefore, has no leg to stand on.
Neither can the petitioner rely on Bacolod Murcia Milling Co., Inc.
v. Henares, etc.[42]where this court declared that satisfaction of the
judgment, in general, does not by itself bar or extinguish the
attorney's liens, as the court may even vacate such satisfaction and
enforce judgment for the amount of the lien.[43] However, the
satisfaction of the judgment extinguishes the lien if there has been a
waiver, as shown either by the attorney's conduct or by his passive
omission.[44] In the instant case, petitioner's act in withdrawing the
case against the camineros and agreeing to settle their dispute may
be considered a waiver of his right to the lien. No rule will allow a
lawyer to collect from his client and then collect anew from the
judgment debtor except, perhaps, on a claim for a bigger amount
which, as earlier discussed, is baseless.
Lawyering is not a moneymaking venture and lawyers are not
merchants. Law advocacy is not capital that yields profits. The
returns it births are simple rewards for a job done or service
rendered. It is a calling that, unlike mercantile pursuits which enjoy
a greater deal of freedom from governmental interference, is
impressed with a public interest, for which it is subject to state
regulation.[45]
Considering that petitioner's claim of higher attorney's fees is
baseless and considering further that he had settled his case as
against his former clients, we cannot sustain his right to damages for
breach of contract against the respondents, even on the basis of
Articles 1191[46] or 1311.[47] Although we sustain his status to
institute the instant case, we cannot render a favorable judgment
because there was no breach of contract. Even if there was such a
breach, he had waived his right to claim against the respondents by
accepting payment and/or absolving from liability those who were
primarily liable to him. Thus, no liability can be imputed to the
province of Cebu or to the respondent public officials, either in their
personal or official capacities.
Lastly, we cannot ascribe bad faith to the respondents who directly
paid the caminerosthe amounts due them. The records do not show
that when they did so, they induced the camineros to violate their
contract with the petitioner; nor do the records show that they paid
their obligation in order to cause prejudice to the petitioner. The
attendant circumstances, in fact, show that
the camineros acknowledged their liability to the petitioner and they
willingly fulfilled their obligation. It would be contrary to human
nature for the petitioner to have acceded to the withdrawal of the
case against them, without receiving the agreed attorney's fees.
WHEREFORE, premises considered, the petition is
hereby DENIED. The Decision of the Court of Appeals dated July
23, 2003 and its Resolution dated January 12, 2004 in CA-G.R. CV
No. 43287 are AFFIRMED.

NEGOTIATION
CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY
WEE, and RODOLFO VERGARA vs. IFC LEASING AND
ACCEPTANCE CORPORATION
FACTS
The petitioner is a corporation engaged in the logging business. For
its program of logging activities the opening of additional roads, and
simultaneous logging operations along the route of said roads, it
needed two (2) additional units of tractors.
Cognizant of petitioner-corporation's need and purpose, Atlantic
Gulf & Pacific Company of Manila, through its sister company and
marketing arm, Industrial Products Marketing a corporation dealing
in tractors and other heavy equipment business, offered to sell to
petitioner-corporation two (2) "Used" Allis Crawler Tractors.
In order to ascertain the extent of work to which the tractors were to
be exposed, and to determine the capability of the "Used" tractors
being offered, petitioner-corporation requested the seller-assignor to
inspect the job site. After conducting said inspection, the sellerassignor assured petitioner-corporation that the "Used" Allis Crawler
Tractors which were being offered were fit for the job.
With said assurance and warranty, and relying on the sellerassignor's skill and judgment, petitioner-corporation through
petitioners Wee and Vergara, president and vice- president,
respectively, agreed to purchase on installment said two (2) units of
"Used" Allis Crawler Tractors. It also paid the down payment of
Two Hundred Ten Thousand Pesos (P210,000.00).
The seller-assignor issued the sales invoice for the two 2) units of
tractors at the same time, the deed of sale with chattel mortgage with
promissory note was executed.
The seller-assignor, by means of a deed of assignment, assigned
its rights and interest in the chattel mortgage in favor of the
respondent.
Barely fourteen (14) days had elapsed after their delivery when one
of the tractors broke down and after another nine (9) days, the other
tractor likewise broke down. Rodolfo T. Vergara formally advised
the seller-assignor of the fact that the tractors broke down and
requested for the seller-assignor's usual prompt attention under the
warranty. The seller-assignor sent to the job site its mechanics to
conduct the necessary repairsbut the tractors did not come out to be
what they should be after the repairs were undertaken because the
units were no longer serviceable.
Because of the breaking down of the tractors, the road building and
simultaneous logging operations of petitioner-corporation were
delayed and petitioner Vergara advised the seller-assignor that the
payments of the installments as listed in the promissory note would
likewise be delayed until the seller-assignor completely fulfills its
obligation under its warranty.
Since the tractors were no longer serviceable, on April 7, 1979,
petitioner Wee asked the seller-assignor to pull out the units and
have them reconditioned, and thereafter to offer them for sale. The
proceeds were to be given to the respondent and the excess, if any,
to be divided between the seller-assignor and petitioner-corporation
which offered to bear one-half (1/2) of the reconditioning
The seller-assignor did nothing with regard to the request, until the
complaint in this case was filed by the respondent against the
petitioners, the corporation, Wee, and Vergara.
The complaint was filed by the respondent against the petitioners for
the recovery of the principal sum and accrued interest
ISSUE:

Whether or not the promissory note in question is a negotiable

instrument so as to bar completely all the available defenses of the
petitioner against the respondent-assignee.
HELD
The promissory note is NOT a negotiable instrument.
It is patent then, that the seller-assignor is liable for its breach of
warranty against the petitioner. This liability as a general rule,
extends to the corporation to whom it assigned its rights and
interests unless the assignee is a holder in due course of the
promissory note in question, assuming the note is negotiable, in
which case the latter's rights are based on the negotiable instrument
and assuming further that the petitioner's defenses may not prevail
against it.
The pertinent portion of the note is as follows:
FOR VALUE RECEIVED, I/we jointly and severally promise to pay
to the INDUSTRIAL PRODUCTS MARKETING, the sum of ONE
MILLION NINETY THREE THOUSAND SEVEN HUNDRED
EIGHTY NINE PESOS & 71/100 only (P 1,093,789.71), Philippine
Currency, the said principal sum, to be payable in 24 monthly
installments starting July 15, 1978 and every 15th of the month
thereafter until fully paid. ...
Considering that paragraph (d), Section 1 of the Negotiable
Instruments Law requires that a promissory note "must be payable
to order or bearer, " it cannot be denied that the promissory note in
question is not a negotiable instrument.
The instrument in order to be considered negotiablility-i.e. must
contain the so-called 'words of negotiable, must be payable to 'order'
or 'bearer'. These words serve as an expression of consent that the
instrument may be transferred. This consent is indispensable since a
maker assumes greater risk under a negotiable instrument than under
a non-negotiable one. ...
xxx xxx xxx
When instrument is payable to order.
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. . . .
xxx xxx xxx
These are the only two ways by which an instrument may be made
payable to order. There must always be a specified person named in
the instrument. It means that the bill or note is to be paid to the
person designated in the instrument or to any person to whom he has
indorsed and delivered the same. Without the words "or order" or"to
the order of, "the instrument is payable only to the person
designated therein and is therefore non-negotiable. Any subsequent
purchaser thereof will not enjoy the advantages of being a holder of
a negotiable instrument but will merely "step into the shoes" of the
person designated in the instrument and will thus be open to all
defenses available against the latter."
Therefore, considering that the subject promissory note is not a
negotiable instrument, it follows that the respondent can never be a
holder in due course but remains a mere assignee of the note in
question. Thus, the petitioner may raise against the respondent all
defenses available to it as against the seller-assignor Industrial
Products Marketing.
Secondly, even conceding for purposes of discussion that the
promissory note in question is a negotiable instrument, the
respondent cannot be a holder in due course for a more significant
reason:
The respondent had actual knowledge of the fact that the sellerassignor's right to collect the purchase price was not unconditional,
and that it was subject to the condition that the tractors -sold were
not defective. The respondent knew that when the tractors turned out

to be defective, it would be subject to the defense of failure of

consideration and cannot recover the purchase price from the
petitioners. Even assuming for the sake of argument that the
promissory note is negotiable, the respondent, which took the same
with actual knowledge of the foregoing facts so that its action in
taking the instrument amounted to bad faith, is not a holder in due
course.
De la Victoria vs. Burgos [GR 111190, 27 June 1995]
Facts: Raul H. Sesbreno filed a complaint for damages against
Assistant City Fiscal Bienvenido N. Mabanto, Jr., et al. before the
Regional Trial Court of Cebu City. After trial Judgment was
rendered ordering Mabanto, et al. to pay P11,000.00 to Sesbreno.
The decision having become final and executory, on motion of the
latter, the trial court ordered its execution. This order was questioned
by Mabanto, et al. before the Court of Appeals. However, on 15
January 1992 a writ of execution was issued. On 4 February 1992 a
notice of garnishment was served on Loreto D. de la Victoria as City
Fiscal of Mandaue City where Mabanto, Jr., was then detailed. The
Notice directed De la Victoria not to disburse, transfer, release or
convey to any other person except to the deputy sheriff concerned
the salary checks, monies, or cash due or belonging to Mabanto, Jr.,
under penalty of law. On 10 March 1992 Sesbreno filed a motion
before the trial court for examination of the garnishees. On 25 May
1992 the petition pending before the Court of Appeals was
dismissed. Thus the trial court, finding no more legal obstacle to act
on the motion for examination of the garnishees, directed De la
Victoria on 4 November 1992 to submit his report showing the
amount of the garnished salaries of Mabanto, Jr., within 15 days
from receipt taking into consideration the provisions of Sec. 12,
pars. (f) and (i), Rule 39 of the Rules of Court. On 24 November
1992 Sesbreno filed a motion to require De la Victoria to explain
why he should not be cited in contempt of court for failing to
comply with the order of 4 November 1992. On the other hand, on
19 January 1993 De la Victoria moved to quash the notice of
garnishment claiming that he was not in possession of any money,
funds, credit, property or anything of value belonging to Mabanto,
Jr., until delivered to him. He further claimed that, as such, they
were still public funds which could not be subject to garnishment.
On 9 March 1993 the trial court denied both motions and ordered De
la Victoria to immediately comply with its order of 4 November
1992. It opined that the checks of Mabanto, Jr., had already been
released through De la Victoria by the Department of Justice duly
signed by the officer concerned; that upon service of the writ of
garnishment, De la Victoria as custodian of the checks was under
obligation to hold them for the judgment creditor; that De la Victoria
became a virtual party to, or a forced intervenor in, the case and the
trial court hereby acquired jurisdiction to bind him to its orders and
processes with a view to the complete satisfaction of the judgment;
and that additionally there was no sufficient reason for De la
Victoria to hold the checks because they were no longer government
funds and presumably delivered to the payee, conformably with the
last sentence of Section 16 of the Negotiable Instruments Law. With
regard to the contempt charge, the trial court was not morally
convinced of De la Victoria's guilt. On 20 April 1993 the motion for
reconsideration was denied. De la Victoria filed the petition.
Issue: Whether a check still in the hands of the maker or its duly
authorized representative is owned by the payee before physical
delivery to the latter.
Held: Garnishment is considered as a species of attachment for
reaching credits belonging to the Judgment debtor owing to him
from a stranger to the litigation. As Assistant City Fiscal, the source
of the salary of Mabanto, Jr., is public funds. He receives his
compensation in the form of checks from the Department of Justice
through De la Victoria as City Fiscal of Mandaue City and head of
office. Under Section 16 of the Negotiable Instruments Law, every

contract on a negotiable instrument is incomplete and revocable

until delivery of the instrument for the purpose of giving effect
thereto. As ordinarily understood, delivery means the transfer of the
possession of the instrument by the maker or the drawer with intent
to transfer title to the payee and recognize him as the holder thereof.
Inasmuch as said checks had not yet been delivered to Mabanto, Jr.,
they did not belong to him and still had the character of public
funds. As held in Tiro v. Hontanosas, "the salary check of a
government officer or employee such a s a teacher does not belong
to him before it is physically delivered to him. Until that time the
check belongs to the government. Accordingly, before there is actual
delivery of the check, the payee has no power over it; he cannot
assign it without the consent of the Government." As a necessary
consequence of being public fund, the checks may not be garnished
to satisfy the judgment. The rationale behind this doctrine is obvious
consideration of public policy. The Court succinctly stated in
Commissioner of Public Highways v. San Diego that "the functions
and public services rendered by the State cannot be allowed to be
paralyzed or disrupted by the diversion of public funds from their
legitimate and specific objects, as appropriated by law." The trial
court exceeded its jurisdiction in issuing the notice of garnishment
concerning the salary checks of Mabanto, Jr., in the possession of
De la Victoria.
Development Bank of Rizal vs. Sima Wei [GR 85419, 9 March
1993]
Facts: In consideration for a loan extended by the Development
Bank of Rizal (DBR) to Sima Wei, the latter executed and delivered
to the former a promissory note, engaging to pay DBR or order the
amount of P1,820,000.00 on or before 24 June 1983 with interest at
32% per annum. Sima Wei made partial payments on the note,
leaving a balance of P1,032,450.02. On 18 November 1983, Sima
Wei issued two crossed checks payable to DBR 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 DBR or to any of its
authorized representatives. For reasons not shown, these checks
came into the possession of Lee Kian Huat, who deposited the
checks without DBR's indorsement (forged or otherwise) to the
account of the Asian Industrial 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 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, in spite of the
fact that the checks were crossed and payable to DBR and bore no
indorsement of the latter. On 5 July 1986, DBR filed the complaint
for a sum of money against Sima Wei and/or Lee Kian Huat, Mary
Cheng Uy, Samson Tung, Asian Industrial Plastic Corporation and
the Producers Bank of the Philippines, on two causes of actionL (1)
To enforce payment of the balance of P1,032,450.02 on a
promissory note executed by Sima Wei on 9 June 1983; and (2) To
enforce payment of two checks executed by Sima Wei, payable to
DBR, and drawn against the China Banking Corporation, to pay the
balance due on the promissory note. Except for Lee Kian Huat,
Sima Wei, et al. filed their separate Motions to Dismiss alleging a
common ground that the complaint states no cause of action. The
trial court granted the Motions to Dismiss. The Court of Appeals
affirmed the decision, to which DBR, represented by its Legal
Liquidator, filed the Petition for Review by Certiorari.
Issue: Whether DBR, as the intended payee of the instrument, has a
cause of action against any or all of the defendants, in the alternative
or otherwise.

Held: 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 that "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. Delivery of an instrument means transfer of
possession, actual or constructive, from one person to another.
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. Herein,
the two (2) China Bank checks, numbered 384934 and 384935, were
not delivered to the payee, DBR. Without the delivery of said checks
to DBR, the former did not acquire any right or interest therein and
cannot therefore assert any cause of action, founded on said checks,
whether against the drawer Sima Wei or against the Producers Bank
or any of the other respondents. Since DBR 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 DBR. It had no right or
interest in the checks which could have been violated by said
respondents. DBR 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 corespondents, if the allegations in the complaint are found to be true.
Metropol (Bacolod) Financing & Investment Corporation vs.
Sambok Motors Co. [GR L-39641, 28 February 1983]
Facts: On 15 April 1969 Dr. Javier Villaruel executed a promissory
note in favor of Ng Sambok Sons Motors Co., Ltd., in the amount of
P15,939.00 payable in 12 equal monthly installments, beginning 18
May 1969, with interest at the rate of 1% per month. It is further
provided that in case on non-payment of any of the installments, the
total principal sum then remaining unpaid shall become due and
payable with an additional interest equal to 25% of the total amount
due. On the same date, Sambok Motors Company, a sister company
of Ng Sambok Sons Motors Co., Ltd., and under the same
management as the former, negotiated and indorsed the note in favor
of Metropol Financing & Investment Corporation with the following
indorsement: "Pay to the order of Metropol Bacolod Financing &
Investment Corporation with recourse. Notice of Demand;
Dishonor; Protest; and Presentment are hereby waived. SAMBOK
MOTORS CO. (BACOLOD) By:
RODOLFO G. NONILLO, Asst. General Manager." The maker, Dr.
Villaruel defaulted in the payment of his installments when they
became due, so on 30 October 1969, Metropol formally presented
the promissory note for payment to the maker. Dr. Villaruel failed to
pay the promissory note as demanded, hence Metropol notified
Sambok as indorsee of said note of the fact that the same has been
dishonored and demanded payment. Sambok failed to pay, so on 26
November 1969 Metropol filed a complaint for collection of a sum
of money before the Court of First Instance of Iloilo, Branch I.
Sambok did not deny its liability but contended that it could not be
obliged to pay until after its co-defendant Dr. Villaruel, has been

declared insolvent. During the pendency of the case in the trial

court, Dr. Villaruel died, hence, on 24 October 1972 the lower court,
on motion, dismissed the case against Dr. Villaruel pursuant to
Section 21, Rule 3 of the Rules of Court. On Metropol's motion for
summary judgment, the trial court rendered its decision dated 12
September 1973, ordering Sambok to pay to Metropol the sum of
P15,939.00 plus the legal rate of interest from 30 October 1969; the
sum equivalent to 25% of P15,939.00 plus interest thereon until
fully paid; and to pay the cost of suit. Not satisfied with the
decision, Samboc appealed. Sambok argue that by adding the words
"with recourse" in the indorsement of the note, it
becomes a qualified indorser; that being a qualified indorser, it does
not warrant that if said note is dishonored by the maker on
presentment, it will pay the amount to the holder; that it only
warrants the following pursuant to Section 65 of the Negotiable
Instruments Law: (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; (d) that he has no
knowledge of any fact which would impair the validity of the
instrument or render it valueless.
Issue: Whether Sambok is a qualified indorser of the subject
promissory note.
Held: A qualified indorsement constitutes the indorser a mere
assignor of the title to the instrument. It may be made by adding to
the indorser's signature the words "without recourse" or any words
of similar import. Such an indorsement relieves the indorser of the
general obligation to pay if the instrument is dishonored but not of
the liability arising from warranties on the instrument as provided in
Section 65 of the Negotiable Instruments Law. However, Sambok
indorsed the note "with recourse" and even waived the notice of
demand, dishonor, protest and presentment. "Recourse" means resort
to a person who is secondarily liable after the default of the person
who is primarily liable. Sambok, by indorsing the note "with
recourse" does not make itself a qualified indorser but a general
indorser who is secondarily liable, because by such indorsement, it
agreed that if Dr. Villaruel fails to pay the note, Metropol can go
after Sambok. The effect of such indorsement is that the note was
indorsed without qualification. A person who indorses without
qualification engages that on due presentment, the note shall be
accepted or paid, or both as the case may be, and that if it be
dishonored, he will pay the amount thereof to the holder. Sambok's
intention of indorsing the note without qualification is made even
more apparent by the fact that the notice of demand, dishonor,
protest and presentment were all waived. The words added by
Sambok do not limit his liability, but rather confirm his obligation as
a general indorser. Further, after an instrument is dishonored by nonpayment, the person secondarily liable thereon ceases to be such and
becomes a principal debtor. His liability becomes the same as that of
the original obligor. Consequently, the holder need not even proceed
against the maker before suing the indorser.
HOLDERS
De Ocampo vs. Gatchalian [GR L-15126, 30 November 1961]
Facts: On or about 8 September 1953, in the evening, 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 Gatchalian. Gonzales represented to
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. Gatchalian, finding the price of the car
quoted by Gonzales to her satisfaction, requested 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. On this
request of Gatchalian, 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 Gonzales requested Gatchalian to give him 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 Gonzales and to be returned to Gatchalian the
following day when Gonzales brings the car and the certificate of
registration. Relying on these representations of Gonzales and with
this assurance that said check will be only for safekeeping and
which will be returned to Gatchalian the following day when the car
and its certificate of registration will be brought by Gonzales to
Gatchalian, Gatchalian drew and issued a check that Gonzales
executed and issued a receipt for said check. On the failure of
Gonzales to appear the day following and on his failure to bring the
car and its certificate of registration and to return the check on the
following day as previously agreed upon, Gatchalian issued a "Stop
Payment Order" on the check with the drawee bank. When Gonzales
received the check from Gatchalian under the representations and
conditions above specified, he delivered the same to the Ocampo
Clinic, in payment of the fees and expenses arising from the
hospitalization of his wife. Vicente R. De Ocampo & Co. for and in
consideration of fees and expenses of hospitalization and the release
of the wife of Gonzales from its hospital, accepted said check,
applying P441.75 thereof to payment of said fees and expenses and
delivering to Gonzales the amount of P158.25 representing the
balance on the amount of the said check. The acts of acceptance of
the check and application of its proceeds in the manner specified
were made without previous inquiry by De Ocampo from
Gatchalian. De Ocampo filed with the Office of the City Fiscal of
Manila, a complaint for estafa against Gonzales based on and arising
from the acts of Gonzales in paying his obligations with De Ocampo
and receiving the cash balance of the check and that said complaint
was subsequently dropped.
De Ocampo subsequently filed an action for the recovery of the
value of a check for P600 payable to De Ocampo and drawn by
Gatchalian. The Court of First Instance of Manila, through Hon.
Conrado M. Vasquez, presiding, sentenced Gatchalian and Gonzales
to pay De Ocampo the sum of P600, with legal interest from 10
September 1953 until paid, and to pay the costs. Gatchalian, et al.
appealed.
Issue [1]: Whether De Ocampo is a holder in due course.
Held [1]: NO. Section 52, Negotiable Instruments Law, defines
holder in due course as "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." Although De Ocampo was not
aware of the circumstances under which the check was delivered to
Gonzales, the circumstances -- such as the fact that Gatchalian 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 - should have put De Ocampo to inquiry as to the why and
wherefore of the possession of the check by Gonzales, and why he
used it to pay Matilde's account. It was payee's duty to ascertain
from the holder Gonzales what the nature of the latter's title to the
check was or the nature of his possession. Having failed in this
respect, De Ocampo was guilty of gross neglect in not finding out
the nature of the title and possession of Gonzales, amounting to
legal absence of good faith, and it may not be considered as a holder

of the check in good faith.

Issue [2]: Whether the rule that a possessor of the instrument is
prima facie a holder in due course applies.

instruments she believed to be lost. Both banks complied with her

requestYang filed against David and ChandiramaniCA affirms RTC:
in favor of David
Issue: Whether David was a holder in due course.

