G.R. No.

166018

June 4, 2014

THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITEDPHILIPPINE BRANCHES, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent;
x-----------------------x
G.R. No. 167728
THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITEDPHILIPPINE BRANCHES, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

HSBCs investor-clients maintain Philippine peso and/or foreign currency accounts,

which are managed by HSBC through instructions given through electronic messages.
The said instructions are standard forms known in the banking industry as SWIFT, or
"Society for Worldwide Interbank Financial Telecommunication." In purchasing shares
of stock and other investment in securities, the investor-clients would send electronic
messages from abroad instructing HSBC to debit their local or foreign currency
accounts and to pay the purchase price therefor upon receipt of the securities.7
Pursuant to the electronic messages of its investor-clients, HSBC purchased and paid
Documentary Stamp Tax (DST) from September to December 1997 and also from
January to December 1998 amounting to P19,572,992.10 and P32,904,437.30,
respectively, broken down as follows:
A. September to December 1997

DECISION
LEONARDO-DE CASTRO, J.:
These petitions for review on certiorari1 assail the Decision2 and Resolution dated July
8, 2004 and October 25, 2004, respectively, of the Court of Appeals in CA-G.R. SP
No. 77580, as well as the Decision3 and Resolution dated September 2, 2004 and
April 4, 2005, respectively, of the Court of Appeals in CA-G.R. SP No. 70814. The
respective Decisions in the said cases similarly reversed and set aside the decisions
of the Court of Tax Appeals (CTA) in CTA Case Nos. 59514 and 6009,5 respectively,
and dismissed the petitions of petitioner Hongkong and Shanghai Banking Corporation
Limited-Philippine Branches (HSBC). The corresponding Resolutions, on the other
hand, denied the respective motions for reconsideration of the said Decisions.
HSBC performs, among others, custodial services on behalf of its investor-clients,
corporate and individual, resident or non-resident of the Philippines, with respect to
their passive investments in the Philippines, particularly investments in shares of
stocks in domestic corporations. As a custodian bank, HSBC serves as the
collection/payment agent with respect to dividends and other income derived from its
investor-clients passive investments.6

B. January to December 1998

Gentlemen:
This refers to your letter dated July 26, 1999 requesting on behalf of your clients, the
CITIBANK & STANDARD CHARTERED BANK, for a ruling as to whether or not the
electronic instructions involving the following transactions of residents and nonresidents of the Philippines with respect to their local or foreign currency accounts are
subject to documentary stamp tax under Section 181 of the 1997 Tax Code, viz:
A. Investment purchase transactions:
An overseas client sends instruction to its bank in the Philippines to either:
(i) debit its local or foreign currency account and to pay a named
recipient in the Philippines; or
(ii) receive funds from another bank in the Philippines for deposit
into its account and to pay a named recipient in the Philippines."

On August 23, 1999, the Bureau of Internal Revenue (BIR), thru its then
Commissioner, Beethoven Rualo, issued BIR Ruling No. 132-99 to the effect that
instructions or advises from abroad on the management of funds located in the
Philippines which do not involve transfer of funds from abroad are not subject to DST.
BIR Ruling No. 132-99 reads:
Date: August 23, 1999
FERRY TOLEDO VICTORINO GONZAGA
& ASSOCIATES
G/F AFC Building, Alfaro St.
Salcedo Village, Makati
Metro Manila
Attn: Atty. Tomas C. Toledo
Tax Counsel

The foregoing transactions are carried out under instruction from abroad and [do] not
involve actual fund transfer since the funds are already in the Philippine accounts. The
instructions are in the form of electronic messages (i.e., SWIFT MT100 or MT 202
and/or MT 521). In both cases, the payment is against the delivery of investments
purchased. The purchase of investments and the payment comprise one single
transaction. DST has already been paid under Section 176 for the investment
purchase.
B. Other transactions:
An overseas client sends an instruction to its bank in the Philippines to either:
(i) debit its local or foreign currency account and to pay a named
recipient, who may be another bank, a corporate entity or an
individual in the Philippines; or
(ii) receive funds from another bank in the Philippines for deposit
to its account and to pay a named recipient, who may be another
bank, a corporate entity or an individual in the Philippines."

The above instruction is in the form of an electronic message (i.e., SWIFT MT 100 or
MT 202) or tested cable, and may not refer to any particular transaction.
The opening and maintenance by a non-resident of local or foreign currency accounts
with a bank in the Philippines is permitted by the Bangko Sentral ng Pilipinas, subject
to certain conditions.
In reply, please be informed that pursuant to Section 181 of the 1997 Tax Code, which
provides that
SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others. Upon any
acceptance or payment of any bill of exchange or order for the payment of money
purporting to be drawn in a foreign country but payable in the Philippines, there shall
be collected a documentary stamp tax of Thirty centavos (P0.30) on each Two
hundred pesos (P200), or fractional part thereof, of the face value of any such bill of
exchange, or order, or Philippine equivalent of such value, if expressed in foreign
currency. (Underscoring supplied.)
a documentary stamp tax shall be imposed on any bill of exchange or order for
payment purporting to be drawn in a foreign country but payable in the Philippines.
Under the foregoing provision, the documentary stamp tax shall be levied on the
instrument, i.e., a bill of exchange or order for the payment of money, which purports
to draw money from a foreign country but payable in the Philippines. In the instant
case, however, while the payor is residing outside the Philippines, he maintains a local
and foreign currency account in the Philippines from where he will draw the money
intended to pay a named recipient. The instruction or order to pay shall be made
through an electronic message, i.e., SWIFT MT 100 or MT 202 and/or MT 521.
Consequently, there is no negotiable instrument to be made, signed or issued by the
payee. In the meantime, such electronic instructions by the non-resident payor cannot
be considered as a transaction per se considering that the same do not involve any
transfer of funds from abroad or from the place where the instruction originates.
Insofar as the local bank is concerned, such instruction could be considered only as a
memorandum and shall be entered as such in its books of accounts. The actual
debiting of the payors account, local or foreign currency account in the Philippines, is
the actual transaction that should be properly entered as such.
Under the Documentary Stamp Tax Law, the mere withdrawal of money from a bank
deposit, local or foreign currency account, is not subject to DST, unless the account so

maintained is a current or checking account, in which case, the issuance of the check
or bank drafts is subject to the documentary stamp tax imposed under Section 179 of
the 1997 Tax Code. In the instant case, and subject to the physical impossibility on the
part of the payor to be present and prepare and sign an instrument purporting to pay a
certain obligation, the withdrawal and payment shall be made in cash. In this light, the
withdrawal shall not be subject to documentary stamp tax. The case is parallel to an
automatic bank transfer of local funds from a savings account to a checking account
maintained by a depositor in one bank.
Likewise, the receipt of funds from another bank in the Philippines for deposit to the
payees account and thereafter upon instruction of the non-resident depositor-payor,
through an electronic message, the depository bank to debit his account and pay a
named recipient shall not be subject to documentary stamp tax.
It should be noted that the receipt of funds from another local bank in the Philippines
by a local depository bank for the account of its client residing abroad is part of its
regular banking transaction which is not subject to documentary stamp tax. Neither
does the receipt of funds makes the recipient subject to the documentary stamp tax.
The funds are deemed to be part of the deposits of the client once credited to his
account, and which, thereafter can be disposed in the manner he wants. The payorclients further instruction to debit his account and pay a named recipient in the
Philippines does not involve transfer of funds from abroad. Likewise, as stated earlier,
such debit of local or foreign currency account in the Philippines is not subject to the
documentary stamp tax under the aforementioned Section 181 of the Tax Code.
In the light of the foregoing, this Office hereby holds that the instruction made through
an electronic message by non-resident payor-client to debit his local or foreign
currency account maintained in the Philippines and to pay a certain named recipient
also residing in the Philippines is not the transaction contemplated under Section 181
of the 1997 Tax Code. Such being the case, such electronic instruction purporting to
draw funds from a local account intended to be paid to a named recipient in the
Philippines is not subject to documentary stamp tax imposed under the foregoing
Section.
This ruling is being issued on the basis of the foregoing facts as represented.
However, if upon investigation it shall be disclosed that the facts are different, this
ruling shall be considered null and void.
Very truly yours,

(Sgd.) BEETHOVEN L. RUALO

Commissioner of Internal Revenue8
With the above BIR Ruling as its basis, HSBC filed on October 8, 1999 an
administrative claim for the refund of the amount of P19,572,992.10 allegedly
representing erroneously paid DST to the BIR for the period covering September to
December 1997.
Subsequently, on January 31, 2000, HSBC filed another administrative claim for the
refund of the amount ofP32,904,437.30 allegedly representing erroneously paid DST
to the BIR for the period covering January to December 1998.
As its claims for refund were not acted upon by the BIR, HSBC subsequently brought
the matter to the CTA as CTA Case Nos. 5951 and 6009, respectively, in order to
suspend the running of the two-year prescriptive period.
The CTA Decisions dated May 2, 2002 in CTA Case No. 6009 and dated December
18, 2002 in CTA Case No. 5951 favored HSBC. Respondent Commissioner of Internal
Revenue was ordered to refund or issue a tax credit certificate in favor of HSBC in the
reduced amounts of P30,360,570.75 in CTA Case No. 6009 and P16,436,395.83 in
CTA Case No. 5951, representing erroneously paid DST that have been sufficiently
substantiated with documentary evidence. The CTA ruled that HSBC is entitled to a
tax refund or tax credit because Sections 180 and 181 of the 1997 Tax Code do not
apply to electronic message instructions transmitted by HSBCs non-resident investorclients:
The instruction made through an electronic message by a nonresident investor-client,
which is to debit his local or foreign currency account in the Philippines and pay a
certain named recipient also residing in the Philippines is not the transaction
contemplated in Section 181 of the Code. In this case, the withdrawal and payment
shall be made in cash. It is parallel to an automatic bank transfer of local funds from a
savings account to a checking account maintained by a depositor in one bank. The act
of debiting the account is not subject to the documentary stamp tax under Section
181. Neither is the transaction subject to the documentary stamp tax under Section
180 of the same Code. These electronic message instructions cannot be considered
negotiable instruments as they lack the feature of negotiability, which, is the ability to
be transferred (Words and Phrases).

These instructions are considered as mere memoranda and entered as such in the
books of account of the local bank, and the actual debiting of the payors local or
foreign currency account in the Philippines is the actual transaction that should be
properly entered as such.9
The respective dispositive portions of the Decisions dated May 2, 2002 in CTA Case
No. 6009 and dated December 18, 2002 in CTA Case No. 5951 read:
II. CTA Case No. 6009
WHEREFORE, in the light of all the foregoing, the instant Petition for Review is
PARTIALLY GRANTED. Respondent is hereby ORDERED to REFUND or ISSUE A
TAX CREDIT CERTIFICATE in favor of Petitioner the amount of P30,360,570.75
representing erroneous payment of documentary stamp tax for the taxable year
1998.10
II. CTA Case No. 5951
WHEREFORE, in the light of the foregoing, the instant petition is hereby partially
granted. Accordingly, respondent is hereby ORDERED to REFUND, or in the
alternative, ISSUE A TAX CREDIT CERTIFICATE in favor of the petitioner in the
reduced amount of P16,436,395.83 representing erroneously paid documentary stamp
tax for the months of September 1997 to December 1997.11
However, the Court of Appeals reversed both decisions of the CTA and ruled that the
electronic messages of HSBCs investor-clients are subject to DST. The Court of
Appeals explained:
At bar, [HSBC] performs custodial services in behalf of its investor-clients as regards
their passive investments in the Philippines mainly involving shares of stocks in
domestic corporations. These investor-clients maintain Philippine peso and/or foreign
currency accounts with [HSBC]. Should they desire to purchase shares of stock and
other investments securities in the Philippines, the investor-clients send their
instructions and advises via electronic messages from abroad to [HSBC] in the form of
SWIFT MT 100, MT 202, or MT 521 directing the latter to debit their local or foreign
currency account and to pay the purchase price upon receipt of the securities (CTA
Decision, pp. 1-2; Rollo, pp. 41-42). Pursuant to Section 181 of the NIRC, [HSBC] was
thus required to pay [DST] based on its acceptance of these electronic messages

which, as [HSBC] readily admits in its petition filed before the [CTA], were essentially
orders to pay the purchases of securities made by its client-investors (Rollo, p. 60).
Appositely, the BIR correctly and legally assessed and collected the [DST] from
[HSBC] considering that the said tax was levied against the acceptances and
payments by [HSBC] of the subject electronic messages/orders for payment. The
issue of whether such electronic messages may be equated as a written document
and thus be subject to tax is beside the point. As We have already stressed, Section
181 of the law cited earlier imposes the [DST] not on the bill of exchange or order for
payment of money but on the acceptance or payment of the said bill or order. The
acceptance of a bill or order is the signification by the drawee of its assent to the order
of the drawer to pay a given sum of money while payment implies not only the assent
to the said order of the drawer and a recognition of the drawers obligation to pay such
aforesaid sum, but also a compliance with such obligation (Philippine National Bank
vs. Court of Appeals, 25 SCRA 693 [1968]; Prudential Bank vs. Intermediate Appellate
Court, 216 SCRA 257 [1992]). What is vital to the valid imposition of the [DST] under
Section 181 is the existence of the requirement of acceptance or payment by the
drawee (in this case, [HSBC]) of the order for payment of money from its investorclients and that the said order was drawn from a foreign country and payable in the
Philippines. These requisites are surely present here.
It would serve the parties well to understand the nature of the tax being imposed in the
case at bar. In Philippine Home Assurance Corporation vs. Court of Appeals (301
SCRA 443 [1999]), the Supreme Court ruled that [DST is] levied on the exercise by
persons of certain privileges conferred by law for the creation, revision, or termination
of specific legal relationships through the execution of specific instruments,
independently of the legal status of the transactions giving rise thereto. In the same
case, the High Court also declared citing Du Pont vs. United States (300 U.S. 150,
153 [1936])
The tax is not upon the business transacted but is an excise upon the privilege,
opportunity, or facility offered at exchanges for the transaction of the business. It is an
excise upon the facilities used in the transaction of the business separate and apart
from the business itself. x x x.
To reiterate, the subject [DST] was levied on the acceptance and payment made by
[HSBC] pursuant to the order made by its client-investors as embodied in the cited
electronic messages, through which the herein parties privilege and opportunity to
transact business respectively as drawee and drawers was exercised, separate and

apart from the circumstances and conditions related to such acceptance and
subsequent payment of the sum of money authorized by the concerned drawers.
Stated another way, the [DST] was exacted on [HSBCs] exercise of its privilege under
its drawee-drawer relationship with its client-investor through the execution of a
specific instrument which, in the case at bar, is the acceptance of the order for
payment of money. The acceptance of a bill or order for payment may be done in
writing by the drawee in the bill or order itself, or in a separate instrument (Prudential
Bank vs. Intermediate Appellate Court, supra.)Here, [HSBC]s acceptance of the
orders for the payment of money was veritably done in writing in a separate
instrument each time it debited the local or foreign currency accounts of its clientinvestors pursuant to the latters instructions and advises sent by electronic messages
to [HSBC]. The [DST] therefore must be paid upon the execution of the specified
instruments or facilities covered by the tax in this case, the acceptance by [HSBC] of
the order for payment of money sent by the client-investors through electronic
messages. x x x.12
Hence, these petitions.
HSBC asserts that the Court of Appeals committed grave error when it disregarded
the factual and legal conclusions of the CTA. According to HSBC, in the absence of
abuse or improvident exercise of authority, the CTAs ruling should not have been
disturbed as the CTA is a highly specialized court which performs judicial functions,
particularly for the review of tax cases. HSBC further argues that the Commissioner of
Internal Revenue had already settled the issue on the taxability of electronic messages
involved in these cases in BIR Ruling No. 132-99 and reiterated in BIR Ruling No. DA280-2004.13
The Commissioner of Internal Revenue, on the other hand, claims that Section 181 of
the 1997 Tax Code imposes DST on the acceptance or payment of a bill of exchange
or order for the payment of money. The DST under Section 18 of the 1997 Tax Code is
levied on HSBCs exercise of a privilege which is specifically taxed by law. BIR Ruling
No. 132-99 is inconsistent with prevailing law and long standing administrative
practice, respondent is not barred from questioning his own revenue ruling. Tax
refunds like tax exemptions are strictly construed against the taxpayer.14
The Court finds for HSBC.
The Court agrees with the CTA that the DST under Section 181 of the Tax Code is
levied on the acceptance or payment of "a bill of exchange purporting to be drawn in a

foreign country but payable in the Philippines" and that "a bill of exchange is an
unconditional order in writing addressed by one person to another, signed by the
person giving it, requiring the person to whom it is addressed to pay on demand or at
a fixed or determinable future time a sum certain in money to order or to bearer." A bill
of exchange is one of two general forms of negotiable instruments under the
Negotiable Instruments Law.15
The Court further agrees with the CTA that the electronic messages of HSBCs
investor-clients containing instructions to debit their respective local or foreign currency
accounts in the Philippines and pay a certain named recipient also residing in the
Philippines is not the transaction contemplated under Section 181 of the Tax Code as
such instructions are "parallel to an automatic bank transfer of local funds from a
savings account to a checking account maintained by a depositor in one bank." The
Court favorably adopts the finding of the CTA that the electronic messages "cannot be
considered negotiable instruments as they lack the feature of negotiability, which, is
the ability to be transferred" and that the said electronic messages are "mere
memoranda" of the transaction consisting of the "actual debiting of the [investor-clientpayors] local or foreign currency account in the Philippines" and "entered as such in
the books of account of the local bank," HSBC.16

The electronic messages are not signed by the investor-clients as supposed drawers
of a bill of exchange; they do not contain an unconditional order to pay a sum certain
in money as the payment is supposed to come from a specific fund or account of the
investor-clients; and, they are not payable to order or bearer but to a specifically
designated third party. Thus, the electronic messages are not bills of exchange. As
there was no bill of exchange or order for the payment drawn abroad and made
payable here in the Philippines, there could have been no acceptance or payment that
will trigger the imposition of the DST under Section 181 of the Tax Code.
Section 181 of the 1997 Tax Code, which governs HSBCs claim for tax refund for
taxable year 1998 subject of G.R. No. 167728, provides:
SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others. Upon any
acceptance or payment of any bill of exchange or order for the payment of money
purporting to be drawn in a foreign country but payable in the Philippines, there shall
be collected a documentary stamp tax of Thirty centavos (P0.30) on each Two
hundred pesos (P200), or fractional part thereof, of the face value of any such bill of
exchange, or order, or the Philippine equivalent of such value, if expressed in foreign
currency. (Emphasis supplied.)

More fundamentally, the instructions given through electronic messages that are
subjected to DST in these cases are not negotiable instruments as they do not comply
with the requisites of negotiability under Section 1 of the Negotiable Instruments Law,
which provides:

Section 230 of the 1977 Tax Code, as amended, which governs HSBCs claim for tax
refund for DST paid during the period September to December 1997 and subject of
G.R. No. 166018, is worded exactly the same as its counterpart provision in the 1997
Tax Code quoted above.