Held [2]: The rule that a possessor of the instrument is prima facie a
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 -- 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.
Yang vs. Court of Appeals [GR 138074, 15 August 2003]
Facts: December 22, 1987: Cely Yang and Prem Chandiramani
entered into an agreement whereby Yang was to give 2 P2.087M
PCIB managers check in the amount of P4.2 million both payable to
the order of Fernando David. Yang and Chandiramani agreed that
the difference of P26K in the exchange would be their profit to be
divided equally between them. Yang and Chandiramani also further
agreed that the Yang would secure from FEBTC a dollar draft in the
amount of US$200K, payable to PCIB FCDU Account No. 419501165-2, which Chandiramani would exchange for another dollar
draft in the same amount to be issued by Hang Seng Bank Ltd. of
Hong Kong. December 22, 1987, Yang procured the ff:
a) Equitable Cashiers Check No. CCPS 14-009467 in the sum of
P2,087,000.00, dated December 22, 1987, payable to the order of
Fernando David; b) FEBTC Cashiers Check No. 287078, in the
amount of P2,087,000.00, 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. December 22, 1987 1 p.m.: Yang gave
the cashiers checks and dollar drafts to her business associate, Albert
Liong, to be delivered to Chandiramani by Liongs messenger,
Danilo Ranigo Ranigo was to meet Chandiramani at 2 p.m. at
Philippine Trust Bank, Ayala Avenue, Makati where he would turn
over Yangs cashiers checks and dollar draft to Chandiramani who, in
turn, would deliver to Ranigo a PCIB managers check in the sum of
P4.2 million and a Hang Seng Bank dollar draft for US$200K in
exchange but Chandiramani did not appear December 22, 1987 4
p.m.: Ranigo reported the alleged loss of the checks and the dollar
draft to Liong. Liong, in turn, informed Yang, and the loss was then
reported to the police. Chandiramani was able to get hold of the
instruments Chandiramani delivered the 2 cashiers checks to
Fernando David at China Banking Corporation branch in San
Fernando City, Pampanga. In exchange, he got US$360K from
David, which he deposited in the savings account of his wife,
Pushpa; and his mother, Rani Reynandas, who held FCDU Account
No. 124 with the United Coconut Planters Bank branch in
Greenhills. He also deposited FEBTC Dollar Draft No. 4771, dated
December 22, 1987, drawn upon the Chemical Bank, New York for
US$200K in PCIB FCDU Account No. 4195-01165-2 on the same
date. Yang requested FEBTC and Equitable to stop payment on the

Held: 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, meaning a "payee or indorsee of a bill
or note, who is in possession of it, or the bearer thereof." Herein, 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. Hence, the presumption that he is a prima facie
holder in due course applies in his favor. However, said presumption
may be 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 52 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. Yang'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, Yang posits that the last
two requisites of Section 52 are missing, thereby preventing David
from being considered a holder in due course. Unfortunately for
Yang, her arguments on this score are less than meritorious and far
from persuasive.
MESINA V. IAC 145 SCRA 497
FACTS: Jose Go purchased from Associate Bank a Cashiers
Check, which he left on top of the managers desk when left the
bank. The bank manager then had it kept for safekeeping by one of
its employees. The employee was then in conference with one
Alexander Lim. He left the check in his desk and upon his return,
Lim and the check were gone. When Go inquired about his check,
the same couldn't be found and Go was advised to request for the
stoppage of payment which he did. He executed also an affidavit of
loss as well as reported it to the police.
The bank then received the check twice for clearing. For these two
times, they dishonored the payment by saying that payment has been
stopped. After the second time, a lawyer contacted it demanding
payment. He refused to disclose the name of his client and
threatened to sue. Later, the name of Mesina was revealed. When
asked by the police on how he possessed the check, he said it was
paid to him Lim. An information for theft was then filed against
Lim.
A case of interpleader was filed by the bank and Go moved to
participate as intervenor in the complaint for damages. Mesina
moved for the dismissal of the case but was denied. The trial court
ruled in the interpleader case ordering the bank to replace the
cashiers check in favor of Go.
HELD: Petitioner cannot raise as arguments that a cashiers check
cannot be countermanded from the hands of a holder in due course
and that a cashiers check is a check drawn by the bank against
itself. Petitioner failed to substantiate that he was a holder in due
course. Upon questioning, he admitted that he got the check from
Lim who stole the check. He refused to disclose how and why it has
passed to him. It simply means that he has notice of the defect of his
title over the check from the start. The holder of a cashiers check
who is not a holder in due course cannot enforce payment against
the issuing bank which dishonors the same. If a payee of a cashiers
check obtained it from the issuing bank by fraud, or if there is some

other reason why the payee is not entitled to collect the check, the
bank would of course have the right to refuse payment of the check
when presented by payee, since the bank was aware of the facts
surrounding the loss of the check in question.
LIABILITY OF PARTIES
Crisologo-Jose vs. Court of Appeals [GR 80599, 15 September
1989]
Facts: In 1980, Ricardo S. Santos, Jr. was the vice-president of
Mover Enterprises, Inc. in-charge of marketing and sales; and the
president of the said corporation was Atty. Oscar Z. Benares. On 30
April 1980, Atty. Benares, in accommodation of his clients, the
spouses Jaime and Clarita Ong, issued Check 093553 drawn against
Traders Royal Bank, dated 14 June 1980, in the amount of
P45,000.00 payable to Ernestina Crisologo-Jose. Since the check
was under the account of Mover Enterprises, Inc., the same was to
be signed by its president, Atty. Oscar Z. Benares, and the treasurer
of the said corporation. However, since at that time, the treasurer of
Mover Enterprises was not available, Atty. Benares prevailed upon
Santos to sign the aforesaid check as an alternate signatory. Santos
did sign the check. The check was issued to Crisologo-Jose in
consideration of the waiver or quitclaim by Crisologo-Jose over a
certain property which the Government Service Insurance System
(GSIS) agreed to sell to the clients of Atty. Benares, the spouses
Ong, with the understanding that upon approval by the GSIS of the
compromise agreement with the spouses Ong, the check will be
encashed accordingly. However, since the compromise agreement
was not approved within the expected period of time, the aforesaid
check for P45,000.00 was replaced by Atty. Benares with another
Traders Royal Bank check bearing 379299 dated 10 August 1980, in
the same amount of P45,000.00, also payable to Crisologo-Jose.
This replacement check was also signed by Atty. Benares and by
Santos When Crisologo-Jose deposited this replacement check with
her account at Family Savings Bank, Mayon Branch, it was
dishonored for insufficiency of funds. A subsequent redepositing
of the said check was likewise dishonored by the bank for the same
reason. Hence, Crisologo-Jose through counsel was
constrained to file a criminal complaint for violation of Batas
Pambansa 22 (BP22) with the Quezon City Fiscal's Office against
Atty. Benares and Santos The investigating Assistant City Fiscal,
Alfonso Llamas, accordingly filed an amended information with the
court charging both Benares and Santos for violation of BP 22
(Criminal Case Q-14867) of then Court of First Instance of Rizal,
Quezon City.
Meanwhile, during the preliminary investigation of the criminal
charge against Benares and Santos, before Assistant City Fiscal
Llamas, Santos tendered cashier's check CC 160152 for P45,000.00
dated 10 April 1981 to Crisologo-Jose, the complainant in that
criminal case. Crisologo-Jose refused to receive the cashier's check
in payment of the dishonored check in the amount of P45,000.00.
Hence, Santos encashed the aforesaid cashier's check and
subsequently deposited said amount of P45,000.00 with the Clerk of
Court on 14 August 1981. Incidentally, the cashier's check adverted
to above was purchased by Atty. Benares and given to Santos to be
applied in payment of the dishonored check. After trial, the court a
quo, holding that it was "not persuaded to believe that consignation
referred to in Article 1256 of the Civil Code is applicable to this
case," rendered judgment dismissing Santos' complaint for
consignation and Crisologo-Jose's counterclaim. On appeal and on 8
September 1987, the appellate court reversed and set aside said
judgment of dismissal and revived the complaint for consignation,
directing the trial court to give due course thereto. Crisologo-Jose
filed the petition.
Issue [1]: Whether Santos, as an accommodation party, is liable
thereon under the Negotiable Instruments Law.

Held [1]: Section 29 (Liability of accommodation party) of the

Negotiable Instruments Law provides that "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." Consequently, to be considered an
accommodation party, a person must (1) be a party to the
instrument, signing as maker, drawer, acceptor, or indorser, (2) not
receive value therefor, and (3) sign for the purpose of lending his
name for the credit of some other person. Based on the foregoing
requisites, it is not a valid defense that the accommodation party did
not receive any valuable consideration when he executed the
instrument. From the standpoint of contract law, he differs from the
ordinary concept of a debtor therein in the sense that he has not
received any valuable consideration for the instrument he signs.
Nevertheless, he is liable to a holder for value as if the contract was
not for accommodation, in whatever capacity such accommodation
party signed the instrument, whether primarily or secondarily. Thus,
it has been held that in lending his name to the accommodated party,
the accommodation party is in effect a surety for the latter.
Sadaya vs. Sevilla, 19 SCRA 924
FACTS: Sadaya, Sevilla and Varona signed solidarily a promissory
note in favor of the bank. Varona was the only one who received the
proceeds of the note. Sadaya and Sevilla both signed as co-makers
to accommodate Varona. Thereafter, the bank collected from
Sadaya. Varona failed to reimburse.
Consequently, Sevilla died and intestate estate proceedings were
established. Sadaya filed a creditors claim on his estate for the
payment he made on the note. The administrator resisted the claim
on the ground that Sevilla didn't receive any proceeds of the loan.
The trial court admitted the claim of Sadaya though this was
reversed by the CA.
HELD:
Sadaya could have sought reimbursement from Varona, which is
right and just as the latter was the only one who received value for
the note executed. There is an implied contract of indemnity
between Sadaya and Varona upon the formers payment of the
obligation to the bank.
Surely enough, the obligations of Varona and Sevilla to Sadaya
cannot be joint and several. For indeed, had payment been made by
Varona, Varona couldn't had reason to seek reimbursement from
either Sadaya or Sevilla. After all, the proceeds of the loan went to
Varona alone. On principle, a solidary accommodation makerwho
made paymenthas the right to contribution, from his coaccomodation maker, in the absence of agreement to the contrary
between them, subject to conditions imposed by law. This right
springs from an implied promise to share equally the burdens they
may ensue from their having consented to stamp their signatures on
the promissory note.
The following are the rules:
1. A joint and several accommodation maker of a negotiable
promissory note may demand from the principal debtor
reimbursement for the amount that he paid to the payee
2. A joint and several accommodation maker who pays on the said
promissory note may directly demand reimbursement from his coaccommodation maker without first directing his action against the
principal debtor provided that
a. He made the payment by virtue of a judicial demand
b. A principal debtor is insolvent.
It was never shown that there was a judicial demand on Sadaya to

pay the obligation and also, it was never proven that Varona was
insolvent. Thus, Sadaya cannot proceed against Sevilla for
reimbursement.
TRAVEL ON V. CA 210 SCRA 351
FACTS: Petitioner was a travel agency involved in ticket sales on a
commission basis for and on behalf of different airline companies.
Miranda has a revolving credit line with the company. He procured
tickets on behalf of others and derived commissions from it.
Petitioner filed a collection suit against Miranda for the unpaid
amount of six checks. Petitioner alleged that Miranda procured
tickets from them which he paid with cash and checks but the
checks were dishonored upon presentment to the bank. This was
being refuted by Miranda by saying that he actually paid for his
obligations, even in the excess. He argued that the checks were for
accommodation purposes only. The company needed to show to its
Board of Directors that its accounts receivable was in good standing.
The RTC and CA held Miranda not to be liable.
ISSUE:
Whether Miranda is liable on the postdated checks he issued even
assuming that said checks were issued for accommodation only.
There was no accommodation transaction in the case at bar. 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. 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. 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. Miranda must be held liable on the checks involved as
petitioner is entitled to the benefit of the statutory presumption that
it was a holder in due course and that the checks were supported by
valuable consideration.
**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. In the case at bar,
Travel-On was the 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.
AGRO CONGLOMERATES, INC. and MARIO
SORIANO, petitioners, vs. THE HON. COURT OF APPEALS
and REGENT SAVINGS and LOAN BANK, INC., respondents.
DECISION
QUISUMBING, J.:
This is a petition for review challenging the decision[1] dated
October 17, 1994 of the Court of Appeals in CA-G.R. No. 32933,
which affirmed in toto the judgment of the Manila Regional Trial
Court, Branch 27, in consolidated Cases Nos. 86-37374, 86-37388,
86-37543.
This petition springs from three complaints for sums of money filed
by respondent bank against herein petitioners. In the decision of the
Court of Appeals, petitioners were ordered to pay respondent bank,
as follows:
Wherefore, judgment is hereby rendered in favor of plaintiff and
against defendants, as follows:

1) In Civil Case No. 86-37374, defendants [petitioners, herein] are

ordered jointly and severally, to pay to plaintiff the amount of
P78,212.29, together with interest and service charge thereon, at the
rates of 14% and 3% per annum, respectively, computed from
November 10, 1982, until fully paid, plus stipulated penalty on
unpaid principal at the rate of 6% per annum, computed from
November 10, 1982, plus 15% as liquidated damage plus 10% of the
total amount due, as attorneys fees, plus costs;
2) In Civil Case No. 86-37388, defendant is ordered to pay plaintiff
the amount of P632,911.39, together with interest and service
charge thereon at the rate of 14% and 3% per annum, respectively,
computed from January 15, 1983, until fully paid, plus stipulated
penalty on unpaid principal at the rate of 6% per annum, computed
from January 15, 1983, plus liquidated damages equivalent to 15%
of the total amount due, plus attorneys fees equivalent to 10% of
the total amount due, plus costs; and
3) In Civil Case No. 86-37543, defendant is ordered to pay plaintiff,
on the first cause of action, the amount of P510,000.00, together
with interest and service charge thereon, at the rates of 14% and
2% per annum, respectively, computed from March 13, 1983, until
fully paid, plus a penalty of 6% per annum, based on the outstanding
principal of the loan, computed from March 13, 1983, until fully
paid; and on the second cause of action, the amount of P494,936.71,
together with interest and service charge thereon at the rates of 14%
and 2%, per annum, respectively, computed from March 30, 1983,
until fully paid, plus a penalty charge of 6% per annum, based on
the unpaid principal, computed from March 30, 1983, until fully
paid, plus (on both causes of action) an amount equal to 15% of the
total amounts due, as liquidated damages, plus attorneys fees equal
to 10% of the total amounts due, plus costs.[2]
Based on the records, the following are the factual antecedents.
On July 17, 1982, petitioner Agro Conglomerates, Inc. as vendor,
sold two parcels of land to Wonderland Food Industries, Inc. In
their Memorandum of Agreement,[3] the parties covenanted that the
purchase price of Five Million (P5,000,000.00) Pesos would be
settled by the vendee, under the following terms and conditions: (1)
One Million (P1,000,000.00) Pesos shall be paid in cash upon the
signing of the agreement; (2) Two Million (P2,000,000.00) Pesos
worth of common shares of stock of the Wonderland Food
Industries, Inc.; and (3) The balance of P2,000,000.00 shall be paid
in four equal installments, the first installment falling due, 180 days
after the signing of the agreement and every six months thereafter,
with an interest rate of 18% per annum, to be advanced by the
vendee upon the signing of the agreement.
On July 19, 1982, the vendor, the vendee, and the respondent bank
Regent Savings & Loan Bank (formerly Summa Savings & Loan
Association), executed an Addendum[4]to the previous
Memorandum of Agreement. The new arrangement pertained to
the revision of settlement of the initial payments of P1,000,000.00
and prepaid interest of P360,000.00 (18% of P2,000,000.00) as
follows:
Whereas, the parties have agreed to qualify the stipulated terms for
the payment of the said ONE MILLION THREE HUNDRED
SIXTY THOUSAND (P1,360,000.00) PESOS.
WHEREFORE, in consideration of the mutual covenant and
agreement of the parties, they do further covenant and agree as
follows:
1. That the VENDEE instead of paying the amount of ONE
MILLION THREE HUNDRED SIXTY THOUSAND
(P1,360,000.00) PESOS in cash, hereby authorizes the VENDOR to
obtain a loan from Summa Savings and Loan Association with
office address at Valenzuela, Metro Manila, being represented herein
by its President, Mr. Jaime Cario and referred to hereafter as
Financier; in the amount of ONE MILLION THREE HUNDRED
SIXTY THOUSAND (P1,360,000.00)PESOS, plus interest thereon
at such rate as the VENDEE and the Financier may agree, which
amount shall cover the ONE MILLION (P1,000,000.00) PESOS
cash which was agreed to be paid upon signing of the Memorandum
of Agreement, plus 18% interest on the balance of two million pesos

stipulated upon in Item No. 1(c) of the said agreement; provided

however, that said loan shall be made for and in the name of the
VENDOR.
2. The VENDEE also agrees that the full amount of ONE
MILLION THREE HUNDRED SIXTY THOUSAND
(P1,360,000.00) PESOS be paid directly to the VENDOR; however,
the VENDEE hereby undertakes to pay the full amount of the said
loan to the Financier on such terms and conditions agreed upon by
the Financier and the VENDOR, it being understood that while the
loan will be secured from and in the name of the VENDOR, the
VENDEE will be the one liable to pay the entire proceeds thereof
including interest and other charges.[5]
This addendum was not notarized.
Consequently, petitioner Mario Soriano signed as maker several
promissory notes,[6] payable to the respondent bank. Thereafter,
the bank released the proceeds of the loan to petitioners. However,
petitioners failed to meet their obligations as they fell due. During
that time, the bank was experiencing financial turmoil and was
under the supervision of the Central Bank. Central Bank examiner
and liquidator Cordula de Jesus, endorsed the subject promissory
notes to the banks counsel for collection. The bank gave petitioners
opportunity to settle their account by extending payment due
dates. Mario Soriano manifested his intention to re-structure the
loan, yet did not show up nor submit his formal written request.
Respondent bank filed three separate complaints before the Regional
Trial Court of Manila for Collection of Sums of money. The
corresponding case histories are illustrated in the table below:
Date of
Amount
Payment Payment
Loan
Due
Extension
Date
Dates
Civil Case
86-37374 P 78,212.29 Nov. 10, Feb. 8,
August
1982
1983
12, 1982
May 9,
1983
Aug. 7,
1983
Civil Case
86-37388 P 632,911.39 Jan. 15, May 16,
July 19,
1983
1983
1982
Aug. 14,
1983
Civil Case
86-37543 P 510,000.00 March
September
13, 1983
14, 1982
P 494,936.71
March
October
30, 1983
1, 1982

June 11,
1983
Sept. 9,
1983

June 28,
1983
Sept. 26,
1983
In their answer, petitioners interposed the defense of novation and
insisted there was a valid substitution of debtor. They alleged that
the addendum specifically states that although the promissory notes
were in their names, Wonderland shall be responsible for the
payment thereof.
The trial court held that petitioners are liable, to wit:
The evidences, however, disclose that Wonderland did not comply
with its obligation under said Addendum (Exh. S) as the
agreement to turn over the farmland to it, did not materialize (57 tsn,
May 29, 1990), and there was, actually no sale of the land (58 tsn,
ibid). Hence, Wonderland is not answerable. And since the loans
obtained under the four promissory notes (Exhs. A, C, G, and
E) have not been paid, despite opportunities given by plaintiff to
defendants to make payments, it stands to reason that defendants are

liable to pay their obligations thereunder to plaintiff. In fact,

defendants failed to file a third-party complaint against Wonderland,
which shows the weakness of its stand that Wonderland is
answerable to make said payments.[7]
Petitioners appealed to the Court of Appeals. The trial courts
decision was affirmed by the appellate court.
Hence, this recourse, wherein petitioners raise the sole issue of:
WHETHER THE COURT OF APPEALS ERRED IN NOT
FINDING THAT THE ADDENDUM, SIGNED BY THE
PETITIONERS, RESPONDENT BANK AND WONDERLAND
INC., CONSTITUTES A NOVATION OF THE CONTRACT BY
SUBSTITUTION OF DEBTOR, WHICH EXEMPTS THE
PETITIONERS FROM ANY LIABILITY OVER THE
PROMISSORY NOTES.
Revealed by the facts on record, the conflict among the parties
started from a contract of sale of a farmland between petitioners and
Wonderland Food Industries, Inc. As found by the trial court, no
such sale materialized.
A contract of sale is a reciprocal transaction. The obligation or
promise of each party is the cause or consideration for the obligation
or promise by the other. The vendee is obliged to pay the price,
while the vendor must deliver actual possession of the land. In the
instant case the original plan was that the initial payments would be
paid in cash. Subsequently, the parties (with the participation of
respondent bank) executed an addendum providing instead, that the
petitioners would secure a loan in the name of Agro Conglomerates
Inc. for the total amount of the initial payments, while the settlement
of said loan would be assumed by Wonderland. Thereafter,
petitioner Soriano signed several promissory notes and received the
proceeds in behalf of petitioner-company.
By this time, we note a subsidiary contract of suretyship had taken
effect since petitioners signed the promissory notes as maker and
accommodation party for the benefit of Wonderland. Petitioners
became liable as accommodation party. An accommodation party is
a person who has signed the instrument as maker, acceptor, or
indorser, without receiving value therefor, and for the purpose of
lending his name to some other person and is liable on the
instrument to a holder for value, notwithstanding such holder at the
time of taking the instrument knew (the signatory) to be an
accommodation party.[8] He has the right, after paying the holder, to
obtain reimbursement from the party accommodated, since the
relation between them has in effect become one of principal and
surety, the accommodation party being the surety.[9] Suretyship is
defined as the relation which exists where one person has
undertaken an obligation and another person is also under the
obligation or other duty to the obligee, who is entitled to but one
performance, and as between the two who are bound, one rather
than the other should perform.[10] The suretys liability to the
creditor or promisee of the principal is said to be direct, primary and
absolute; in other words, he is directly and equally bound with the
principal.[11] And the creditor may proceed against any one of the
solidary debtors.[12]
We do not give credence to petitioners assertion that, as provided
by the addendum, their obligation to pay the promissory notes was
novated by substitution of a new debtor, Wonderland. Contrary to
petitioners contention, the attendant facts herein do not make a case
of novation.
Novation is the extinguishment of an obligation by the substitution
or change of the obligation by a subsequent one which extinguishes
or modifies the first, either by changing the object or principal
conditions, or by substituting another in place of the debtor, or by
subrogating a third person in the rights of the creditor.[13] In order
that a novation can take place, the concurrence of the following
requisites[14] are indispensable:
1) There must be a previous valid obligation;
2) There must be an agreement of the parties concerned to a new
contract;
3) There must be the extinguishment of the old contract; and
4) There must be the validity of the new contract.

In the instant case, the first requisite for a valid novation is lacking.
There was no novation by substitution of debtor because there was
no prior obligation which was substituted by a new contract. It will
be noted that the promissory notes, which bound the petitioners to
pay, were executed after the addendum. The addendum modified
the contract of sale, not the stipulations in the promissory notes
which pertain to the surety contract. At this instance, Wonderland
apparently assured the payment of future debts to be incurred by the
petitioners. Consequently, only a contract of surety arose. It was
wrong for petitioners to presume a novation had taken place. The
well-settled rule is that novation is never presumed,[15] it must be
clearly and unequivocally shown.[16]
As it turned out, the contract of surety between Wonderland and the
petitioners was extinguished by the rescission of the contract of sale
of the farmland. With the rescission, there was confusion or merger
in the persons of the principal obligor and the surety, namely the
petitioners herein. The addendum which was dependent thereon
likewise lost its efficacy.
It is true that the basic and fundamental rule in the interpretation of
contract is that, if the terms thereof are clear and leave no doubt as
to the intention of the contracting parties, the literal meaning shall
control. However, in order to judge the intention of the parties, their
contemporaneous and subsequent acts should be considered.[17]
The contract of sale between Wonderland and petitioners did not
materialize. But it was admitted that petitioners received the
proceeds of the promissory notes obtained from respondent bank.
Sec. 22 of the Civil Code provides:
Every person who through an act of performance by another, or any
other means, acquires or comes into possession of something at the
expense of the latter without just or legal ground, shall return the
same to him.
Petitioners had no legal or just ground to retain the proceeds of the
loan at the expense of private respondent. Neither could petitioners
excuse themselves and hold Wonderland still liable to pay the loan
upon the rescission of their sales contract. If petitioners sustained
damages as a result of the rescission, they should have impleaded
Wonderland and asked damages. The non-inclusion of a necessary
party does not prevent the court from proceeding in the action, and
the judgment rendered therein shall be without prejudice to the
rights of such necessary party.[18] But respondent appellate court
did not err in holding that petitioners are duty-bound under the law
to pay the claims of respondent bank from whom they had obtained
the loan proceeds.
WHEREFORE, the petition is DENIED for lack of merit. The
assailed decision of the Court of Appeals dated October 17, 1994 is
AFFIRMED. Costs against petitioners.

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.
The deductions was implemented. 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. 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.
Gonzales resigned from RCBC. RCBC filed a complaint for a sum
of money against Eva Alviar, Melva Theresa Alviar-Gonzales and
the latters husband Gino Gonzales.
ISSUE: WHETHER OR NOT AN ACCOMMODATION PARTY
TO A CHECK SUBSEQUENTLY ENDORSED PARTIALLY, IS
LIABLE TO RCBC AS GUARANTOR.
Ruling:
NO. 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 P17,500.00 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.
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. RCBC, in this instance, should
therefore bear the loss.

GONZALES vs RCBC
G.R. No. 156294 November 29, 2006

FACTS:

FACTS:
Gonzales was an employee of RCBC. A foreign check in the amount
of $7,500 was drawn by Dr. Don Zapanta against the drawee bank
Wilshire Center Bank and payable to Gonzales mother, defendant
Eva Alviar. Alviar then endorsed this check. Since RCBC gives
special accommodations to its employees to receive the checks
value without awaiting the clearing period, Gonzales presented the
foreign check to Olivia Gomez, the RCBCs 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 P17,500.00 only". Gonzales presented the
check to Rolando Zornosa who after scrutinizing the entries and
signatures therein authorized its encashment. Gonzales then received
its peso equivalent. RCBC then tried to collect the amount of the
check with the drawee bank by the latter through its correspondent
bank on two occasions dishonored the check because of irregular
indorsement. Insisting, RCBC again sent the check to the drawee
bank, but this time the check was returned due to "account closed".

TOMAS ANG, petitioner, vs. ASSOCIATED BANK AND

ANTONIO ANG ENG LIONG, respondents.

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 comaker, respectively. 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
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;

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.

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-ininterest. 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.

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 comaker 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.

The trial court rendered against defendant Antonio Ang Eng Liong
and in favor of plaintiff, ordering the former to pay the latter: The
decision became final and executory as no appeal1was taken
therefrom. Upon the bank's ex-parte motion, the court accordingly
issued a writ of execution on April 5, 1991. 7
Thereafter, on June13, 1991, the court set the pre-trial conference
between the bank and Tomas Ang,18 who, in turn, filed a Motion to
Dismiss 9 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 in20case of several defendants, one of whom is declared
in default. Moreover, in his Supplemental Motion to Dismiss, 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.
Trial then ensued between the bank and Tomas Ang. Upon the
latter's motion during the pre-trial conference, Ant4onio Ang Eng
Liong was again declared in default for his failure to answer the
cross-claim within the reglementary period.2
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 T1rust, as certified by
the notary public, and news clippings from the Manila Bulletin
dated May 18, 1994 and May 30, 1994.3 All the documentary
exhibits were admitted for failure of the bank to submit its comment
to the formal offer.32 Thereafter, Tom3as Ang elected to withdraw
his petition in CA G.R. SP No. 34840 before the Court of Appeals,
which was then granted. 3
On January 5, 1996, the trial court rendered judgment against the
bank, dismissing the complaint for lack of cause of action.
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

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.
ISSUE: 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?
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. R7oderick Orallo, counsel for the bank, openly
admitted that it was under the trusteeship of the Asset Privatization
Trust.5 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 ban8k reclaimed its real and actual interest over the
unpaid promissory notes; hence, it could rightfully qualify as a
"holder"5 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) he5must not receive value therefor;
and (3) he must sign for the purpose of lending his name or credit to
some other person. 9 An accommodation party lends his name to
enable the accommodated party to obtain credit or to rais0e money;
he receives no part of the consideration for the instrument but

assumes liability to the other party/ies thereto.6 The accommodation

party is liable on the instrument to a holder for value even though
the holder, at the time of taking the ins1trument, knew him or her to
be merely an accommodation party, as if the contract was not for
accommodation. As petitioner acknowledged it to be, the relation
between an acco6mmodation party and the accommodated party is
one of principal and surety6 the accommodation party being the
surety. 2 As such, he is deemed an original promisor and debtor
from the beginning; 3 he is considered in law as the same party as
the debtor in rela4tion to whatever is adjudged touching the
obligation of the latter since their liabilities are interwoven as to be
inseparable.6 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 principal6obligor even without possessing a
direct or personal interest in the obligations nor does he receive any
benefit therefrom
Consequently, in issuing the two promissory notes, petitio8ner as
accommodating party warranted to the holder in due course that
he81would pay the same according to its tenor. 0 It is no defense to
state on his part that he did not receive any value therefor because
the phrase "without receiving value therefor" used in Sec. 29 of the
NIL means "without receiving value by2 virtue of the instrument"
and not as it is apparently supposed to mean, "without receiving
payment for lending his name."8 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 m3oney advanced to the accommodated
party. It is enough that value was given for the note at the time of its
creation.8 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
concerned8whether one of the signers, particularly petitioner, has or
has not received anything in payment of the use of his name. 4
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 enf8o5rce the guaranty against the other
signers of the note for the reimbursement of what he is entitled to
recover from them.
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 86 represented that he would take
care of the matter, instead of directly communicating with the bank
for its settlement. Thus, petitioner cannot now claim that he was
prejudiced by the supposed "extension of time" given by the bank to
his co- debtor.
Furthermore, since the liability of an accommodation party remains
not only primary but also unconditional to a holder for value, even
if the accommodated party receives an extension of the period for
payment without the consent of the accommodation party, the latter
is still liable for the whole obligati8on and such extensio8n does not
release him because as far as a holder for value is concerned, he is a
solidary co-debtor. 7 In Clark v. Sellner,8 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 univer8sally consider it
essentially inconsistent with the relation of the parties to the note.
(21 R.C.L., 1032-1034) 9
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 value0, can escape liability by the convenient
expedient of interposing the defense that he is a merely an
accommodation party.9
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 u1nder the rule to examine,
evaluate or weigh the probative value of the evidence presented by
the parties all over again.9
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.
FAR EAST BANK & TRUST COMPANY vs GOLD PALACE
JEWELLERY CO., as represented by Judy L. Yang, Julie YangGo and Kho Soon Huat G.R. No. 168274 (2008)
FACTS:
Tagoe purchased from Gold Palaces store several pieces of
jewelry valued at P258,000.00. In payment of the same, he offered
Foreign Draft issued by the United Overseas Bank (a bank in
Malaysia) (UOB), addressed to the Land Bank of the Philippines,
Manila (LBP), and payable to Gold Palace for P380,000.00.
Yang, the assistant general manager of Gold Palace, inquired from
Far East Bank) the nature of the draft. The teller informed her that it
is similar to a managers check, but advised her not to release the
pieces of jewelry until the draft had been cleared. She followed the
banks advice. Yang-Go, the manager of Gold Palace, consequently

deposited the draft in the companys account with Far East Bank.
When Far East, the collecting bank, presented the draft for clearing
to LBP, the drawee bank, the latter cleared the same. UOBs account
with LBP was credited. Gold Palaces account with Far East was
credited with the amount stated in the draft.
Yang released the pieces of jewelry to 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 for P122,000.00. It was
also paid by Far East Bank upon presentment of Tagoe.
After around 3 weeks, LBP informed Far East that the amount in
Foreign Draft had been materially altered from P300.00 to
P380,000.00 and that it was returning the same. Far East
subsequently refunded the P380,000.00 earlier paid by LBP.
Far East demanded from Gold Palace the payment of P211,946.64
or the difference between the amount in the materially altered draft
and the amount debited from the Gold Palaces account. The latter
didnt heed the demand. Far East filed a civil case for collection of
money.
RTC: in favor of Far East, ordering Gold Palace to pay the former
P211,946.64 on the basis of its warranties as a general indorser.
CA: reversed. The drawee bank had cleared the check, and its
remedy should be against the party responsible for the alteration.
ISSUE: WON Far East can reimburse Gold Palace for the amount it
paid to LBP.
HELD: NO. LBP cleared and paid the foreign draft and forwarded
the amount thereof to Far East Bank. The latter then credited to Gold
Palaces account the payment it received. LBP, by the said payment,
recognized and complied with its obligation to pay in accordance
with the tenor of his acceptance. LBP was liable on its payment of
the check according to the tenor of the check at the time of payment.
Gold Palace was not a participant in the alteration of the draft, was
not negligent, and was a holder in due courseit 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. Having relied on LBPs
clearance and payment of the draft and not being negligent (it
delivered the purchased jewelry only when the draft was cleared and
paid), Gold Palace is amply protected by Section 62. 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. LBP
should first verify the amount of the draft before it cleared and paid
the same. Far East (collecting bank) should not have debited the
money paid by the LBP from Gold Palaces account. When Gold
Palace deposited the check with Far East, the latter, under the terms
of the deposit and the provisions of the NIL, became an agent of the
former for the collection of the amount in the draft. The subsequent
payment by LBP and the collection of the amount by Far East Bank
closed the transaction. 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. Far East did not own the
draft; it merely presented it for payment. Considering that the
warranties of a general indorser as provided in Section 66 of the NIL
are based upon a transfer of title and are available only to holders in
due course, these warranties did not attach to the indorsement for
deposit and collection made by Gold Palace to Far East. Without any
legal right to do so, Far East Bank, therefore, could not debit Gold
Palaces account for the amount it refunded to LBP.
DEFENSES
SALAS V. CA
181 SCRA 296
FACTS:

Petitioner bought a car from Viologo Motor Sales Company,

which was secured by a promissory note, which was later on
indorsed to Filinvest Finance, which financed the transaction.
Petitioner later on defaulted in her installment payments,
allegedly due to the fraud imputed by VMS in selling her a
different vehicle from what was agreed upon. This default in
payment prompted Filinvest Finance to initiate a case against
petitioner. The trial court decided in favor of Filinvest, to
which the appellate court upheld by increasing the amount to be
paid. It is the contention of petitioner that since the agreement
between her and the motor company was inexistent, none had
been assigned in favor of private respondent.
HELD:
Petitioners liability on the promissory note, the due execution
and genuineness of which she never denied under oath, is under the
foregoing factual milieu, as inevitable as it is clearly established.
The records reveal that involved herein is not a simple case of
assignment of credit as petitioner would have it appear, where
the assignee merely steps into the shoes of, is open to all
defenses available against and can enforce payment only to the
same extent as, the assignor-vendor.
The instrument to be negotiable must contain the so-called
words of negotiability. There are only 2 ways for an instrument to
be payable to order. There must always be a specified person named
in the instrument and the bill or note is to be paid to the person
designated in the instrument or to any person to whom he has
indorsed and delivered the same. Without the words or order or
to the order of, the instrument is payable only to the person
designated therein and is thus non-negotiable. Any subsequent
purchaser thereof will not enjoy the advantages of being
a holder in due course but will merely step into the shoes of
the person designated in the instrument and will thus be open
to the defenses available against the latter.
In the case at bar, the promissory notes is earmarked with
negotiability and Filinvest is a holder in due course.
Philippine National Bank vs. CA, 256 SCRA 491
FACTS:
DECS issued a check in favor of Abante Marketing containing a
specific serial number, drawn against PNB. The check was
deposited by Abante in its account with Capitol and the latter
consequently deposited the same with its account with PBCOM
which later deposited it with petitioner for clearing. The check was
thereafter cleared. However, on a relevant date, petitioner PNB
returned the check on account that there had been a material
alteration on it. Subsequent debits were made but Capitol cannot
debit the account of Abante any longer for the latter had withdrawn
all the money already from the account. This prompted Capitol to
seek reclarification from PBCOM and demanded the recrediting of
its account. PBCOM followed suit by doing the same against PNB.
Demands unheeded, it filed an action against PBCOM and the latter
filed a third-party complaint against petitioner.
HELD:
An alteration is said to be material if it alters the effect of the
instrument. It means an unauthorized change in the 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 the party. In other
words, a material alteration is one which changes the items which
are required to be stated under Section 1 of the NIL.

In this case, the alleged material alteration was the alteration of the
serial number of the check in issuewhich is not an essential element
of a negotiable instrument under Section 1. PNB alleges that the
alteration was material since it is an accepted concept that a TCAA
check by its very nature is the medium of exchange of governments,
instrumentalities and agencies. As a safety measure, every
government office or agency is assigned checks bearing different
serial numbers.
But this contention has to fail. The checks serial number is not the
sole indicia of its origin. The name of the government agency
issuing the check is clearly stated therein. Thus, the checks drawer
is sufficiently identified, rendering redundant the referral to its serial
number.

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:

Therefore, there being no material alteration in the check

committed, PNB could not return the check to PBCOM. It should
pay the same.

Check Number

Date Deposited

Account Deposited

7-3694621-4

7-23-81

CA 0060 02360 3

THE INTERNATIONAL CORPORATE BANK,

INC., petitioner,
vs.
COURT OF APPEALS and PHILIPPINE NATIONAL
BANK, respondents.
DECISION

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

Before the Court is a petition for review 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.

7-4535675-2

8-27-81

CA 0060 02360 3

7-4535699-5

8-31-81

CA 0060 30982 5

The Antecedent Facts

7-4535700-6

8-24-81

SA 0061 32331 7

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").

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

CARPIO, J.:
The Case
1

The Ministry of Education and Culture issued 15 checks 5 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

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.

7-3694609-6

7-27-81

Romero D. Palmares

98,500.50

The Ruling of the Trial Court

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

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 petitioners 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 courts 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 courts 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 courts 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 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 courts 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:
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 Ybaez 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

(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.

The alterations in the checks were made on their serial numbers.

xxxx
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;
(c) Must be payable on demand, or at a fixed or determinable future
time;
(d) Must be payable to order or to bearer; and

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 checks 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 checks 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 petitioners 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 Respondents Motion for Reconsideration
Respondent filed its motion for reconsideration of the 10 October
1991 Decision on 6 November 1991. Respondents 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 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
respondents 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.

Associated Bank vs. Court of Appeals [GR 107382, 31 January

1996]; also Philippine National Bank vs. Court of
Appeals [GR 107612]
Facts: 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.
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 19 February 1981, the Provincial
Treasurer requested the manager of the PNB to return all of its
cleared checks which were issued from 1977 to 1980 in order to
verify the regularity of their encashment. After the checks were
examined, the Provincial Treasurer learned that 30 checks
amounting to P203,300.00 were encashed by one Fausto Pangilinan,
with the Associated Bank acting as collecting bank. It turned out that
Fausto Pangilinan, who was the administrative officer and cashier of
payee hospital until his retirement on 28 February 1978, collected
the 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. Pangilinan sought to encash the
first check 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 20 April 1978, as well as for 28
other checks of various amounts and on various dates. The last
check negotiated by Pangilinan was for P8,000.00 and dated 10
February 1981. All the checks bore the stamp of Associated Bank
which reads "All prior endorsements guaranteed Associated Bank."
Jesus David, the manager of Associated Bank, alleged that

Pangilinan made it appear that the checks were paid to him for
certain projects with the hospital. 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. On 26
February 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. In turn, the PNB manager
demanded reimbursement from the Associated Bank on 15 May
1981. As both banks resisted payment, the Province brought suit
against PNB which, in turn, impleaded Associated Bank as thirdparty defendant. The latter then filed a fourth-party complaint
against Adena Canlas and Fausto Pangilinan. After trial on the
merits, the lower court rendered its decision on 21 March 1988, on
the basic complaint, in favor of the Province and against PNB,
ordering the latter to pay to the former, the sum of P203,300.00 with
legal interest thereon from 20 March 1981 until fully paid; on the
third-party complaint, in favor of PNB and against Associated Bank
ordering the latter to reimburse to the former the amount of
P203,300.00 with legal interests thereon from 20 March 1981 until
fully paid; on the fourth-party complaint, the same was ordered
dismissed for lack of cause of action as against Adena Canlas and
lack of jurisdiction over the person of Fausto Pangilinan as against
the latter. The court also dismissed the counterclaims on the
complaint, third-party complaint and fourth-party complaint, for
lack of merit. PNB and Associated Bank appealed to the Court of
Appeals. The appellate court affirmed the trial court's decision in
toto on 30 September 1992. Hence the consolidated petitions which
seek a reversal of the appellate court's decision.
Issue: Whether PNB was at fault and should solely bear the loss
because it cleared and paid the forged checks.
Held: The present case 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. Where the instrument is payable to order at
the time of the forgery, such as the checks in the 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. 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." 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'
client is forged, the collecting bank is bound by his warranties as an
indorser and cannot set up the defense of forgery as against the
drawee bank. The bank on which a check is drawn, known as the
drawee bank, is under strict liability to pay the check to the order of
the payee. The drawee bank is not similarly situated as the collecting
bank because the former makes no warranty as to the genuineness of
any indorsement. 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. Herein, 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 drawerProvince 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. 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 17 January 1978), all the
checks were issued and released after Pangilinan's
retirement on 28 February 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. Hence, 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, the Province contributed to the loss
amounting to P203,300.00 and shall be liable to the PNB for 50%
thereof. In effect, the Province of Tarlac can only recover 50% of
P203,300.00 from PNB. The collecting bank, Associated Bank, shall
be liable to PNB for 50% 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.
Jai-Alai Corp vs BPI
G.R. No. L-29432 August 6, 1975

66 SCRA 29

FACTS:
Petitioner deposited in its current account with respondent bank
several checks, all acquired from Antonio J. Ramirez, a regular
bettor at the jai-alai games and a sale agent of the Inter-Island Gas
Service, Inc., the payee of the checks.
The deposits were all temporarily credited to petitioner's account.
Subsequently, Ramirez resigned and after the checks had been
submitted to inter-bank clearing, the Inter-Island Gas discovered that
all the indorsement made on the cheeks were forgeries.
It informed petitioner, the respondent, the drawers and the
drawee banks of the said checks and forgeries and filed a criminal

complaint against its former employee.

In view of these circumstances, the respondent Bank debited the
petitioner's current account and forwarded to the latter the checks
containing the forged indorsements, which petitioner refused to
accept.
Later, petitioner drew against its current account a check.
This check was dishonored by respondent as its records showed
that petitioner's balance after netting out the value of the checks with
the forged indorsement, was insufficient to cover the value of the
check drawn.
A complaint was filed by petitioner in the CFI but the same was
dismissed, as well as by the Court of Appeals, on appeal.
Hence, this petition for review.
ISSUE:
Whether BPI had the right to debit from petitioner's current account
the value of the checks with the forged indorsements.
RULING:
BPI acted within legal bounds when it debited the petitioner's
account. Having indorsed the checks to respondent bank, petitioner
is deemed to have given the warranty prescribed in Section 66 of the
NIL that every single one of those checks "is genuine and in all
respects what it purports to be." Respondent which relied upon the
petitioner's warranty should not be held liable for the resulting loss.
**The depositor of a check as indorser warrants that it is genuine
and in all respects what it purports to be. Having indorsed the
checks to respondent bank, petitioner is deemed to have given the
warranty prescribed in Section 66 of the NIL that every single one
of those checks " is genuine and in all respects what it purports to
be."
Republic Bank vs. Ebrada [GR L-40796, 31 July 1975]
Facts: On or about 27 February 1963, Mauricia T. Ebrada, encashed
Back Pay Check 508060 dated 15 January 1963 for P1,246.08 at the
main office of the Republic Bank at Escolta, Manila. The check was
issued by the Bureau of Treasury. Republic 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 forgery
since the latter had allegedly died as of 14 July 1952. Republic Bank
was then requested by the Bureau of Treasury to refund the amount
of P1,246.08. To recover what it had refunded to the Bureau of
Treasury, Republic Bank made verbal and formal demands upon
Ebrada to account for the sum of P1,246.08, but Ebrada refused to
do so. So Republic Bank sued Ebrada before the City Court of
Manila. On 11 July 1966, 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 Republic 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. On the same date, Ebrada filed a Third-Party
complaint against Adelaida Dominguez who, in turn, filed on 14
September 1966 a Fourth-Party complaint against Justina Tinio. On
21 March 1967, the City Court of Manila rendered judgment for the
Republic Bank against Ebrada; for Ebrada against Dominguez, and
for Dominguez against Tinio. From the judgment of the City Court,
Ebrada took an appeal to the Court of First Instance of Manila,
where a partial stipulation of facts was submitted. Based on the
stipulation of facts and the documentary evidence presented, the trial
court rendered a decision, ordering Ebrada to pay Republic Bank the
amount of P1,246.08, with interest as the legal rate from the filing of
the complaint on 16 June 1966, until fully paid, plus the costs in
both instances against Ebrada; reserving therein the right of Ebrada
to file whatever claim she may have against Dominguez in

connection with the case, as well as the right of the estate of

Dominguez to file the fourth-party complaint against Tinio. Ebrada
appealed.
Issue [1]: Whether the existence of one forged signature in a
negotiable instrument will render void all the other negotiations of
the check with respect to the other parties whose signature are
genuine.
Held [1]: 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, 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, the original payee, to Ramon R.
Lorenzo, the second indorser, should be declared of no effect, but
the negotiation of the aforesaid check from Ramon R. Lorenzo to
Adelaida Dominguez, the third indorser, and from Adelaida
Dominguez to Ebrada who
did not know of the forgery, should be considered valid and
enforceable, barring any claim of forgery.

Forgery is a real defense by the party whose signature was forged. A

party whose signature was forged was never a party and never gave
his consent to the instrument. Since his signature doesnt appear in
the instrument, the same cannot be enforced against him even by a
holder in due course. The drawee bank cannot charge the account of
the drawer whose signature was forged because he never gave the
bank the order to pay. In the case at bar the checks were filled up by
petitioners employee Galang and were later given to her for
signature. Her signing the checks made the negotiable instruments
complete. Prior to signing of the checks, there was no valid contract
yet. Petitioner completed the checks by signing them and thereafter
authorized Galang to deliver the same to their respective payees.
The checks were then indorsed, forged indorsements thereon. As a
rule, a drawee bank who has paid a check on which an indorsement
has been forged cannot debit the account of a drawer for the amount
of said check. An exception to this rule is when the drawer is guilty
of negligence which causes the bank to honor such checks.
Petitioner in this case has relied solely on the honesty and loyalty of
her bookkeeper and never bothered to verify the accuracy of the
amounts of the checks she signed the invoices attached thereto. And
though she received her bank statements, she didn't carefully
examine the same to double-check her payments. Petitioner didn't
exercise reasonable diligence which eventually led to the fruition of
her bookkeepers fraudulent schemes.

PNB vs Quimpo
Philippine Commercial International Bank vs Court of Appeals
FACTS: June 1973, Francisco Gozon II went to
the Philippine National Bank (Caloocan City) accompanied by
his friend Ernesto Santos. Gozon left Santos in his car and while
Gozon was at the bank, Santos took a check from Gozons
checkbook. Santos forged Gozons signature and filled out the check
with the amount of P5,000.00. Santos was able to encash the check
that day with PNB. Gozon learned of this when his statement
arrived. Santos eventually admitted to forging Gozons signature.
Gozon then demanded the PNB to refund him the amount. PNB
refused. Judge Quimpo ruled in favor of Gozon.
ISSUE: Whether or not PNB is liable.
HELD: Yes. A bank is bound to know the signatures of its
customers; and if it pays a forged check, it must be considered
asmaking the payment out of its own funds, and cannot ordinarily
change the amount so paid to the account of the depositor whose
name was forged. PNB failed to meet its obligation to know the
signature of its correspondent (Gozon). Further, it was found by the
court that there are glaring differences between Gozons authentic
specimen signatures and that of the forged check.

FACTS: In October 1977, Ford Philippines drew a Citibank check

in the amount of P4,746,114.41 in favor of the Commissioner of the
Internal Revenue (CIR). The check represents Fords tax payment
for the third quarter of 1977. On the face of the check was written
Payees account only which means that the check cannot be
encashed and can only be deposited with the CIRs savings account
(which is with Metrobank). The said check was however presented
to PCIB and PCIB accepted the same. PCIB then indorsed the check
for clearing to Citibank. Citibank cleared the check and paid PCIB
P4,746,114.41. CIR later informed Ford that it never received the
tax payment. An investigation ensued and it was discovered that
Fords accountant Godofredo Rivera, when the check was deposited
with PCIB, recalled the check since there was allegedly an error in
the computation of the tax to be paid. PCIB, as instructed by Rivera,
replaced the check with two of its managers checks. It was further
discovered that Rivera was actually a member of a syndicate and the
managers checks were subsequently deposited with the Pacific
Banking Corporation by other members of the syndicate. Thereafter,
Rivera and the other members became fugitives of justice.
G.R. No. 128604

Gempesaw vs. Court of Appeals [GR 92244. 9 February 1993]

FACTS:
Gempensaw was the owner of many grocery stores. She paid her
suppliers through the issuance of checks drawn against her checking
account with respondent bank. The checks were prepared by her
bookkeeper Galang. In the signing of the checks prepared by
Galang, Gempensaw didn't bother herself in verifying to whom the
checks were being paid and if the issuances were necessary. She
didn't even verify the returned checks of the bank when the latter
notifies her of the same. During her two years in business, there
were incidents shown that the amounts paid for were in excess of
what should have been paid. It was also shown that even if the
checks were crossed, the intended payees didn't receive the amount
of the checks. This prompted Gempensaw to demand the bank to
credit her account for the amount of the forged checks. The bank
refused to do so and this prompted her to file the case against the
bank.
HELD:

In July 1978 and in April 1979, Ford drew two checks in the
amounts of P5,851,706.37 and P6,311,591.73 respectively. Both
checks are again for tax payments. Both checks are for Payees
account only or for the CIRs bank savings account only with
Metrobank. Again, these checks never reached the CIR. In an
investigation, it was found that these checks were embezzled by the
same syndicate to which Rivera was a member. It was established
that an employee of PCIB, also a member of the syndicate, created a
PCIB account under a fictitious name upon which the two checks,
through high end manipulation, were deposited. PCIB unwittingly
endorsed the checks to Citibank which the latter cleared. Upon
clearing, the amount was withdrawn from the fictitious account by
syndicate members.
ISSUE: What are the liabilities of each party?
HELD: G.R. No. 121413/G.R. No. 121479
PCIB is liable for the amount of the check (P4,746,114.41). PCIB,
as a collecting bank has been negligent in verifying the authority of
Rivera to negotiate the check. It failed to ascertain whether or not

Rivera can validly recall the check and have them be replaced with
PCIBs managers checks as in fact, Ford has no knowledge and did
not authorize such. A bank (in this case PCIB) which cashes a check
drawn upon another bank (in this case Citibank), without requiring
proof as to the identity of persons presenting it, or making inquiries
with regard to them, cannot hold the proceeds against the drawee
when the proceeds of the checks were afterwards diverted to the
hands of a third party. Hence, PCIB is liable for the amount of the
embezzled check.
G.R. No. 128604
PCIB and Citibank are liable for the amount of the checks on a 5050 basis.
As a general rule, a bank is liable for the negligent or tortuous act of
its employees within the course and apparent scope of their
employment or authority. Hence, PCIB is liable for the fraudulent
act of its employee who set up the savings account under a fictitious
name.
Citibank is likewise liable because it was negligent in the
performance of its obligations with respect to its agreement with
Ford. The checks which were drawn against Fords account with
Citibank clearly states that they are payable to the CIR only yet
Citibank delivered said payments to PCIB. Citibank however argues
that the checks were indorsed by PCIB to Citibank and that the latter
has nothing to do but to pay it. The Supreme Court cited Section 62
of the Negotiable Instruments Law which mandates the Citibank, as
an acceptor of the checks, to engage in paying the checks according
to the tenor of the acceptance which is to deliver the payment to the
payees account only.
But the Supreme Court ruled that in the consolidated cases, that
PCIB and Citibank are not the only negligent parties. Ford is also
negligent for failing to examine its passbook in a timely manner
which could have avoided further loss. But this negligence is not the
proximate cause of the loss but is merely contributory. Nevertheless,
this mitigates the liability of PCIB and Citibank hence the rate of
interest, with which PCIB and Citibank is to pay Ford, is lowered
from 12% to 6% per annum.
MWSS v. CA, 1986
Facts:
MWSS issued 23 personalized checks against its account with
PNB in favor of different payees.
During the same month, a second batch of 23 checks were issued
bearing the same numbers as those of the 1st batch.
Both batches were paid and cleared by PNB and debited against
the account of MWSS.
The second batchs payees deposited the said checks to their
respective accounts with PCIB and PBC.
At the time of their presentation to PNB these checks bear the
standard indorsement which reads 'all prior indorsement and/or lack
of endorsement guaranteed.'
Investigation however, conducted by the NBI showed that all the
payees for the 2nd batch were all fictitious persons.
Upon learning this, MWSS wrote PNB to restore the
corresponding total amount of the 2nd batch payments on the 23
checks claimed by MWSS to be forged and/or spurious checks.
Upon refusal of PNB to credit back, MWSS filed the instant
complaint.
Issue:
Whether the drawee bank PNB is liable to MWSS.
Ruling:
No. First of all, there is no express and categorical finding that the
23 questioned checks were indeed signed by persons other than the
authorized MWSS signatories. Forgery cannot be presumed. It must
be established by clear, positive, and convincing evidence. This was
not done in the present case.
Further, the petitioner was using its own personalized checks,