Sec. 1. Form of negotiable instruments. An instrument to be negotiable must conform

to the following requirements:

The origin of the above provision is Section 117 of the Tax Code of 1904,17 which
provided: SECTION 117. The acceptor or acceptors of any bill of exchange or order for
the payment of any sum of money drawn or purporting to be drawn in any foreign
country but payable in the Philippine Islands, shall, before paying or accepting the
same, place thereupon a stamp in payment of the tax upon such document in the
same manner as is required in this Act for the stamping of inland bills of exchange or
promissory notes, and no bill of exchange shall be paid nor negotiated until such
stamp shall have been affixed thereto.18 (Emphasis supplied.)

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

(b) Must contain an unconditional promise or order to pay a sum certain in
money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty.

It then became Section 30(h) of the 1914 Tax Code19:

SEC. 30. Stamp tax upon documents and papers. Upon documents, instruments,
and papers, and upon acceptances, assignments, sales, and transfers of the
obligation, right, or property incident thereto documentary taxes for and in respect of

the transaction so had or accomplished shall be paid as hereinafter prescribed, by the

persons making, signing, issuing, accepting, or transferring the same, and at the time
such act is done or transaction had:
xxxx
(h) Upon any acceptance or payment upon acceptance of any bill of exchange or order
for the payment of money purporting to be drawn in a foreign country but payable in
the Philippine Islands, on each two hundred pesos, or fractional part thereof, of the
face value of any such bill of exchange or order, or the Philippine equivalent of such
value, if expressed in foreign currency, two centavos[.] (Emphasis supplied.)
It was implemented by Section 46 in relation to Section 39 of Revenue Regulations
No. 26,20 as amended:
SEC. 39. A Bill of Exchange is one that "denotes checks, drafts, and all other kinds of
orders for the payment of money, payable at sight or on demand, or after a specific
period after sight or from a stated date."
SEC. 46. Bill of Exchange, etc. When any bill of exchange or order for the payment
of money drawn in a foreign country but payable in this country whether at sight or on
demand or after a specified period after sight or from a stated date, is presented for
acceptance or payment, there must be affixed upon acceptance or payment of
documentary stamp equal to P0.02 for each P200 or fractional part thereof. (Emphasis
supplied.)
It took its present form in Section 218 of the Tax Code of 1939,21 which provided:
SEC. 218. Stamp Tax Upon Acceptance of Bills of Exchange and Others. Upon any
acceptance or payment of any bill of exchange or order for the payment of money
purporting to be drawn in a foreign country but payable in the Philippines, there shall
be collected a documentary stamp tax of four centavos on each two hundred pesos, or
fractional part thereof, of the face value of any such bill of exchange or order, or the
Philippine equivalent of such value, if expressed in foreign currency. (Emphasis
supplied.)
It then became Section 230 of the 1977 Tax Code,22 as amended by Presidential
Decree Nos. 1457 and 1959,which, as stated earlier, was worded exactly as Section
181 of the current Tax Code:

SEC. 230. Stamp tax upon acceptance of bills of exchange and others. Upon any
acceptance or payment of any bill of exchange or order for the payment of money
purporting to be drawn in a foreign country but payable in the Philippines, there shall
be collected a documentary stamp tax of thirty centavos on each two hundred pesos,
or fractional part thereof, of the face value of any such bill of exchange, or order, or the
Philippine equivalent of such value, if expressed in foreign currency. (Emphasis
supplied.)
The pertinent provision of the present Tax Code has therefore remained substantially
the same for the past one hundred years.1wphi1 The identical text and common
history of Section 230 of the 1977 Tax Code, as amended, and the 1997 Tax Code, as
amended, show that the law imposes DST on either (a) the acceptance or (b) the
payment of a foreign bill of exchange or order for the payment of money that was
drawn abroad but payable in the Philippines.
DST is an excise tax on the exercise of a right or privilege to transfer obligations, rights
or properties incident thereto.23 Under Section 173 of the 1997 Tax Code, the persons
primarily liable for the payment of the DST are those (1) making, (2) signing, (3)
issuing, (4) accepting, or (5) transferring the taxable documents, instruments or
papers.24
In general, DST is levied on the exercise by persons of certain privileges conferred by
law for the creation, revision, or termination of specific legal relationships through the
execution of specific instruments. Examples of such privileges, the exercise of which,
as effected through the issuance of particular documents, are subject to the payment
of DST are leases of lands, mortgages, pledges and trusts, and conveyances of real
property.25
As stated above, Section 230 of the 1977 Tax Code, as amended, now Section 181 of
the 1997 Tax Code, levies DST on either (a) the acceptance or (b) the payment of a
foreign bill of exchange or order for the payment of money that was drawn abroad but
payable in the Philippines. In other words, it levies DST as an excise tax on the
privilege of the drawee to accept or pay a bill of exchange or order for the payment of
money, which has been drawn abroad but payable in the Philippines, and on the
corresponding privilege of the drawer to have acceptance of or payment for the bill of
exchange or order for the payment of money which it has drawn abroad but payable in
the Philippines.

Acceptance applies only to bills of exchange.26 Acceptance of a bill of exchange has a

very definite meaning in law.27 In particular, Section 132 of the Negotiable Instruments
Law provides:
Sec. 132. Acceptance; how made, by and so forth. The acceptance of a bill [of
exchange28] is the signification by the drawee of his assent to the order of the drawer.
The acceptance must be in writing and signed by the drawee. It must not express that
the drawee will perform his promise by any other means than the payment of money.
Under the law, therefore, what is accepted is a bill of exchange, and the acceptance of
a bill of exchange is both the manifestation of the drawees consent to the drawers
order to pay money and the expression of the drawees promise to pay. It is "the act by
which the drawee manifests his consent to comply with the request contained in the
bill of exchange directed to him and it contemplates an engagement or promise to
pay."29 Once the drawee accepts, he becomes an acceptor.30 As acceptor, he engages
to pay the bill of exchange according to the tenor of his acceptance.31
Acceptance is made upon presentment of the bill of exchange, or within 24 hours after
such presentment.32Presentment for acceptance is the production or exhibition of the
bill of exchange to the drawee for the purpose of obtaining his acceptance. 33
Presentment for acceptance is necessary only in the instances where the law requires
it.34 In the instances where presentment for acceptance is not necessary, the holder of
the bill of exchange can proceed directly to presentment for payment.
Presentment for payment is the presentation of the instrument to the person primarily
liable for the purpose of demanding and obtaining payment thereof.35
Thus, whether it be presentment for acceptance or presentment for payment, the
negotiable instrument has to be produced and shown to the drawee for acceptance or
to the acceptor for payment.
Revenue Regulations No. 26 recognizes that the acceptance or payment (of bills of
exchange or orders for the payment of money that have been drawn abroad but
payable in the Philippines) that is subjected to DST under Section 181 of the 1997 Tax
Code is done after presentment for acceptance or presentment for payment,
respectively. In other words, the acceptance or payment of the subject bill of exchange
or order for the payment of money is done when there is presentment either for
acceptance or for payment of the bill of exchange or order for the payment of money.

Applying the above concepts to the matter subjected to DST in these cases, the
electronic messages received by HSBC from its investor-clients abroad instructing the
former to debit the latter's local and foreign currency accounts and to pay the purchase
price of shares of stock or investment in securities do not properly qualify as either
presentment for acceptance or presentment for payment. There being neither
presentment for acceptance nor presentment for payment, then there was no
acceptance or payment that could have been subjected to DST to speak of.
Indeed, there had been no acceptance of a bill of exchange or order for the payment
of money on the part of HSBC. To reiterate, there was no bill of exchange or order for
the payment drawn abroad and made payable here in the Philippines. Thus, there was
no acceptance as the electronic messages did not constitute the written and signed
manifestation of HSBC to a drawer's order to pay money. As HSBC could not have
been an acceptor, then it could not have made any payment of a bill of exchange or
order for the payment of money drawn abroad but payable here in the Philippines. In
other words, HSBC could not have been held liable for DST under Section 230 of the
1977 Tax Code, as amended, and Section 181 of the 1997 Tax Code as it is not "a
person making, signing, issuing, accepting, or, transferring" the taxable instruments
under the said provision. Thus, HSBC erroneously paid DST on the said electronic
messages for which it is entitled to a tax refund.
WHEREFORE, the petitions are hereby GRANTED and the Decisions dated May 2,
2002 in CTA Case No. 6009 and dated December 18, 2002 in CT A Case No. 5951 of
the Court of Tax Appeals are REINSTATED.
SO ORDERED.

In G.R. No. 184458, Rivera persists in his contention that there was no valid
promissory note and questions the entire ruling of the lower courts. On the other hand,
petitioners in G.R. No. 184472, Spouses Salvador and Violeta Chua (Spouses Chua),
take exception to the appellate courts reduction of the stipulated interest rate of sixty
percent (60%) to twelve percent (12%) per annum.
We proceed to the facts.
G.R. No. 184458

January 14, 2015

RODRIGO RIVERA, Petitioner,

vs.
SPOUSES SALVADOR CHUA AND VIOLETA S. CHUA, Respondents.
x-----------------------x

The parties were friends of long standing having known each other since 1973: Rivera
and Salvador are kumpadres, the former is the godfather of the Spouses Chuas son.
On 24 February 1995, Rivera obtained a loan from the Spouses Chua:
PROMISSORY NOTE
120,000.00

G.R. No. 184472

SPS. SALVADOR CHUA and VIOLETA S. CHUA, Petitioners,
vs.
RODRIGO RIVERA, Respondent.
DECISION
PEREZ, J.:
Before us are consolidated Petitions for Review on Certiorari under Rule 45 of the
Rules of Court assailing the Decision1 of the Court of Appeals in CA-G.R. SP No.
90609 which affirmed with modification the separate rulings of the Manila City trial
courts, the Regional Trial Court, Branch 17 in Civil Case No. 02-1052562 and the
Metropolitan Trial Court (MeTC), Branch 30, in Civil Case No. 163661,3 a case for
collection of a sum of money due a promissory note. While all three (3) lower courts
upheld the validity and authenticity of the promissory note as duly signed by the
obligor, Rodrigo Rivera (Rivera), petitioner in G.R. No. 184458, the appellate court
modified the trial courts consistent awards: (1) the stipulated interest rate of sixty
percent (60%) reduced to twelve percent (12%) per annumcomputed from the date of
judicial or extrajudicial demand, and (2) reinstatement of the award of attorneys fees
also in a reduced amount of P50,000.00.

FOR VALUE RECEIVED, I, RODRIGO RIVERA promise to pay spouses SALVADOR

C. CHUA and VIOLETA SY CHUA, the sum of One Hundred Twenty Thousand
Philippine Currency (P120,000.00) on December 31, 1995.
It is agreed and understood that failure on my part to pay the amount of (120,000.00)
One Hundred Twenty Thousand Pesos on December 31, 1995. (sic) I agree to pay the
sum equivalent to FIVE PERCENT (5%) interest monthly from the date of default until
the entire obligation is fully paid for.
Should this note be referred to a lawyer for collection, I agree to pay the further sum
equivalent to twenty percent (20%) of the total amount due and payable as and for
attorneys fees which in no case shall be less than P5,000.00 and to pay in addition
the cost of suit and other incidental litigation expense.
Any action which may arise in connection with this note shall be brought in the proper
Court of the City of Manila.
Manila, February 24, 1995[.]
(SGD.) RODRIGO RIVERA4

In October 1998, almost three years from the date of payment stipulated in the
promissory note, Rivera, as partial payment for the loan, issued and delivered to the
SpousesChua, as payee, a check numbered 012467, dated 30 December 1998,
drawn against Riveras current account with the Philippine Commercial International
Bank (PCIB) in the amount of P25,000.00.
On 21 December 1998, the Spouses Chua received another check presumably issued
by Rivera, likewise drawn against Riveras PCIB current account, numbered 013224,
duly signed and dated, but blank as to payee and amount. Ostensibly, as per
understanding by the parties, PCIB Check No. 013224 was issued in the amount
ofP133,454.00 with "cash" as payee. Purportedly, both checks were simply partial
payment for Riveras loan in the principal amount of P120,000.00.
Upon presentment for payment, the two checks were dishonored for the reason
"account closed."
As of 31 May 1999, the amount due the Spouses Chua was pegged at P366,000.00
covering the principal ofP120,000.00 plus five percent (5%) interest per month from 1
January 1996 to 31 May 1999.
The Spouses Chua alleged that they have repeatedly demanded payment from Rivera
to no avail. Because of Riveras unjustified refusal to pay, the Spouses Chua were
constrained to file a suit on 11 June 1999. The case was raffled before the MeTC,
Branch 30, Manila and docketed as Civil Case No. 163661.
In his Answer with Compulsory Counterclaim, Rivera countered that: (1) he never
executed the subject Promissory Note; (2) in all instances when he obtained a loan
from the Spouses Chua, the loans were always covered by a security; (3) at the time
of the filing of the complaint, he still had an existing indebtedness to the Spouses
Chua, secured by a real estate mortgage, but not yet in default; (4) PCIB Check No.
132224 signed by him which he delivered to the Spouses Chua on 21 December
1998, should have been issued in the amount of only 1,300.00, representing the
amount he received from the Spouses Chuas saleslady; (5) contrary to the supposed
agreement, the Spouses Chua presented the check for payment in the amount
of P133,454.00; and (6) there was no demand for payment of the amount
of P120,000.00 prior to the encashment of PCIB Check No. 0132224.5
In the main, Rivera claimed forgery of the subject Promissory Note and denied his
indebtedness thereunder.

The MeTC summarized the testimonies of both parties respective witnesses:

[The spouses Chuas] evidence include[s] documentary evidence and oral evidence
(consisting of the testimonies of [the spouses] Chua and NBI Senior Documents
Examiner Antonio Magbojos). x x x
xxxx
Witness Magbojos enumerated his credentials as follows: joined the NBI (1987); NBI
document examiner (1989); NBI Senior Document Examiner (1994 to the date he
testified); registered criminologist; graduate of 18th Basic Training Course [i]n
Questioned Document Examination conducted by the NBI; twice attended a seminar
on US Dollar Counterfeit Detection conducted by the US Embassy in Manila; attended
a seminar on Effective Methodology in Teaching and Instructional design conducted by
the NBI Academy; seminar lecturer on Questioned Documents, Signature Verification
and/or Detection; had examined more than a hundred thousand questioned
documents at the time he testified.
Upon [order of the MeTC], Mr. Magbojos examined the purported signature of [Rivera]
appearing in the Promissory Note and compared the signature thereon with the
specimen signatures of [Rivera] appearing on several documents. After a thorough
study, examination, and comparison of the signature on the questioned document
(Promissory Note) and the specimen signatures on the documents submitted to him,
he concluded that the questioned signature appearing in the Promissory Note and the
specimen signatures of [Rivera] appearing on the other documents submitted were
written by one and the same person. In connection with his findings, Magbojos
prepared Questioned Documents Report No. 712-1000 dated 8 January 2001, with
the following conclusion: "The questioned and the standard specimen signatures
RODGRIGO RIVERA were written by one and the same person."
[Rivera] testified as follows: he and [respondent] Salvador are "kumpadres;" in May
1998, he obtained a loan from [respondent] Salvador and executed a real estate
mortgage over a parcel of land in favor of [respondent Salvador] as collateral; aside
from this loan, in October, 1998 he borrowed P25,000.00 from Salvador and issued
PCIB Check No. 126407 dated 30 December 1998; he expressly denied execution of
the Promissory Note dated 24 February 1995 and alleged that the signature appearing
thereon was not his signature; [respondent Salvadors] claim that PCIB Check No.
0132224 was partial payment for the Promissory Note was not true, the truth being
that he delivered the check to [respondent Salvador] with the space for amount left

blank as he and [respondent] Salvador had agreed that the latter was to fill it in with
the amount of P1,300.00 which amount he owed [the spouses Chua]; however, on 29
December 1998 [respondent] Salvador called him and told him that he had
written P133,454.00 instead of P1,300.00; x x x. To rebut the testimony of NBI Senior
Document Examiner Magbojos, [Rivera] reiterated his averment that the signature
appearing on the Promissory Note was not his signature and that he did not execute
the Promissory Note.6
After trial, the MeTC ruled in favor of the Spouses Chua:
WHEREFORE, [Rivera] is required to pay [the spouses Chua]: P120,000.00 plus
stipulated interest at the rate of 5% per month from 1 January 1996, and legal interest
at the rate of 12% percent per annum from 11 June 1999, as actual and compensatory
damages; 20% of the whole amount due as attorneys fees.7
On appeal, the Regional Trial Court, Branch 17, Manila affirmed the Decision of the
MeTC, but deleted the award of attorneys fees to the Spouses Chua:
WHEREFORE, except as to the amount of attorneys fees which is hereby deleted, the
rest of the Decision dated October 21, 2002 is hereby AFFIRMED.8

1. WHETHER OR NOT THE HONORABLE COURT OF

APPEALS ERRED IN UPHOLDING THE RULING OF THE RTC
AND M[e]TC THAT THERE WAS A VALID PROMISSORY NOTE
EXECUTED BY [RIVERA].
2. WHETHER OR NOT THE HONORABLE COURT OF
APPEALS ERRED IN HOLDING THAT DEMAND IS NO
LONGER NECESSARY AND IN APPLYING THE PROVISIONS
OF THE NEGOTIABLE INSTRUMENTS LAW.
3. WHETHER OR NOT THE HONORABLE COURT OF
APPEALS ERRED IN AWARDING ATTORNEYS FEES DESPITE
THE FACT THAT THE SAME HAS NO BASIS IN FACT AND IN
LAW AND DESPITE THE FACT THAT [THE SPOUSES CHUA]
DID NOT APPEAL FROM THE DECISION OF THE RTC
DELETING THE AWARD OF ATTORNEYS FEES.10
B. In G.R. No. 184472

Both trial courts found the Promissory Note as authentic and validly bore the signature
of Rivera. Undaunted, Rivera appealed to the Court of Appeals which affirmed Riveras
liability under the Promissory Note, reduced the imposition of interest on the loan from
60% to 12% per annum, and reinstated the award of attorneys fees in favor of the
Spouses Chua:

[WHETHER OR NOT] THE HONORABLE COURT OF APPEALS COMMITTED

GROSS LEGAL ERROR WHEN IT MODIFIED THE APPEALED JUDGMENT BY
REDUCING THE INTEREST RATE FROM 60% PER ANNUM TO 12% PER ANNUM
IN SPITE OF THE FACT THAT RIVERA NEVER RAISED IN HIS ANSWER THE
DEFENSE THAT THE SAID STIPULATED RATE OF INTEREST IS EXORBITANT,
UNCONSCIONABLE, UNREASONABLE, INEQUITABLE, ILLEGAL, IMMORAL OR
VOID.11

WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the

MODIFICATION that the interest rate of 60% per annum is hereby reduced to12% per
annum and the award of attorneys fees is reinstated atthe reduced amount
of P50,000.00 Costs against [Rivera].9

As early as 15 December 2008, wealready disposed of G.R. No. 184472 and denied
the petition, via a Minute Resolution, for failure to sufficiently show any reversible error
in the ruling of the appellate court specifically concerning the correct rate of interest on
Riveras indebtedness under the Promissory Note.12

Hence, these consolidated petitions for review on certiorariof Rivera in G.R. No.
184458 and the Spouses Chua in G.R. No. 184472, respectively raising the following
issues:

On 26 February 2009, Entry of Judgment was made in G.R. No. 184472.

Thus, what remains for our disposition is G.R. No. 184458, the appeal of Rivera
questioning the entire ruling of the Court of Appeals in CA-G.R. SP No. 90609.