instead of the official PNB Commercial blank checks. Considering

the absence of sufficient security in the printing of the checks
coupled with the very close similarities between the genuine
signatures and the alleged forgeries, the 23 checks in question could
have been presented to the petitioner's signatories without their
knowing that they were bogus checks. Petitioner failed to provide
the needed security measures. Another factor which facilitated the
fraudulent encashment of the 23 checks in question was the failure
of the petitioner to reconcile the bank statements with its own
records.
Thus, even if the 23 checks in question are considered forgeries,
considering the petitioner's gross negligence, it is barred from
setting up the defense of forgery under Section 23 of the NIL.
Drawee Bank PNB cannot be faulted for not having detected the
fraudulent encashment of the checks because the printing of the
petitioner's personalized checks was not done under the supervision
and control of the Bank. There is no evidence on record indicating
that because of this private printing, the petitioner furnished the
respondent Bank with samples of checks, pens, and inks or took
other precautionary measures with the PNB to safeguard its
interests. Under the circumstances, therefore, the petitioner was in a
better position to detect and prevent the fraudulent encashment of its
checks.
Ilusorio vs. CA Ramon Ilusorio, petitioner vs. Manila Banking
Corporation, CA, respondents
Facts:
Petitioner is a prominent businessman who, at the time material to
this case, was the Managing Director of Multinational Investment
Bancorporation and the Chairman and/or President of several other
corporations. He was a depositor in good standing of respondent
bank, the Manila Banking Corporation. As he was then running
about 20 corporations, and was going out of the country a number of
times, petitioner entrusted to his secretary, Katherine E. Eugenio, his
credit cards and his checkbook with blank checks. It was also
Eugenio who verified and reconciled the statements of said checking
account. Between the dates September 5, 1980 and January 23,
1981, Eugenio was able to encash and deposit to her personal
account about seventeen (17) checks drawn against the account of
the petitioner at the respondent bank, with an aggregate amount of
P119,634.34. Petitioner did not bother to check his statement of
account until a business partner apprised him that he saw Eugenio
use his credit cards. Petitioner fired Eugenio immediately, and
instituted a criminal action against her for estafa thru falsification
before the Office of the Provincial Fiscal of Rizal. Private
respondent, through an affidavit executed by its employee, Mr.
Dante Razon, also lodged a complaint for estafa thru falsification of
commercial documents against Eugenio on the basis of petitioners
statement that his signatures in the checks were forged. Petitioner
then requested the respondent bank to credit back and restore to its
account the value of the checks which were wrongfully encashed but
respondent refused.ndent refused. Finding no sufficient basis for
plaintiff's cause against defendant bank, the trial court DISMISSED
the case. Aggrieved, petitioner elevated the case to the Court of
Appeals by way of a petition for review but without success. The
appellate court held that petitioners own negligence was the
proximate cause of his loss.
Issue:
(2) whether or not private respondent, in filing an estafa case against
petitioners secretary, is barred from raising the defense that the fact
of forgery was not established.
Held:
On the second issue, the fact that Manila Bank had filed a case for

estafa against Eugenio would not estop it from asserting the fact that
forgery has not been clearly established. Petitioner cannot hold
private respondent in estoppel for the latter is not the actual party to
the criminal action.
Samsung Construction vs. Far East Bank, 15 August 2004
FACTS: Plaintiff Samsung Construction Company Philippines, Inc.
(Samsung Construction), maintained a current account with
defendant Far East Bank and Trust Company (FEBTC) at the
latters Bel-Air, Makati branch. The sole signatory to Samsung
Constructions account was Jong Kyu Lee (Jong), its Project
Manager, while the checks remained in the custody of the
companys accountant, Kyu Yong Lee (Kyu). On 19 March 1992,
a certain Roberto Gonzaga presented for payment FEBTC Check
No. 432100 to the banks branch in Bel-Air, Makati . The check,
payable to cash and drawn against Samsung Constructions current
account, was in the amount of Nine Hundred Ninety Nine Thousand
Five Hundred Pesos (P999,500.00). The bank teller, Cleofe exercise
the bank procedure in encashment using check. She then asked
Gonzaga to submit proof of his identity, and the latter presented
three (3) identification cards.The bank officer Syfu also noticed Jose
Sempio III (Sempio), the assistant accountant of Samsung
Construction , who supported the claim of Gonzaga. Syfu showed
the check to Sempio, who vouched for the genuineness of Jongs
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 banks encashment of the check to Gonzaga. The
following day Kyu, discovered that a check in the amount of Nine
Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00)
had been encashed. Kyu perused the checkbook and found that the
last blank check was missing. 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. Jong proceeded to the police station and
consulted with his lawyers. Subsequently, a criminal case
for qualified theft was filed against Sempio before the Laguna court.
FEBTC on the other hand, said that it was still conducting an
investigation on the matter. Unsatisfied, Samsung Construction filed
aComplaint on 10 June 1992 for violation of Section 23 of the
Negotiable Instruments Law, before the Regional Trial Court (RTC
) of Manila , Branch 9. During the trial, both sides presented their
respective expert witnesses to testify on the claim that Jongs
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 Jongs signature had been forged
on the check. On the other hand, FEBTC, which had sought the
assistance of the Philippine National Police (PNP), presented
Rosario C. Perez, a document examiner from the PNP Crime
Laboratory. She testified that her findings showed that Jongs
signature on the check was genuine.
ISSUE: Whether or not the signature of Jong in the subject check
was forged?
RULING Upon examination of the record, and based on the
applicable laws and jurisprudence, we reverse the Court of Appeals
decision. Indeed there was forgery in this case. 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 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. In this case, indeed there was forgery. A bank
is liable, irrespective of its good faith, in paying a forged check.
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.
Metrobank vs. Cabilzo, 06 December 2006
FACTS:

November 12,1994: Renato D. Cabilzo (Cabilzo) issued a

Metrobank Check payable to "CASH" and postdated on November
24, 1994 in the amount of P1,000 drawn against his Metrobank
account to Mr. Marquez, as his sales commission

check was presented to Westmont Bank for payment who

indorsed it to Metrobank for appropriate clearing

After the entries thereon were examined, including the

availability of funds and the authenticity of the signature of the
drawer, Metrobank cleared the check for encashment in accordance
with the Philippine Clearing House Corporation (PCHC) Rules

November 16, 1994: Cabilzos representative was at

Metrobank when he was asked by a bank personnel if Cabilzo had
issued a check in the amount of P91K to which he replied in
negative

That afternoon: Cabilzo called Metrobank to reiterate that

he did not issue the check
o He later discovered that the check of P1K was altered to P91K and
date was changed from Nov 24 to Nov 14.
o Cabilzo demanded that Metrobank re-credit the amount
of P91,000.00 to his account

June 30, 1995: Through counsel sent a letter-demand for

the amount of P90K

CA affirmed RTC: Favored Cablizo

ISSUE: W/N Cablizo can recover from Metrobank
HELD: YES. CA Affirmed

In the case at bar, the check was altered so that the amount
was increased from P1,000.00 to P91,000.00 and the date was
changed from 24 November 1994 to 14 November 1994.

Section 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,and assented to the alteration and
subsequent indorsers.
But when the 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 the payment thereof according to its original tenor.

Cabilzo was not the one who made nor authorized the
alteration. Neither did he assent to the alteration by his express or
implied acts
o There is no showing that he failed to exercise such
reasonable degree of diligence required of a prudent man which
could have otherwise prevented the loss.

bank must be a high degree of diligence, if not the utmost

diligence
o Surprisingly, however, Metrobank failed to detect the
above alterations which could not escape the attention of even an
ordinary person
ffi "NINETY" is also typed differently and with a lighter ink ffi only

2 asterisks were placed before the amount in figures, while 3

asterisks were placed after such amount ffi "NINETY" are likewise
a little bigger when compared with the letters of the words "ONE
THOUSAND PESOS ONLY"

When the drawee bank pays a materially altered check, it

violates the terms of the check, as well as its duty to charge its
clients account only for bona fide disbursements he had made.

The corollary liability of Westmont Ban's indorsement, if

any, is separate and independent from the liability of Metrobank to
Cabilzo.
BANK OF AMERICA NT & SA, Petitioner,
vs.
PHILIPPINE RACING CLUB, Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
This is a petition for review on certiorari under Rule 45 of the Rules
of Court from the Decision1 promulgated on July 16, 2001 by the
former Second Division of the Court of Appeals (CA), in CA-G.R.
CV No. 45371 entitled "Philippine Racing Club, Inc. v. Bank of
America NT & SA," affirming the Decision2 dated March 17, 1994 of
the Regional Trial Court (RTC) of Makati, Branch 135 in Civil Case
No. 89-5650, in favor of the respondent. Likewise, the present
petition assails the Resolution3 promulgated on September 28, 2001,
denying the Motion for Reconsideration of the CA Decision.
The facts of this case as narrated in the assailed CA Decision are as
follows:
Plaintiff-appellee PRCI is a domestic corporation which maintains
several accounts with different banks in the Metro Manila area.
Among the accounts maintained was Current Account No. 58891-012
with defendant-appellant BA (Paseo de Roxas Branch). The
authorized joint signatories with respect to said Current Account were
plaintiff-appellees President (Antonia Reyes) and Vice President for
Finance (Gregorio Reyes).
On or about the 2nd week of December 1988, the President and Vice
President of plaintiff-appellee corporation were scheduled to go out
of the country in connection with the corporations business. In order
not to disrupt operations in their absence, they pre-signed several
checks relating to Current Account No. 58891-012. The intention was
to insure continuity of plaintiff-appellees operations by making
available cash/money especially to settle obligations that might
become due. These checks were entrusted to the accountant with
instruction to make use of the same as the need arose. The internal
arrangement was, in the event there was need to make use of the
checks, the accountant would prepare the corresponding voucher and
thereafter complete the entries on the pre-signed checks.
It turned out that on December 16, 1988, a John Doe presented to
defendant-appellant bank for encashment a couple of plaintiffappellee corporations checks (Nos. 401116 and 401117) with the
indicated value of P110,000.00 each. It is admitted that these 2
checks were among those presigned by plaintiff-appellee
corporations authorized signatories.
The two (2) checks had similar entries with similar infirmities and
irregularities. On the space where the name of the payee should be
indicated (Pay To The Order Of) the following 2-line entries were
instead typewritten: on the upper line was the word "CASH" while
the lower line had the following typewritten words, viz: "ONE
HUNDRED TEN THOUSAND PESOS ONLY." Despite the highly
irregular entries on the face of the checks, defendant-appellant bank,
without as much as verifying and/or confirming the legitimacy of the
checks considering the substantial amount involved and the obvious

infirmity/defect of the checks on their faces, encashed said checks. A

verification process, even by was of a telephone call to PRCI office,
would have taken less than ten (10) minutes. But this was not done by
BA. Investigation conducted by plaintiff-appellee corporation yielded
the fact that there was no transaction involving PRCI that call for the
payment of P220,000.00 to anyone. The checks appeared to have
come into the hands of an employee of PRCI (one Clarita Mesina
who was subsequently criminally charged for qualified theft) who
eventually completed without authority the entries on the pre-signed
checks. PRCIs demand for defendant-appellant to pay fell on deaf
ears. Hence, the complaint. 4
After due proceedings, the trial court rendered a Decision in favor of
respondent, the dispositive portion of which reads:
PREMISES CONSIDERED, judgment is hereby rendered in favor of
plaintiff and against the defendant, and the latter is ordered to pay
plaintiff:
(1) The sum of Two Hundred Twenty Thousand
(P220,000.00) Pesos, with legal interest to be computed
from date of the filing of the herein complaint;
(2) The sum of Twenty Thousand (P20,000.00) Pesos by
way of attorneys fees;
(3) The sum of Ten Thousand (P10,000.00) Pesos for
litigation expenses, and
(4) To pay the costs of suit.
SO ORDERED.5
Petitioner appealed the aforesaid trial court Decision to the CA
which, however, affirmed said decision in toto in its July 16, 2001
Decision. Petitioners Motion for Reconsideration of the CA Decision
was subsequently denied on September 28, 2001.
Petitioner now comes before this Court arguing that:
I. The Court of Appeals gravely erred in holding that the proximate
cause of respondents loss was petitioners encashment of the checks.
A. The Court of Appeals gravely erred in holding that
petitioner was liable for the amount of the checks despite
the fact that petitioner was merely fulfilling its obligation
under law and contract.
B. The Court of Appeals gravely erred in holding that
petitioner had a duty to verify the encashment, despite the
absence of any obligation to do so.
C. The Court of Appeals gravely erred in not applying
Section 14 of the Negotiable Instruments Law, despite its
clear applicability to this case;
II. The Court of Appeals gravely erred in not holding that the
proximate cause of respondents loss was its own grossly negligent
practice of pre-signing checks without payees and amounts and
delivering these pre-signed checks to its employees (other than their
signatories).
III. The Court of Appeals gravely erred in affirming the trial courts
award of attorneys fees despite the absence of any applicable ground
under Article 2208 of the Civil Code.
IV. The Court of Appeals gravely erred in not awarding attorneys
fees, moral and exemplary damages, and costs of suit in favor of
petitioner, who clearly deserves them. 6

From the discussions of both parties in their pleadings, the key issue
to be resolved in the present case is whether the proximate cause of
the wrongful encashment of the checks in question was due to (a)
petitioners failure to make a verification regarding the said checks
with the respondent in view of the misplacement of entries on the
face of the checks or (b) the practice of the respondent of pre-signing
blank checks and leaving the same with its employees.
Petitioner insists that it merely fulfilled its obligation under law and
contract when it encashed the aforesaid checks. Invoking Sections
1267 and 1858 of the Negotiable Instruments Law (NIL), petitioner
claims that its duty as a drawee bank to a drawer-client maintaining a
checking account with it is to pay orders for checks bearing the
drawer-clients genuine signatures. The genuine signatures of the
clients duly authorized signatories affixed on the checks signify the
order for payment. Thus, pursuant to the said obligation, the drawee
bank has the duty to determine whether the signatures appearing on
the check are the drawer-clients or its duly authorized signatories. If
the signatures are genuine, the bank has the unavoidable legal and
contractual duty to pay. If the signatures are forged and falsified, the
drawee bank has the corollary, but equally unavoidable legal and
contractual, duty not to pay.9
Furthermore, petitioner maintains that there exists a duty on the
drawee bank to inquire from the drawer before encashing a check
only when the check bears a material alteration. A material alteration
is defined in Section 125 of the NIL to be one which changes the
date, the sum payable, the time or place of payment, the number or
relations of the parties, the currency in which payment is to be made
or one which adds a place of payment where no place of payment is
specified, or any other change or addition which alters the effect of
the instrument in any respect. With respect to the checks at issue,
petitioner points out that they do not contain any material
alteration.10 This is a fact which was affirmed by the trial court
itself.11
There is no dispute that the signatures appearing on the subject
checks were genuine signatures of the respondents authorized joint
signatories; namely, Antonia Reyes and Gregorio Reyes who were
respondents President and Vice-President for Finance, respectively.
Both pre-signed the said checks since they were both scheduled to go
abroad and it was apparently their practice to leave with the company
accountant checks signed in black to answer for company obligations
that might fall due during the signatories absence. It is likewise
admitted that neither of the subject checks contains any material
alteration or erasure.
However, on the blank space of each check reserved for the payee,
the following typewritten words appear: "ONE HUNDRED TEN
THOUSAND PESOS ONLY." Above the same is the typewritten
word, "CASH." On the blank reserved for the amount, the same
amount of One Hundred Ten Thousand Pesos was indicated with the
use of a check writer. The presence of these irregularities in each
check should have alerted the petitioner to be cautious before
proceeding to encash them which it did not do.
It is well-settled that banks are engaged in a business impressed with
public interest, and it is their duty to protect in return their many
clients and depositors who transact business with them. They have
the obligation to treat their clients account meticulously and with the
highest degree of care, considering the fiduciary nature of their
relationship. The diligence required of banks, therefore, is more than
that of a good father of a family.12
Petitioner asserts that it was not duty-bound to verify with the
respondent since the amount below the typewritten word "CASH,"
expressed in words, is the very same amount indicated in figures by
means of a check writer on the amount portion of the check. The
amount stated in words is, therefore, a mere reiteration of the amount

stated in figures. Petitioner emphasizes that a reiteration of the

amount in words is merely a repetition and that a repetition is not an
alteration which if present and material would have enjoined it to
commence verification with respondent.13
We do not agree with petitioners myopic view and carefully crafted
defense. Although not in the strict sense "material alterations," the
misplacement of the typewritten entries for the payee and the amount
on the same blank and the repetition of the amount using a check
writer were glaringly obvious irregularities on the face of the check.
Clearly, someone made a mistake in filling up the checks and the
repetition of the entries was possibly an attempt to rectify the
mistake. Also, if the check had been filled up by the person who
customarily accomplishes the checks of respondent, it should have
occurred to petitioners employees that it would be unlikely such
mistakes would be made. All these circumstances should have alerted
the bank to the possibility that the holder or the person who is
attempting to encash the checks did not have proper title to the
checks or did not have authority to fill up and encash the same. As
noted by the CA, petitioner could have made a simple phone call to
its client to clarify the irregularities and the loss to respondent due to
the encashment of the stolen checks would have been prevented.
In the case at bar, extraordinary diligence demands that petitioner
should have ascertained from respondent the authenticity of the
subject checks or the accuracy of the entries therein not only because
of the presence of highly irregular entries on the face of the checks
but also of the decidedly unusual circumstances surrounding their
encashment. Respondents witness testified that for checks in
amounts greater than Twenty Thousand Pesos (P20,000.00) it is the
companys practice to ensure that the payee is indicated by name in
the check.14 This was not rebutted by petitioner. Indeed, it is highly
uncommon for a corporation to make out checks payable to "CASH"
for substantial amounts such as in this case. If each irregular
circumstance in this case were taken singly or isolated, the banks
employees might have been justified in ignoring them. However, the
confluence of the irregularities on the face of the checks and
circumstances that depart from the usual banking practice of
respondent should have put petitioners employees on guard that the
checks were possibly not issued by the respondent in due course of its
business. Petitioners subtle sophistry cannot exculpate it from
behavior that fell extremely short of the highest degree of care and
diligence required of it as a banking institution.
Indeed, taking this with the testimony of petitioners operations
manager that in case of an irregularity on the face of the check (such
as when blanks were not properly filled out) the bank may or may not
call the client depending on how busy the bank is on a particular
day,15 we are even more convinced that petitioners safeguards to
protect clients from check fraud are arbitrary and subjective. Every
client should be treated equally by a banking institution regardless of
the amount of his deposits and each client has the right to expect that
every centavo he entrusts to a bank would be handled with the same
degree of care as the accounts of other clients. Perforce, we find that
petitioner plainly failed to adhere to the high standard of diligence
expected of it as a banking institution.
In defense of its cashier/tellers questionable action, petitioner insists
that pursuant to Sections 1416 and 1617 of the NIL, it could validly
presume, upon presentation of the checks, that the party who filled up
the blanks had authority and that a valid and intentional delivery to
the party presenting the checks had taken place. Thus, in petitioners
view, the sole blame for this debacle should be shifted to respondent
for having its signatories pre-sign and deliver the subject
checks.18 Petitioner argues that there was indeed delivery in this case
because, following American jurisprudence, the gross negligence of
respondents accountant in safekeeping the subject checks which
resulted in their theft should be treated as a voluntary delivery by the

maker who is estopped from claiming non-delivery of the

instrument.19

Explaining this provision in Lambert v. Heirs of Ray Castillon, 25 the

Court held:

Petitioners contention would have been correct if the subject checks

were correctly and properly filled out by the thief and presented to
the bank in good order. In that instance, there would be nothing to
give notice to the bank of any infirmity in the title of the holder of the
checks and it could validly presume that there was proper delivery to
the holder. The bank could not be faulted if it encashed the checks
under those circumstances. However, the undisputed facts plainly
show that there were circumstances that should have alerted the bank
to the likelihood that the checks were not properly delivered to the
person who encashed the same. In all, we see no reason to depart
from the finding in the assailed CA Decision that the subject checks
are properly characterized as incomplete and undelivered instruments
thus making Section 1520 of the NIL applicable in this case.

The underlying precept on contributory negligence is that a plaintiff

who is partly responsible for his own injury should not be entitled to
recover damages in full but must bear the consequences of his own
negligence. The defendant must thus be held liable only for the
damages actually caused by his negligence. xxx xxx xxx

However, we do agree with petitioner that respondents officers

practice of pre-signing of blank checks should be deemed seriously
negligent behavior and a highly risky means of purportedly ensuring
the efficient operation of businesses. It should have occurred to
respondents officers and managers that the pre-signed blank checks
could fall into the wrong hands as they did in this case where the said
checks were stolen from the company accountant to whom the checks
were entrusted.
Nevertheless, even if we assume that both parties were guilty of
negligent acts that led to the loss, petitioner will still emerge as the
party foremost liable in this case. In instances where both parties are
at fault, this Court has consistently applied the doctrine of last clear
chance in order to assign liability.
In Westmont Bank v. Ong,21 we ruled:
[I]t is petitioner [bank] which had the last clear chance to stop the
fraudulent encashment of the subject checks had it exercised due
diligence and followed the proper and regular banking procedures in
clearing checks. As we had earlier ruled, the one who had a last clear
opportunity to avoid the impending harm but failed to do so is
chargeable with the consequences thereof. 22 (emphasis ours)
In the case at bar, petitioner cannot evade responsibility for the loss
by attributing negligence on the part of respondent because, even if
we concur that the latter was indeed negligent in pre-signing blank
checks, the former had the last clear chance to avoid the loss. To
reiterate, petitioners own operations manager admitted that they
could have called up the client for verification or confirmation before
honoring the dubious checks. Verily, petitioner had the final
opportunity to avert the injury that befell the respondent. Failing to
make the necessary verification due to the volume of banking
transactions on that particular day is a flimsy and unacceptable
excuse, considering that the "banking business is so impressed with
public interest where the trust and confidence of the public in general
is of paramount importance such that the appropriate standard of
diligence must be a high degree of diligence, if not the utmost
diligence."23 Petitioners negligence has been undoubtedly established
and, thus, pursuant to Art. 1170 of the NCC,24 it must suffer the
consequence of said negligence.
In the interest of fairness, however, we believe it is proper to consider
respondents own negligence to mitigate petitioners liability. Article
2179 of the Civil Code provides:
Art. 2179. When the plaintiffs own negligence was the immediate
and proximate cause of his injury, he cannot recover damages. But if
his negligence was only contributory, the immediate and proximate
cause of the injury being the defendants lack of due care, the plaintiff
may recover damages, but the courts shall mitigate the damages to be
awarded.1avvph!1

As we previously stated, respondents practice of signing checks in

blank whenever its authorized bank signatories would travel abroad
was a dangerous policy, especially considering the lack of evidence
on record that respondent had appropriate safeguards or internal
controls to prevent the pre-signed blank checks from falling into the
hands of unscrupulous individuals and being used to commit a fraud
against the company. We cannot believe that there was no other
secure and reasonable way to guarantee the non-disruption of
respondents business. As testified to by petitioners expert witness,
other corporations would ordinarily have another set of authorized
bank signatories who would be able to sign checks in the absence of
the preferred signatories.26Indeed, if not for the fortunate
happenstance that the thief failed to properly fill up the subject
checks, respondent would expectedly take the blame for the entire
loss since the defense of forgery of a drawers signature(s) would be
unavailable to it. Considering that respondent knowingly took the risk
that the pre-signed blank checks might fall into the hands of
wrongdoers, it is but just that respondent shares in the responsibility
for the loss.
We also cannot ignore the fact that the person who stole the presigned checks subject of this case from respondents accountant
turned out to be another employee, purportedly a clerk in
respondents accounting department. As the employer of the "thief,"
respondent supposedly had control and supervision over its own
employee. This gives the Court more reason to allocate part of the
loss to respondent.
Following established jurisprudential precedents, 27 we believe the
allocation of sixty percent (60%) of the actual damages involved in
this case (represented by the amount of the checks with legal interest)
to petitioner is proper under the premises. Respondent should, in light
of its contributory negligence, bear forty percent (40%) of its own
loss.
Finally, we find that the awards of attorneys fees and litigation
expenses in favor of respondent are not justified under the
circumstances and, thus, must be deleted. The power of the court to
award attorneys fees and litigation expenses under Article 2208 of
the NCC28 demands factual, legal, and equitable justification.
An adverse decision does not ipso facto justify an award of attorneys
fees to the winning party.29 Even when a claimant is compelled to
litigate with third persons or to incur expenses to protect his rights,
still attorneys fees may not be awarded where no sufficient showing
of bad faith could be reflected in a partys persistence in a case other
than an erroneous conviction of the righteousness of his cause. 30
WHEREFORE, the Decision of the Court of Appeals dated July 16,
2001 and its Resolution dated September 28, 2001 are AFFIRMED
with the following MODIFICATIONS: (a) petitioner Bank of
America NT & SA shall pay to respondent Philippine Racing Club
sixty percent (60%) of the sum of Two Hundred Twenty Thousand
Pesos (P220,000.00) with legal interest as awarded by the trial court
and (b) the awards of attorneys fees and litigation expenses in favor
of respondent are deleted.
Metrobank vs. BA Finance, 4 December 2009
FACTS:
Lamberto Bitanga (Bitanga) obtained from respondent BA Finance

Corporation (BA Finance) a P329,280 loan to secure which, he

mortgaged his car to respondent BA Finance. The car was stolen. On
Bitangas claim, Malayan Insurance issued a check payable to the
order of B.A. Finance Corporation and Lamberto Bitanga for
P224,500, drawn against China Banking Corporation (China Bank).
The check was crossed with the notation For Deposit Payees
Account Only. Without the indorsement or authority of his copayee 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, Bitangas 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 Insurances issuance of a crossed
check payable to it and Bitanga, and of Bitangas depositing it in his
account at Asianbank and withdrawing the entire proceeds thereof.
BA Finance thereupon demanded the payment of the value
of the check from Asianbank 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, alleging
that, inter alia, it is entitled to the entire proceeds of the check.
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, 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.
The appellate court, summarizing the errors attributed to
the trial court by Asianbank to be whetherBA Finance has a cause
of action against [it] even if the subject check had not been delivered
toBA Finance by the issuer itself, held in the affirmative and
accordingly affirmed the trial courts decision but deleted the award
of P20,000 as actual damages.
ISSUE:
The petition fails. Section 41 of the Negotiable Instruments Law
provides: 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 Bitangas co-payee BA Finance to endorse it on its
behalf. The payment of an instrument over a missing indorsement is
the equivalent of payment on a forged indorsement or an
unauthorized indorsement in itself in the case of joint payees.
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. 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. Undoubtedly, BA Finance has a cause

of action against petitioner.

Is petitioner liable to BA Finance for the full value of the
check?
Petitioners argument is flawed.
The provisions of the Negotiable Instruments Law and underlying
jurisprudential teachings on the black-letter law provide definitive
justification for petitioners 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. 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 and, for all intents and purposes,
treats the check as a negotiable instrument, hence, assumes the
warranty of an indorser. Without Asianbanks 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.
Accordingly, one who credits the proceeds of a check to
the account of the indorsing payee is liable in conversion to the nonindorsing payee for the entire amount of the check.
ENFORCEMENT OF LIABILITY
FAR EAST REALTY INVESTMENT INC. v. CA
G.R. No. L-36549 October 5, 1988
Paras, J.
Doctrine:
Where the instrument is not payable on demand, presentment must
be made on the day it falls due. Where it is payable on demand,
presentment must be made within a reasonable time after issue,
except that in the case of a bill of exchange, presentment for
payment will be sufficient if made within a reasonable time after the
last negotiation thereof.
Reasonable Time has been defined as so much time as is necessary
under the circumstances for a reasonable prudent and diligent man
to do, conveniently, what the contract or duty requires should be
done, having a regard for the rights, and possibility of loss, if any, to
the other party.
No hard and fast demarcation line can be drawn between what
may be considered as a reasonable or an unreasonable time,
because reasonable time depends upon the peculiar facts and
circumstances in each case.
Facts:
Private respondents asked the petitioner to extend an
accommodation loan in the sum of P4,500.00. Respondents
delivered to the petitioner a check for P4,500.00, drawn by Dy Hian
Tat, and signed by them at the back of said check, with the assurance
that after one month from September 13, 1960, the said check would
be redeemed by them by paying cash in the sum of P4,500.00, or the
said check can be presented for payment on or immediately after
one month. Petitioner agreed and extended an accommodation loan
The aforesaid check was presented for payment to the China
Banking Corporation, but said check bounced and was not cashed
by said bank, for the reason that the current account of the drawer
thereof had already been closed. Petitioner demanded payment from

the private but the latter failed and refused to pay notwithstanding
repeated demands.
Both private respondents raised the defense that both have been
wholly discharged by delay in presentment of the check for
payment.
The Lower Court ruled in favor of the petitioner. However, this was
reversed by the CA upon appeal by the respondents, ruling that the
check was not given as collateral to guarantee a loan secured since
the check passed through other hands before reaching the petitioner
and the said check was not presented within a reasonable time.
Hence this petition.
Petitioner argues that presentment for payment and notice of
dishonor are not necessary as when funds are insufficient to meet a
check, thus the drawer is liable, whether such presentment and
notice be totally omitted or merely delayed.
Issues:
1. Whether or not presentment for payment can be dispensed with
2. Whether or not presentment for payment and notice of dishonor
of the questioned check were made within reasonable time
Held:
1. No. Where the instrument is not payable on demand, presentment
must be made on the day it falls due. Where it is payable on
demand, presentment must be made within a reasonable time after
issue, except that in the case of a bill of exchange, presentment for
payment will be sufficient if made within a reasonable time after the
last negotiation thereof (Section 71, Negotiable Instruments Law).
2. No. It is obvious in this case that presentment and notice of
dishonor were not made within a reasonable time.
Reasonable time has been defined as so much time as is necessary
under the circumstances for a reasonable prudent and diligent man
to do, conveniently, what the contract or duty requires should be
done, having a regard for the rights, and possibility of loss, if any, to
the other party (Citizens Bank Bldg. v. L & E. Wertheirmer 189 S.W.
361, 362, 126 Ark, 38, Ann. Cas. 1917 E, 520).
Notice may be given as soon as the instrument is dishonored; and
unless delay is excused must be given within the time fixed by the
law (Section 102, Negotiable Instruments Law).
In the instant case, the check in question was issued on September
13, 1960, but was presented to the drawee bank only on March 5,
1964, and dishonored on the same date. After dishonor by the
drawee bank, a formal notice of dishonor was made by the petitioner
through a letter dated April 27, 1968. Under these circumstances, the
petitioner undoubtedly failed to exercise prudence and diligence on
what he ought to do al. required by law. The petitioner likewise
failed to show any justification for the unreasonable delay.
No hard and fast demarcation line can be drawn between what may
be considered as a reasonable or an unreasonable time, because
reasonable time depends upon the peculiar facts and
circumstances in each case
LUIS S. WONG, petitioner, vs. COURT OF APPEALS and
PEOPLE OF THE PHILIPPINES, respondents.
[G.R. No. 117857. February 2, 2001]
FACTS:
Petitioner Wong was an agent of Limtong Press Inc. (LPI), a
manufacturer of calendars. LPI would print sample calendars, then
give them to agents to present to customers. The agents would get
the purchase orders of customers and forward them to LPI. After
printing the calendars, LPI would ship the calendars directly to the
customers. Thereafter, the agents would come around to collect the
payments. Petitioner, however, had a history of unremitted
collections, which he duly acknowledged in a confirmation receipt
he co-signed with his wife. Hence, petitioners customers were
required to issue postdated checks before LPI would accept their

purchase orders.
In early December 1985, Wong issued six (6) postdated checks
totaling P18,025.00, all dated December 30, 1985 and drawn
payable to the order of LPI.These checks were initially intended to
guarantee the calendar orders of customers who failed to issue postdated checks. However, following company policy, LPI refused to
accept the checks as guarantees. Instead, the parties agreed to apply
the checks to the payment of petitioners unremitted collections for
1984 amounting to P18,077.07. LPI waived the P52.07 difference.
Before the maturity of the checks, petitioner prevailed upon LPI not
to deposit the checks and promised to replace them within 30 days.
However, petitioner reneged on his promise. Hence, on June 5,
1986, LPI deposited the checks with Rizal Commercial Banking
Corporation (RCBC). The checks were returned for the reason
account closed. The dishonor of the checks was evidenced by the
RCBC return slip.
On June 20, 1986, complainant through counsel notified the
petitioner of the dishonor. Petitioner failed to make arrangements for
payment within five (5) banking days.
On November 6, 1987, petitioner was charged with three (3) counts
of violation of B.P. Blg. 22 under three separate Informations for the
three checks amounting to P5,500.00, P3,375.00, and P6,410.00.
Upon arraignment, Wong pleaded not guilty. Trial ensued.
On August 30, 1990, the trial court finds the accused Luis S. Wong
GUILTY beyond reasonable doubt of the offense of Violations of
Section 1 of Batas Pambansa Bilang 22. The appellate court
affirmed the the trial courts decision in toto.
ISSUE: whether or not the prosecution was able to establish beyond
reasonable doubt all the elements of the offense penalized under B.P.
Blg. 22.
There are two (2) ways of violating B.P. Blg. 22: (1) by making or
drawing and issuing a check to apply on account or for value
knowing at the time of issue that the check is not sufficiently
funded; and (2) by having sufficient funds in or credit with the
drawee bank at the time of issue but failing to keep sufficient funds
therein or credit with said bank to cover the full amount of the check
when presented to the drawee bank within a period of ninety (90)
days. for the same reason had not the drawer, without any valid
cause, ordered the bank to stop payment.
Petitioner contends that the first element does not exist because the
checks were not issued to apply for account or for value. He
attempts to distinguish his situation from the usual cut-and-dried
B.P. 22 case by claiming that the checks were issued as guarantee
and the obligations they were supposed to guarantee were already
paid. This flawed argument has no factual basis, the RTC and CA
having both ruled that the checks were in payment for unremitted
collections, and not as guarantee. Likewise, the argument has no
legal basis, for what B.P. Blg. 22 punishes is the issuance of a
bouncing check and not the purpose for which it was issued nor the
terms and conditions relating to its issuance.
As to the second element, B.P. Blg. 22 creates a presumption juris
tantum that the second element prima facie exists when the first and
third elements of the offense are present. Thus, the makers
knowledge is presumed from the dishonor of the check for
insufficiency of funds.
Petitioner avers that since the complainant deposited the checks on
June 5, 1986, or 157 days after the December 30, 1985 maturity
date, the presumption of knowledge of lack of funds under Section 2

of B.P. Blg. 22 should not apply to him. He further claims that he

should not be expected to keep his bank account active and funded
beyond the ninety-day period.

The International Corporate Bank (now Union Bnak of the

Philippines) vs. Spouses Gueco
GR 141968, 12 February 2001

Section 2 of B.P. Blg. 22 provides:

Facts: Spouses Francis S. Gueco and Ma. Luz E. Gueco obtained a

loan from petitioner International Corporate Bank (now Union Bank
of the Philippines) to purchase a car a Nissan Sentra 1600 4DR,
1989 Model. In consideration thereof, the Spouses executed
promissory notes which were payable in monthly installments and
chattel mortgage over the car to serve as security for the notes. The
Spouses defaulted in payment of installments. Consequently, the
Bank filed on 7 August 1995 a civil action (Civil Case 658-95) for
"Sum of Money with Prayer for a Writ of Replevin" before the
Metropolitan Trial Court of Pasay City, Branch 45. On 25 August
1995, Dr. Francis Gueco was served summons and was fetched by
the sheriff and representative of the bank for a meeting in the bank
premises. Desi Tomas, the Bank's Assistant Vice President
demanded payment of the amount of P184,000.00 which represents
the unpaid balance for the car loan. After some negotiations and
computation, the amount was lowered to P154,000.00, However, as
a result of the non-payment of the reduced amount on that date, the
car was detained inside the bank's compound. On 28 August 1995,
Dr. Gueco went to the bank and talked with its Administrative
Support Auto Loans/Credit Card Collection Head, Jefferson Rivera.
The negotiations resulted in the further reduction of the outstanding
loan to P150,000.00. On 29 August 1995, Dr. Gueco delivered a
manager's check in the amount of P150,000.00 but the car was not
released because of his refusal to sign the Joint Motion to Dismiss.
It is the contention of the Gueco spouses and their counsel that Dr.
Gueco need not sign the motion for joint dismissal considering that
they had not yet filed their Answer. the Bank, however, insisted that
the joint motion to dismiss is standard operating procedure in their
bank to effect a compromise and to preclude future filing of claims,
counterclaims or suits for damages. After several demand letters and
meetings with bank representatives, the
Gueco spouses initiated a civil action for damages before the
Metropolitan Trial Court of Quezon City, Branch 33. The
Metropolitan Trial Court dismissed the complaint for lack of merit.
On appeal to the Regional Trial Court, Branch 227 of Quezon City,
the decision of the Metropolitan Trial Court was reversed. In its
decision, the RTC held that there was a meeting of the minds
between the parties as to the reduction of the amount of
indebtedness and the release of the car but said agreement did not
include the signing of the joint motion to dismiss as a condition sine
qua non for the effectivity of the compromise. The court further
ordered the bank to return immediately the subject car to the spouses
in good working condition; and to pay the spouses the sum of
P50,000.00 as moral damages; P25,000.00 as exemplary damages,
and P25,000.00 as attorney's fees, and to pay the cost of suit. In
other respect, the court affirmed the decision of the Metropolitan
Trial Court Branch 33. The case was elevated to the Court of
Appeals, which on 17 February 2000, issued the decision, denying
the petition for review on certiorari and affirming the Decision of
the RTC of Quezon City, Branch 227, in Civil Case Q-97-31176, in
toto; with costs against the bank. The bank filed the petition for
review on certiorari with the Supreme Court.

Evidence of knowledge of insufficient funds. -- The making, drawing

and issuance of a check payment of which is refused by the drawee
because of insufficient funds in or credit with such bank, when
presented within ninety (90) days from the date of the check, shall
be prima facie evidence of knowledge of such insufficiency of funds
or credit unless such maker or drawer pays the holder thereof the
amount due thereon, or makes arrangements for payment in full by
the drawee of such check within five (5) banking days after
receiving notice that such check has not been paid by the drawee.
An essential element of the offense is knowledge on the part of the
maker or drawer of the check of the insufficiency of his funds in or
credit with the bank to cover the check upon its presentment. Since
this involves a state of mind difficult to establish, the statute itself
creates a prima facie presumption of such knowledge where
payment of the check is refused by the drawee because of
insufficient funds in or credit with such bank when presented within
ninety (90) days from the date of the check. To mitigate the
harshness of the law in its application, the statute provides that such
presumption shall not arise if within five (5) banking days from
receipt of the notice of dishonor, the maker or drawer makes
arrangements for payment of the check by the bank or pays the
holder the amount of the check. Contrary to petitioners assertions,
nowhere in said provision does the law require a maker to maintain
funds in his bank account for only 90 days. Rather, the clear import
of the law is to establish a prima facie presumption of knowledge of
such insufficiency of funds under the following conditions (1)
presentment within 90 days from date of the check, and (2) the
dishonor of the check and failure of the maker to make
arrangements for payment in full within 5 banking days after notice
thereof. That the check must be deposited within ninety (90) days is
simply one of the conditions for the prima facie presumption of
knowledge of lack of funds to arise. It is not an element of the
offense. Neither does it discharge petitioner from his duty to
maintain sufficient funds in the account within a reasonable time
thereof. Under Section 186 of the Negotiable Instruments Law, a
check must be presented for payment within a reasonable time after
its issue or the drawer will be discharged from liability thereon to
the extent of the loss caused by the delay. By current banking
practice, a check becomes stale after more than six (6) months, or
180 days. Private respondent herein deposited the checks 157 days
after the date of the check. Hence said checks cannot be considered
stale. Only the presumption of knowledge of insufficiency of funds
was lost, but such knowledge could still be proven by direct or
circumstantial evidence. As found by the trial court, private
respondent did not deposit the checks because of the reassurance of
petitioner that he would issue new checks. Upon his failure to do so,
LPI was constrained to deposit the said checks. After the checks
were dishonored, petitioner was duly notified of such fact but failed
to make arrangements for full payment within five (5) banking days
thereof. There is, on record, sufficient evidence that petitioner had
knowledge of the insufficiency of his funds in or credit with the
drawee bank at the time of issuance of the checks. And despite
petitioners insistent plea of innocence, we find no error in the
respondent courts affirmance of his conviction by the trial court for
violations of the Bouncing Checks Law.
However, pursuant to the policy guidelines in Administrative
Circular No. 12-2000, which took effect on November 21, 2000, the
penalty imposed on petitioner should now be modified to a fine of
not less than but not more than double the amount of the checks that
were dishonored.

(Short facts: In the meeting of 29 August 1995, Dr. Gueco

delivered a manager's check representing the reduced amount of
P150,000.00. Said check was given to Mr. Rivera, a representative
of the bank However, since Dr. Gueco refused to sign the joint
motion to dismiss, he was made to execute a statement to the effect
that he was withholding the payment of the check. Subsequently, in
a letter addressed to Ms. Desi Tomas, vice president of the bank,
dated 4 September 1995, Dr. Gueco instructed the bank to disregard
the "hold order" letter and demanded the immediate release of his
car, to which the former replied that the condition of signing the
joint motion to dismiss must be satisfied and that they had kept the
check which could be claimed by Dr. Gueco anytime. While there is

controversy as to whether the document evidencing the order to hold

payment of the check was formally offered as evidence by the bank,
it appears from the pleadings that said check has not been encashed.)
Issue: Whether the bank was negligent in opting not to deposit or
use the managers check.
Held: NO. A stale check is one which has not been presented for
payment within a reasonable time after its issue. It is valueless and,
therefore, should not be paid. Under the negotiable instruments law,
an instrument not payable on demand must be presented for
payment on the day it falls due. When the instrument is payable on
demand, presentment must be made within a reasonable time after
its issue. In the case of a bill of exchange, presentment is sufficient
if made within a reasonable time after the last negotiation thereof. A
check must be presented for payment within a reasonable time after
its issue, and in determining what is a "reasonable time," regard is to
be had to the nature of the instrument, the usage of trade or business
with respect to such instruments, and the facts of the particular case.
The test is whether the payee employed such diligence as a prudent
man exercises in his own affairs. This is because the nature and
theory behind the use of a check points to its immediate use and
payability. In a case, a check payable on demand which was long
overdue by about two and a half (2-1/2) years was considered a stale
check. Failure of a payee to encash a check for more than 10 years
undoubtedly resulted in the check becoming stale. Thus, even a
delay of 1 week or two (2) days, under the specific circumstances of
the certain cases constituted unreasonable time as a matter of law.
Herein, the check involved is not an ordinary bill of exchange but a
manager's check. A manager's check is one drawn by the bank's
manager upon the bank itself. It is similar to a cashier's check both
as to effect and use. A cashier's check is a check of the bank's
cashier on his own or another check. In effect, it is a bill of
exchange drawn by the cashier of a bank upon the bank itself, and
accepted in advance by the act of its issuance. It is really the bank's
own check and may be treated as a promissory note with the bank as
a maker. The check becomes the primary obligation of the bank
which issues it and constitutes its written promise to pay upon
demand. The mere issuance of it is considered an acceptance
thereof. If treated as promissory note, the drawer would be the
maker and in which case the holder need not prove presentment for
payment or present the bill to the drawee for acceptance. Even
assuming that presentment is needed, failure to present for payment
within a reasonable time will result to the discharge of the drawer
only to the extent of the loss caused by the delay. Failure to present
on time, thus, does not totally wipe out all liability. In fact, the legal
situation amounts to an acknowledgment of liability in the sum
stated in the check. In this case, the Gueco spouses have not alleged,
much less shown that they or the bank which issued the manager's
check has suffered damage or loss caused by the delay or nonpresentment. Definitely, the original obligation to pay certainly has
not been erased. It has been held that, if the check had become stale,
it becomes imperative that the circumstances that caused its nonpresentment be determined. Herein, the bank held on the check and
refused to encash the same because of the controversy surrounding
the signing of the joint motion to dismiss. The Court saw no bad
faith or negligence in this position taken by the Bank.
State Investment House vs. CA, 217 SCRA 32
Facts: Nora B. Moulic issued to Corazon Victoriano, as security for
pieces of jewelry to be sold on commission, 2 post- dated Equitable
Banking Corporation checks in the amount of P50,000 each, one
dated 30 August 1979 and the other, 30 September 1979. Thereafter,
the payee negotiated the checks to the State Investment House Inc.
(SIHI). Moulic failed to sell the pieces of jewelry, so she returned
them to the payee before maturity of the checks. The checks,
however, could no longer be retrieved as they had already been
negotiated. Consequently, before their maturity dates, Moulic

withdrew her funds from the drawee bank.Upon presentment for

payment, the checks were dishonored for insufficiency of funds.
On 20 December 1979, SIHI allegedly notified Moulic of the
dishonor of the checks and requested that it be paid in cash instead,
although Moulic avers that no such notice was given her. On 6
October 1983, SIHI sued to recover the value of the checks plus
attorney's fees and expenses of litigation. In her Answer, Moulic
contends that she incurred no obligation on the checks because the
jewelry was never sold and the checks were negotiated without her
knowledge and consent. She also instituted a Third-Party Complaint
against Corazon Victoriano, who later assumed full responsibility
for the checks. On 26 May 1988, the trial court dismissed the
Complaint as well as the Third-Party Complaint, and ordered SIHI
to pay Moulic P3,000.00 for attorney's fees. SIHI elevated the order
of dismissal to the Court of Appeals, but the appellate court affirmed
the trial court on the ground that the Notice of Dishonor to Moulic
was made beyond the period prescribed by the Negotiable
Instruments Law and that even if SIHI did serve such notice on
Moulic within the reglementary period it would be of no
consequence as the checks should never have been presented for
payment. SIHI filed the petition for review.
Issue [1]: Whether the alleged issuance of the post-dated checks as
security is a ground for the discharge of the instrument as against a
holder in due course.
Held [1]: Section 119 of the Negotiable Instrument Law outlined
the grounds in which an instrument is discharged. The provision
states that "A negotiable instrument is discharged: (a) By payment in
due course by or on behalf of the principal debtor Whether the postdated checks, issued as security, is a ground for the discharge of the
instrument as against a holder in due course.; (b) By payment in due
course by the party accommodated, where the instrument is made or
accepted for his accommodation; (c) By the intentional cancellation
thereof by the holder; (d) By any other act which will discharge a
simple contract for the payment of money; (e) When the principal
debtor becomes the holder of the instrument at or after maturity in
his own right." Obviously, MOULIC may only invoke paragraphs
(c) and (d) as possible grounds for the discharge of the instrument.
But, the intentional cancellation contemplated under paragraph (c) is
that cancellation effected by destroying the instrument either by
tearing it up, burning it, or writing the word "cancelled" on the
instrument. The act of destroying the instrument must also be made
by the holder of the instrument intentionally. Since MOULIC failed
to get back possession of the post-dated checks, the intentional
cancellation of the said checks is altogether impossible. On the other
hand, the acts which will discharge a simple contract for the
payment of money under paragraph (d) are determined by other
existing legislations since Section 119 does not specify what these
acts are, e.g., Art. 1231 of the Civil Code which enumerates the
modes of extinguishing obligations. Again, none of the modes
outlined therein is applicable in the instant case as Section 119
contemplates of a situation where the holder of the instrument is the
creditor while its drawer is the debtor. Herein, the payee, Corazon
Victoriano, was no longer MOULIC's creditor at the time the
jewelry was returned. Correspondingly, MOULIC may not
unilaterally discharge herself from her liability by the mere
expediency of withdrawing her funds from the drawee bank. She is
thus liable as she has no legal basis to excuse herself from liability
on her checks to a holder in due course.
Issue [2]: Whether the requirement that SIHI should give Notice of
Dishonor to MOULIC is indispensable.
Held [2]: The need for notice is not absolute; there are exceptions
under Section 114 of the Negotiable Instruments Law. Section 114
(When notice need not be given to drawer) provides that "Notice of
dishonor is not required to be given to the drawer in the following
cases: (a) Where the drawer and the drawee are the same person; (b)

When the drawee is a fictitious person or a person not having

capacity to contract; (c) When the drawer is the person to whom the
instrument is presented for payment; (d) Where the drawer has no
right to expect or require that the drawee or acceptor will honor the
instrument; (e) Where the drawer had countermanded payment."
Indeed, MOULIC'S actuations leave much to be desired. She did not
retrieve the checks when she returned the jewelry. She simply
withdrew her funds from her drawee bank and transferred them to
another to protect herself. After withdrawing her funds, she could
not have expected her checks to be honored. In other words, she was
responsible for the dishonor of her checks, hence, there was no need
to serve her Notice of Dishonor, which is simply bringing to the
knowledge of the drawer or indorser of the instrument, either
verbally or by writing, the fact that a specified instrument, upon
proper proceedings taken, has not been accepted or has not been
paid, and that the party notified is expected to pay it. In addition, the
Negotiable Instruments Law was enacted for the purpose of
facilitating, not hindering or hampering transactions in commercial
paper. Thus, the said statute should not be tampered with
haphazardly or lightly. Nor should it be brushed aside in order to
meet the necessities in a single case. The holder who takes the
negotiated paper makes a contract with the parties on the face of the
instrument. There is an implied representation that funds or credit
are available for the payment of the instrument in the bank upon
which it is drawn. Consequently, the withdrawal of the money from
the drawee bank to avoid liability on the checks cannot prejudice the
rights of holders in due course. Herein, such withdrawal renders the
drawer, Moulic, liable to SIHI, a holder in due course of the checks.
SIHI could not expect payment as MOULIC left no funds with the
drawee bank to meet her obligation on the checks, so that Notice of
Dishonor would be futile.
ASIAN BANKING CORPORATION v. JUAN JAVIER
G.R. No. L-19051 April 4, 1923
Avancea, J.
Doctrine:
When a negotiable instrument is dishonored for non-acceptance or
non-payment, notice thereof must be given to the drawer and each
of the indorsers, and those who are not notified shall be discharged
from liability, except as provided otherwise.
It is incumbent upon a person, who seeks to enforce the indorsers
liability, to establish said liability by proving that notice was within
the time, and in the manner, required by the law.
Facts:
Salvador B. Chaves drew a check on the Philippine National Bank
for P11,000 in favor of La Insular. This check was indorsed by the
limited partners of La Insular, and then deposited by Salvador B.
Chaves in his current account with the plaintiff, Asia Banking
Corporation. Another check was drawn and deposited in similar
fashion.
The amount represented by both checks was used by Salvador B.
Chaves after they were deposited in the plaintiff bank, by drawing
checks on the plaintiff. Subsequently these checks were presented
by the plaintiff to the Philippine National Bank for payment, but the
latter refused to pay on the ground that the drawer, Salvador B.
Chaves, had no funds therein.
The lower court sentenced the defendant, as indorser, to pay the
plaintiff P11,000. From this judgment the defendant appealed.
Issue:
Whether or not the defendants liability as an indorser is
extinguished for lack of notice
Held:
Yes. Section 89 of the Negotiable Instruments Law (Act No. 2031)
provides that, when a negotiable instrument is dishonored for non-