A. In G.R. No. 184458

Rivera continues to deny that heexecuted the Promissory Note; he claims that given
his friendship withthe Spouses Chua who were money lenders, he has been able to

maintain a loan account with them. However, each of these loan transactions was
respectively "secured by checks or sufficient collateral."
Rivera points out that the Spouses Chua "never demanded payment for the loan nor
interest thereof (sic) from [Rivera] for almost four (4) years from the time of the alleged
default in payment [i.e., after December 31, 1995]."13
On the issue of the supposed forgery of the promissory note, we are not inclined to
depart from the lower courts uniform rulings that Rivera indeed signed it.
Rivera offers no evidence for his asseveration that his signature on the promissory
note was forged, only that the signature is not his and varies from his usual signature.
He likewise makes a confusing defense of having previously obtained loans from the
Spouses Chua who were money lenders and who had allowed him a period of "almost
four (4) years" before demanding payment of the loan under the Promissory Note.
First, we cannot give credence to such a naked claim of forgery over the testimony of
the National Bureau of Investigation (NBI) handwriting expert on the integrity of the
promissory note. On that score, the appellate court aptly disabled Riveras contention:
[Rivera] failed to adduce clear and convincing evidence that the signature on the
promissory note is a forgery. The fact of forgery cannot be presumed but must be
proved by clear, positive and convincing evidence. Mere variance of signatures cannot
be considered as conclusive proof that the same was forged. Save for the denial of
Rivera that the signature on the note was not his, there is nothing in the records to
support his claim of forgery. And while it is true that resort to experts is not mandatory
or indispensable to the examination of alleged forged documents, the opinions of
handwriting experts are nevertheless helpful in the courts determination of a
documents authenticity.
To be sure, a bare denial will not suffice to overcome the positive value of the
promissory note and the testimony of the NBI witness. In fact, even a perfunctory
comparison of the signatures offered in evidence would lead to the conclusion that the
signatures were made by one and the same person.
It is a basic rule in civil cases that the party having the burden of proof must establish
his case by preponderance of evidence, which simply means "evidence which is of
greater weight, or more convincing than that which is offered in opposition to it."

Evaluating the evidence on record, we are convinced that [the Spouses Chua] have
established a prima faciecase in their favor, hence, the burden of evidence has shifted
to [Rivera] to prove his allegation of forgery. Unfortunately for [Rivera], he failed to
substantiate his defense.14 Well-entrenched in jurisprudence is the rule that factual
findings of the trial court, especially when affirmed by the appellate court, are
accorded the highest degree of respect and are considered conclusive between the
parties.15 A review of such findings by this Court is not warranted except upon a
showing of highly meritorious circumstances, such as: (1) when the findings of a trial
court are grounded entirely on speculation, surmises or conjectures; (2) when a lower
court's inference from its factual findings is manifestly mistaken, absurd or impossible;
(3) when there is grave abuse of discretion in the appreciation of facts; (4) when the
findings of the appellate court go beyond the issues of the case, or fail to notice certain
relevant facts which, if properly considered, will justify a different conclusion; (5) when
there is a misappreciation of facts; (6) when the findings of fact are conclusions
without mention of the specific evidence on which they are based, are premised on the
absence of evidence, or are contradicted by evidence on record.16 None of these
exceptions obtains in this instance. There is no reason to depart from the separate
factual findings of the three (3) lower courts on the validity of Riveras signature
reflected in the Promissory Note.
Indeed, Rivera had the burden ofproving the material allegations which he sets up in
his Answer to the plaintiffs claim or cause of action, upon which issue is joined,
whether they relate to the whole case or only to certain issues in the case.17
In this case, Riveras bare assertion is unsubstantiated and directly disputed by the
testimony of a handwriting expert from the NBI. While it is true that resort to experts is
not mandatory or indispensable to the examination or the comparison of handwriting,
the trial courts in this case, on its own, using the handwriting expert testimony only as
an aid, found the disputed document valid.18
Hence, the MeTC ruled that:
[Rivera] executed the Promissory Note after consideration of the following: categorical
statement of [respondent] Salvador that [Rivera] signed the Promissory Note before
him, in his ([Riveras]) house; the conclusion of NBI Senior Documents Examiner that
the questioned signature (appearing on the Promissory Note) and standard specimen
signatures "Rodrigo Rivera" "were written by one and the same person"; actual view at
the hearing of the enlarged photographs of the questioned signature and the standard
specimen signatures.19

Specifically, Rivera insists that: "[i]f that promissory note indeed exists, it is beyond
logic for a money lender to extend another loan on May 4, 1998 secured by a real
estate mortgage, when he was already in default and has not been paying any interest
for a loan incurred in February 1995."20
We disagree.

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

(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty.

It is likewise likely that precisely because of the long standing friendship of the parties
as "kumpadres," Rivera was allowed another loan, albeit this time secured by a real
estate mortgage, which will cover Riveras loan should Rivera fail to pay. There is
nothing inconsistent with the Spouses Chuas two (2) and successive loan
accommodations to Rivera: one, secured by a real estate mortgage and the other,
secured by only a Promissory Note.

On the other hand, Section 184 of the NIL defines what negotiable promissory note is:
SECTION 184. Promissory Note, Defined. A negotiable promissory note within the
meaning of this Act is an unconditional promise in writing made by one person to
another, signed by the maker, engaging to pay on demand, or at a fixed or
determinable future time, a sum certain in money to order or to bearer. Where a note is
drawn to the makers own order, it is not complete until indorsed by him.

Also completely plausible is thatgiven the relationship between the parties, Rivera was
allowed a substantial amount of time before the Spouses Chua demanded payment of
the obligation due under the Promissory Note.

The Promissory Note in this case is made out to specific persons, herein respondents,
the Spouses Chua, and not to order or to bearer, or to the order of the Spouses Chua
as payees. However, even if Riveras Promissory Note is not a negotiable instrument
and therefore outside the coverage of Section 70 of the NIL which provides that
presentment for payment is not necessary to charge the person liable on the
instrument, Rivera is still liable under the terms of the Promissory Note that he issued.

In all, Riveras evidence or lack thereof consisted only of a barefaced claim of forgery
and a discordant defense to assail the authenticity and validity of the Promissory Note.
Although the burden of proof rested on the Spouses Chua having instituted the civil
case and after they established a prima facie case against Rivera, the burden of
evidence shifted to the latter to establish his defense.21 Consequently, Rivera failed to
discharge the burden of evidence, refute the existence of the Promissory Note duly
signed by him and subsequently, that he did not fail to pay his obligation thereunder.
On the whole, there was no question left on where the respective evidence of the
parties preponderatedin favor of plaintiffs, the Spouses Chua. Rivera next argues
that even assuming the validity of the Promissory Note, demand was still necessary in
order to charge him liable thereunder. Rivera argues that it was grave error on the part
of the appellate court to apply Section 70 of the Negotiable Instruments Law (NIL).22
We agree that the subject promissory note is not a negotiable instrument and the
provisions of the NIL do not apply to this case. Section 1 of the NIL requires the
concurrence of the following elements to be a negotiable instrument:

The Promissory Note is unequivocal about the date when the obligation falls due and
becomes demandable31 December 1995. As of 1 January 1996, Rivera had
already incurred in delay when he failed to pay the amount ofP120,000.00 due to the
Spouses Chua on 31 December 1995 under the Promissory Note.
Article 1169 of the Civil Code explicitly provides:
Art. 1169. Those obliged to deliver or to do something incur in delay from the time the
obligee judicially or extrajudicially demands from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that delay may
exist:

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

(1) When the obligation or the law expressly so declare; or

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

money;

(2) When from the nature and the circumstances of the obligation it appears
that the designation of the time when the thing is to be delivered or the

service is to be rendered was a controlling motive for the establishment of

the contract; or

The liability for damages of those who default, including those who are guilty of delay,
in the performance of their obligations is laid down on Article 1170 24 of the Civil Code.

(3) When demand would be useless, as when the obligor has rendered it
beyond his power to perform.

Corollary thereto, Article 2209 solidifies the consequence of payment of interest as an

indemnity for damages when the obligor incurs in delay:

In reciprocal obligations, neither party incurs in delay if the other does not comply or is
not ready to comply in a proper manner with what is incumbent upon him. From the
moment one of the parties fulfills his obligation, delay by the other begins. (Emphasis
supplied)

Art. 2209. If the obligation consists inthe payment of a sum of money, and the debtor
incurs in delay, the indemnity for damages, there being no stipulation to the contrary,
shall be the payment of the interest agreed upon, and in the absence of stipulation, the
legal interest, which is six percent per annum. (Emphasis supplied)

There are four instances when demand is not necessary to constitute the debtor in
default: (1) when there is an express stipulation to that effect; (2) where the law so
provides; (3) when the period is the controlling motive or the principal inducement for
the creation of the obligation; and (4) where demand would be useless. In the first two
paragraphs, it is not sufficient that the law or obligation fixes a date for performance; it
must further state expressly that after the period lapses, default will commence.

Article 2209 is specifically applicable in this instance where: (1) the obligation is for a
sum of money; (2) the debtor, Rivera, incurred in delay when he failed to pay on or
before 31 December 1995; and (3) the Promissory Note provides for an indemnity for
damages upon default of Rivera which is the payment of a 5%monthly interest from
the date of default.

We refer to the clause in the Promissory Note containing the stipulation of interest:
It is agreed and understood that failure on my part to pay the amount of (P120,000.00)
One Hundred Twenty Thousand Pesos on December 31, 1995. (sic) I agree to pay the
sum equivalent to FIVE PERCENT (5%) interest monthly from the date of default until
the entire obligation is fully paid for.23
which expressly requires the debtor (Rivera) to pay a 5% monthly interest from the
"date of default" until the entire obligation is fully paid for. The parties evidently agreed
that the maturity of the obligation at a date certain, 31 December 1995, will give rise to
the obligation to pay interest. The Promissory Note expressly provided that after 31
December 1995, default commences and the stipulation on payment of interest starts.
The date of default under the Promissory Note is 1 January 1996, the day following 31
December 1995, the due date of the obligation. On that date, Rivera became liable for
the stipulated interest which the Promissory Note says is equivalent to 5% a month. In
sum, until 31 December 1995, demand was not necessary before Rivera could be held
liable for the principal amount of P120,000.00. Thereafter, on 1 January 1996, upon
default, Rivera became liable to pay the Spouses Chua damages, in the form of
stipulated interest.

We do not consider the stipulation on payment of interest in this case as a penal

clause although Rivera, as obligor, assumed to pay additional 5% monthly interest on
the principal amount of P120,000.00 upon default.
Article 1226 of the Civil Code provides:
Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity
for damages and the payment of interests in case of noncompliance, if there isno
stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses
to pay the penalty or is guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the
provisions of this Code.
The penal clause is generally undertaken to insure performance and works as either,
or both, punishment and reparation. It is an exception to the general rules on recovery
of losses and damages. As an exception to the general rule, a penal clause must be
specifically set forth in the obligation.25
In high relief, the stipulation in the Promissory Note is designated as payment of
interest, not as a penal clause, and is simply an indemnity for damages incurred by the

Spouses Chua because Rivera defaulted in the payment of the amount

of P120,000.00. The measure of damages for the Riveras delay is limited to the
interest stipulated in the Promissory Note. In apt instances, in default of stipulation, the
interest is that provided by law.26

be on the merits; (3) the decision must have been rendered by a court having
jurisdiction over the subject matter and the parties; and (4) there must be, between the
first and the second action, identity of parties, of subject matter and of causes of
action.28

In this instance, the parties stipulated that in case of default, Rivera will pay interest at
the rate of 5% a month or 60% per annum. On this score, the appellate court ruled:

In this case, the petitions in G.R. Nos. 184458 and 184472 involve an identity of
parties and subject matter raising specifically errors in the Decision of the Court of
Appeals. Where the Court of Appeals disposition on the propriety of the reduction of
the interest rate was raised by the Spouses Chua in G.R. No. 184472, our ruling
thereon affirming the Court of Appeals is a "bar by prior judgment."

It bears emphasizing that the undertaking based on the note clearly states the date of
payment tobe 31 December 1995. Given this circumstance, demand by the creditor
isno longer necessary in order that delay may exist since the contract itself already
expressly so declares. The mere failure of [Spouses Chua] to immediately demand or
collect payment of the value of the note does not exonerate [Rivera] from his liability
therefrom. Verily, the trial court committed no reversible error when it imposed interest
from 1 January 1996 on the ratiocination that [Spouses Chua] were relieved from
making demand under Article 1169 of the Civil Code.
xxxx
As observed by [Rivera], the stipulated interest of 5% per month or 60% per annum in
addition to legal interests and attorneys fees is, indeed, highly iniquitous and
unreasonable. Stipulated interest rates are illegal if they are unconscionable and the
Court is allowed to temper interest rates when necessary. Since the interest rate
agreed upon is void, the parties are considered to have no stipulation regarding the
interest rate, thus, the rate of interest should be 12% per annum computed from the
date of judicial or extrajudicial demand.27
The appellate court found the 5% a month or 60% per annum interest rate, on top of
the legal interest and attorneys fees, steep, tantamount to it being illegal, iniquitous
and unconscionable. Significantly, the issue on payment of interest has been squarely
disposed of in G.R. No. 184472 denying the petition of the Spouses Chua for failure to
sufficiently showany reversible error in the ruling of the appellate court, specifically the
reduction of the interest rate imposed on Riveras indebtedness under the Promissory
Note. Ultimately, the denial of the petition in G.R. No. 184472 is res judicata in its
concept of "bar by prior judgment" on whether the Court of Appeals correctly reduced
the interest rate stipulated in the Promissory Note.
Res judicata applies in the concept of "bar by prior judgment" if the following requisites
concur: (1) the former judgment or order must be final; (2) the judgment or order must

At the time interest accrued from 1 January 1996, the date of default under the
Promissory Note, the then prevailing rate of legal interest was 12% per annum under
Central Bank (CB) Circular No. 416 in cases involving the loan or for bearance of
money.29 Thus, the legal interest accruing from the Promissory Note is 12% per annum
from the date of default on 1 January 1996. However, the 12% per annumrate of legal
interest is only applicable until 30 June 2013, before the advent and effectivity of
Bangko Sentral ng Pilipinas (BSP) Circular No. 799, Series of 2013 reducing the rate
of legal interest to 6% per annum. Pursuant to our ruling in Nacar v. Gallery
Frames,30 BSP Circular No. 799 is prospectively applied from 1 July 2013. In short, the
applicable rate of legal interest from 1 January 1996, the date when Rivera defaulted,
to date when this Decision becomes final and executor is divided into two periods
reflecting two rates of legal interest: (1) 12% per annum from 1 January 1996 to 30
June 2013; and (2) 6% per annum FROM 1 July 2013 to date when this Decision
becomes final and executory.
As for the legal interest accruing from 11 June 1999, when judicial demand was made,
to the date when this Decision becomes final and executory, such is likewise divided
into two periods: (1) 12% per annum from 11 June 1999, the date of judicial demand
to 30 June 2013; and (2) 6% per annum from 1 July 2013 to date when this Decision
becomes final and executor.31 We base this imposition of interest on interest due
earning legal interest on Article 2212 of the Civil Code which provides that "interest
due shall earn legal interest from the time it is judicially demanded, although the
obligation may be silent on this point."
From the time of judicial demand, 11 June 1999, the actual amount owed by Rivera to
the Spouses Chua could already be determined with reasonable certainty given the
wording of the Promissory Note.32

We cite our recent ruling in Nacar v. Gallery Frames:33

I. When an obligation, regardless of its source, i.e., law, contracts,
quasicontracts, delicts or quasi-delicts is breached, the contravenor can be
held liable for damages. The provisions under Title XVIII on "Damages" of
the Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual
and compensatory damages, the rate of interest, as well as the accrual
thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment
of a sum of money, i.e., a loan or for bearance of money, the
interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded. In the absence of
stipulation, the rate of interest shall be 6% per annum to be
computed from default, i.e., from judicial or extra judicial demand
under and subject to the provisions ofArticle 1169 of the Civil
Code.
2. When an obligation, not constituting a loan or forbearance of
money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the rate
of 6% per annum.1wphi1 No interest, however, shall be
adjudged on unliquidated claims or damages, except when or until
the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is
made judicially or extrajudicially (Art. 1169, Civil Code), but when
such certainty cannot be so reasonably established at the time
the demand is made, the interest shall begin to run only from the
date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of
legal interest shall, in any case, be on the amount finally
adjudged. 3. When the judgment of the court awarding a sum of
money becomes final and executory, the rate of legal interest,
whether the case falls under paragraph 1 or paragraph 2, above,

shall be 6% per annum from such finality until its satisfaction, this
interim period being deemed to be by then an equivalent to a for
bearance of credit. And, in addition to the above, judgments that
have become final and executory prior to July 1, 2013, shall not
be disturbed and shall continue to be implemented applying the
rate of interest fixed therein. (Emphasis supplied)
On the reinstatement of the award of attorneys fees based on the stipulation in the
Promissory Note, weagree with the reduction thereof but not the ratiocination of the
appellate court that the attorneys fees are in the nature of liquidated damages or
penalty. The interest imposed in the Promissory Note already answers as liquidated
damages for Riveras default in paying his obligation. We award attorneys fees, albeit
in a reduced amount, in recognition that the Spouses Chua were compelled to litigate
and incurred expenses to protect their interests.34 Thus, the award ofP50,000.00 as
attorneys fees is proper.
For clarity and to obviate confusion, we chart the breakdown of the total amount owed
by Rivera to the Spouses Chua:

The total amount owing to the Spouses Chua set forth in this Decision shall further
earn legal interest at the rate of 6% per annum computed from its finality until full
payment thereof, the interim period being deemed to be a forbearance of credit.

WHEREFORE, the petition in G.R. No. 184458 is DENIED. The Decision of the Court
of Appeals in CA-G.R. SP No. 90609 is MODIFIED. Petitioner Rodrigo Rivera is
ordered to pay respondents Spouse Salvador and Violeta Chua the following:
(1) the principal amount of P120,000.00;
(2) legal interest of 12% per annumof the principal amount of P120,000.00
reckoned from 1 January 1996 until 30 June 2013;
(3) legal interest of 6% per annumof the principal amount of P120,000.00
form 1 July 2013 to date when this Decision becomes final and executory;
(4) 12% per annumapplied to the total of paragraphs 2 and 3 from 11 June
1999, date of judicial demand, to 30 June 2013, as interest due earning
legal interest;
(5) 6% per annumapplied to the total amount of paragraphs 2 and 3 from 1
July 2013 to date when this Decision becomes final and executor, asinterest
due earning legal interest;
(6) Attorneys fees in the amount of P50,000.00; and
(7) 6% per annum interest on the total of the monetary awards from the
finality of this Decision until full payment thereof.
Costs against petitioner Rodrigo Rivera.
SO ORDERED.

Sometime in 1983, Avelino Violago, President of Violago Motor Sales Corporation

(VMSC), offered to sell a car to his cousin, Pedro F. Violago, and the latters wife,
Florencia. Avelino explained that he needed to sell a vehicle to increase the sales
quota of VMSC, and that the spouses would just have to pay a down payment of PhP
60,500 while the balance would be financed by respondent BA Finance. The spouses
would pay the monthly installments to BA Finance while Avelino would take care of the
documentation and approval of financing of the car. Under these terms, the spouses
then agreed to purchase a Toyota Cressida Model 1983 from VMSC.3

G.R. No. 158262

July 21, 2008

SPS. PEDRO AND FLORENCIA VIOLAGO, Petitioners,

vs.
BA FINANCE CORPORATION and AVELINO VIOLAGO, Respondents.
DECISION
VELASCO, JR., J.:
This is a Petition for Review on Certiorari of the August 20, 2002 Decision1 and May
15, 2003 Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No. 48489 entitled
BA Finance Corporation, Plaintiff-Appellee v. Sps. Pedro and Florencia Violago,
Defendants and Third Party Plaintiffs-Appellants v. Avelino Violago, Third Party
Defendant-Appellant. Petitioners-spouses Pedro and Florencia Violago pray for the
reversal of the appellate courts ruling which held them liable to respondent BA
Finance Corporation (BA Finance) under a promissory note and a chattel mortgage.
Petitioners likewise pray that respondent Avelino Violago be adjudged directly liable to
BA Finance.
The Facts

On August 4, 1983, the spouses and Avelino signed a promissory note under which
they bound themselves to pay jointly and severally to the order of VMSC the amount of
PhP 209,601 in 36 monthly installments of PhP 5,822.25 a month, the first installment
to be due and payable on September 16, 1983. Avelino prepared a Disclosure
Statement of Loan/Credit Transportation which showed the net purchase price of the
vehicle, down payment, balance, and finance charges. VMSC then issued a sales
invoice in favor of the spouses with a detailed description of the Toyota Cressida car.
In turn, the spouses executed a chattel mortgage over the car in favor of VMSC as
security for the amount of PhP 209,601. VMSC, through Avelino, endorsed the
promissory note to BA Finance without recourse. After receiving the amount of PhP
209,601, VMSC executed a Deed of Assignment of its rights and interests under the
promissory note and chattel mortgage in favor of BA Finance. Meanwhile, the spouses
remitted the amount of PhP 60,500 to VMSC through Avelino.4
The sales invoice was filed with the Land Transportation Office (LTO)-Baliwag Branch,
which issued Certificate of Registration No. 0137032 in the name of Pedro on August
8, 1983. The spouses were unaware that the same car had already been sold in 1982
to Esmeraldo Violago, another cousin of Avelino, and registered in Esmeraldos name
by the LTO-San Rafael Branch. Despite the spouses demand for the car and Avelinos
repeated assurances, there was no delivery of the vehicle. Since VMSC failed to
deliver the car, Pedro did not pay any monthly amortization to BA Finance. 5
On March 1, 1984, BA Finance filed with the Regional Trial Court (RTC), Branch 116 in
Pasay City a complaint for Replevin with Damages against the spouses. The
complaint, docketed as Civil Case No. 1628-P, prayed for the delivery of the vehicle in
favor of BA Finance or, if delivery cannot be effected, for the payment of PhP
199,049.41 plus penalty at the rate of 3% per month from February 15, 1984 until fully
paid. BA Finance also asked for the payment of attorneys fees, liquidated damages,
replevin bond premium, expenses in the seizure of the vehicle, and costs of suit. The
RTC issued an Order of Replevin on March 28, 1984. The Violago spouses, as
defendants a quo, were declared in default for failing to file an answer. Eventually, the

RTC rendered on December 3, 1984 a decision in favor of BA Finance. A writ of

execution was thereafter issued on January 11, 1985, followed by an alias writ of
execution.6
In the meantime, Esmeraldo conveyed the vehicle to Jose V. Olvido who was then
issued Certificate of Registration No. 0014830-4 by the LTO-Cebu City Branch on April
29, 1985. On May 8, 1987, Jose executed a Chattel Mortgage over the vehicle in favor
of Generoso Lopez as security for a loan covered by a promissory note in the amount
of PhP 260,664. This promissory note was later endorsed to BA Finance, Cebu City
branch.7
On August 21, 1989, the spouses Violago filed a Motion for Reconsideration and
Motion to Quash Writ of Execution on the basis of lack of a valid service of summons
on them, among other reasons. The RTC denied the motions; hence, the spouses filed
a petition for certiorari under Rule 65 before the CA, docketed as CA G.R. No. 2002SP. On May 31, 1991, the CA nullified the RTCs order. This CA decision became final
and executory.
On January 28, 1992, the spouses filed their Answer before the RTC, alleging the
following: they never received the vehicle from VMSC; the vehicle was previously sold
to Esmeraldo; BA Finance was not a holder in due course under Section 59 of
the Negotiable Instruments Law (NIL); and the recourse of BA Finance should be
against VMSC. On February 25, 1995, the Violago spouses, with prior leave of court,
filed a Third Party Complaint against Avelino praying that he be held liable to them in
the event that they be held liable to BA Finance, as well as for damages. VMSC was
not impleaded as third party defendant. In his Motion to Dismiss and Answer, Avelino
contended that he was not a party to the transaction personally, but VMSC. Avelinos
motion was denied and the third party complaint against him was entertained by the
trial court. Subsequently, the spouses belabored to prove that they affixed their
signatures on the promissory note and chattel mortgage in favor of VMSC in blank.8
The RTC rendered a Decision on March 5, 1994, finding for BA Finance but against
the Violago spouses. The RTC, however, declared that they are entitled to be
indemnified by Avelino. The dispositive portion of the RTCs decision reads:
WHEREFORE, defendant-[third]-party plaintiffs spouses Pedro F. Violago and
Florencia R. Violago are ordered to deliver to plaintiff BA Finance Corporation, at its
principal office the BAFC Building, Gamboa St., Legaspi Village, Makati, Metro Manila
the Toyota Cressida car, model 1983, bearing Engine No. 21R-02854117, and with

Serial No. RX60-804614, covered by the deed of chattel mortgage dated August 4,
1983; or if such delivery cannot be made, to pay, jointly and severally, to the plaintiff
the sum of P198,003.06 together with the penalty [thereon] at three percent (3%) a
month, from March 1, 1984, until the amount is fully paid.
In either case, the defendant-third-party plaintiffs are required to pay, jointly and
severally, to the plaintiff a sum equivalent to twenty-five percent (25%) of P198,003.06
as attorneys fees, and another amount also equivalent to twenty five percent (25%) of
the said unpaid balance, as liquidated damages. The defendant-third party-plaintiffs
are also required to shoulder the litigation expenses and costs.1awphil
As indemnification, third-party defendant Avelino Violago is ordered to deliver to
defendants-third-party plaintiffs spouses Pedro F. Violago and Florencia R. Violago the
aforedescribed motor vehicle; or if such delivery is not possible, to pay to the said
spouses the sum of P198,003.06, together with the penalty thereon at three (3%) a
month from March 1, 1984, until the amount is entirely paid.
In either case, the third-party defendant should pay to the defendant-third-party
plaintiffs spouses a sum equivalent to twenty-five percent (25%) of P198,003.06 as
attorneys fees, and another sum equivalent also to twenty-five percent (25%) of the
said unpaid balance, as liquidated damages.
Third-party defendant Avelino Violago is further ordered to return to the third-party
plaintiffs the sum of P60,500.00 they paid to him as down payment for the car; and to
pay them P15,000.00 as moral damages; P10,000.00 as exemplary damages; and
reimburse them for all the expenses and costs of the suit.
The counterclaims of the defendants and third-party defendant, for lack of merit, are
dismissed.9
The Ruling of the CA
Petitioners-spouses and Avelino appealed to the CA. The spouses argued that the
promissory note is a negotiable instrument; hence, the trial court should have applied
the NIL and not the Civil Code. The spouses also asserted that since VMSC was not
the owner of the vehicle at the time of sale, the sale was null and void for the failure in
the "cause or consideration" of the promissory note, which in this case was the sale
and delivery of the vehicle. The spouses also alleged that BA Finance was not a
holder in due course of the note since it knew, through its Cebu City branch, that the

car was never delivered to the spouses.10 On the other hand, Avelino prayed for the
dismissal of the complaint against him because he was not a party to the transaction,
and for an order to the spouses to pay him moral damages and costs of suit.
The appellate court ruled that the promissory note was a negotiable instrument and
that BA Finance was a holder in due course, applying Secs. 8, 24, and 52 of the NIL.
The CA faulted petitioners for failing to implead VMSC, the seller of the vehicle and
creditor in the promissory note, as a party in their Third Party Complaint. Citing Salas
v. Court of Appeals,11 the appellate court reasoned that since VMSC is an
indispensable party, any judgment will not bind it or be enforced against it. The
absence of VMSC rendered the proceedings in the RTC and the judgment in the Third
Party Complaint "null and void, not only as to the absent party but also to the present
parties, namely the Defendants-Appellants (petitioners herein) and the Third-PartyDefendant-Appellant (Avelino Violago)." The CA set aside the trial courts order
holding Avelino liable for damages to the spouses without prejudice to the action of the
spouses against VMSC and Avelino in a separate action.12
The dispositive portion of the August 20, 2002 CA Decision reads:
IN THE LIGHT OF ALL THE FOREGOING, the appeal of the Plaintiffs-Appellants
is DISMISSED. The appeal of the Third-Party-Defendant-Appellant is GRANTED. The
Decision of the Court a quo is AFFIRMED, with the modification that the Third-Party
Complaint against the Third-Party-Defendant-appellant is DISMISSED, without
prejudice. The counterclaims of the Third-Party Defendant Appellant against the
Defendants-Appellants are DISMISSED, also without prejudice.13
The spouses Violago sought but were denied reconsideration by the CA per its
Resolution of May 15, 2003.
The Issues
Petitioners raise the following issues:
WHETHER OR NOT THE HOLDER OF AN INVALID NEGOTIABLE
PROMISSORY NOTE MAY BE CONSIDERED A HOLDER IN DUE
COURSE
WHETHER OR NOT A CHATTEL MORTGAGE SHOULD BE
CONSIDERED VALID DESPITE VITIATION OF CONSENT OF, AND THE

FRAUD COMMITTED ON, THE MORTGAGORS BY AVELINO, AND THE

CLEAR ABSENCE OF OBJECT CERTAIN
WHETHER OR NOT THE VEIL OF CORPORATE ENTITY MAY BE
INVOKED AND SUSTAINED DESPITE THE FRAUD AND DECEPTION OF
AVELINO
The Courts Ruling
The ruling of the appellate court is set aside insofar as it dismissed, without prejudice,
the third party complaint of petitioners against Avelino thereby effectively absolving
Avelino from any liability under the third party complaint.
In addressing the threshold issue of whether BA Finance is a holder in due course of
the promissory note, we must determine whether the note is a negotiable instrument
and, hence, covered by the NIL. In their appeal to the CA, petitioners argued that the
promissory note is a negotiable instrument and that the provisions of the NIL, not the
Civil Code, should be applied. In the present petition, however, petitioners claim that
Article 1318 of the Civil Code14should be applied since their consent was vitiated by
fraud, and, thus, the promissory note does not carry any legal effect despite its
negotiation. Either way, the petitioners arguments deserve no merit.
The promissory note is clearly negotiable. The appellate court was correct in finding all
the requisites of a negotiable instrument present. The NIL 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

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

otherwise indicated therein with reasonable certainty.
The promissory note signed by petitioners reads:
209,601.00 Makati, Metro Manila, Philippines, August 4, 1983
For value received, I/we, jointly and severally, promise to pay to the order of VIOLAGO
MOTOR SALES CORPORATION, its office, the principal sum of TWO HUNDRED
NINE THOUSAND SIX HUNDRED ONE ONLY Pesos (P209,601.00), Philippines
Currency, with interest at the rate stipulated herein below, in installments as follows:
Thirty Six (36) successive monthly installments of P5,822.25, the first installment to be
paid on 9-16-83, and the succeeding monthly installments on the 16th day of each and
every succeeding month thereafter until the account is fully paid, provided that the
penalty charge of three (3%) per cent per month or a fraction thereof shall be added
on each unpaid installment from maturity thereof until fully paid.
xxxx
Notice of demand, presentment, dishonor and protest are hereby waived.

The promissory note clearly satisfies the requirements of a negotiable instrument

under the NIL. It is in writing; signed by the Violago spouses; has an unconditional
promise to pay a certain amount, i.e., PhP 209,601, on specific dates in the future
which could be determined from the terms of the note; made payable to the order of
VMSC; and names the drawees with certainty. The indorsement by VMSC to BA
Finance appears likewise to be valid and regular.
The more important issue now is whether or not BA Finance is a holder in due course.
The resolution of this issue will determine whether petitioners defense of fraud and
nullity of the sale could validly be raised against respondent corporation. Sec. 52 of
the NIL provides:
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
that it had been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no notice of any infirmity
in the instrument or defect in the title of the person negotiating it.
The law presumes that a holder of a negotiable instrument is a holder thereof in due
course. 16 In this case, the CA is correct in finding that BA Finance meets all the
foregoing requisites:
In the present recourse, on its face, (a) the "Promissory Note", Exhibit "A", is
complete and regular; (b) the "Promissory Note" was endorsed by the VMSC in favor
of the Appellee; (c) the Appellee, when it accepted the Note, acted in good faith and
for value; (d) the Appellee was never informed, before and at the time the
"Promissory Note" was endorsed to the Appellee, that the vehicle sold to the
Defendants-Appellants was not delivered to the latter and that VMSC had already
previously sold the vehicle to Esmeraldo Violago. Although Jose Olvido mortgaged the
vehicle to Generoso Lopez, who assigned his rights to the BA Finance Corporation
(Cebu Branch), the same occurred only on May 8, 1987, much later than August 4,

1983, when VMSC assigned its rights over the "Chattel Mortgage" by the
Defendants-Appellants to the Appellee. Hence, Appellee was a holder in due course.17

respect to the transaction attacked so that the corporate entity as to this

transaction had at the time no separate mind, will or existence of its own;

In the hands of one other than a holder in due course, a negotiable instrument is
subject to the same defenses as if it were non-negotiable.18 A holder in due course,
however, holds the instrument free from any defect of title of prior parties and from
defenses available to prior parties among themselves, and may enforce payment of
the instrument for the full amount thereof.19 Since BA Finance is a holder in due
course, petitioners cannot raise the defense of non-delivery of the object and nullity of
the sale against the corporation. The NIL considers every negotiable instrument prima
facie to have been issued for a valuable consideration.20 In Salas, we held that a party
holding an instrument may enforce payment of the instrument for the full amount
thereof. As such, the maker cannot set up the defense of nullity of the contract of
sale.21 Thus, petitioners are liable to respondent corporation for the payment of the
amount stated in the instrument.

2. Such control must have been used by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal duty,
or dishonest and unjust acts in contravention of plaintiffs legal rights; and

From the third party complaint to the present petition, however, petitioners pray that
the veil of corporate fiction be set aside and Avelino be adjudged directly liable to BA
Finance. Petitioners likewise pray for damages for the fraud committed upon them.
In Concept Builders, Inc. v. NLRC, we held:
It is a fundamental principle of corporation law that a corporation is an entity separate
and distinct from its stockholders and from other corporations to which it may be
connected. But, this separate and distinct personality of a corporation is merely a
fiction created by law for convenience and to promote justice. So, when the notion of
separate juridical personality is used to defeat public convenience, justify wrong,
protect fraud or defend crime, or is used as a device to defeat the labor laws, this
separate personality of the corporation may be disregarded or the veil of corporate
fiction pierced. This is true likewise when the corporation is merely an adjunct, a
business conduit or an alter ego of another corporation.
xxxx
The test in determining the applicability of the doctrine of piercing the veil of corporate
fiction is as follows:
1. Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in

3. The aforesaid control and breach of duty must proximately cause the
injury or unjust loss complained of.22
This case meets the foregoing test. VMSC is a family-owned corporation of which
Avelino was president. Avelino committed fraud in selling the vehicle to petitioners, a
vehicle that was previously sold to Avelinos other cousin, Esmeraldo. Nowhere in the
pleadings did Avelino refute the fact that the vehicle in this case was already
previously sold to Esmeraldo; he merely insisted that he cannot be held liable because
he was not a party to the transaction. The fact that Avelino and Pedro are cousins, and
that Avelino claimed to have a need to increase the sales quota, was likely among the
factors which motivated the spouses to buy the car. Avelino, knowing fully well that the
vehicle was already sold, and with abuse of his relationship with the spouses, still
proceeded with the sale and collected the down payment from petitioners. The trial
court found that the vehicle was not delivered to the spouses. Avelino clearly
defrauded petitioners. His actions were the proximate cause of petitioners loss. He
cannot now hide behind the separate corporate personality of VMSC to escape from
liability for the amount adjudged by the trial court in favor of petitioners.
The fact that VMSC was not included as defendant in petitioners third party complaint
does not preclude recovery by petitioners from Avelino; neither would such noninclusion constitute a bar to the application of the piercing-of-the-corporate-veil
doctrine. We suggested as much in Arcilla v. Court of Appeals, an appellate
proceeding involving petitioner Arcillas bid to avoid the adverse CA decision on the
argument that he is not personally liable for the amount adjudged since the same
constitutes a corporate liability which nevertheless cannot even be enforced against
the corporation which has not been impleaded as a party below. In that case, the
Court found as well-taken the CAs act of disregarding the separate juridical
personality of the corporation and holding its president, Arcilla, liable for the
obligations incurred in the name of the corporation although it was not a party to the
collection suit before the trial court. An excerpt from Arcilla:

x x x In short, even if We are to assume arguendo that the obligation was incurred in
the name of the corporation, the petitioner [Arcilla] would still be personally liable
therefor because for all legal intents and purposes, he and the corporation are one
and the same. Csar Marine Resources, Inc. is nothing more than his business conduit
and alter ego. The fiction of separate juridical personality conferred upon such
corporation by law should be disregarded. Significantly, petitioner does not seriously
challenge the [CAs] application of the doctrine which permits the piercing of the
corporate veil and the disregarding of the fiction of a separate juridical personality; this
is because he knows only too well that from the beginning, he merely used the
corporation for his personal purposes.23
WHEREFORE, the CAs August 20, 2002 Decision and May 15, 2003 Resolution in
CA-G.R. CV No. 48489 are SET ASIDE insofar as they dismissed without prejudice
the third party complaint of petitioners-spouses Pedro and Florencia Violago against
respondent Avelino Violago. The March 5, 1994 Decision of the RTC
is REINSTATED andAFFIRMED. Costs against Avelino Violago.
SO ORDERED.

G.R. No. 72593 April 30, 1987

CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and RODOLFO T.
VERGARA, petitioners,
vs.
IFC LEASING AND ACCEPTANCE CORPORATION, respondent.
Carpio, Villaraza & Cruz Law Offices for petitioners.
Europa, Dacanay & Tolentino for respondent.

GUTIERREZ, JR., J.:

This is a petition for certiorari under Rule 45 of the Rules of Court which assails on
questions of law a decision of the Intermediate Appellate Court in AC-G.R. CV No.
68609 dated July 17, 1985, as well as its resolution dated October 17, 1985, denying
the motion for reconsideration.

On April 5, 1978, the seller-assignor issued the sales invoice for the two 2) units of
tractors (Exh. "3-A"). At the same time, the deed of sale with chattel mortgage with
promissory note was executed (Exh. "2").
Simultaneously with the execution of the deed of sale with chattel mortgage with
promissory note, the seller-assignor, by means of a deed of assignment (E exh. " 1 "),
assigned its rights and interest in the chattel mortgage in favor of the respondent.