acceptance or non-payment, notice thereof must be given to the

drawer and each of the indorsers, and those who are not notified
shall be discharged from liability, except where this act provides
otherwise.
According to this, the indorsers are not liable unless they are
notified that the document was dishonored. Then, under the general
principle of the law of procedure, it will be incumbent upon the
plaintiff, who seeks to enforce the defendants liability upon these
checks as indorser, to establish said liability by proving that notice
was given to the defendant within the time, and in the manner,
required by the law that the checks in question had been dishonored.
If these facts are not proven, the plaintiff has not sufficiently
established the defendants liability. There is no proof in the record
tending to show that plaintiff gave any notice whatsoever to the
defendant that the checks in question had been dishonored, and there
it has not established its cause of action.
Nyco Sales Corporation vs BA Finance Corporation 200 SCRA
637 Assignment of Credit
Nyco Sales has discounting privileges with BA Finance. In 1978,
brothers Renato Fernandez and Santiago Renato (officers of
Sanshell Corporation) approached Nyco Sales Corporation for a
credit accommodation in order for the brothers make use of Nycos
discounting privileges. Nyco Sales agreed and so on November 15,
1978, Sanshell issued a post-dated (November 17, 1978) BPI check
to Nyco Sales in the amount of P60,000.00. Following the
discounting process agreed upon, Nyco Sales, thru its president
Rufino Yao, endorsed the check in favor of BA Finance. Thereafter,
BA Finance issued a check payable to Nyco Sales which endorsed it
in favor of Sanshell. Sanshell then made use of and/or negotiated the
check. Accompanying the exchange of checks was a Deed of
Assignment executed by Nyco Sales (assignor) in favor of BA
Finance (assignee) with the conformity of Sanshell. Under the said
Deed, the subject of the discounting was P60k BPI check.
The check bounced. BA Finance notified Sanshell. Sanshell
substituted the BPI check with a Security Bank and Trust
Companycheck for P60k. This check again bounced. BA Finance
made repeated demands to Nyco Sales and Sanshell but neither of
the two settled the obligation. Hence, BA Finance sued Nyco Sales.
Nyco Sales averred that it received no notice of dishonor when the
second check was dishonored.
ISSUE: Whether or not Nyco Sales is liable to pay BA Finance.
HELD: Yes. The relationship between Nyco Sales and BA Finance
is one of assignor-assignee. The assignor-vendor warrants both the
credit itself (its existence and legality) and the person of the debtor
(his solvency), if so stipulated, as in the case at bar. Consequently, if
there be any breach of the above warranties, the assignor-vendor
should be held answerable therefor. There is no question then that
the assignor-vendor is indeed liable for the invalidity of whatever he
assigned to the assignee-vendee. Considering now the facts of the
case at bar, it is beyond dispute that Nyco executed a deed of
assignment in favor of BA Finance with Sanshell Corporation as the
debtor-obligor. BA Finance is actually enforcing said deed and the
check covered thereby is merely an incidental or collateral matter.
This particular check merely evidenced the credit which was
actually assigned to BA Finance. Thus, the designation is immaterial
as it could be any other check. It is only what is represented by the
said checks that Nyco is being asked to pay.
Nyco Sales pretension that it had not been notified of the fact of
dishonor is belied not only by the formal demand letter issued by
BA Finance but also by the fact that Nyco Sales and Sanshell had
frequent contacts before, during and after the dishonor. More
importantly, as long as the credit remains outstanding, Nyco Sales
shall continue to be liable to BA Finance as its assignor. The
dishonor of an assigned check simply stresses its liability and the
failure to give a notice of dishonor will not discharge it from such

liability. This is because the cause of action stems from the breach of
the warranties embodied in the Deed of Assignment, and not from
the dishonoring of the check alone.
PACIFICO B. ARCEO, JR, Jr. vs. People of the Philippines,
G.R. No. 142641, 17 July 2006
FACTS:
On March 14, 1991, [petitioner], obtained a loan from private
complainant Josefino Cenizal in the amount of P100,000.00. Several
weeks thereafter, [petitioner] obtained an additional loan of
P50,000.00 from [Cenizal]. [Petitioner] then issued in favor of
Cenizal, Bank of the Philippine Islands [(BPI)] Check No. 163255,
postdated August 4, 1991, for P150,000.00, at Cenizals house
located at 70 Panay Avenue, Quezon City. When August 4, 1991
came, [Cenizal] did not deposit the check immediately because
[petitioner] promised [] that he would replace the check with cash.
Such promise was made verbally seven (7) times. When his patience
ran out, [Cenizal] brought the check to the bank for encashment. The
head office of the Bank of the Philippine Islands through a letter
dated December 5, 1991, informed [Cenizal] that the check bounced
because of insufficient funds.
Thereafter, [Cenizal] went to the house of [petitioner] to
inform him of the dishonor of the check but [Cenizal] found out that
[petitioner] had left the place. So, [Cenizal] referred the matter to a
lawyer who wrote a letter giving [petitioner] three days from receipt
thereof to pay the amount of the check. [Petitioner] still failed to
make good the amount of the check. As a consequence, [Cenizal]
executed on January 20, 1992 before the office of the City
Prosecutor of Quezon City his affidavit and submitted documents in
support of his complaint for [e]stafa and [v]iolation of [BP 22]
against [petitioner]. After due investigation, this case for [v]iolation
of [BP 22] was filed against [petitioner] on March 27, 1992. The
check in question and the return slip were however lost by [Cenizal]
as a result of a fire that occurred near his residence on September
16, 1992. [Cenizal] executed an Affidavit of Loss regarding the loss
of the check in question and the return slip. The trial, petitioner was
found guilty as charged, the appellate court affirmed the trial courts
decision in toto
ISSUE: WON petitioner is held liable for the dishonor of the check
because it was presented beyond the 90-day period provided under
the law.
HELD:
The Court ruled that the 90-day period provided in the law is not
an element of the offense. Neither does it discharge petitioner from
his duty to maintain sufficient funds in the account within a
reasonable time from the date indicated in the check. According to
current banking practice, the reasonable period within which to
present a check to the drawee bank is six months. Thereafter, the
check becomes stale and the drawer is discharged from liability
thereon to the extent of the loss caused by the delay.
Thus, Cenizals presentment of the check to the drawee bank
120 days (four months) after its issue was still within the allowable
period. Petitioner was freed neither from the obligation to keep
sufficient funds in his account nor from liability resulting from the
dishonor of the check.
The gravamen of the offense is the act of drawing and issuing
a worthless check. Hence, the subject of the inquiry is the fact of
issuance or execution of the check, not its content.
Here, the due execution and existence of the check were sufficiently
established. Cenizal testified that he presented the originals of the
check, the return slip and other pertinent documents before the
Office of the City Prosecutor of Quezon City when he executed his

complaint-affidavit during the preliminary investigation. The City

Prosecutor found a prima facie case against petitioner for violation
of BP 22 and filed the corresponding information based on the
documents. Although the check and the return slip were among the
documents lost by Cenizal in a fire that occurred near his residence
on September 16, 1992, he was nevertheless able to adequately
establish the due execution, existence and loss of the check and the
return slip in an affidavit of loss as well as in his testimony during
the trial of the case.
Moreover, petitioner himself admitted that he issued the
check. He never denied that the check was presented for payment to
the drawee bank and was dishonored for having been drawn against
insufficient funds.
Allied Banking vs. CA, GG Sportswear, 11 July 2006
FACTS:
On January 6, 1981, petitioner Allied Bank, Manila (ALLIED)
purchased Export Bill No. BDO-81-002 in the amount of US
$20,085.00 from respondent G.G. Sportswear Mfg. Corporation
(GGS). The bill, drawn under a letter of credit No. BB640549
covered Mens Valvoline Training Suit that was in transit to West
Germany (Uniger via Rotterdam) under Cont. #73/S0299. The
export bill was issued by Chekiang First Bank Ltd., Hongkong. With
the purchase of the bill, ALLIED credited GGS the peso equivalent
of the aforementioned bill amounting to P151,474.52 and the receipt
of which was acknowledged by the latter in its letter dated June 22,
1981.
On the same date, respondents Nari Gidwani and Alcron
International Ltd. (Alcron) executed their respective Letters of
Guaranty, holding themselves liable on the export bill if it should be
dishonored or retired by the drawee for any reason.
Subsequently, the spouses Leon and Leticia de Villa and Nari
Gidwani also executed a Continuing Guaranty/Comprehensive
Surety (surety, for brevity), guaranteeing payment of any and all
such credit accommodations which ALLIED may extend to GGS.
When ALLIED negotiated the export bill to Chekiang, payment was
refused due to some material discrepancies in the documents
submitted by GGS relative to the exportation covered by the letter of
credit. Consequently, ALLIED demanded payment from all the
respondents based on the Letters of Guaranty and Surety executed in
favor of ALLIED. However, respondents refused to pay, prompting
ALLIED to file an action for a sum of money.
Respondent GGS, as the beneficiary of the export bill, instead of
going to Chekiang First Bank Ltd. (issuing bank), went to petitioner
ALLIED, to have the export bill purchased or discounted. Before
ALLIED agreed to purchase the subject export bill, it required
respondents Nari Gidwani and Alcron to execute Letters of
Guaranty, holding them liable on demand, in case the subject export
bill was dishonored or retired for any reason.[8]
Likewise, respondents Nari Gidwani and spouses Leon and Leticia
de Villa executed Continuing Guaranty/Comprehensive Surety,
holding themselves jointly and severally liable on any and all credit
accommodations, instruments, loans, advances, credits and/or other
obligation that may be granted by the petitioner ALLIED to
respondent GGS.[9] The surety also contained a clause whereby said
sureties waive protest and notice of dishonor of any and all such
instruments, loans, advances, credits and/or obligations.[10] These
letters of guaranty and surety are now the basis of the petitioners
action.
ISSUE: Whether or not respondents Nari, De Villa and Alcron are
liable under the Letters of Guaranty and the Continuing Guaranty/
comprehensive Surety notwithstanding the fact that no protest was
made after the bill, a foreign bill of exchange, was dishonored

HELD:
Section 152 of the Negotiable Instruments Law pertaining to
indorsers, relied on by respondents, is not pertinent to this case.
There are well-defined distinctions between the contract of an
indorser and that of a guarantor/surety of a commercial paper, which
is what is involved in this case. The contract of indorsement is
primarily that of transfer, while the contract of guaranty is that of
personal security.[14] The liability of a guarantor/surety is broader
than that of an indorser. Unless the bill is promptly presented for
payment at maturity and due notice of dishonor given to the indorser
within a reasonable time, he will be discharged from liability
thereon.[15] On the other hand, except where required by the
provisions of the contract of suretyship, a demand or notice of
default is not required to fix the suretys liability.[16] He cannot
complain that the creditor has not notified him in the absence of a
special agreement to that effect in the contract of suretyship.[17]
Therefore, no protest on the export bill is necessary to charge all the
respondents jointly and severally liable with G.G. Sportswear since
the respondents held themselves liable upon demand in case the
instrument was dishonored and on the surety, they even waived
notice of dishonor as stipulated in their Letters of Guarantee.
DISCHARGE OF INSTRUMENTS
NEW PACIFIC TIMBER & SUPPLY CO. INC. VS. SENERIS
10 SCRA 686
FACTS: Petitioner, New Pacific Timber & Supply Co. Inc. was the
defendant in a complaint for collection of money filed by private
respondent, Ricardo A. Tong. In this complaint, respondent Judge
rendered a compromise judgment based on the amicable settlement
entered by the parties wherein petitioner will pay to private
respondent P54,500.00 at 6% interest per annum and P6,000.00 as
attorneys fee of which P5,000.00 has been paid. Upon failure of the
petitioner to pay the judgment obligation, a writ of execution worth
P63,130.00 was issued levied on the personal properties of the
petitioner. Before the date of the auction sale, petitioner deposited
with the Clerk of Court in his capacity as the Ex-Officio Sheriff
P50,000.00 in Cashiers Check of the Equitable Banking
Corporation and P13,130.00 in cash for a total of P63,130.00.
Private respondent refused to accept the check and the cash and
requested for the auction sale to proceed. The properties were sold
for P50,000.00 to the highest bidder with a deficiency of
P13,130.00. Petitioner subsequently filed an ex-parte motion for
issuance of certificate of satisfaction of judgment which was denied
by the respondent Judge. Hence this present petition, alleging that
the respondent Judge capriciously and whimsically abused his
discretion in not granting the requested motion for the reason that
the judgment obligation was fully satisfied before the auction sale
with the deposit made by the petitioner to the Ex-Officio Sheriff. In
upholding the refusal of the private respondent to accept the check,
the respondent Judge cited Article 1249 of the New Civil Code
which provides that payments of debts shall be made in the currency
which is the legal tender of the Philippines and Section 63 of the
Central Bank Act which provides that checks representing deposit
money do not have legal tender power. In sustaining the contention
of the private respondent to refuse the acceptance of the cash, the
respondent Judge cited Article 1248 of the New Civil Code which
provides that creditor cannot be compelled to accept partial payment
unless there is an express stipulation to the contrary.
ISSUE: Can the check be considered a valid payment of the
judgment obligation?
RULING: Yes. It is to be emphasized that it is a well-known and
accepted practice in the business sector that a Cashiers Check is
deemed cash. Moreover, since the check has been certified by the
drawee bank, this certification implies that the check is sufficiently
funded in the drawee bank and the funds will be applied whenever

the check is presented for payment. The object of certifying a check

is to enable the holder to use it as money. When the holder procures
the check to be certified, it operates as an assignment of a part of the
funds to the creditors. Hence, the exception provided in Section 63
of the Central Bank Act which states that checks which have been
cleared and credited to the account of the creditor shall be
equivalent to a delivery to the creditor in cash the amount equal to
that which is credited to his account. The Cashiers Check and the
cash are valid payment of the obligation of the petitioner. The
private respondent has no valid reason to refuse the acceptance of
the check and cash as full payment of the obligation
PNB vs. National City Bank, 1936
Facts:
An unknown person or persons negotiated with Motor Service Co.
checks purportedlyissued by the Pangasinan Transportation Co. by
JL Klar, Manager and Treasurer, againstPNB and in favor of
International Auto Repair Shop for P144.50 and P215.75. Said
checkswere indorsed by said unknown persons in the manner
indicated at the back thereof. Thechecks were indorsed fro deposit at
the National City Bank of New York (NCBNY) and MotorService
Co. was credited with the amounts thereof. Said checks were cleared
at the clearinghouse and PNB credited NCBNY for the amounts
thereof, believing that the signatures of thedrawer are genuine, etc.
PNB found that the signature were forged when so informed by
thePangasinan Transportation Co. It demanded reimbursement from
NCBNY and Motor ServiceCo. Both refused. Pangasinan
Transportation objected to its deduction of its deposit.
Issue [1]:
Whether the payment of the checks made by the drawee bank
constitutes anacceptance.
Held [1]:
A check is a bill of exchange payable on demand and only the rules
governingbills of exchange payable on demand are applicable to it
(Section 185). The fact thatacceptance is a step unnecessary insofar
as bills of exchange payable on demand are concerned, it follows
that the provisions relative to acceptance are without application
tochecks. There is nothing in law, however, against the presentation
of checks for acceptancebefore they are paid. Certification is
equivalent to acceptance (Section 187). When certified,the drawer
will perform his promise by any other means than the payment of
money(Section 132). When certified, the drawer and all indorsers
are discharged from liabilitythereon (Section 188), and then the
check operates as an assignment of a part of the fundsto the credit of
the drawer with the bank (Section 189). Acceptance has a technical
meaning
in the Negotiable Instruments Law. With few exceptions, payment
neither includes orimplies payment. Payment of the check,
cashing it on presentment is not acceptance.
Issue [2]:
Whether the drawee bank is liable for the amount in a forged check
for itsfailure to detect the forgery.
Held [2]:
In determining the relative rights of a drawee who, under a mistake
of fact, haspaid, and a holder who has received such payment, upon
a check to which the name of thedrawer is forged, it is only fair to
consider the question of diligence or negligencecontributed to the
success of the fraud or to mislead the drawee. To entitle the holder
of aforged check to retain the money obtained thereon, there must be
a showing that the dutyto ascertain the genuineness of the signature
rested entirely upon the drawee, and that theconstructive negligence
of such drawee in failing to detect the forgery was not affected
byany disregard of duty on the part of the holder, or by failure of
any precaution which, fromhis implied assertion in presenting the

check as a sufficient voucher, the drawee had theright to believe he

had taken. Under the circumstance of the case, if the PNB is allowed
torecover, there will be no change of position as to the injury or
prejudice of the MotorService Co.
Bataan Cigar vs. CA, 230 SCRA 648
Facts: Bataan Cigar & Cigarette Factory, Inc. (BCCFI), a
corporation involved in the manufacturing of cigarettes, engaged
one of its suppliers, King Tim Pua George (George King), to deliver
2,000 bales of tobacco leaf starting October 1978. In consideration
thereof, BCCFI, on 13 July 1978 issued crossed checks post dated
sometime in March 1979 in the total amount of P820,000.00.
Relying on the supplier's representation that he would complete
delivery within three months from 5 December 1978, BCCFI agreed
to purchase additional 2,500 bales of tobacco leaves, despite the
supplier's failure to deliver in accordance with their earlier
agreement. Again BCCFI issued postdated crossed checks in the
total amount of P1,100,000.00, payable sometime in September
1979. During these times, George King was simultaneously dealing
with State Investment House, Inc. (SIHI) On 19 July 1978, he sold
at a discount check TCBT 551826 bearing an amount of
P164,000.00, post dated 31 March 1979, drawn by BCCFI, naming
George King as payee to SIHI. On December 19 and 26, 1978, he
again sold to SIHI checks TCBT 608967 & 608968, both in the
amount of P100,000.00, post dated September 15 & 30, 1979
respectively, drawn by BCCFI in favor of George King. In as much
as George King failed to deliver the bales of tobacco leaf as agreed
despite BCCFI's demand, BCCFI issued on 30 March 1979, a stop
payment order on all checks payable to George King, including
check TCBT 551826. Subsequently, stop payment was also ordered
on checks TCBTs 608967 & 608968 on September 14 & 28, 1979,
respectively, due to George King's failure to deliver the tobacco
leaves. Efforts of SIHI to collect from BCCFI having failed, it
instituted the case for collection on three unpaid checks, naming
only BCCFI as party defendant. The trial court pronounced SIHI as
having a valid claim being a holder in due course. It further said that
the non-inclusion of King Tim Pua George as party defendant is
immaterial in the case, since he, as payee, is not an indispensable
party. The Court of Appeals affirmed the decision of the trial court.
BCCFI filed the petition for review.
Issue: Whether SIHI, a second indorser, a holder of crossed checks,
is a holder in due course, to be able to collect from the drawer,
BCCFI.
Held: The Negotiable Instruments Law states what constitutes a
holder in due course, i.e. "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." Section 59 of the NIL further
states that every holder is deemed prima facie a holder in due
course. However, when it is shown that the title of any person who
has negotiated the instrument was defective, the burden is on the
holder to prove that he or some person under whom he claims,
acquired the title as holder in due course. Crossing of checks should
put the holder on inquiry and upon him devolves the duty to
ascertain the indorser's title to the check or the nature of his
possession. Failing in this respect, the holder is declared guilty of
gross negligence amounting to legal absence of good faith, contrary
to Sec. 52(c) of the Negotiable Instruments Law, and as such the
consensus of authority is to the effect that the holder of the check is
not a holder in due course. Herein, BCCFI's defense in stopping
payment is as good to SIHI as it is to George King. Because, really,

the checks were issued with the intention that George King would
supply BCCFI with the bales of tobacco leaf. There being failure of
consideration, SIHI is not a holder in due course. Consequently,
BCCFI cannot be obliged to pay the checks.
(Note: It does not mean, however, that SIHI could not recover from
the checks. The only disadvantage of a holder who is not a holder in
due course is that the instrument is subject to defenses as if it were
non-negotiable. Hence, SIHI can collect from the immediate
indorser, George King.)
Stelco Mktg. v. CA (June 17, 1992)
Facts: Petitioner Stelco Marketing Corp (Stelco) is engaged in the
distribution and sale to the public of structural steel bars. It sold on 7
occasions quantities of steel bars and rolls of G.I sheets with an
aggregate amount of P126,859.61 to RYL Construction, Inc. (RYL).
Despite the parties agreement that payment would be on COD
basis, RYL never paid upon delivery of the materials and despite
insistent demands.
One year later, RYL issued a check drawn against Metrobank to
Armstrong Industries, the sister company and manufacturing arm of
Stelco, to the amount of its obligations to the latter. The check
however was a company check of another corporation Steelweld
Corporation of the Philippines (Steelweld) signed by its President
and Vice President. Said check was issued by the president of
Steelweld at the request of the president of RYL as an
accommodation and only as guaranty but not to pay for anything.
Armstrong subsequently deposited the check but was dishonoured
because it was DAIF*. It bore the endorsements of RYL and
Armstrong. The latter filed a complaint against the pres and vp of
Steelweld for violation of BP22. The trial court acquitted the
defendants noting that the checks were not issued to apply on
account for value, it being merely for accommodation purposes.
However, the court did not release Steelweld from its liabilities,
relying on Sec 29 of the NIL for issuing a check for accommodation.
Relying on the previous decision and averring that it was a holder in
due course, Stelco subsequently filed a complaint for recovery of the
value of the materials from RYL and Steelweld. However, RYL had
already been dissolved leading the trial court to rule against
Steelweld and hold them liable. Steelweld appealed to the CA which
reversed the decision of the RTC declaring that STELCO was not a
holder in due course and Steelweld was a stranger to the contract
between STELCO and RYL.
Issue: Whether or not STELCO was a holder in due course
Held: STELCOs reliance on the RTCs decision in the previous
criminal case is misplaced. Although the RTC maintained that
Steelweld was liable for issuing a check for accommodation, the
RTC did not specify to whom it was liable. Despite the records
showing that STELCO was in possession of the check, such
possession does not give a presumption that the holder is one for
value. There was no evidence that STELCO had possession before
the checks were presented and dishonoured nor evidence that the
checks were given to STELCO, indorsed to STELCO in any manner
or form of payment. Only after said checks were dishonoured were
they acquired by STELCO.
STELCO never became a holder for value since nowhere in the
check was STELCO identified as payee, indorsee, or depositor.
Evidence shows that Armstrong was the intended payee, that it was
the injured party, and the proper party to bring the action.
State Investment House vs. CA, 175 SCRA 311

Facts: Shortly before 5 September 1980, New Sikatuna Wood

Industries, Inc. (NSWII) requested for a loan from Harris Chua. The
latter agreed to grant the same subject to the condition that the
former should wait until December 1980 when he would have the
money. In view of this agreement, Anita Pena Chua (Harris Chua's
wife) issued 3 crossed checks payable to NSWII all postdated 22
December 1980. The total value of the postdated checks amounted
to P 299,450.00. Subsequently, NSWII entered into an agreement
with State Investment House, Inc. (SIHI) whereby for and in
consideration of the sum of Pl,047,402.91 under a deed of sale, the
former assigned and discounted with SIHI 11 postdated checks
including the 3 postdated checks issued by Pea Chua to NSWII.
When the three checks issued by Pena Chua were allegedly
deposited by SIHI, these checks were dishonored by reason of
"insufficient funds", "stop payment" and "account closed",
respectively. SIHI claimed that despite demands on Pea Chua to
make good said checks, the latter failed to pay the same
necessitating the former to file an action for collection against the
latter and her husband before the Regional Trial Court of Manila,
Branch XXXVII (Civil Case 82-10547). The spouses Chua filed a
third party complaint against NSWII for reimbursement and
indemnification in the event that they be held liable to SIHI. For
failure of NSWII to answer the third party complaint despite due
service of summons, the latter was declared in default. On 30 April
1984, the lower court rendered judgment against the spouses,
ordering them to pay jointly and severally to SIHI P 229,450.00 with
interest at the rate of 12% per annum from 24 February 1981 until
fully paid; P 29,945.00 as and for attorney's fees; and the costs of
suit. On the third party complaint, NSWII was ordered to pay the
spouses all amounts said spouses may pay to SIHI on account of the
case. On appeal filed by the spouses (AC-GR CV 04523), the
Intermediate Appellate Court (now Court of Appeals) reversed the
lower court's judgment in its decision, dismissing the complaint,
with costs against SIHI. SIHI filed the petition for review.
Issue [1]: Whether SIHI is a holder in due course as to entitle it to
proceed against the spouses Chua for the amount stated in the
dishonored cross checks.
Held [1]: NO. Section 52(c) of the Negotiable Instruments Law
defines a holder in due course as one who takes the instrument "in
good faith and for value". On the other hand, Section 52(d) provides
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."
However, under Section 59 every holder is deemed prima facie to be
a holder in due course. Admittedly, the Negotiable Instruments Law
regulating the issuance of negotiable checks as well as the lights and
liabilities arising therefrom, does not mention "crossed checks". But
the Court has taken 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 may not be converted into cash. Consequently,
such circumstance should put the payee on inquiry and upon him
devolves the duty to ascertain the holder's title to the check or the
nature of his possession. Failing in this respect, the payee is declared
guilty of gross negligence amounting to legal absence of good faith
and as such the consensus of authority is to the effect that the holder
of the check is not a holder in good faith. Relying on the ruling in
Ocampo v. Gatchalian (GR L-15126, 30 November 1961), the
Intermediate Appellate Court (now Court of Appeals), correctly
elucidated that the effects of crossing a check are: the check may not
be encashed but only deposited in the bank; the check may be
negotiated only once to one who has an account with a bank; and 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. Further, the appellate court said that
when SIHI rediscounted the check knowing that it was a crossed
check he was knowingly violating the avowed intention of crossing

the check; that his failure to inquire from the holder, NSWII, the
purpose for which the three checks were cross despite the warning
of the crossing, prevents him from being considered in good faith
and thus he is not a holder in due course; that being not a holder in
due course, SIHI was subject to personal defenses, such as lack of
consideration between the spouses and NSWII (no deposits were
made, hence no loan was made, hence the three checks are without
consideration as per Section 28, NIL); that NSWII negotiated the
three checks in breach of faith in violation of Section 55, Negotiable
Instruments Law, which is a personal defense available to the
drawer of the check; that such instruments are mentioned in Section
541 of the Code of Commerce; and that tThe payment made to a
person other than the banker or institution shall not exempt the
person on whom it is drawn, if the payment was not correctly made.
The Supreme Court agreed with the appellate court.
PAPA vs. VALENCIA
G.R. No. 105188 January 23, 1998
Facts:
Sometime in June 1982, A.U. Valencia and Co., Inc. and Felix
Pearroyo, filed with the Regional Trial Court of Pasig, Branch 151,
a complaint for specific performance against Myron C. Papa, in his
capacity as administrator of the Testate Estate of one Angela M.
Butte. The complaint alleged that Papa, acting as attorney-in-fact of
Angela M. Butte, sold to Pearroyo, through Valencia, a parcel of
land.
Prior to the alleged sale, the said property had been mortgaged by
her to the Associated Banking Corporation. After the alleged sale to
Valencia and Penarroyo, but before the title to the subject property
had been released, Butte passed away. Despite representations made
by Valencia to the bank to release the title to the property sold to
Pearroyo, the bank refused to release it unless and until all the
mortgaged properties of the late Butte were also redeemed.
In order to protect his rights and interests over the property,
Pearroyo caused the annotation on the title of an adverse claim.
Sometime in April 1977, that Valencia and Pearroyo discovered
that the mortgage rights of the bank had been assigned to Tomas L.
Parpana, as special administrator of the Estate of Ramon Papa. Jr.
Since then, Papa had been collecting monthly rentals in the amount
of P800.00 from the tenants of the property, knowing that said
property had already been sold to Valencia and Pearroyo. Despite
repeated demands from said respondents, Papa refused and failed to
deliver the title to the property.
Valencia and Pearroyo prayed that Papa be ordered to deliver to
Pearroyo the title to the subject property
RTC rendered a decision, allowing Papa to redeem from the Reyes
spouses, who bought the land at a public auction because of tax
delinquency and ordering Papa to execute a Deed of Absolute Sale
in favor of Pearroyo.
Papas defense: The sale was never consummated as he did not
encash the check (in the amount of P40,000.00) given by Valencia
and Pearroyo in payment of the full purchase price of the subject
lot. He maintained that what Valencia and Pearroyo had actually
paid was only the amount of P5,000.00 (in cash) as earnest money.
Issue: Was there valid payment although Papa failed to encash the
check?
Held:
Yes. Valencia and Pearroyo had given Papa the amounts of
P5,000.00 in cash on 24 May 1973, and P40,000.00 in check on 15
June 1973, in payment of the purchase price of the subject lot. Papa
himself admits having received said amounts, and having issued
receipts therefor. Papas assertion that he never encashed the
aforesaid check is not substantiated and is at odds with his statement

in his answer that he can no longer recall the transaction which is

supposed to have happened 10 years ago.
After more than 10 years from the payment in part by cash and in
part by check, the presumption is that the check had been encashed.
Granting that Papa had never encashed the check, his failure to do
so for more than 10 years undoubtedly resulted in the impairment of
the check through his unreasonable and unexplained delay.
While it is true that the delivery of a check produces the effect of
payment only when it is cashed, pursuant to Article 1249 of the
Civil Code, the rule is otherwise if the debtor is prejudiced by the
creditors unreasonable delay in presentment. The acceptance of a
check implies an undertaking of due diligence in presenting it for
payment, and if he from whom it is received sustains loss by want of
such diligence, it will be held to operate as actual payment of the
debt or obligation for which it was given.
If no presentment is made at all, the drawer cannot be held liable
irrespective of loss or injury unless presentment is otherwise
excused. This is in harmony with Article 1249 of the Civil Code
under which payment by way of check or other negotiable
instrument is conditioned on its being cashed, except when through
the fault of the creditor, the instrument is impaired. The payee of a
check would be a creditor under this provision and if its nonpayment is caused by his negligence, payment will be deemed
effected and the obligation for which the check was given as
conditional payment will be discharged.
Considering that Valencia and Pearroyo had fulfilled their part of
the contract of sale by delivering the payment of the purchase price,
they, therefore, had the right to compel Papa to deliver to them the
owners duplicate of TCT 28993 of Angela M. Butte and the
peaceful possession and enjoyment of the lot in question.

these was PCI Bank Check No. 073661 dated 5 December 1991
for P132,000.00 which Sarande issued to respondent Rowena Ong
Owing to a business transaction. On the same day, Ong presented to
PCI Bank Magsaysay Avenue Branch said Check No. 073661, and
instead of encashing it, requested PCI Bank to convert the proceeds
thereof into a manager's check, which the PCI Bank obliged.
Whereupon, Ong was issued PCI Bank Manager's Check No. 10983
dated 5 December 1991 for the sum of P132,000.00, the value of
Check No. 073661.