The antecedent facts culled from the petition are as follows:

Immediately thereafter, the seller-assignor delivered said two (2) units of "Used"
tractors to the petitioner-corporation's job site and as agreed, the seller-assignor
stationed its own mechanics to supervise the operations of the machines.

The petitioner is a corporation engaged in the logging business. It had for its program
of logging activities for the year 1978 the opening of additional roads, and
simultaneous logging operations along the route of said roads, in its logging
concession area at Baganga, Manay, and Caraga, Davao Oriental. For this purpose, it
needed two (2) additional units of tractors.

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
(t.s.n., May 28, 1980, pp. 68-69).

Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf & Pacific

Company of Manila, through its sister company and marketing arm, Industrial Products
Marketing (the "seller-assignor"), a corporation dealing in tractors and other heavy
equipment business, offered to sell to petitioner-corporation two (2) "Used" Allis
Crawler Tractors, one (1) an HDD-21-B and the other an HDD-16-B.
In order to ascertain the extent of work to which the tractors were to be exposed,
(t.s.n., May 28, 1980, p. 44) 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 seller-assignor assured petitionercorporation that the "Used" Allis Crawler Tractors which were being offered were fit for
the job, and gave the corresponding warranty of ninety (90) days performance of the
machines and availability of parts. (t.s.n., May 28, 1980, pp. 59-66).
With said assurance and warranty, and relying on the seller-assignor'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).

On April 25, 1978, petitioner 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 (E exh. " 5 ").
In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit "5," the
seller-assignor sent to the job site its mechanics to conduct the necessary repairs
(Exhs. "6," "6-A," "6-B," 16 C," "16-C-1," "6-D," and "6-E"), but the tractors did not
come out to be what they should be after the repairs were undertaken because the
units were no longer serviceable (t. s. n., May 28, 1980, p. 78).
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 (t.s.n, May 28, 1980, p. 79).
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 cost (E exh. " 7 ").

No response to this letter, Exhibit "7," was received by the petitioner-corporation and
despite several follow-up calls, 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 of One Million Ninety Three Thousand Seven Hundred Eighty Nine
Pesos & 71/100 (P1,093,789.71), accrued interest of One Hundred Fifty One
Thousand Six Hundred Eighteen Pesos & 86/100 (P151,618.86) as of August 15,
1979, accruing interest thereafter at the rate of twelve (12%) percent per annum,
attorney's fees of Two Hundred Forty Nine Thousand Eighty One Pesos & 71/100
(P249,081.7 1) and costs of suit.
The petitioners filed their amended answer praying for the dismissal of the complaint
and asking the trial court to order the respondent to pay the petitioners damages in an
amount at the sound discretion of the court, Twenty Thousand Pesos (P20,000.00) as
and for attorney's fees, and Five Thousand Pesos (P5,000.00) for expenses of
litigation. The petitioners likewise prayed for such other and further relief as would be
just under the premises.
In a decision dated April 20, 1981, the trial court rendered the following judgment:
WHEREFORE, judgment is hereby rendered:
1. ordering defendants to pay jointly and severally in their official
and personal capacities the principal sum of ONE MILLION
NINETY THREE THOUSAND SEVEN HUNDRED NINETY
EIGHT PESOS & 71/100 (P1,093,798.71) with accrued interest of
ONE HUNDRED FIFTY ONE THOUSAND SIX HUNDRED
EIGHTEEN PESOS & 86/100 (P151,618.,86) as of August 15,
1979 and accruing interest thereafter at the rate of 12% per
annum;
2. ordering defendants to pay jointly and severally attorney's fees
equivalent to ten percent (10%) of the principal and to pay the
costs of the suit.
Defendants' counterclaim is disallowed. (pp. 45-46, Rollo)

On June 8, 1981, the trial court issued an order denying the motion for reconsideration
filed by the petitioners.
Thus, the petitioners appealed to the Intermediate Appellate Court and assigned
therein the following errors:
I
THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER ATLANTIC
GULF AND PACIFIC COMPANY OF MANILA DID NOT APPROVE DEFENDANTSAPPELLANTS CLAIM OF WARRANTY.
II
THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF- APPELLEE IS A
HOLDER IN DUE COURSE OF THE PROMISSORY NOTE AND SUED UNDER SAID
NOTE AS HOLDER THEREOF IN DUE COURSE.
On July 17, 1985, the Intermediate Appellate Court issued the challenged decision
affirming in toto the decision of the trial court. The pertinent portions of the decision
are as follows:
xxx xxx xxx
From the evidence presented by the parties on the issue of
warranty, We are of the considered opinion that aside from the
fact that no provision of warranty appears or is provided in the
Deed of Sale of the tractors and even admitting that in a contract
of sale unless a contrary intention appears, there is an implied
warranty, the defense of breach of warranty, if there is any, as in
this case, does not lie in favor of the appellants and against the
plaintiff-appellee who is the assignee of the promissory note and a
holder of the same in due course. Warranty lies in this case only
between Industrial Products Marketing and Consolidated Plywood
Industries, Inc. The plaintiff-appellant herein upon application by
appellant corporation granted financing for the purchase of the
questioned units of Fiat-Allis Crawler,Tractors.

xxx xxx xxx

In view of the essential elements found in the questioned

promissory note, We opine that the same is legally and
conclusively enforceable against the defendants-appellants.

Holding that breach of warranty if any, is not a defense available

to appellants either to withdraw from the contract and/or demand
a proportionate reduction of the price with damages in either case
(Art. 1567, New Civil Code). We now come to the issue as to
whether the plaintiff-appellee is a holder in due course of the
promissory note.
To begin with, it is beyond arguments that the plaintiff-appellee is
a financing corporation engaged in financing and receivable
discounting extending credit facilities to consumers and industrial,
commercial or agricultural enterprises by discounting or factoring
commercial papers or accounts receivable duly authorized
pursuant to R.A. 5980 otherwise known as the Financing Act.
A study of the questioned promissory note reveals that it is a
negotiable instrument which was discounted or sold to the IFC
Leasing and Acceptance Corporation for P800,000.00 (Exh. "A")
considering the following. it is in writing and signed by the maker;
it contains an unconditional promise to pay a certain sum of
money payable at a fixed or determinable future time; it is payable
to order (Sec. 1, NIL); the promissory note was negotiated when it
was transferred and delivered by IPM to the appellee and duly
endorsed to the latter (Sec. 30, NIL); it was taken in the conditions
that the note was complete and regular upon its face before the
same was overdue and without notice, that it had been previously
dishonored and that the note is in good faith and for value without
notice of any infirmity or defect in the title of IPM (Sec. 52, NIL);
that IFC Leasing and Acceptance Corporation held the instrument
free from any defect of title of prior parties and free from defenses
available to prior parties among themselves and may enforce
payment of the instrument for the full amount thereof against all
parties liable thereon (Sec. 57, NIL); the appellants engaged that
they would pay the note according to its tenor, and admit the
existence of the payee IPM and its capacity to endorse (Sec. 60,
NIL).

WHEREFORE, finding the decision appealed from according to

law and evidence, We find the appeal without merit and thus
affirm the decision in toto. With costs against the appellants. (pp.
50-55, Rollo)
The petitioners' motion for reconsideration of the decision of July 17, 1985 was denied
by the Intermediate Appellate Court in its resolution dated October 17, 1985, a copy of
which was received by the petitioners on October 21, 1985.
Hence, this petition was filed on the following grounds:
I.
ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A NEGOTIABLE
INSTRUMENT AS DEFINED UNDER THE LAW SINCE IT IS NEITHER PAYABLE TO
ORDER NOR TO BEARER.
II
THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT IS A MERE
ASSIGNEE OF THE SUBJECT PROMISSORY NOTE.
III.
SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE INSTRUMENT AND
THE TRANSFER OF RIGHTS WAS THROUGH A MERE ASSIGNMENT, THE
PETITIONERS MAY RAISE AGAINST THE RESPONDENT ALL DEFENSES THAT
ARE AVAILABLE TO IT AS AGAINST THE SELLER- ASSIGNOR, INDUSTRIAL
PRODUCTS MARKETING.
IV.
THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE PROMISSORY
NOTE BECAUSE:

A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF WARRANTY UNDER THE

LAW;
B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE SELLERASSIGNOR OF THE PROMISSORY NOTE.

First, there is no question that the seller-assignor breached its express 90-day
warranty because the findings of the trial court, adopted by the respondent appellate
court, that "14 days after delivery, the first tractor broke down and 9 days, thereafter,
the second tractor became inoperable" are sustained by the records. The petitioner
was clearly a victim of a warranty not honored by the maker.

V.

The Civil Code provides that:

THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLER- ASSIGNOR

IN FAVOR OF THE RESPONDENT DOES NOT CHANGE THE NATURE OF THE
TRANSACTION FROM BEING A SALE ON INSTALLMENTS TO A PURE LOAN.
VI.
THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN EVIDENCE IN
ANY COURT BECAUSE THE REQUISITE DOCUMENTARY STAMPS HAVE NOT
BEEN AFFIXED THEREON OR CANCELLED.
The petitioners prayed that judgment be rendered setting aside the decision dated July
17, 1985, as well as the resolution dated October 17, 1985 and dismissing the
complaint but granting petitioners' counterclaims before the court of origin.
On the other hand, the respondent corporation in its comment to the petition filed on
February 20, 1986, contended that the petition was filed out of time; that the
promissory note is a negotiable instrument and respondent a holder in due course;
that respondent is not liable for any breach of warranty; and finally, that the promissory
note is admissible in evidence.
The core issue herein is 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.
Preliminarily, it must be established at the outset that we consider the instant petition
to have been filed on time because the petitioners' motion for reconsideration actually
raised new issues. It cannot, therefore, be considered pro- formal.
The petition is impressed with merit.

ART. 1561. The vendor shall be responsible for warranty against

the hidden defects which the thing sold may have, should they
render it unfit for the use for which it is intended, or should they
diminish its fitness for such use to such an extent that, had the
vendee been aware thereof, he would not have acquired it or
would have given a lower price for it; but said vendor shall not be
answerable for patent defects or those which may be visible, or for
those which are not visible if the vendee is an expert who, by
reason of his trade or profession, should have known them.
ART. 1562. In a sale of goods, there is an implied warranty or
condition as to the quality or fitness of the goods, as follows:
(1) Where the buyer, expressly or by implication makes known to
the seller the particular purpose for which the goods are acquired,
and it appears that the buyer relies on the sellers skill or judge
judgment (whether he be the grower or manufacturer or not),
there is an implied warranty that the goods shall be reasonably fit
for such purpose;
xxx xxx xxx
ART. 1564. An implied warranty or condition as to the quality or
fitness for a particular purpose may be annexed by the usage of
trade.
xxx xxx xxx
ART. 1566. The vendor is responsible to the vendee for any
hidden faults or defects in the thing sold even though he was not
aware thereof.

This provision shall not apply if the contrary has been stipulated,
and the vendor was not aware of the hidden faults or defects in
the thing sold. (Emphasis supplied).
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.
Secondly, it likewise cannot be denied that as soon as the tractors broke down, the
petitioner-corporation notified the seller-assignor's sister company, AG & P, about the
breakdown based on the seller-assignor's express 90-day warranty, with which the
latter complied by sending its mechanics. However, due to the seller-assignor's delay
and its failure to comply with its warranty, the tractors became totally unserviceable
and useless for the purpose for which they were purchased.
Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its contract with the
seller-assignor.
Articles 1191 and 1567 of the Civil Code provide that:
ART. 1191. The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not comply
with what is incumbent upon him.
The injured party may choose between the fulfillment and the
rescission of the obligation with the payment of damages in either
case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.
xxx xxx xxx
ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and
1566, the vendee may elect between withdrawing from the
contract and demanding a proportionate reduction of the price,
with damages in either case. (Emphasis supplied)

Petitioner, having unilaterally and extrajudicially rescinded its contract with the sellerassignor, necessarily can no longer sue the seller-assignor except by way of
counterclaim if the seller-assignor sues it because of the rescission.
In the case of the University of the Philippines v. De los Angeles (35 SCRA 102) we
held:
In other words, the party who deems the contract violated may
consider it resolved or rescinded, and act accordingly, without
previous court action, but it proceeds at its own risk. For it is only
the final judgment of the corresponding court that will conclusively
and finally settle whether the action taken was or was not correct
in law. But the law definitely does not require that the contracting
party who believes itself injured must first file suit and wait for
adjudgement before taking extrajudicial steps to protect its
interest. Otherwise, the party injured by the other's breach will
have to passively sit and watch its damages accumulate during
the pendency of the suit until the final judgment of rescission is
rendered when the law itself requires that he should exercise due
diligence to minimize its own damages (Civil Code, Article
2203). (Emphasis supplied)
Going back to the core issue, we rule that the promissory note in question is not a
negotiable instrument.
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." (Campos
and Campos, Notes and Selected Cases on Negotiable
Instruments Law, Third Edition, page 38). (Emphasis supplied)
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.
This being so, there was no need for the petitioner to implied the seller-assignor when
it was sued by the respondent-assignee because the petitioner's defenses apply to

both or either of either of them. Actually, the records show that even the respondent
itself admitted to being a mere assignee of the promissory note in question, to wit:
ATTY. PALACA:
Did we get it right from the counsel that what
is being assigned is the Deed of Sale with
Chattel Mortgage with the promissory note
which is as testified to by the witness was
indorsed? (Counsel for Plaintiff nodding his
head.) Then we have no further questions on
cross,
COURT:
You confirm his manifestation? You are
nodding your head? Do you confirm that?
ATTY. ILAGAN:
The Deed of Sale cannot be assigned. A
deed of sale is a transaction between two
persons; what is assigned are rights, the
rights of the mortgagee were assigned to the
IFC Leasing & Acceptance Corporation.
COURT:
He puts it in a simple way as one-deed of
sale and chattel mortgage were assigned; . . .
you want to make a distinction, one is an
assignment of mortgage right and the other
one is indorsement of the promissory note.
What counsel for defendants wants is that
you stipulate that it is contained in one single
transaction?
ATTY. ILAGAN:

We stipulate it is one single transaction. (pp.

27-29, TSN., February 13, 1980).
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.

xxx xxx xxx

SEC. 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:
xxx xxx xxx

The evidence presented in the instant case shows that prior to the sale on installment
of the tractors, there was an arrangement between the seller-assignor, Industrial
Products Marketing, and the respondent whereby the latter would pay the sellerassignor the entire purchase price and the seller-assignor, in turn, would assign its
rights to the respondent which acquired the right to collect the price from the buyer,
herein petitioner Consolidated Plywood Industries, Inc.
A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory Note, the
Deed of Assignment and the Disclosure of Loan/Credit Transaction shows that said
documents evidencing the sale on installment of the tractors were all executed on the
same day by and among the buyer, which is herein petitioner Consolidated Plywood
Industries, Inc.; the seller-assignor which is the Industrial Products Marketing; and the
assignee-financing company, which is the respondent. Therefore, the respondent had
actual knowledge of the fact that the seller-assignor'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. As such, the respondent is
subject to all defenses which the petitioners may raise against the seller-assignor. Any
other interpretation would be most inequitous to the unfortunate buyer who is not only
saddled with two useless tractors but must also face a lawsuit from the assignee for
the entire purchase price and all its incidents without being able to raise valid defenses
available as against the assignor.
Lastly, the respondent failed to present any evidence to prove that it had no knowledge
of any fact, which would justify its act of taking the promissory note as not amounting
to bad faith.
Sections 52 and 56 of the Negotiable Instruments Law provide that: negotiating it.

xxx xxx xxx

(c) That he took it in good faith and for value
(d) That the time it was negotiated by him he had no notice of any
infirmity in the instrument of deffect in the title of the person
negotiating it
xxx xxx xxx
SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. To
constitute notice of an infirmity in the instrument or defect in the
title of the person negotiating the same, the person to whom it is
negotiated must have had actual knowledge of the infirmity or
defect, or knowledge of such facts that his action in taking the
instrument amounts to bad faith. (Emphasis supplied)
We subscribe to the view of Campos and Campos that a financing company is not a
holder in good faith as to the buyer, to wit:
In installment sales, the buyer usually issues a note payable to the
seller to cover the purchase price. Many times, in pursuance of a
previous arrangement with the seller, a finance company pays the
full price and the note is indorsed to it, subrogating it to the right to
collect the price from the buyer, with interest. With the increasing
frequency of installment buying in this country, it is most probable
that the tendency of the courts in the United States to protect the
buyer against the finance company will , the finance company will
be subject to the defense of failure of consideration and cannot
recover the purchase price from the buyer. As against the

argument that such a rule would seriously affect "a certain mode
of transacting business adopted throughout the State," a court in
one case stated:
It may be that our holding here will require
some changes in business methods and will
impose a greater burden on the finance
companies. We think the buyer-Mr. & Mrs.
General Public-should have some protection
somewhere along the line. We believe the
finance company is better able to bear the
risk of the dealer's insolvency than the buyer
and in a far better position to protect his
interests against unscrupulous and insolvent
dealers. . . .
If this opinion imposes great burdens on
finance companies it is a potent argument in
favor of a rule which win afford public
protection to the general buying public
against unscrupulous dealers in personal
property. . . . (Mutual Finance Co. v. Martin,
63 So. 2d 649, 44 ALR 2d 1 [1953]) (Campos
and Campos, Notes and Selected Cases on
Negotiable Instruments Law, Third Edition, p.
128).
In the case of Commercial Credit Corporation v. Orange Country Machine Works (34
Cal. 2d 766) involving similar facts, it was held that in a very real sense, the finance
company was a moving force in the transaction from its very inception and acted as a
party to it. When a finance company actively participates in a transaction of this type
from its inception, it cannot be regarded as a holder in due course of the note given in
the transaction.
In like manner, therefore, even assuming that the subject promissory note is
negotiable, the respondent, a financing company which actively participated in the sale
on installment of the subject two Allis Crawler tractors, cannot be regarded as a holder
in due course of said note. It follows that the respondent's rights under the promissory
note involved in this case are subject to all defenses that the petitioners have against

the seller-assignor, Industrial Products Marketing. For Section 58 of the Negotiable

Instruments Law provides that "in the hands of any holder other than a holder in due
course, a negotiable instrument is subject to the same defenses as if it were nonnegotiable. ... "
Prescinding from the foregoing and setting aside other peripheral issues, we find that
both the trial and respondent appellate court erred in holding the promissory note in
question to be negotiable. Such a ruling does not only violate the law and applicable
jurisprudence, but would result in unjust enrichment on the part of both the assignerassignor and respondent assignee at the expense of the petitioner-corporation which
rightfully rescinded an inequitable contract. We note, however, that since the sellerassignor has not been impleaded herein, there is no obstacle for the respondent to file
a civil Suit and litigate its claims against the seller- assignor in the rather unlikely
possibility that it so desires,
WHEREFORE, in view of the foregoing, the decision of the respondent appellate court
dated July 17, 1985, as well as its resolution dated October 17, 1986, are hereby
ANNULLED and SET ASIDE. The complaint against the petitioner before the trial
court is DISMISSED.
SO ORDERED.
G.R. No. 154127

December 8, 2003

ROMEO C. GARCIA, petitioner,

vs.
DIONISIO V. LLAMAS, respondent.
DECISION
PANGANIBAN, J.:
Novation cannot be presumed. It must be clearly shown either by the express assent
of the parties or by the complete incompatibility between the old and the new
agreements. Petitioner herein fails to show either requirement convincingly; hence, the
summary judgment holding him liable as a joint and solidary debtor stands.
The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to
nullify the November 26, 2001 Decision2 and the June 26, 2002 Resolution3 of the
Court of Appeals (CA) in CA-GR CV No. 60521. The appellate court disposed as
follows:
"UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment appealed from,
insofar as it pertains to [Petitioner] Romeo Garcia, must be, as it hereby is,
AFFIRMED, subject to the modification that the award for attorneys fees and cost of
suit is DELETED. The portion of the judgment that pertains to x x x Eduardo de Jesus
is SET ASIDE and VACATED. Accordingly, the case against x x x Eduardo de Jesus is
REMANDED to the court of origin for purposes of receiving ex parte [Respondent]
Dionisio Llamas evidence against x x x Eduardo de Jesus."4
The challenged Resolution, on the other hand, denied petitioners Motion for
Reconsideration.
The Antecedents
The antecedents of the case are narrated by the CA as follows:
"This case started out as a complaint for sum of money and damages by x x x
[Respondent] Dionisio Llamas against x x x [Petitioner] Romeo Garcia and Eduardo de
Jesus. Docketed as Civil Case No. Q97-32-873, the complaint alleged that on 23
December 1996[,] [petitioner and de Jesus] borrowed P400,000.00 from [respondent];
that, on the same day, [they] executed a promissory note wherein they bound
themselves jointly and severally to pay the loan on or before 23 January 1997 with a
5% interest per month; that the loan has long been overdue and, despite repeated
demands, [petitioner and de Jesus] have failed and refused to pay it; and that, by
reason of the[ir] unjustified refusal, [respondent] was compelled to engage the
services of counsel to whom he agreed to pay 25% of the sum to be recovered from
[petitioner and de Jesus], plus P2,000.00 for every appearance in court. Annexed to
the complaint were the promissory note above-mentioned and a demand letter, dated
02 May 1997, by [respondent] addressed to [petitioner and de Jesus].
"Resisting the complaint, [Petitioner Garcia,] in his [Answer,] averred that he assumed
no liability under the promissory note because he signed it merely as an
accommodation party for x x x de Jesus; and, alternatively, that he is relieved from any
liability arising from the note inasmuch as the loan had been paid by x x x de Jesus by

means of a check dated 17 April 1997; and that, in any event, the issuance of the
check and [respondents] acceptance thereof novated or superseded the note.
"[Respondent] tendered a reply to [Petitioner] Garcias answer, thereunder asserting
that the loan remained unpaid for the reason that the check issued by x x x de Jesus
bounced, and that [Petitioner] Garcias answer was not even accompanied by a
certificate of non-forum shopping. Annexed to the reply were the face of the check and
the reverse side thereof.
"For his part, x x x de Jesus asserted in his [A]nswer with [C]ounterclaim that out of
the supposed P400,000.00 loan, he received only P360,000.00, the P40,000.00
having been advance interest thereon for two months, that is, for January and
February 1997; that[,] in fact[,] he paid the sum of P120,000.00 by way of interests;
that this was made when [respondents] daughter, one Nits Llamas-Quijencio, received
from the Central Police District Command at Bicutan, Taguig, Metro Manila (where x x
x de Jesus worked), the sum of P40,000.00, representing the peso equivalent of his
accumulated leave credits, another P40,000.00 as advance interest, and still
another P40,000.00 as interest for the months of March and April 1997; that he had
difficulty in paying the loan and had asked [respondent] for an extension of time; that
[respondent] acted in bad faith in instituting the case, [respondent] having agreed to
accept the benefits he (de Jesus) would receive for his retirement, but [respondent]
nonetheless filed the instant case while his retirement was being processed; and that,
in defense of his rights, he agreed to pay his counsel P20,000.00 [as] attorneys fees,
plus P1,000.00 for every court appearance.
"During the pre-trial conference, x x x de Jesus and his lawyer did not appear, nor did
they file any pre-trial brief. Neither did [Petitioner] Garcia file a pre-trial brief, and his
counsel even manifested that he would no [longer] present evidence. Given this
development, the trial court gave [respondent] permission to present his evidence ex
parte against x x x de Jesus; and, as regards [Petitioner] Garcia, the trial court
directed [respondent] to file a motion for judgment on the pleadings, and for [Petitioner]
Garcia to file his comment or opposition thereto.
"Instead, [respondent] filed a [M]otion to declare [Petitioner] Garcia in default and to
allow him to present his evidence ex parte. Meanwhile, [Petitioner] Garcia filed a
[M]anifestation submitting his defense to a judgment on the pleadings. Subsequently,
[respondent] filed a [M]anifestation/[M]otion to submit the case for judgement on the
pleadings, withdrawing in the process his previous motion. Thereunder, he asserted
that [petitioners and de Jesus] solidary liability under the promissory note cannot be

any clearer, and that the check issued by de Jesus did not discharge the loan since
the check bounced."5
On July 7, 1998, the Regional Trial Court (RTC) of Quezon City (Branch 222) disposed
of the case as follows:
"WHEREFORE, premises considered, judgment on the pleadings is hereby rendered
in favor of [respondent] and against [petitioner and De Jesus], who are hereby ordered
to pay, jointly and severally, the [respondent] the following sums, to wit:
1) P400,000.00 representing the principal amount plus 5% interest thereon
per month from January 23, 1997 until the same shall have been fully paid,
less the amount of P120,000.00 representing interests already paid by x x x
de Jesus;
2) P100,000.00 as attorneys fees plus appearance fee of P2,000.00 for
each day of [c]ourt appearance, and;

obligation incurred by him and petitioner was joint and several; and, second, the check
-- which had been intended to extinguish the obligation -- bounced upon its
presentment.
Hence, this Petition.7
Issues
Petitioner submits the following issues for our consideration:
"I
Whether or not the Honorable Court of Appeals gravely erred in not holding that
novation applies in the instant case as x x x Eduardo de Jesus had expressly assumed
sole and exclusive liability for the loan obligation he obtained from x x x Respondent
Dionisio Llamas, as clearly evidenced by:
a) Issuance by x x x de Jesus of a check in payment of the full amount of
the loan of P400,000.00 in favor of Respondent Llamas, although the check
subsequently bounced[;]

3) Cost of this suit."6

Ruling of the Court of Appeals

b) Acceptance of the check by the x x x respondent x x x which resulted in

[the] substitution by x x x de Jesus or [the superseding of] the promissory
note;

The CA ruled that the trial court had erred when it rendered a judgment on the
pleadings against De Jesus. According to the appellate court, his Answer raised
genuinely contentious issues. Moreover, he was still required to present his evidence
ex parte. Thus, respondent was not ipso facto entitled to the RTC judgment, even
though De Jesus had been declared in default. The case against the latter was
therefore remanded by the CA to the trial court for the ex parte reception of the
formers evidence.

c) x x x de Jesus having paid interests on the loan in the total amount

of P120,000.00;
d) The fact that Respondent Llamas agreed to the proposal of x x x de
Jesus that due to financial difficulties, he be given an extension of time to
pay his loan obligation and that his retirement benefits from the Philippine
National Police will answer for said obligation.

As to petitioner, the CA treated his case as a summary judgment, because his Answer
had failed to raise even a single genuine issue regarding any material fact.
The appellate court ruled that no novation -- express or implied -- had taken place
when respondent accepted the check from De Jesus. According to the CA, the check
was issued precisely to pay for the loan that was covered by the promissory note
jointly and severally undertaken by petitioner and De Jesus. Respondents acceptance
of the check did not serve to make De Jesus the sole debtor because, first, the

"II
Whether or not the Honorable Court of Appeals seriously erred in not holding that the
defense of petitioner that he was merely an accommodation party, despite the fact that
the promissory note provided for a joint and solidary liability, should have been given

weight and credence considering that subsequent events showed that the principal
obligor was in truth and in fact x x x de Jesus, as evidenced by the foregoing
circumstances showing his assumption of sole liability over the loan obligation.
"III
Whether or not judgment on the pleadings or summary judgment was properly availed
of by Respondent Llamas, despite the fact that there are genuine issues of fact, which
the Honorable Court of Appeals itself admitted in its Decision, which call for the
presentation of evidence in a full-blown trial."8
Simply put, the issues are the following: 1) whether there was novation of the
obligation; 2) whether the defense that petitioner was only an accommodation party
had any basis; and 3) whether the judgment against him -- be it a judgment on the
pleadings or a summary judgment -- was proper.
The Courts Ruling
The Petition has no merit.
First Issue:
Novation
Petitioner seeks to extricate himself from his obligation as joint and solidary debtor by
insisting that novation took place, either through the substitution of De Jesus as sole
debtor or the replacement of the promissory note by the check. Alternatively, the
former argues that the original obligation was extinguished when the latter, who was
his co-obligor, "paid" the loan with the check.
The fallacy of the second (alternative) argument is all too apparent. The check could
not have extinguished the obligation, because it bounced upon presentment. By
law,9 the delivery of a check produces the effect of payment only when it is encashed.
We now come to the main issue of whether novation took place.
Novation is a mode of extinguishing an obligation by changing its objects or principal
obligations, by substituting a new debtor in place of the old one, or by subrogating a

third person to the rights of the creditor.10 Article 1293 of the Civil Code defines
novation as follows:
"Art. 1293. Novation which consists in substituting a new debtor in the place of the
original one, may be made even without the knowledge or against the will of the latter,
but not without the consent of the creditor. Payment by the new debtor gives him rights
mentioned in articles 1236 and 1237."
In general, there are two modes of substituting the person of the debtor: (1)
expromision and (2) delegacion. In expromision, the initiative for the change does not
come from -- and may even be made without the knowledge of -- the debtor, since it
consists of a third persons assumption of the obligation. As such, it logically requires
the consent of the third person and the creditor. In delegacion, the debtor offers, and
the creditor accepts, a third person who consents to the substitution and assumes the
obligation; thus, the consent of these three persons are necessary.11Both modes of
substitution by the debtor require the consent of the creditor.12
Novation may also be extinctive or modificatory. It is extinctive when an old obligation
is terminated by the creation of a new one that takes the place of the former. It is
merely modificatory when the old obligation subsists to the extent that it remains
compatible with the amendatory agreement.13 Whether extinctive or modificatory,
novation is made either by changing the object or the principal conditions, referred to
as objective or real novation; or by substituting the person of the debtor or subrogating
a third person to the rights of the creditor, an act known as subjective or personal
novation.14 For novation to take place, the following requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.15
Novation may also be express or implied. It is express when the new obligation
declares in unequivocal terms that the old obligation is extinguished. It is implied when
the new obligation is incompatible with the old one on every point. 16 The test of
incompatibility is whether the two obligations can stand together, each one with its own
independent existence.17

Applying the foregoing to the instant case, we hold that no novation took place.

express.24 It cannot be supposed, without clear proof, that the present respondent has
done away with his right to exact fulfillment from either of the solidary debtors. 25

The parties did not unequivocally declare that the old obligation had been extinguished
by the issuance and the acceptance of the check, or that the check would take the
place of the note. There is no incompatibility between the promissory note and the
check. As the CA correctly observed, the check had been issued precisely to answer
for the obligation. On the one hand, the note evidences the loan obligation; and on the
other, the check answers for it. Verily, the two can stand together.

More important, De Jesus was not a third person to the obligation. From the
beginning, he was a joint and solidary obligor of the P400,000 loan; thus, he can be
released from it only upon its extinguishment. Respondents acceptance of his check
did not change the person of the debtor, because a joint and solidary obligor is
required to pay the entirety of the obligation.

Neither could the payment of interests -- which, in petitioners view, also constitutes
novation18 -- change the terms and conditions of the obligation. Such payment was
already provided for in the promissory note and, like the check, was totally in accord
with the terms thereof.

It must be noted that in a solidary obligation, the creditor is entitled to demand the
satisfaction of the whole obligation from any or all of the debtors.26 It is up to the former
to determine against whom to enforce collection.27Having made himself jointly and
severally liable with De Jesus, petitioner is therefore liable28 for the entire obligation.29

Also unmeritorious is petitioners argument that the obligation was novated by the
substitution of debtors. In order to change the person of the debtor, the old one must
be expressly released from the obligation, and the third person or new debtor must
assume the formers place in the relation.19 Well-settled is the rule that novation is
never presumed.20 Consequently, that which arises from a purported change in the
person of the debtor must be clear and express.21 It is thus incumbent on petitioner to
show clearly and unequivocally that novation has indeed taken place.

Second Issue:

In the present case, petitioner has not shown that he was expressly released from the
obligation, that a third person was substituted in his place, or that the joint and solidary
obligation was cancelled and substituted by the solitary undertaking of De Jesus. The
CA aptly held:
"x x x. Plaintiffs acceptance of the bum check did not result in substitution by de Jesus
either, the nature of the obligation being solidary due to the fact that the promissory
note expressly declared that the liability of appellants thereunder is joint and [solidary.]
Reason: under the law, a creditor may demand payment or performance from one of
the solidary debtors or some or all of them simultaneously, and payment made by one
of them extinguishes the obligation. It therefore follows that in case the creditor fails to
collect from one of the solidary debtors, he may still proceed against the other or
others. x x x "22

Accommodation Party
Petitioner avers that he signed the promissory note merely as an accommodation
party; and that, as such, he was released as obligor when respondent agreed to
extend the term of the obligation.
This reasoning is misplaced, because the note herein is not a negotiable instrument.
The note reads:
"PROMISSORY NOTE
"P400,000.00
"RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of FOUR HUNDRED
THOUSAND PESOS, Philippine Currency payable on or before January 23, 1997 at
No. 144 K-10 St. Kamias, Quezon City, with interest at the rate of 5% per month or
fraction thereof.
"It is understood that our liability under this loan is jointly and severally [sic].

Moreover, it must be noted that for novation to be valid and legal, the law requires that
the creditor expressly consent to the substitution of a new debtor.23 Since novation
implies a waiver of the right the creditor had before the novation, such waiver must be

"Done at Quezon City, Metro Manila this 23rd day of December, 1996."30

By its terms, the note was made payable to a specific person rather than to bearer or
to order31 -- a requisite for negotiability under Act 2031, the Negotiable Instruments
Law (NIL). Hence, petitioner cannot avail himself of the NILs provisions on the
liabilities and defenses of an accommodation party. Besides, a non-negotiable note is
merely a simple contract in writing and is evidence of such intangible rights as may
have been created by the assent of the parties.32 The promissory note is thus covered
by the general provisions of the Civil Code, not by the NIL.
Even granting arguendo that the NIL was applicable, still, petitioner would be liable for
the promissory note. Under Article 29 of Act 2031, an accommodation party is liable
for the instrument to a holder for value even if, at the time of its taking, the latter knew
the former to be only an accommodation party. The relation between an
accommodation party and the party accommodated is, in effect, one of principal and
surety -- the accommodation party being the surety.33 It is a settled rule that a surety is
bound equally and absolutely with the principal and is deemed an original promissor
and debtor from the beginning. The liability is immediate and direct.34
Third Issue:
Propriety of Summary Judgment
or Judgment on the Pleadings
The next issue illustrates the usual confusion between a judgment on the pleadings
and a summary judgment. Under Section 3 of Rule 35 of the Rules of Court, a
summary judgment may be rendered after a summary hearing if the pleadings,
supporting affidavits, depositions and admissions on file show that (1) except as to the
amount of damages, there is no genuine issue regarding any material fact; and (2) the
moving party is entitled to a judgment as a matter of law.
A summary judgment is a procedural device designed for the prompt disposition of
actions in which the pleadings raise only a legal, not a genuine, issue regarding any
material fact.35 Consequently, facts are asserted in the complaint regarding which
there is yet no admission, disavowal or qualification; or specific denials or affirmative
defenses are set forth in the answer, but the issues are fictitious as shown by the
pleadings, depositions or admissions.36 A summary judgment may be applied for by
either a claimant or a defending party.37
On the other hand, under Section 1 of Rule 34 of the Rules of Court, a judgment on
the pleadings is proper when an answer fails to render an issue or otherwise admits

the material allegations of the adverse partys pleading. The essential question is
whether there are issues generated by the pleadings.38 A judgment on the pleadings
may be sought only by a claimant, who is the party seeking to recover upon a claim,
counterclaim or cross-claim; or to obtain a declaratory relief. 39
Apropos thereto, it must be stressed that the trial courts judgment against petitioner
was correctly treated by the appellate court as a summary judgment, rather than as a
judgment on the pleadings. His Answer40 apparently raised several issues -- that he
signed the promissory note allegedly as a mere accommodation party, and that the
obligation was extinguished by either payment or novation. However, these are not
factual issues requiring trial. We quote with approval the CAs observations:
"Although Garcias [A]nswer tendered some issues, by way of affirmative defenses, the
documents submitted by [respondent] nevertheless clearly showed that the issues so
tendered were not valid issues. Firstly, Garcias claim that he was merely an
accommodation party is belied by the promissory note that he signed. Nothing in the
note indicates that he was only an accommodation party as he claimed to be. Quite
the contrary, the promissory note bears the statement: It is understood that our liability
under this loan is jointly and severally [sic]. Secondly, his claim that his co-defendant
de Jesus already paid the loan by means of a check collapses in view of the dishonor
thereof as shown at the dorsal side of said check."41
From the records, it also appears that petitioner himself moved to submit the case for
judgment on the basis of the pleadings and documents.1wphi1 In a written
Manifestation,42 he stated that "judgment on the pleadings may now be rendered
without further evidence, considering the allegations and admissions of the parties." 43
In view of the foregoing, the CA correctly considered as a summary judgment that
which the trial court had issued against petitioner.
WHEREFORE, this Petition is hereby DENIED and the assailed Decision AFFIRMED.
Costs against petitioner.
SO ORDERED.

DATE

WITHDRAWAL SLIP NO.

AMOUNT

June 15, 1978

42127

P1,198,092.80

July 15, 1978

42128

940,190.00

Aug. 15, 1978

42129

880,000.00

Sep. 15, 1978

42130

This petition assails the decision 1

dated December 29, 1993 of the Court
of Appeals in CA-G.R. CV No. 29546,
which affirmed the judgment 2 of the
Regional Trial Court of Pasay City,
Branch 113 in Civil Case No. PQ-7854P, dismissing Firestone's complaint for
damages.
The facts of this case, adopted by the
CA and based on findings by the trial
court, are as follows:

. . . [D]efendant is a banking
corporation. It operates under
a certificate of authority
issued by the Central Bank of
981,500.00
the Philippines, and among its
activities, accepts savings
and time deposits. Said
defendant had as one of its client-depositors the Fojas-Arca Enterprises
Company ("Fojas-Arca" for brevity). Fojas-Arca maintaining a special
savings account with the defendant, the latter authorized and allowed
withdrawals of funds therefrom through the medium of special withdrawal
slips. These are supplied by the defendant to Fojas-Arca.
In January 1978, plaintiff and Fojas-Arca entered into a "Franchised
Dealership Agreement" (Exh. B) whereby Fojas-Arca has the privilege to
purchase on credit and sell plaintiff's products.