Villanueva vs. Nite, G.R. No. 148211, 25 July 2006

After the pre-trial conference, Ong filed a motion for summary

judgment.4 Though they were duly furnished with a copy of the
motion for summary judgment, PCI Bank and its counsel failed to
appear at the scheduled hearing. 5Neither did they file any written
comment or opposition thereto. The trial court thereafter ordered
Ong to formally offer her exhibits in writing, furnishing copies of
the same to PCI Bank which was directed to file its comment or
objection.6

Facts:
Nite allegedly took out a loan of P409,000 from Villanueva. As
security, Nite provided Villanueva with an Asian Bank Corporation
check of P325,500.00 originally dated 08 February 1994 and later
on changed to 08 June 1994 with the consent of Villanueva. The
check was later on dishonoured for material alteration. On 24
August 1994, Nite paid P235,000 of her loan. The balance is to be
paid on 08 December. Due to said dishonour, Villanueva filed an
action for sum of money and damages against ABC for full amount
of the dishonoured check. ABC remitted to the sheriff a managers
check amounting to P325,500 drawn on respondents account.
Issue: Whether or not Villanueva has a cause of action against
ABC.
Held: NO, VILLANUEVA CANNOT SUE ABC.
Invoking Sections 185 and 189 of the Negotiable Instruments Law,
if a bank refuses to pay a check, the payee-holder cannot sue the
bank. the payee should instead sue the holder who might in turn sue
the bank. there is no privity of contract that exists between the
drawee-bank and the payee.
Equitable PCI vs. Ong, 15 September 2006
CHICO-NAZARIO, J.:
On 29 November 1991, Warliza Sarande deposited in her account at
Philippine Commercial International (PCI) Bank Magsaysay
Avenue, Santa Ana District, Davao City Branch, under Account No.
8502-00347-6, a PCI Bank General Santos City Branch,
TCBT1 Check No. 0249188 in the amount of P225,000.00. Upon
inquiry by Serande at PCI Bank on 5 December 1991 on whether
TCBT Check No. 0249188 had been cleared, she received an
affirmative answer. Relying on this assurance, she issued two checks
drawn against the proceeds of TCBT Check No. 0249188. One of

The next day, 6 December 1991, Ong deposited PCI Bank

Manager's Check No. 10983 in her account with Equitable Banking
Corporation Davao City Branch. On 9 December 1991, she received
a check return-slip informing her that PCI Bank had stopped the
payment of the said check on the ground of irregular issuance.
Despite several demands made by her to PCI Bank for the payment
of the amount in PCI Bank Manager's Check No. 10983, the same
was met with refusal; thus, Ong was constrained to file a Complaint
for sum of money, damages and attorney's fees against PCI Bank. 2
From PCI Bank's version, TCBT-General Santos City Check No.
0249188 was returned on 5 December 1991 at 5:00 pm on the
ground that the account against which it was drawn was already
closed. According to PCI Bank, it immediately gave notice to
Sarande and Ong about the return of Check No. 0249188 and
requested Ong to return PCI Bank Manager's Check No. 10983
inasmuch as the return of Check No. 0249188 on the ground that the
account from which it was drawn had already been closed resulted
in a failure or want of consideration for the issuance of PCI Bank
Manager's Check No. 10983.3

Ong complied with the Order of the trial court, but PCI Bank failed
to file any comment or objection within the period given to it despite
receipt of the same order.7 The trial court then granted the motion
for summary judgment and in its Order dated 2 March 1995, it held:
IN THE LIGHT OF THE FOREGOING, the motion for summary
judgment is GRANTED, ordering defendant Philippine Commercial
International Bank to pay the plaintiff the amount of ONE
HUNDRED THIRTY-TWO THOUSAND PESOS (P132,000.00)
equivalent to the amount of PCIB Manager's Check No. 10983.
Set the reception of the plaintiff's evidence with respect to the
damages claimed in the complaint.8
PCI Bank filed a Motion for Reconsideration which the trial court
denied in its Order dated 11 April 1996.9 After the reception of
Ong's evidence in support of her claim for damages, the trial court
rendered its Decision10 dated 3 May 1999 wherein it ruled:
IN LIGHT OF THE FOREGOIN CONSIDERATION, and as
plaintiff has preponderantly established by competent evidence her
claims in the Complaint, judgment in hereby rendered for the
plaintiff against the defendant-bank ordering the latter:
1. To pay the plaintiff the sum of FIFTY THOUSAND PESOS
(P50,000.00) in the concept of moral damages;
2. To pay the plaintiff the sum of TWENTY THOUSAND PESOS
(P20,000.00) as exemplary damages;

3. To pay the plaintiff the sum of THREE THOUSAND FIVE

HUNDRED PESOS (P3,500.00) representing actual expenses;

depositions or admissions for a summary judgment in his favor upon

all or any part thereof.

4. To pay the plaintiff the sum of TWENTY THOUSAND PESOS

(P20,000.00) as and for attorney's fee's; and

Thus, it has been held that a summary judgment is proper where,

upon a motion filed after the issues had been joined and on the basis
of the pleadings and papers filed, the court finds that there is no
genuine issue as to any material fact to except as to the amount of
damages. A genuine issue has been defined as an issue of fact which
calls for the presentation of evidence, as distinguished from an issue
which is sham, fictitious, contrived and patently unsubstantial so as
not to constitute a genuine issue for trial.14

5. To pay the costs.11

From this decision, PCI Bank sought recourse before the Court of
Appeals. In a Decision12 dated 29 October 2002, the appellate court
denied the appeal of PCI Bank and affirmed the orders and decision
of the trial court.
Unperturbed, PCI Bank then filed the present petition for review
before this Court and raised the following issues:
1. WHETHER OR NOT THE COURT OF APPEALS
COMMITTED A GRAVE AND REVERSIBLE ERROR WHEN IT
SUSTAINED THE LOWER COURT'S ORDER DATED 2
MARCH 1999 GRANTING RESPONDENT'S MOTION FOR
SUMMARY JUDGMENT NOTWITHSTANDING THE
GLARING FACT THAT THERE ARE GENUINE, MATERIAL
AND FACTUAL ISSUES WHICH REQUIRE THE
PRESENTATION OF EVIDENCE.
2. WHETHER OR NOT THE COURT OF APPEALS WAS IN
ERROR WHEN IT SUSTAINED THE LOWER COURT'S
DECISION DATED 3 MAY 1999 GRANTING THE RELIEFS
PRAYED FOR IN RESPONDENT ONG'S COMPLAINT INSPITE
OF THE FACT THAT RESPONDENT ONG WOULD BE
"UNJUSTLY ENRICHED" AT THE EXPENSE OF PETITIONER
BANK, IF PETITIONER BANK WOULD BE REQUIRED TO
PAY AN UNFUNDED CHECK.
3. WHETHER OR NOT THE COURT OF APPEALS
COMMITTED REVERSIBLE ERRORS WHEN IT AFFIRMED
THE COURT A QUO'S DECISIION DATED 3 MAY 1999
AWARDING DAMAGES TO RESPONDENT ONG AND
HOLDING THAT RESPONDENT ONG HAD
PREPONDERANTLY ESTABLISHED BY COMPETENT
EVIDENCE HER CLAIMS IN THE COMPLAINT INSPITE OF
THE FACT THAT THE EVIDENCE ON RECORD DOES NOT
JUSTIFY THE AWARD OF DAMAGES.
4. WHETHER OR NOT THE COURT OF APPEALS
COMMITTED A REVERSIBLE ERROR WHEN IT AFFIRMED
THE LOWER COURT'S FACTUAL FINDING IN ITS DECISION
DATED 3 MAY 1999 HOLDING RESPONDENT ONG A
"HOLDER IN DUE COURSE" INSPITE OF THE FACT THAT
THE REQUISITE OF "GOOD FAITH" AND FOR VALUE IS
LACKING AND DESPITE THE ABSENCE OF A PROPER
TRIAL TO DETERMINE SUCH FACTUAL ISSUE.
5. WHETHER OR NOT THE COURT OF APPEALS
COMMITTED A REVERSIBLE ERROR WHEN IT UPHELD
THE LOWER COURT'S DECISION DATED 3 MAY 1999
DENYING PETITIONER EPCI BANK'S COUNTERCLAIM
INSPITE OF THE FACT THAT IT WAS SHOWN THAT
RESPONDENT ONG'S COMPLAINT LACKS MERIT.13
We affirm the Decision of the trial court and the Court of Appeals.
The provision on summary judgment is found in Section 1, Rule 35
of the 1997 Rules of Court:
SECTION 1. Summary judgment for claimant. A party seeking to
recover upon a claim, counterclaim, or cross-claim or to obtain a
declaratory relief may, at any time after the pleading in answer
thereto has been served, move with supporting affidavits,

A court may grant summary judgment to settle expeditiously a case

if, on motion of either party, there appears from the pleadings,
depositions, admissions, and affidavits that no important issues of
fact are involved, except the amount of damages. 15 Rule 35, Section
3, of the Rules of Court provides two requisites for summary
judgment to be proper: (1) there must be no genuine issue as to any
material fact, except for the amount of damages; and (2) the party
presenting the motion for summary judgment must be entitled to a
judgment as a matter of law.16
Certainly, when the facts as pleaded appear uncontested or
undisputed, then there's no real or genuine issue or question as to the
facts, and summary judgment is called for.17
By admitting it committed an error, clearing the check of Sarande
and issuing in favor of Ong not just any check but a manager's check
for that matter, PCI Bank's liability is fixed. Under the
circumstances, we find that summary judgment was proper and a
hearing would serve no purpose. That summary judgment is
appropriate was incisively expounded by the trial court when it
made the following observation:
[D]efendant-bank had certified plaintiff's PCIB Check No. 073661
and since certification is equivalent to acceptance, defendant-bank
as drawee bank is bound on the instrument upon certification and it
is immaterial to such liability in favor of the plaintiff who is a holder
in due course whether the drawer (Warliza Sarande) had funds or not
with the defendant-bank (Security vs. State Bank, 154 N.W. 282) or
the drawer was indebted to the bank for more than the amount of the
check (Nat. Bank vs. Schmelz, Nat. Bank, 116 S.E. 880) as the
certifying bank as all the liabilities under Sec. 62 of the Negotiable
Instruments Law which refers to liability of acceptor (Title
Guarantee vs. Emadee Realty Corp., 240 N.Y. 36).
It may be true that plaintiff's PCIB Check No. 073661
for P132,000.00 which was paid to her by Warliza Sarande was
actually not funded but since plaintiff became a holder in due
course, defendant-bank cannot interpose a defense of want or lack of
consideration because that defense is equitable or personal and
cannot prosper against a holder in due course pursuant to Section 28
of the Negotiable Instruments Law. Therefore, when the
aforementioned check was endorsed and presented by the plaintiff
and certified to and accepted by defendant-bank in the purchase of
PCIB Manager's Check No. 1983 in the amount ofP132,000.00,
there was a valid consideration.18
The property of summary judgment was further explained by this
Court when it pronounced that:
The theory of summary judgment is that although an answer may on
its face appear to tender issues requiring trial yet if it is
demonstrated by affidavits, depositions, or admissions that those
issues are not genuine, but sham or fictitious, the Court is unjustified
in dispensing with the trial and rendering summary judgment for
plaintiff. The court is expected to act chiefly on the basis of the
affidavits, depositions, admissions submitted by the movant, and
those of the other party in opposition thereto. The hearing

contemplated (with 10-day notice) is for the purpose of determining

whether the issues are genuine or not, not to receive evidence on the
issues set up in the pleadings. A hearing is not thus de riguer. The
matter may be resolved, and usually is, on the basis of affidavits,
depositions, admissions. This is not to say that a hearing may be
regarded as a superfluity. It is not, and the Court has plenary
discretion to determine the necessity therefore. 19
The second and fourth issues are inter-related and so they shall be
resolved together. The second issue has reference to PCI Bank's
claim of unjust enrichment on the part of Ong if it would be
compelled to make good the manager's check it had issued. As
asserted by PCI Bank under the fourth issue, Ong is not a holder in
due course because the manager's check was drawn against a closed
account; therefore, the same was issued without consideration.
On the matter of unjust enrichment, the fundamental doctrine of
unjust enrichment is the transfer of value without just cause or
consideration. The elements of this doctrine are: enrichment on the
part of the defendant; impoverishment on the part of the plaintiff;
and lack of cause. The main objective is to prevent one to enrich
himself at the expense of another.20 It is based on the equitable
postulate that it is unjust for a person to retain benefit without
paying for it.21 It is well to stress that the check of Sarande had been
cleared by the PCI Bank for which reason the former issued the
check to Ong. A check which has been cleared and credited to the
account of the creditor shall be equivalent to a delivery to the
creditor of cash in an amount equal to the amount credited to his
account.22
Having cleared the check earlier, PCI Bank, therefore, became liable
to Ong and it cannot allege want or failure of consideration between
it and Sarande. Under settled jurisprudence, Ong is a stranger as
regards the transaction between PCI Bank and Sarande. 23

holder in due course; and partial failure of consideration is a

defense pro tanto, whether the failure is an ascertained and
liquidated amount or otherwise.
Easily discernible is that what Ong obtained from PCI Bank was not
just any ordinary check but a manager's check. A manager's check is
an order of the bank to pay, drawn upon itself, committing in effect
its total resources, integrity and honor behind its issuance. By its
peculiar character and general use in commerce, a manager's check
is regarded substantially to be as good as the money it represents. 24
A manager's check stands on the same footing as a certified
check.25 The effect of certification is found in Section 187,
Negotiable Instruments Law.
Sec. 187. Certification of check; effect of. Where a check is
certified by the bank on which it is drawn, the certification is
equivalent to an acceptance.26
The effect of issuing a manager's check was incontrovertibly
elucidated when we declared that:
A manager's check is one drawn by the bank's manager upon the
bank itself. It is similar to a cashier's check both as to effect and use.
A cashier's check is a check of the bank's cashier on his own or
another check. In effect, it is a bill of exchange drawn by the cashier
of a bank upon the bank itself, and accepted in advance by the act of
its issuance. It is really the bank's own check and may be treated as a
promissory note with the bank as a maker. The check becomes the
primary obligation of the bank which issues it and constitutes its
written promise to pay upon demand. The mere issuance of it is
considered an acceptance thereof. x x x.27
In the case of New Pacific Timber & Supply Co., Inc. v. Seneris28:

The same law provides further:

[S]ince 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. Where a check
is certified by the bank on which it is drawn, the certification is
equivalent to acceptance. 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 circulation,
a certificate of deposit payable to the order of 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." When the
holder procures the check to be certified, "the check operates as an
assignment of a part of the funds to the creditors." 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 account" shall apply in this case x x x.

Sec. 24. Presumption of consideration. Every negotiable

instrument is deemed prima facie to have been issued for a valuable
consideration; and every person whose signature appears thereon to
have become a party thereto for value.

By accepting PCI Bank Check No. 073661 issued by Sarande to

Ong and issuing in turn a manager's check in exchange thereof, PCI
Bank assumed the liabilities of an acceptor under Section 62 of the
Negotiable Instruments Law which states:

Sec. 26. What constitutes holder for value. Where value has at any
time been given for the instrument, the holder is deemed a holder for
value in respect to all parties who become such prior to that time.

Sec. 62. Liability of acceptor. The acceptor by accepting the

instruments engages that he will pay it according to the tenor of his
acceptance; and admits

Sec. 28. Effect of want of consideration. Absence or failure of

consideration is a matter of defense as against any person not a

(a) The existence of the drawer, the genuineness of his signature,

and his capacity and authority to draw the instrument; and

PCI Bank next insists that since there was no consideration for the
issuance of the manager's check, ergo, Ong is not a holder in due
course. This claim is equally without basis. Pertinent provisions of
the Negotiable Instruments Law are hereunder quoted:
SECTION 52. What constitutes a holder in due course. A holder in
due course is a holder who has taken the instrument under the
following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and
without notice it had been previously dishonored, if such was the
fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no notice of any
infirmity in the instrument or defect in the title of the person
negotiating it.

(b) The existence of the payee and his then capacity to indorse.
With the above jurisprudential basis, the issues on Ong being not a
holder in due course and failure or want of consideration for PCI
Bank's issuance of the manager's check is out of sync.
Section 2, of Republic Act No. 8791, The General Banking Law of
2000 decrees:
SEC. 2. Declaration of Policy. The State recognizes the vital role
of banks in providing an environment conducive to the sustained
development of the national economy and the fiduciary nature of
banking that requires high standards of integrity and performance. In
furtherance thereof, the State shall promote and maintain a stable
and efficient banking and financial system that is globally
competitive, dynamic and responsive to the demands of a
developing economy.
In Associated Bank v. Tan,29 it was reiterated:
"x x x the degree of diligence required of banks is more than that of
a good father of a family where the fiduciary nature of their
relationship with their depositors is concerned." Indeed, the banking
business is vested with the trust and confidence of the public; hence
the "appropriate standard of diligence must be very high, if not the
highest degree of diligence."
Measured against these standards, the next question that needs to be
addressed is: Did PCI Bank exercise the requisite degree of
diligence required of it? From all indications, it did not. PCI Bank
distinctly made the following uncontested admission:
1. On 29 November 1991, one Warliza Sarande deposited to her
savings account with PCI Bank's Magsaysay Avenue Branch, TCBTGeneral Santos Branch Check No. 0249188 for P225,000.00. Said
check, however, was inadvertently sent by PCI Bank through
local clearing when it should have been sent through interregional clearing since the check was drawn at TCBT-General
Santos City.
2. On 5 December 1991, Warliza Sarande inquired whether TCBT
Check No. 0249188 had been cleared. Not having received any
advice from the drawee bank within the regular clearing period for
the return of locally cleared checks, and unaware then of the error
of not having sent the check through inter-regional clearing, PCI
Bank advised her that Check No. 024188 is treated as cleared. x
x x.30(Emphasis supplied.)
From the foregoing, it is palpable and readily apparent that PCI
Bank failed to exercise the highest degree of care 31 required of it
under the law.
In the case of Philippine National Bank v. Court of Appeals,32 we
declared:
The banking system has become an indispensable institution in the
modern world and plays a vital role in the economic life of every
civilized society. Whether as mere passive entities for the safekeeping and saving of money or as active instruments of business
and commerce, banks have attained an ubiquitous presence among
the people, who have come to regard them with respect and even
gratitude and, most of all, confidence.
Having settled the other issues, we now resolve the question on the
award of moral and exemplary damages by the trial court to the
respondent.
Moral damages include physical suffering, mental anguish, fright,
serious anxiety, besmirched reputation, wounded feelings, moral

shock, social humiliation, and similar injury. Though incapable of

pecuniary computation, moral damages may be recovered if they are
the proximate result of the defendant's wrongful act or
omission.33 The requisites for an award of moral damages are welldefined, thus, firstly, evidence of besmirched reputation or physical,
mental or psychological suffering sustained by the
claimant; secondly, a culpable act or omission factually
established; thirdly, proof that the wrongful act or omission of the
defendant is the proximate cause of the damages sustained by the
claimant; and fourthly, that the case is predicated on any of the
instances expressed or envisioned by Article 221934 and Article
222035 of the Civil Code. All these elements are present in the
instant case.36
In the first place, by refusing to make good the manager's check it
has issued, Ong suffered embarrassment and humiliation arising
from the dishonor of the said check. 37 Secondly, the culpable act of
PCI Bank in having cleared the check of Serande and issuing the
manager's check to Ong is undeniable. Thirdly, the proximate cause
of the loss is attributable to PCI Bank. Proximate cause is defined as
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.38 In this case, the
proximate cause of the loss is the act of PCI Bank in having cleared
the check of Sarande and its failure to exercise that degree of
diligence required of it under the law which resulted in the loss to
Ong.
On exemplary damages, Article 2229 of the Civil Code states:
Art. 2229. Exemplary or corrective damages are imposed, by way of
example or correction for the public good, in addition to the moral,
temperate, liquidated or compensatory damages.
The law allows the grant of exemplary damages to set an example
for the public good. The banking system has become an
indispensable institution in the modern world and plays a vital role
in the economic life of every civilized society. Whether as mere
passive entities for the safe-keeping and saving of money or as
active instruments of business and commerce, banks have attained
an ubiquitous presence among the people, who have come to regard
them with respect and even gratitude and most of all, confidence.
For this reason, banks should guard against injury attributable to
negligence or bad faith on its part.39 Without a doubt, it has been
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 diligence is expected, and high standards of integrity and
performance are even required of it.40 Having failed in this respect,
the award of exemplary damages is warranted.
Article 2216 of the Civil Code provides:
ART. 2216. No proof of pecuniary loss is necessary in order that
moral, nominal, temperate, liquidated or exemplary damages may be
adjudicated. The assessment of such damages, except liquidated
ones, is left to the discretion of the court, according to the
circumstances of each case.
Based on the above provision, the determination of the amount to be
awarded (except liquidated damages) is left to the sound discretion
of the court according to the circumstances of each case. 41 In the
case before us, we find that the award of moral damages in the
amount of P50,000.00 and exemplary damages in the amount
ofP20,000.00 is reasonable and justified.
With the above disquisition, there is no necessity of further
discussing the last issue on the PCI Bank's counterclaim based on
the supposed lack of merit of Ong's complaint.

WHEREFORE, premises considered, the Petition is DENIED and

the Decision of the Court of Appeals dated 29 October 2002 in CAG.R. CV No. 65000 affirming the Decision dated 3 may 1999, of the
Regional Trial Court of Davao City, Branch 14, in Civil Case No.
21458-92, are AFFIRMED.