G.R. No. 113236

March 5, 2001

FIRESTONE TIRE & RUBBER COMPANY OF THE PHILIPPINES, petitioner,

vs.
COURT OF APPEALS and LUZON DEVELOPMENT BANK, respondents.
QUISUMBING, J.:

On January 14, 1978 up to May 15, 1978. Pursuant to the aforesaid

Agreement, Fojas-Arca purchased on credit Firestone products from plaintiff
with a total amount of P4,896,000.00. In payment of these purchases, FojasArca delivered to plaintiff six (6) special withdrawal slips drawn upon the
defendant. In turn, these were deposited by the plaintiff with its current
account with the Citibank. All of them were honored and paid by the
defendant. This singular circumstance made plaintiff believe [sic] and relied
[sic] on the fact that the succeeding special withdrawal slips drawn upon the
defendant would be equally sufficiently funded. Relying on such confidence

and belief and as a direct consequence thereof, plaintiff extended to FojasArca other purchases on credit of its products.
On the following dates Fojas-Arca purchased Firestone products on credit
(Exh. M, I, J, K) and delivered to plaintiff the corresponding special
withdrawal slips in payment thereof drawn upon the defendant, to wit:

These were likewise deposited by plaintiff in its current account with Citibank
and in turn the Citibank forwarded it [sic] to the defendant for payment and
collection, as it had done in respect of the previous special withdrawal slips.
Out of these four (4) withdrawal slips only withdrawal slip No. 42130 in the
amount of P981,500.00 was honored and paid by the defendant in October
1978. Because of the absence for a long period coupled with the fact that
defendant honored and paid withdrawal slips No. 42128 dated July 15,
1978, in the amount of P981,500.00 plaintiff's belief was all the more
strengthened that the other withdrawal slips were likewise sufficiently
funded, and that it had received full value and payment of Fojas-Arca's
credit purchased then outstanding at the time. On this basis, plaintiff was
induced to continue extending to Fojas-Arca further purchase on credit of its
products as per agreement (Exh. "B").
However, on December 14, 1978, plaintiff was informed by Citibank that
special withdrawal slips No. 42127 dated June 15, 1978 for P1,198,092.80
and No. 42129 dated August 15, 1978 for P880,000.00 were dishonored
and not paid for the reason 'NO ARRANGEMENT.' As a consequence, the
Citibank debited plaintiff's account for the total sum of P2,078,092.80
representing the aggregate amount of the above-two special withdrawal
slips. Under such situation, plaintiff averred that the pecuniary losses it
suffered is caused by and directly attributable to defendant's gross
negligence.
On September 25, 1979, counsel of plaintiff served a written demand upon
the defendant for the satisfaction of the damages suffered by it. And due to
defendant's refusal to pay plaintiff's claim, plaintiff has been constrained to
file this complaint, thereby compelling plaintiff to incur litigation expenses
and attorney's fees which amount are recoverable from the defendant.

Controverting the foregoing asseverations of plaintiff, defendant

asserted, inter alia that the transactions mentioned by plaintiff are that of
plaintiff and Fojas-Arca only, [in] which defendant is not involved;
Vehemently, it was denied by defendant that the special withdrawal slips
were honored and treated as if it were checks, the truth being that when the
special withdrawal slips were received by defendant, it only verified whether
or not the signatures therein were authentic, and whether or not the deposit
level in the passbook concurred with the savings ledger, and whether or not
the deposit is sufficient to cover the withdrawal; if plaintiff treated the special
withdrawal slips paid by Fojas-Arca as checks then plaintiff has to blame
itself for being grossly negligent in treating the withdrawal slips as check
when it is clearly stated therein that the withdrawal slips are non-negotiable;
that defendant is not a privy to any of the transactions between Fojas-Arca
and plaintiff for which reason defendant is not duty bound to notify nor give
notice of anything to plaintiff. If at first defendant had given notice to plaintiff
it is merely an extension of usual bank courtesy to a prospective client; that
defendant is only dealing with its depositor Fojas-Arca and not the plaintiff.
In summation, defendant categorically stated that plaintiff has no cause of
action against it (pp. 1-3, Dec.; pp. 368-370, id).3
Petitioner's complaint4 for a sum of money and damages with the Regional Trial Court
of Pasay City, Branch 113, docketed as Civil Case No. 29546, was dismissed together
with the counterclaim of defendant.
Petitioner appealed the decision to the Court of Appeals. It averred that respondent
Luzon Development Bank was liable for damages under Article 21765 in relation to
Articles 196 and 207 of the Civil Code. As noted by the CA, petitioner alleged the
following tortious acts on the part of private respondent: 1) the acceptance and
payment of the special withdrawal slips without the presentation of the depositor's
passbook thereby giving the impression that the withdrawal slips are instruments
payable upon presentment; 2) giving the special withdrawal slips the general
appearance of checks; and 3) the failure of respondent bank to seasonably warn
petitioner that it would not honor two of the four special withdrawal slips.
On December 29, 1993, the Court of Appeals promulgated its assailed decision. It
denied the appeal and affirmed the judgment of the trial court. According to the
appellate court, respondent bank notified the depositor to present the passbook
whenever it received a collection note from another bank, belying petitioner's claim
that respondent bank was negligent in not requiring a passbook under the subject
transaction. The appellate court also found that the special withdrawal slips in question

were not purposely given the appearance of checks, contrary to petitioner's

assertions, and thus should not have been mistaken for checks. Lastly, the appellate
court ruled that the respondent bank was under no obligation to inform petitioner of the
dishonor of the special withdrawal slips, for to do so would have been a violation of the
law on the secrecy of bank deposits.
Hence, the instant petition, alleging the following assignment of error:
25. The CA grievously erred in holding that the [Luzon Development] Bank
was free from any fault or negligence regarding the dishonor, or in failing to
give fair and timely advice of the dishonor, of the twointermediate LDB Slips
and in failing to award damages to Firestone pursuant to Article 2176 of the
New Civil Code.8
The issue for our consideration is whether or not respondent bank should be held
liable for damages suffered by petitioner, due to its allegedly belated notice of nonpayment of the subject withdrawal slips.
The initial transaction in this case was between petitioner and Fojas-Arca, whereby the
latter purchased tires from the former with special withdrawal slips drawn upon FojasArca's special savings account with respondent bank. Petitioner in turn deposited
these withdrawal slips with Citibank. The latter credited the same to petitioner's current
account, then presented the slips for payment to respondent bank. It was at this point
that the bone of contention arose.
On December 14, 1978, Citibank informed petitioner that special withdrawal slips Nos.
42127 and 42129 dated June 15, 1978 and August 15, 1978, respectively, were
refused payment by respondent bank due to insufficiency of Fojas-Arca's funds on
deposit. That information came about six months from the time Fojas-Arca purchased
tires from petitioner using the subject withdrawal slips. Citibank then debited the
amount of these withdrawal slips from petitioner's account, causing the alleged
pecuniary damage subject of petitioner's cause of action.
At the outset, we note that petitioner admits that the withdrawal slips in question were
non-negotiable.9 Hence, the rules governing the giving of immediate notice of dishonor
of negotiable instruments do not apply in this case.10Petitioner itself concedes this
point.11 Thus, respondent bank was under no obligation to give immediate notice that it
would not make payment on the subject withdrawal slips. Citibank should have known
that withdrawal slips were not negotiable instruments. It could not expect these slips to

be treated as checks by other entities. Payment or notice of dishonor from respondent

bank could not be expected immediately, in contrast to the situation involving checks.
In the case at bar, it appears that Citibank, with the knowledge that respondent Luzon
Development Bank, had honored and paid the previous withdrawal slips, automatically
credited petitioner's current account with the amount of the subject withdrawal slips,
then merely waited for the same to be honored and paid by respondent bank. It
presumed that the withdrawal slips were "good."
It bears stressing that Citibank could not have missed the non-negotiable nature of the
withdrawal slips. The essence of negotiability which characterizes a negotiable paper
as a credit instrument lies in its freedom to circulate freely as a substitute for
money.12 The withdrawal slips in question lacked this character.
A bank is under obligation to treat the accounts of its depositors with meticulous care,
whether such account consists only of a few hundred pesos or of millions of
pesos.13 The fact that the other withdrawal slips were honored and paid by respondent
bank was no license for Citibank to presume that subsequent slips would be honored
and paid immediately. By doing so, it failed in its fiduciary duty to treat the accounts of
its clients with the highest degree of care.14
In the ordinary and usual course of banking operations, current account deposits are
accepted by the bank on the basis of deposit slips prepared and signed by the
depositor, or the latter's agent or representative, who indicates therein the current
account number to which the deposit is to be credited, the name of the depositor or
current account holder, the date of the deposit, and the amount of the deposit either in
cash or in check.15
The withdrawal slips deposited with petitioner's current account with Citibank were not
checks, as petitioner admits. Citibank was not bound to accept the withdrawal slips as
a valid mode of deposit. But having erroneously accepted them as such, Citibank
and petitioner as account-holder must bear the risks attendant to the acceptance of
these instruments. Petitioner and Citibank could not now shift the risk and hold private
respondent liable for their admitted mistake.
WHEREFORE, the petition is DENIED and the decision of the Court of Appeals in CAG.R. CV No. 29546 is AFFIRMED. Costs against petitioner.
SO ORDERED.

G.R. No. 157943

September 4, 2013

PEOPLE OF THE PHILIPPINES, PLAINTIFF-APPELLEE,

vs.
GILBERT REYES WAGAS, ACCUSED-APPELLANT.
DECISION
BERSAMIN, J.:
The Bill of Rights guarantees the right of an accused to be presumed innocent until the
contrary is proved. In order to overcome the presumption of innocence, the
Prosecution is required to adduce against him nothing less than proof beyond

reasonable doubt. Such proof is not only in relation to the elements of the offense, but
also in relation to the identity of the offender. If the Prosecution fails to discharge its
heavy burden, then it is not only the right of the accused to be freed, it becomes the
Courts constitutional duty to acquit him.
The Case
Gilbert R. Wagas appeals his conviction for estafa under the decision rendered on July
11, 2002 by the Regional Trial Court, Branch 58, in Cebu City (RTC), meting on him
the indeterminate penalty of 12 years of prision mayor, as minimum, to 30 years of
reclusion perpetua, as maximum.
Antecedents
Wagas was charged with estafa under the information that reads:
That on or about the 30th day of April, 1997, and for sometime prior and subsequent
thereto, in the City of Cebu, Philippines, and within the jurisdiction of this Honorable
Court, the said accused, with deliberate intent, with intent to gain and by means of
false pretenses or fraudulent acts executed prior to or simultaneously with the
commission of the fraud, to wit: knowing that he did not have sufficient funds deposited
with the Bank of Philippine Islands, and without informing Alberto Ligaray of that
circumstance, with intent to defraud the latter, did then and there issue Bank of the
Philippine Islands Check No. 0011003, dated May 08, 1997 in the amount
of P200,000.00, which check was issued in payment of an obligation, but which check
when presented for encashment with the bank, was dishonored for the reason "drawn
against insufficient funds" and inspite of notice and several demands made upon said
accused to make good said check or replace the same with cash, he had failed and
refused and up to the present time still fails and refuses to do so, to the damage and
prejudice of Alberto Ligaray in the amount aforestated.
CONTRARY TO LAW.1
After Wagas entered a plea of not guilty, the pre-trial was held, during which the
Defense admitted that the check alleged in the information had been dishonored due
to insufficient funds.3 On its part, the Prosecution made no admission.4
2

At the trial, the Prosecution presented complainant Alberto Ligaray as its lone witness.
Ligaray testified that on April 30, 1997, Wagas placed an order for 200 bags of rice

over the telephone; that he and his wife would not agree at first to the proposed
payment of the order by postdated check, but because of Wagas assurance that he
would not disappoint them and that he had the means to pay them because he had a
lending business and money in the bank, they relented and accepted the order; that he
released the goods to Wagas on April 30, 1997 and at the same time received Bank of
the Philippine Islands (BPI) Check No. 0011003 for P200,000.00 payable to cash and
postdated May 8, 1997; that he later deposited the check with Solid Bank, his
depository bank, but the check was dishonored due to insufficiency of funds;5 that he
called Wagas about the matter, and the latter told him that he would pay upon his
return to Cebu; and that despite repeated demands, Wagas did not pay him.6
On cross-examination, Ligaray admitted that he did not personally meet Wagas
because they transacted through telephone only; that he released the 200 bags of rice
directly to Robert Caada, the brother-in-law of Wagas, who signed the delivery
receipt upon receiving the rice.7
After Ligaray testified, the Prosecution formally offered the following: (a) BPI Check
No. 0011003 in the amount ofP200,000.00 payable to "cash;" (b) the return slip dated
May 13, 1997 issued by Solid Bank; (c) Ligarays affidavit; and (d) the delivery receipt
signed by Caada. After the RTC admitted the exhibits, the Prosecution then rested its
case.8
In his defense, Wagas himself testified. He admitted having issued BPI Check No.
0011003 to Caada, his brother-in-law, not to Ligaray. He denied having any telephone
conversation or any dealings with Ligaray. He explained that the check was intended
as payment for a portion of Caadas property that he wanted to buy, but when the
sale did not push through, he did not anymore fund the check.9
On cross-examination, the Prosecution confronted Wagas with a letter dated July 3,
1997 apparently signed by him and addressed to Ligarays counsel, wherein he
admitted owing Ligaray P200,000.00 for goods received, to wit:
This is to acknowledge receipt of your letter dated June 23, 1997 which is selfexplanatory. It is worthy also to discuss with you the environmental facts of the case
for your consideration, to wit:
It is true that I obtained goods from your client worth P200,000.00 and I promised to
settle the same last May 10, 1997, but to no avail. On this point, let me inform you that
I sold my real property to a buyer in Manila, and promised to pay the consideration on

the same date as I promised with your client. Unfortunately, said buyer likewise failed
to make good with such obligation. Hence, I failed to fulfill my promise resultant
thereof. (sic)
Again, I made another promise to settle said obligation on or before June 15, 1997, but
still to no avail attributable to the same reason as aforementioned. (sic)

WHEREFORE, premises considered, the Court finds the accused GUILTY beyond
reasonable doubt as charged and he is hereby sentenced as follows:
To suffer an indeterminate penalty of from twelve (12) years of pris[i]on mayor, as
minimum, to thirty (30) years of reclusion perpetua as maximum;
To indemnify the complainant, Albert[o] Ligaray in the sum of P200,000.00;

To arrest this problem, we decided to source some funds using the subject property as
collateral. This other means is resorted to for the purpose of settling the herein
obligation. And as to its status, said funds will be rele[a]sed within thirty (30) days from
today.
In view of the foregoing, it is my sincere request and promise to settle said obligation
on or before August 15, 1997.
Lastly, I would like to manifest that it is not my intention to shy away from any financial
obligation.
xxxx

To pay said complainant the sum of P30,000.00 by way of attorneys fees; and the
costs of suit.
SO ORDERED.14
The RTC held that the Prosecution had proved beyond reasonable doubt all the
elements constituting the crime of estafa, namely: (a) that Wagas issued the postdated
check as payment for an obligation contracted at the time the check was issued; (b)
that he failed to deposit an amount sufficient to cover the check despite having been
informed that the check had been dishonored; and (c) that Ligaray released the goods
upon receipt of the postdated check and upon Wagas assurance that the check would
be funded on its date.

Respectfully yours,
(SGD.)
GILBERT R. WAGAS10
Wagas admitted the letter, but insisted that it was Caada who had transacted with
Ligaray, and that he had signed the letter only because his sister and her husband
(Caada) had begged him to assume the responsibility.11 On redirect examination,
Wagas declared that Caada, a seafarer, was then out of the country; that he signed
the letter only to accommodate the pleas of his sister and Caada, and to avoid
jeopardizing Caadas application for overseas employment.12 The Prosecution
subsequently offered and the RTC admitted the letter as rebuttal evidence.13
Decision of the RTC
As stated, the RTC convicted Wagas of estafa on July 11, 2002, viz:

Wagas filed a motion for new trial and/or reconsideration,15 arguing that the
Prosecution did not establish that it was he who had transacted with Ligaray and who
had negotiated the check to the latter; that the records showed that Ligaray did not
meet him at any time; and that Ligarays testimony on their alleged telephone
conversation was not reliable because it was not shown that Ligaray had been familiar
with his voice. Wagas also sought the reopening of the case based on newly
discovered evidence, specifically: (a) the testimony of Caada who could not testify
during the trial because he was then out of the country, and (b) Ligarays testimony
given against Wagas in another criminal case for violation of Batas Pambansa Blg. 22.
On October 21, 2002, the RTC denied the motion for new trial and/or reconsideration,
opining that the evidence Wagas desired to present at a new trial did not qualify as
newly discovered, and that there was no compelling ground to reverse its decision. 16
Wagas appealed directly to this Court by notice of appeal.17

Prior to the elevation of the records to the Court, Wagas filed a petition for admission
to bail pending appeal. The RTC granted the petition and fixed Wagas bond
at P40,000.00.18 Wagas then posted bail for his provisional liberty pending appeal.19

The appeal is meritorious.

The resolution of this appeal was delayed by incidents bearing on the grant of Wagas
application for bail. On November 17, 2003, the Court required the RTC Judge to
explain why Wagas was out on bail.20 On January 15, 2004, the RTC Judge submitted
to the Court a so-called manifestation and compliance which the Court referred to the
Office of the Court Administrator (OCA) for evaluation, report, and
recommendation.21 On July 5, 2005, the Court, upon the OCAs recommendation,
directed the filing of an administrative complaint for simple ignorance of the law
against the RTC Judge.22 On September 12, 2006, the Court directed the OCA to
comply with its July 5, 2005 directive, and to cause the filing of the administrative
complaint against the RTC Judge. The Court also directed Wagas to explain why his
bail should not be cancelled for having been erroneously granted.23 Finally, in its
memorandum dated September 27, 2006, the OCA manifested to the Court that it had
meanwhile filed the administrative complaint against the RTC Judge.24

Article 315. Swindling (estafa). Any person who shall defraud another by any of the
means mentioned hereinbelow shall be punished by:

Issues
In this appeal, Wagas insists that he and Ligaray were neither friends nor personally
known to one other; that it was highly incredible that Ligaray, a businessman, would
have entered into a transaction with him involving a huge amount of money only over
the telephone; that on the contrary, the evidence pointed to Caada as the person with
whom Ligaray had transacted, considering that the delivery receipt, which had been
signed by Caada, indicated that the goods had been "Ordered by ROBERT
CAADA," that the goods had been received by Caada in good order and condition,
and that there was no showing that Caada had been acting on behalf of Wagas; that
he had issued the check to Caada upon a different transaction; that Caada had
negotiated the check to Ligaray; and that the element of deceit had not been
established because it had not been proved with certainty that it was him who had
transacted with Ligaray over the telephone.
The circumstances beg the question: did the Prosecution establish beyond reasonable
doubt the existence of all the elements of the crime of estafa as charged, as well as
the identity of the perpetrator of the crime?
Ruling

Article 315, paragraph 2(d) of the Revised Penal Code, as amended, provides:

xxxx
2. By means of any of the following false pretenses or fraudulent acts executed prior to
or simultaneously with the commission of the fraud:
xxxx
(d) By postdating a check, or issuing a check in payment of an obligation when the
offender had no funds in the bank, or his funds deposited therein were not sufficient to
cover the amount of the check. The failure of the drawer of the check to deposit the
amount necessary to cover his check within three (3) days from receipt of notice from
the bank and/or the payee or holder that said check has been dishonored for lack or
insufficiency of funds shall be prima facie evidence of deceit constituting false
pretense or fraudulent act.
In order to constitute estafa under this statutory provision, the act of postdating or
issuing a check in payment of an obligation must be the efficient cause of the
defraudation. This means that the offender must be able to obtain money or property
from the offended party by reason of the issuance of the check, whether dated or
postdated. In other words, the Prosecution must show that the person to whom the
check was delivered would not have parted with his money or property were it not for
the issuance of the check by the offender.25
The essential elements of the crime charged are that: (a) a check is postdated or
issued in payment of an obligation contracted at the time the check is issued; (b) lack
or insufficiency of funds to cover the check; and (c) damage to the payee thereof.26 It is
the criminal fraud or deceit in the issuance of a check that is punishable, not the nonpayment of a debt.27 Prima facie evidence of deceit exists by law upon proof that the
drawer of the check failed to deposit the amount necessary to cover his check within
three days from receipt of the notice of dishonor.