2. PhP100,000.00 as and for attorneys fees; and,

3. the costs.
SO ORDERED.8

SO ORDERED.
SECURITY BANK AND TRUST COMPANY, Petitioner,
vs.
RIZAL COMMERCIAL BANKING
CORPORATION, Respondent.
x-------------------------x
G.R. No. 170987

1. PhP4,000,000.00 as and for actual damages;

January 30, 2009

RIZAL COMMERCIAL BANKING

CORPORATION, Petitioner,
vs.
SECURITY BANK AND TRUST COMPANY, Respondent.
DECISION
QUISUMBING, Acting C.J.:
Before us are opposing parties petitions for review of the
Decision1 dated March 29, 2005 and Resolution2 dated December 12,
2005 of the Court of Appeals in CA-G.R. CV No. 67387. The two
petitions are herein consolidated as they stem from the same set of
factual circumstances.
The facts, as found by the trial and appellate courts, are as follows:
On January 9, 1981, Security Bank and Trust Company (SBTC)
issued a managers check for P8 million, payable to "CASH," as
proceeds of the loan granted to Guidon Construction and
Development Corporation (GCDC). On the same day, the P8-million
check, along with other checks, was deposited by Continental
Manufacturing Corporation (CMC) in its Current Account No. 0109022888 with Rizal Commercial Banking Corporation (RCBC).
Immediately, RCBC honored the P8-million check and allowed CMC
to withdraw the same.3
On the next banking day, January 12, 1981, GCDC issued a "Stop
Payment Order" to SBTC, claiming that the P8-million check was
released to a third party by mistake. Consequently, SBTC dishonored
and returned the managers check to RCBC. Thereafter, the check
was returned back and forth between the two banks, resulting in
automatic debits and credits in each banks clearing balance. 4
On February 13, 1981, RCBC filed a complaint 5 for damages against
SBTC with the then Court of First Instance of Rizal, Branch XXII.
Said case was docketed as Civil Case No. 1081 and later transferred
to the Regional Trial Court (RTC) of Makati City, Branch 143.
Meanwhile, following the rules of the Philippine Clearing House,
RCBC and SBTC stopped returning the checks to each other. By way
of a temporary arrangement pending resolution of the case, the P8million check was equally divided between, and credited to, RCBC
and SBTC.6
On May 9, 2000, the RTC of Makati City, Branch 143, rendered a
Decision7 in favor of RCBC. The dispositive portion of the decision
reads:
PREMISES CONSIDERED, the Court renders judgment in favor of
plaintiff [RCBC] and finds defendant SBTC justly liable to [RCBC]
and sentences [SBTC] to pay [RCBC] the amount of:

On appeal, the Court of Appeals affirmed with modification the

above Decision, to wit:
WHEREFORE, the appealed Decision
is AFFIRMED with MODIFICATION. Appellant Security Bank
and Trust Co. shall pay appellee Rizal Commercial Banking
Corporation not only the principal amount of P4,000,000.00 but also
interest thereon at (6%) per annum covering appellees unearned
income on interest computed from the time of filing of the complaint
on February 13, 1981 to the date of finality of this Decision. For lack
of factual and legal basis, the award of attorneys fees is DELETED.
SO ORDERED.9
Now for our resolution are the opposing parties petitions for review
on certiorari of the abovecited decision. On its part, SBTC alleges the
following to support its petition:
I.
THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN
REFUSING TO APPLY THE LAW BECAUSE, IN ITS OPINION,
TO DO SO WOULD "RESULT IN AN INJUSTICE."
II.
THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN
HOLDING THAT TO DETERMINE WHETHER OR NOT A BANK
IS A HOLDER IN DUE COURSE, ONLY THE NEGOTIABLE
INSTRUMENTS LAW NEED BE APPLIED TO THE EXCLUSION
OF CENTRAL BANK RULES AND REGULATIONS.
III.
THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN
FAILING TO NOTE THAT THE MANAGERS CHECK IN
QUESTION WAS ACCEPTED FOR DEPOSIT BY THE RCBC
AND WAS NOT ENCASHED BY THE PAYEE.
IV.
THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN
FAILING TO CONSIDER THAT PRIOR TO THE DEPOSIT OF
THE CHECKS WORTH PhP53 MILLION, RCBC WAS HOLDING
43 CHECKS TOTALING P49,017,669.66 DRAWN BY
CONTINENTAL MANUFACTURING CORPORATION AGAINST
ITS CURRENT ACCOUNT WHEN THE BALANCE OF THAT
ACCOUNT WAS A MERE P573.62.
V.
THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN
FAILING TO CONSIDER THAT THE CHECKS DEPOSITED
WITH RCBC THE PROCEEDS OF WHICH WERE
IMMEDIATELY WITHDRAWN TO HONOR THE 43 CHECKS
TOTALING P49,017,669.66 DRAWN BY CONTINENTAL
MANUFACTURING CORPORATION ON ITS CURRENT
ACCOUNT WERE NOT ALL MANAGERS CHECK[S] BUT
INCLUDED ORDINARY CHECKS IN THE TOTAL AMOUNT OF
PhP15,436,140.81.

VI.
THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN
FAILING TO CONSIDER THAT EACH OF THE 43 CHECKS
DRAWN BY THE CONTINENTAL MANUFACTURING
CORPORATION WERE ALL HONORED BY RCBC ON THE
BASIS OF A MIXTURE OF ALL THE MANAGERS AND
ORDINARY CHECKS DEPOSITED ON THAT DAY OF 9
JANUARY 1981.
VII.
THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN
HOLDING THAT THE RCBC IS A HOLDER IN DUE COURSE.
VIII.
THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN
HOLDING THAT SBTC WAITED FOR THREE (3) DAYS TO
NOTIFY THE RCBC OF THE STOP PAYMENT ORDER.
IX.
THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN
HOLDING THAT SBTC SHOULD HAVE FIRST ACQUIRED
PERSONAL KNOWLEDGE OF THE FACTS WHICH GAVE RISE
TO THE REQUEST FOR THE STOP PAYMENT ORDER BEFORE
HONORING SUCH REQUEST.
X.
THE HONORABLE COURT OF APPEALS RULED CORRECTLY
IN REFUSING TO HOLD SBTC LIABLE FOR DAMAGE
CLAIMS BASED SOLELY ON SPECULATION, CONJECTURE
AND GUESSWORK.
XI.
THE HONORABLE COURT OF APPEALS RULED CORRECTLY
IN HOLDING THAT RCBC IS NOT ENTITLED TO EXEMPLARY
DAMAGES.
XII.
THE HONORABLE COURT OF APPEALS ERRED GRAVELY IN
HOLDING SBTC LIABLE FOR THE ATTORNEYS FEES OF
RCBC [SIC].10
On RCBCs part, the following issues are submitted for resolution:
I.
WHETHER OR NOT SBTC IS LIABLE FOR THE MANAGERS
CHECK IT ISSUED.
II.

RCBC avers that the managers check issued by SBTC is

substantially as good as the money it represents because by its
peculiar character, its issuance has the effect of an advance
acceptance. RCBC claims that it is a holder in due course when it
credited the P8-million managers check to CMCs account.
Accordingly, RCBC asserts that SBTCs refusal to honor its
obligation justifies RCBC claim for lost interest income, exemplary
damages and attorneys fees.
On the other hand, SBTC contends that RCBC violated Monetary
Board Resolution No. 2202 of the Central Bank of the Philippines
mandating all banks to verify the genuineness and validity of all
checks before allowing drawings of the same. SBTC insists that
RCBC should bear the consequences of allowing CMC to withdraw
the amount of the check before it was cleared. 12
We shall rule on the issues seriatim.
At the outset, it must be noted that the questioned check issued by
SBTC is not just an ordinary check but a managers check. A
managers check is one drawn by a banks manager upon the bank
itself. It stands on the same footing as a certified check, 13 which is
deemed to have been accepted by the bank that certified it. 14 As the
banks own check, a managers check becomes the primary
obligation of the bank and is accepted in advance by the act of its
issuance.15
In this case, RCBC, in immediately crediting the amount of P8
million to CMCs account, relied on the integrity and honor of the
check as it is regarded in commercial transactions. Where the
questioned check, which was payable to "Cash," appeared regular on
its face, and the bank found nothing unusual in the transaction, as the
drawer usually issued checks in big amounts made payable to cash,
RCBC cannot be faulted in paying the value of the questioned
check.16
In our considered view, SBTC cannot escape liability by invoking
Monetary Board Resolution No. 2202 dated December 21, 1979,
prohibiting drawings against uncollected deposits. For we must point
out that the Central Bank at that time issued a Memorandum dated
July 9, 1980, which interpreted said Monetary Board Resolution No.
2202. In its pertinent portion, said Memorandum reads:
"MEMORANDUM TO ALL BANKS
July 9, 1980
For the guidance of all concerned, Monetary Board Resolution No.
2202 dated December 31, 1979 prohibiting, as a matter of
policy, drawing against uncollected deposit effective July 1,
1980,uncollected deposits representing managers cashiers/
treasurers checks, treasury warrants, postal money orders and duly
funded "on us" checks which may be permitted at the discretion of
each bank, covers drawings against demand deposits as well as
withdrawals from savings deposits."17

WHETHER OR NOT RCBC IS ENTITLED TO COMPENSATORY

DAMAGES EQUIVALENT TO THE INTEREST INCOME LOST
AS A RESULT OF THE ILLEGAL REFUSAL OF SBTC TO
HONOR ITS OWN MANAGERS CHECK, AS WELL AS FOR
EXEMPLARY DAMAGES AND ATTORNEYS FEES.11

Thus, it is clear from the July 9, 1980 Memorandum that banks were
given the discretion to allow immediate drawings on uncollected
deposits of managers checks, among others. Consequently, RCBC,
in allowing the immediate withdrawal against the subject managers
check, only exercised a prerogative expressly granted to it by the
Monetary Board.

Simply stated, we find that in these consolidated petitions, the legal

issues for our resolution are: (1) Is SBTC liable to RCBC for the
remaining P4 million? and (2) Is SBTC liable to pay for lost interest
income on the remaining P4 million, exemplary damages and
attorneys fees?

Moreover, neither Monetary Board Resolution No. 2202 nor the July
9, 1980 Memorandum alters the extraordinary nature of the
managers check and the relative rights of the parties thereto. SBTCs
liability as drawer remains the same by drawing the instrument, it
admits the existence of the payee and his then capacity to indorse;

and engages that on due presentment, the instrument will be accepted,

or paid, or both, according to its tenor.18
Concerning RCBCs claim for lost interest income on the
remaining P4 million, this is already covered by the amount of
damages in the form of legal interest of 6%, based on Article
220019 and 220920 of the Civil Code of the Philippines, as awarded by
the Court of Appeals in its decision.
In addition to the above-mentioned award of compensatory damages,
we also find merit in the need to award exemplary damages in order
to set an example for the public good. The banking system has
become an indispensable institution in the modern world and plays a
vital role in the economic life of every civilized society. Whether as
mere passive entities for the safe-keeping and saving of money or as
active instruments of business and commerce, banks have attained an
ubiquitous presence among the people, who have come to regard
them with respect and even gratitude and, above all, trust and
confidence. In this connection, it is important that banks should guard
against injury attributable to negligence or bad faith on its part. As
repeatedly emphasized, since the banking business is impressed with
public interest, the trust and confidence of the public in it is of
paramount importance. Consequently, the highest degree of diligence
is expected, and high standards of integrity and performance are
required of it. SBTC having failed in this respect, the award of
exemplary damages to RCBC in the amount of P50,000.00 is
warranted.21
Pursuant to current jurisprudence, with the finding of liability for
exemplary damages, attorneys fees in the amount
of P25,000.0022 must also be awarded against SBTC and in favor of
RCBC.
WHEREFORE, the assailed Decision dated March 29, 2005 and
Resolution dated December 12, 2005 of the Court of Appeals in CAG.R. CV No. 67387 is hereby AFFIRMED with MODIFICATION.
Security Bank and Trust Company is ordered to pay Rizal
Commercial Banking Corporation: (1) the remaining P4,000,000.00,
with legal interest thereon at six percent (6%) per annum from the
time of filing of the complaint on February 13, 1981 to the date of
finality of this Decision; (2) exemplary damages of P50,000.00; and
(3) attorneys fees of P25,000.00.
Salazar vs. JY Brothers, 20 October 2010
PERALTA, J.:
Before us is a petition for review seeking to annul and set aside the
Decision1 dated September 29, 2005 and the Resolution2 dated March
2, 2006 of the Court of Appeals (CA) in CA-G.R. CV No. 83104.
The facts, as found by the Court of Appeals, are not disputed, thus:
J.Y. Brothers Marketing (J.Y. Bros., for short) is a corporation
engaged in the business of selling sugar, rice and other commodities.
On October 15, 1996, Anamer Salazar, a freelance sales agent, was
approached by Isagani Calleja and Jess Kallos, if she knew a supplier
of rice. Answering in the positive, Salazar accompanied the two to
J.Y. Bros. As a consequence, Salazar with Calleja and Kallos
procured from J. Y. Bros. 300 cavans of rice worthP214,000.00. As
payment, Salazar negotiated and indorsed to J.Y. Bros. Prudential
Bank Check No. 067481 dated October 15, 1996 issued by Nena
Jaucian Timario in the amount of P214,000.00 with the assurance that
the check is good as cash. On that assurance, J.Y. Bros. parted with
300 cavans of rice to Salazar. However, upon presentment, the check
was dishonored due to "closed account."
Informed of the dishonor of the check, Calleja, Kallos and Salazar
delivered to J.Y. Bros. a replacement cross Solid Bank Check No.

PA365704 dated October 29, 1996 again issued by Nena Jaucian

Timario in the amount ofP214,000.00 but which, just the same,
bounced due to insufficient funds. When despite the demand letter
dated February 27, 1997, Salazar failed to settle the amount due J.Y.
Bros., the latter charged Salazar and Timario with the crime of estafa
before the Regional Trial Court of Legaspi City, docketed as Criminal
Case No. 7474.
After the prosecution rested its case and with prior leave of court,
Salazar submitted a demurrer to evidence. On November 19, 2001,
the court a quo rendered an Order, the dispositive portion of which
reads:
WHEREFORE, premises considered, the accused Anamer D. Salazar
is hereby ACQUITTED of the crime charged but is hereby held liable
for the value of the 300 bags of rice. Accused Anamer D. Salazar is
therefore ordered to pay J.Y. Brothers Marketing Corporation the sum
of P214,000.00. Costs against the accused.
SO ORDERED.
Aggrieved, accused attempted a reconsideration on the civil aspect of
the order and to allow her to present evidence thereon. The motion
was denied. Accused went up to the Supreme Court on a petition for
review on certiorari under Rule 45 of the Rules of Court. Docketed as
G.R. 151931, in its Decision dated September 23, 2003, the High
Court ruled:
IN LIGHT OF ALL THE FOREGOING, the Petition is GRANTED.
The Orders dated November 19, 2001 and January 14, 2002 are SET
ASIDE and NULLIFIED. The Regional Trial Court of Legaspi City,
Branch 5, is hereby DIRECTED to set Criminal Case No. 7474 for
the continuation of trial for the reception of the evidence-in-chief of
the petitioner on the civil aspect of the case and for the rebuttal
evidence of the private complainant and the sur-rebuttal evidence of
the parties if they opt to adduce any.
SO ORDERED.3
The Regional Trial Court (RTC) of Legaspi City, Branch 5, then
proceeded with the trial on the civil aspect of the criminal case.
On April 1, 2004, the RTC rendered its Decision,4 the dispositive
portion of which reads:
WHEREFORE, Premises Considered, judgment is rendered
DISMISSING as against Anamer D. Salazar the civil aspect of the
above-entitled case. No pronouncement as to costs.
Place into the files (archive) the record of the above-entitled case as
against the other accused Nena Jaucian Timario. Let an alias (bench)
warrant of arrest without expiry dated issue for her apprehension, and
fix the amount of the bail bond for her provisional liberty at
59,000.00 pesos.
SO ORDERED.5
The RTC found that the Prudential Bank check drawn by Timario for
the amount of P214,000.00 was payable to the order of respondent,
and such check was a negotiable order instrument; that petitioner was
not the payee appearing in the check, but respondent who had not
endorsed the check, much less delivered it to petitioner. It then found
that petitioners liability should be limited to the allegation in the
amended information that "she endorsed and negotiated said check,"
and since she had never been the holder of the check, petitioner's
signing of her name on the face of the dorsal side of the check did not
produce the technical effect of an indorsement arising from
negotiation. The RTC ruled that after the Prudential Bank check was
dishonored, it was replaced by a Solid Bank check which, however,

was also subsequently dishonored; that since the Solid Bank check
was a crossed check, which meant that such check was only for
deposit in payees account, a condition that rendered such check nonnegotiable, the substitution of a non-negotiable Solid Bank check for
a negotiable Prudential Bank check was an essential change which
had the effect of discharging from the obligation whoever may be the
endorser of the negotiable check. The RTC concluded that the
absence of negotiability rendered nugatory the obligation arising
from the technical act of indorsing a check and, thus, had the effect of
novation; and that the ultimate effect of such substitution was to
extinguish the obligation arising from the issuance of the Prudential
Bank check.
Respondent filed an appeal with the CA on the sole assignment of
error that:
IN BRIEF, THE LOWER COURT ERRED IN RULING THAT
ACCUSED ANAMER SALAZAR BY INDORSING THE CHECK
(A) DID NOT BECOME A HOLDER OF THE CHECK, (B) DID
NOT PRODUCE THE TECHNICAL EFFECT OF AN
INDORSEMENT ARISING FROM NEGOTIATION; AND (C) DID
NOT INCUR CIVIL LIABILITY.6

OR EXCESS OF JURISDICTION WHEN IT DENIED

THE MOTION FOR RECONSIDERATION OF THE
PETITIONER ON THE GROUND THAT THE ISSUE
RAISED THEREIN HAD ALREADY BEEN PASSED
UPON AND CONSIDERED IN THE DECISION
SOUGHT TO BE RECONSIDERED WHEN IN TRUTH
AND IN FACT SUCH ISSUE HAD NOT BEEN
RESOLVED AS YET.11
Petitioner contends that the issuance of the Solid Bank check and the
acceptance thereof by the respondent, in replacement of the
dishonored Prudential Bank check, amounted to novation that
discharged the latter check; that respondent's acceptance of the Solid
Bank check, notwithstanding its eventual dishonor by the drawee
bank, had the effect of erasing whatever criminal responsibility, under
Article 315 of the Revised Penal Code, the drawer or indorser of the
Prudential Bank check would have incurred in the issuance thereof in
the amount of P214,000.00; and that a check is a contract which is
susceptible to a novation just like any other contract.
Respondent filed its Comment, echoing the findings of the CA.
Petitioner filed her Reply thereto.

After petitioner filed her appellees' brief, the case was submitted for
decision. On September 29, 2005, the CA rendered its assailed
Decision, the decretal portion of which reads:

We find no merit in this petition.

IN VIEW OF ALL THE FOREGOING, the instant appeal is

GRANTED, the challenged Decision is REVERSED and SET
ASIDE, and a new one entered ordering the appellee to pay the
appellant the amount of P214,000.00, plus interest at the legal rate
from the written demand until full payment. Costs against the
appellee.7

SECTION 119. Instrument; how discharged. A negotiable

instrument is discharged:

Section 119 of the Negotiable Instrument Law provides, thus:

(a) By payment in due course by or on behalf of the

principal debtor;
(b) By payment in due course by the party accommodated,
where the instrument is made or accepted for his
accommodation;

In so ruling, the CA found that petitioner indorsed the Prudential

Bank check, which was later replaced by a Solid Bank check issued
by Timario, also indorsed by petitioner as payment for the 300 cavans
of rice bought from respondent. The CA, applying Sections
63,8 669 and 2910 of the Negotiable Instruments Law, found that
petitioner was considered an indorser of the checks paid to
respondent and considered her as an accommodation indorser, who
was liable on the instrument to a holder for value, notwithstanding
that such holder at the time of the taking of the instrument knew her
only to be an accommodation party.
Respondent filed a motion for reconsideration, which the CA denied
in a Resolution dated March 2, 2006.
Hence this petition, wherein petitioner raises the following
assignment of errors:
1. THE COURT OF APPEALS ERRED IN IGNORING
THE RAMIFICATIONS OF THE ISSUANCE OF THE
SOLIDBANK CHECK IN REPLACEMENT OF THE
PRUDENTIAL BANK CHECK WHICH WOULD HAVE
RESULTED TO THE NOVATION OF THE
OBLIGATION ARISING FROM THE ISSUANCE OF
THE LATTER CHECK.
2. THE COURT OF APPEALS ERRED IN REVERSING
THE DECISION OF THE REGIONAL TRIAL COURT
OF LEGASPI CITY, BRANCH 5, DISMISSING AS
AGAINST THE PETITIONER THE CIVIL ASPECT OF
THE CRIMINAL ACTION ON THE GROUND OF
NOVATION OF OBLIGATION ARISING FROM THE
ISSUANCE OF THE PRUDENTIAL BANK CHECK.
3. THE COURT OF APPEALS COMMITTED GRAVE
ABUSE OF DISCRETION TANTAMOUNT TO LACK

(c) By the intentional cancellation thereof by the holder;

(d) By any other act which will discharge a simple
contract for the payment of money;
(e) When the principal debtor becomes the holder of the
instrument at or after maturity in his own right. (Emphasis
ours)
And, under Article 1231 of the Civil Code, obligations are
extinguished:
xxxx
(6) By novation.
Petitioner's claim that respondent's acceptance of the Solid Bank
check which replaced the dishonored Prudential bank check resulted
to novation which discharged the latter check is unmeritorious.
In Foundation Specialists, Inc. v. Betonval Ready Concrete, Inc. and
Stronghold Insurance Co., Inc.,12 we stated the concept of novation,
thus:
x x x Novation is done by the substitution or change of the obligation
by a subsequent one which extinguishes the first, either by changing
the object or principal conditions, or by substituting the person of the
debtor, or by subrogating a third person in the rights of the creditor.
Novation may:
[E]ither be extinctive or modificatory, much being dependent on the
nature of the change and the intention of the parties. Extinctive

novation is never presumed; there must be an express intention to

novate; in cases where it is implied, the acts of the parties must
clearly demonstrate their intent to dissolve the old obligation as the
moving consideration for the emergence of the new one. Implied
novation necessitates that the incompatibility between the old and
new obligation be total on every point such that the old obligation is
completely superceded by the new one. The test of incompatibility is
whether they can stand together, each one having an independent
existence; if they cannot and are irreconcilable, the subsequent
obligation would also extinguish the first.
An extinctive novation would thus have the twin effects of, first,
extinguishing an existing obligation and, second, creating a new one
in its stead. This kind of novation presupposes a confluence of four
essential requisites: (1) a previous valid obligation, (2) an agreement
of all parties concerned to a new contract, (3) the extinguishment of
the old obligation, and (4) the birth of a valid new obligation.
Novation is merely modificatory where the change brought about by
any subsequent agreement is merely incidental to the main obligation
(e.g., a change in interest rates or an extension of time to pay; in this
instance, the new agreement will not have the effect of extinguishing
the first but would merely supplement it or supplant some but not all
of its provisions.)
The obligation to pay a sum of money is not novated by an
instrument that expressly recognizes the old, changes only the terms
of payment, adds other obligations not incompatible with the old ones
or the new contract merely supplements the old one. 13
In Nyco Sales Corporation v. BA Finance Corporation,14 we found
untenable petitioner Nyco's claim that novation took place when the
dishonored BPI check it endorsed to BA Finance Corporation was
subsequently replaced by a Security Bank check, 15 and said:
There are only two ways which indicate the presence of novation and
thereby produce the effect of extinguishing an obligation by another
which substitutes the same. First, novation must be explicitly stated
and declared in unequivocal terms as novation is never presumed.
Secondly, the old and the new obligations must be incompatible on
every point.1avvphi1 The test of incompatibility is whether or not the
two obligations can stand together, each one having its independent
existence. If they cannot, they are incompatible and the latter
obligation novates the first. In the instant case, there was no express
agreement that BA Finance's acceptance of the SBTC check will
discharge Nyco from liability. Neither is there incompatibility
because both checks were given precisely to terminate a single
obligation arising from Nyco's sale of credit to BA Finance. As
novation speaks of two distinct obligations, such is inapplicable to
this case.16
In this case, respondents acceptance of the Solid Bank check, which
replaced the dishonored Prudential Bank check, did not result to
novation as there was no express agreement to establish that
petitioner was already discharged from his liability to pay respondent
the amount of P214,000.00 as payment for the 300 bags of rice. As
we said, novation is never presumed, there must be an express
intention to novate. In fact, when the Solid Bank check was delivered
to respondent, the same was also indorsed by petitioner which shows
petitioners recognition of the existing obligation to respondent to
pay P214,000.00 subject of the replaced Prudential Bank check.
Moreover, respondents acceptance of the Solid Bank check did not
result to any incompatibility, since the two checks Prudential and
Solid Bank checks were precisely for the purpose of paying the
amount of P214,000.00,i.e., the credit obtained from the purchase of
the 300 bags of rice from respondent. Indeed, there was no
substantial change in the object or principal condition of the
obligation of petitioner as the indorser of the check to pay the amount

of P214,000.00. It would appear that respondent accepted the Solid

Bank check to give petitioner the chance to pay her obligation.
Petitioner also contends that the acceptance of the Solid Bank check,
a non-negotiable check being a crossed check, which replaced the
dishonored Prudential Bank check, a negotiable check, is a new
obligation in lieu of the old obligation arising from the issuance of
the Prudential Bank check, since there was an essential change in the
circumstance of each check.
Such argument deserves scant consideration.
Among the different types of checks issued by a drawer is the crossed
check.17 The Negotiable Instruments Law is silent with respect to
crossed checks,18 although the Code of Commerce makes reference to
such instruments.19We have 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.20 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.21 The
change in the mode of paying the obligation was not a change in any
of the objects or principal condition of the contract for novation to
take place.22
Considering that when the Solid Bank check, which replaced the
Prudential Bank check, was presented for payment, the same was
again dishonored; thus, the obligation which was secured by the
Prudential Bank check was not extinguished and the Prudential Bank
check was not discharged. Thus, we found no reversible error
committed by the CA in holding petitioner liable as an
accommodation indorser for the payment of the dishonored
Prudential Bank check.
WHEREFORE, the petition is DENIED. The Decision dated
September 29, 2005 and the Resolution dated March 2, 2006, of the
Court of Appeals in CA-G.R. CV No. 83104, are AFFIRMED.