The Prosecution established that Ligaray had released the goods to Caada because
of the postdated check the latter had given to him; and that the check was dishonored
when presented for payment because of the insufficiency of funds.

A:

In every criminal prosecution, however, the identity of the offender, like the crime itself,
must be established by proof beyond reasonable doubt.28 In that regard, the
Prosecution did not establish beyond reasonable doubt that it was Wagas who had
defrauded Ligaray by issuing the check.

Q:

Firstly, Ligaray expressly admitted that he did not personally meet the person with
whom he was transacting over the telephone, thus:
Q:

I made a demand on them.

How did you make a demand?

A:
I called him over the phone.
Q:

On April 30, 1997, do you remember having a transaction with the accused in this
case?

Who is that "him" that you are referring to?

A:

A:

Yes, sir. He purchased two hundred bags of rice from me.

Gilbert Wagas.30

Q:

Secondly, the check delivered to Ligaray was made payable to cash. Under the
Negotiable Instruments Law, this type of check was payable to the bearer and could
be negotiated by mere delivery without the need of an indorsement.31 This rendered it
highly probable that Wagas had issued the check not to Ligaray, but to somebody else
like Caada, his brother-in-law, who then negotiated it to Ligaray.1wphi1 Relevantly,
Ligaray confirmed that he did not himself see or meet Wagas at the time of the
transaction and thereafter, and expressly stated that the person who signed for and
received the stocks of rice was Caada.

How did this purchase of rice transaction started? (sic)

A:
He talked with me over the phone and told me that he would like to purchase two
hundred bags of rice and he will just issue a check.29
Even after the dishonor of the check, Ligaray did not personally see and meet whoever
he had dealt with and to whom he had made the demand for payment, and that he had
talked with him only over the telephone, to wit:
Q:
After the check was (sic) bounced, what did you do next?

It bears stressing that the accused, to be guilty of estafa as charged, must have used
the check in order to defraud the complainant. What the law punishes is the fraud or
deceit, not the mere issuance of the worthless check. Wagas could not be held guilty
of estafa simply because he had issued the check used to defraud Ligaray. The proof
of guilt must still clearly show that it had been Wagas as the drawer who had
defrauded Ligaray by means of the check.
Thirdly, Ligaray admitted that it was Caada who received the rice from him and who
delivered the check to him. Considering that the records are bereft of any showing that

Caada was then acting on behalf of Wagas, the RTC had no factual and legal bases
to conclude and find that Caada had been acting for Wagas. This lack of factual and
legal bases for the RTC to infer so obtained despite Wagas being Caadas brother-inlaw.
Finally, Ligarays declaration that it was Wagas who had transacted with him over the
telephone was not reliable because he did not explain how he determined that the
person with whom he had the telephone conversation was really Wagas whom he had
not yet met or known before then. We deem it essential for purposes of reliability and
trustworthiness that a telephone conversation like that one Ligaray supposedly had
with the buyer of rice to be first authenticated before it could be received in evidence.
Among others, the person with whom the witness conversed by telephone should be
first satisfactorily identified by voice recognition or any other means.32 Without the
authentication, incriminating another person just by adverting to the telephone
conversation with him would be all too easy. In this respect, an identification based on
familiarity with the voice of the caller, or because of clearly recognizable peculiarities of
the caller would have sufficed.33 The identity of the caller could also be established by
the callers self-identification, coupled with additional evidence, like the context and
timing of the telephone call, the contents of the statement challenged, internal
patterns, and other distinctive characteristics, and disclosure of knowledge of facts
known peculiarly to the caller.34
Verily, it is only fair that the caller be reliably identified first before a telephone
communication is accorded probative weight. The identity of the caller may be
established by direct or circumstantial evidence. According to one ruling of the Kansas
Supreme Court:
Communications by telephone are admissible in evidence where they are relevant to
the fact or facts in issue, and admissibility is governed by the same rules of evidence
concerning face-to-face conversations except the party against whom the
conversations are sought to be used must ordinarily be identified. It is not necessary
that the witness be able, at the time of the conversation, to identify the person with
whom the conversation was had, provided subsequent identification is proved by direct
or circumstantial evidence somewhere in the development of the case. The mere
statement of his identity by the party calling is not in itself sufficient proof of such
identity, in the absence of corroborating circumstances so as to render the
conversation admissible. However, circumstances preceding or following the
conversation may serve to sufficiently identify the caller. The completeness of the
identification goes to the weight of the evidence rather than its admissibility, and the
responsibility lies in the first instance with the district court to determine within its

sound discretion whether the threshold of admissibility has been met.35 (Bold
emphasis supplied)
Yet, the Prosecution did not tender any plausible explanation or offer any proof to
definitely establish that it had been Wagas whom Ligaray had conversed with on the
telephone. The Prosecution did not show through Ligaray during the trial as to how he
had determined that his caller was Wagas. All that the Prosecution sought to elicit from
him was whether he had known and why he had known Wagas, and he answered as
follows:

Q:
Do you know the accused in this case?
A:
Yes, sir.
Q:
If he is present inside the courtroom []
A:
No, sir. He is not around.
Q:
Why do you know him?
A:
I know him as a resident of Compostela because he is an ex-mayor of Compostela.36

During cross-examination, Ligaray was allowed another opportunity to show how he

had determined that his caller was Wagas, but he still failed to provide a satisfactory
showing, to wit:

Yes, sir.

Q:

There was no instant (sic) that the accused went to see you personally regarding the
200 bags rice transaction?

Mr. Witness, you mentioned that you and the accused entered into [a] transaction of
rice selling, particularly with these 200 sacks of rice subject of this case, through
telephone conversation?
A:
Yes, sir.

Q:

A:
No. It was through telephone only.
Q:

Q:

In fact[,] you did not cause the delivery of these 200 bags of rice through the accused
himself?

But you cannot really ascertain that it was the accused whom you are talking with?

A:

A:

Yes. It was through Robert.

I know it was him because I know him.

Q:

Q:

So, after that phone call[,] you deliver[ed] th[ose] 200 sacks of rice through somebody
other than the accused?

Am I right to say [that] that was the first time that you had a transaction with the
accused through telephone conversation, and as a consequence of that alleged
conversation with the accused through telephone he issued a check in your favor?
A:
No. Before that call I had a talk[ ] with the accused.
Q:
But still through the telephone?
A:

A:
Yes, sir.37
Ligarays statement that he could tell that it was Wagas who had ordered the rice
because he "know[s]" him was still vague and unreliable for not assuring the certainty
of the identification, and should not support a finding of Ligarays familiarity with
Wagas as the caller by his voice. It was evident from Ligarays answers that Wagas
was not even an acquaintance of Ligarays prior to the transaction. Thus, the RTCs
conclusion that Ligaray had transacted with Wagas had no factual basis. Without that
factual basis, the RTC was speculating on a matter as decisive as the identification of
the buyer to be Wagas.

The letter of Wagas did not competently establish that he was the person who had
conversed with Ligaray by telephone to place the order for the rice. The letter was
admitted exclusively as the States rebuttal evidence to controvert or impeach the
denial of Wagas of entering into any transaction with Ligaray on the rice; hence, it
could be considered and appreciated only for that purpose. Under the law of evidence,
the court shall consider evidence solely for the purpose for which it is offered, 38 not for
any other purpose.39 Fairness to the adverse party demands such exclusivity.
Moreover, the high plausibility of the explanation of Wagas that he had signed the
letter only because his sister and her husband had pleaded with him to do so could not
be taken for granted.
It is a fundamental rule in criminal procedure that the State carries the onus probandi
in establishing the guilt of the accused beyond a reasonable doubt, as a consequence
of the tenet ei incumbit probation, qui dicit, non qui negat, which means that he who
asserts, not he who denies, must prove,40 and as a means of respecting the
presumption of innocence in favor of the man or woman on the dock for a crime.
Accordingly, the State has the burden of proof to show: (1) the correct identification of
the author of a crime, and (2) the actuality of the commission of the offense with the
participation of the accused. All these facts must be proved by the State beyond
reasonable doubt on the strength of its evidence and without solace from the
weakness of the defense. That the defense the accused puts up may be weak is
inconsequential if, in the first place, the State has failed to discharge the onus of his
identity and culpability. The presumption of innocence dictates that it is for the
Prosecution to demonstrate the guilt and not for the accused to establish
innocence.41 Indeed, the accused, being presumed innocent, carries no burden of
proof on his or her shoulders. For this reason, the first duty of the Prosecution is not to
prove the crime but to prove the identity of the criminal. For even if the commission of
the crime can be established, without competent proof of the identity of the accused
beyond reasonable doubt, there can be no conviction.42
There is no question that an identification that does not preclude a reasonable
possibility of mistake cannot be accorded any evidentiary force.43 Thus, considering
that the circumstances of the identification of Wagas as the person who transacted on
the rice did not preclude a reasonable possibility of mistake, the proof of guilt did not
measure up to the standard of proof beyond reasonable doubt demanded in criminal
cases. Perforce, the accuseds constitutional right of presumption of innocence until
the contrary is proved is not overcome, and he is entitled to an acquittal,44 even though
his innocence may be doubted.45

Nevertheless, an accused, though acquitted of estafa, may still be held civilly liable
where the preponderance of the established facts so warrants.46 Wagas as the
admitted drawer of the check was legally liable to pay the amount of it to Ligaray, a
holder in due course.47 Consequently, we pronounce and hold him fully liable to pay
the amount of the dishonored check, plus legal interest of 6% per annum from the
finality of this decision.
WHEREFORE, the Court REVERSES and SETS ASIDE the decision rendered on
July 11, 2002 by the Regional Trial Court, Branch 58, in Cebu City; and ACQUITS
Gilbert R. Wagas of the crime of estafa on the ground of reasonable doubt, but
ORDERS him to pay Alberto Ligaray the amount of P200,000.00 as actual damages,
plus interest of 6% per annum from the finality of this decision.
No pronouncement on costs of suit.
SO ORDERED.

WHEN the payee of the check is not intended to be the true recipient of its proceeds,
is it payable to order or bearer? What is the fictitious-payee rule and who is liable
under it? Is there any exception?
These questions seek answers in this petition for review on certiorari of the Amended
Decision1 of the Court of Appeals (CA) which affirmed with modification that of the
Regional Trial Court (RTC).2
The Facts
The facts as borne by the records are as follows:
Respondents-Spouses Erlando and Norma Rodriguez were clients of petitioner
Philippine National Bank (PNB), Amelia Avenue Branch, Cebu City. They maintained
savings and demand/checking accounts, namely, PNBig Demand Deposits
(Checking/Current Account No. 810624-6 under the account name Erlando and/or
Norma Rodriguez), and PNBig Demand Deposit (Checking/Current Account No.
810480-4 under the account name Erlando T. Rodriguez).
The spouses were engaged in the informal lending business. In line with their
business, they had a discounting3 arrangement with the Philnabank Employees
Savings and Loan Association (PEMSLA), an association of PNB employees.
Naturally, PEMSLA was likewise a client of PNB Amelia Avenue Branch. The
association maintained current and savings accounts with petitioner bank.

G.R. No. 170325

September 26, 2008

PHILIPPINE NATIONAL BANK, Petitioner,

vs.
ERLANDO T. RODRIGUEZ and NORMA RODRIGUEZ, Respondents.
DECISION
REYES, R.T., J.:

PEMSLA regularly granted loans to its members. Spouses Rodriguez would

rediscount the postdated checks issued to members whenever the association was
short of funds. As was customary, the spouses would replace the postdated checks
with their own checks issued in the name of the members.
It was PEMSLAs policy not to approve applications for loans of members with
outstanding debts. To subvert this policy, some PEMSLA officers devised a scheme to
obtain additional loans despite their outstanding loan accounts. They took out loans in
the names of unknowing members, without the knowledge or consent of the latter. The
PEMSLA checks issued for these loans were then given to the spouses for
rediscounting. The officers carried this out by forging the indorsement of the named
payees in the checks.

In return, the spouses issued their personal checks (Rodriguez checks) in the name of
the members and delivered the checks to an officer of PEMSLA. The PEMSLA
checks, on the other hand, were deposited by the spouses to their account.
Meanwhile, the Rodriguez checks were deposited directly by PEMSLA to its savings
account without any indorsement from the named payees. This was an irregular
procedure made possible through the facilitation of Edmundo Palermo, Jr., treasurer of
PEMSLA and bank teller in the PNB Branch. It appears that this became the usual
practice for the parties.

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

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

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

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

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

follows:

RTC Disposition
Alarmed over the unexpected turn of events, the spouses Rodriguez filed a civil
complaint for damages against PEMSLA, the Multi-Purpose Cooperative of
Philnabankers (MCP), and petitioner PNB. They sought to recover the value of their
checks that were deposited to the PEMSLA savings account amounting
to P2,345,804.00. The spouses contended that because PNB credited the checks to
the PEMSLA account even without indorsements, PNB violated its contractual
obligation to them as depositors. PNB paid the wrong payees, hence, it should bear
the loss.
PNB moved to dismiss the complaint on the ground of lack of cause of action. PNB
argued that the claim for damages should come from the payees of the checks, and
not from spouses Rodriguez. Since there was no demand from the said payees, the
obligation should be considered as discharged.
In an Order dated January 12, 2000, the RTC denied PNBs motion to dismiss.

1. Defendant is hereby ordered to pay the plaintiffs the total amount

of P2,345,804.00 or reinstate or restore the amount of P775,337.00 in the
PNBig Demand Deposit Checking/Current Account No. 810480-4 of Erlando
T. Rodriguez, and the amount of P1,570,467.00 in the PNBig Demand
Deposit, Checking/Current Account No. 810624-6 of Erlando T. Rodriguez
and/or Norma Rodriguez, plus legal rate of interest thereon to be computed
from the filing of this complaint until fully paid;
2. The defendant PNB is hereby ordered to pay the plaintiffs the following
reasonable amount of damages suffered by them taking into consideration
the standing of the plaintiffs being sugarcane planters, realtors, residential
subdivision owners, and other businesses:
(a) Consequential damages, unearned income in the amount
of P4,000,000.00, as a result of their having incurred great
dificulty (sic) especially in the residential subdivision business,
which was not pushed through and the contractor even threatened
to file a case against the plaintiffs;
(b) Moral damages in the amount of P1,000,000.00;
(c) Exemplary damages in the amount of P500,000.00;

(d) Attorneys fees in the amount of P150,000.00 considering that

this case does not involve very complicated issues; and for the
(e) Costs of suit.
3. Other claims and counterclaims are hereby dismissed.6
CA Disposition
PNB appealed the decision of the trial court to the CA on the principal ground that the
disputed checks should be considered as payable to bearer and not to order.
In a Decision7 dated July 22, 2004, the CA reversed and set aside the RTC disposition.
The CA concluded that the checks were obviously meant by the spouses to be really
paid to PEMSLA. The court a quo declared:
We are not swayed by the contention of the plaintiffs-appellees (Spouses Rodriguez)
that their cause of action arose from the alleged breach of contract by the defendantappellant (PNB) when it paid the value of the checks to PEMSLA despite the checks
being payable to order. Rather, we are more convinced by the strong and credible
evidence for the defendant-appellant with regard to the plaintiffs-appellees and
PEMSLAs business arrangement that the value of the rediscounted checks of the
plaintiffs-appellees would be deposited in PEMSLAs account for payment of the loans
it has approved in exchange for PEMSLAs checks with the full value of the said loans.
This is the only obvious explanation as to why all the disputed sixty-nine (69) checks
were in the possession of PEMSLAs errand boy for presentment to the defendantappellant that led to this present controversy. It also appears that the teller who
accepted the said checks was PEMSLAs officer, and that such was a regular practice
by the parties until the defendant-appellant discovered the scam. The logical
conclusion, therefore, is that the checks were never meant to be paid to order, but
instead, to PEMSLA. We thus find no breach of contract on the part of the defendantappellant.
According to plaintiff-appellee Erlando Rodriguez testimony, PEMSLA allegedly
issued post-dated checks to its qualified members who had applied for loans.
However, because of PEMSLAs insufficiency of funds, PEMSLA approached the
plaintiffs-appellees for the latter to issue rediscounted checks in favor of said applicant
members. Based on the investigation of the defendant-appellant, meanwhile, this
arrangement allowed the plaintiffs-appellees to make a profit by issuing rediscounted

checks, while the officers of PEMSLA and other members would be able to claim their
loans, despite the fact that they were disqualified for one reason or another. They were
able to achieve this conspiracy by using other members who had loaned lesser
amounts of money or had not applied at all. x x x.8 (Emphasis added)
The CA found that the checks were bearer instruments, thus they do not require
indorsement for negotiation; and that spouses Rodriguez and PEMSLA conspired with
each other to accomplish this money-making scheme. The payees in the checks were
"fictitious payees" because they were not the intended payees at all.
The spouses Rodriguez moved for reconsideration. They argued, inter alia, that the
checks on their faces were unquestionably payable to order; and that PNB committed
a breach of contract when it paid the value of the checks to PEMSLA without
indorsement from the payees. They also argued that their cause of action is not only
against PEMSLA but also against PNB to recover the value of the checks.
On October 11, 2005, the CA reversed itself via an Amended Decision, the last
paragraph and fallo of which read:
In sum, we rule that the defendant-appellant PNB is liable to the plaintiffs-appellees
Sps. Rodriguez for the following:
1. Actual damages in the amount of P2,345,804 with interest at 6% per
annum from 14 May 1999 until fully paid;
2. Moral damages in the amount of P200,000;
3. Attorneys fees in the amount of P100,000; and
4. Costs of suit.
WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by Us
AFFIRMING WITH MODIFICATION the assailed decision rendered in Civil Case No.
99-10892, as set forth in the immediately next preceding paragraph hereof, and
SETTING ASIDE Our original decision promulgated in this case on 22 July 2004.
SO ORDERED.9

The CA ruled that the checks were payable to order. According to the appellate court,
PNB failed to present sufficient proof to defeat the claim of the spouses Rodriguez that
they really intended the checks to be received by the specified payees. Thus, PNB is
liable for the value of the checks which it paid to PEMSLA without indorsements from
the named payees. The award for damages was deemed appropriate in view of the
failure of PNB to treat the Rodriguez account with the highest degree of care
considering the fiduciary nature of their relationship, which constrained respondents to
seek legal action.
Hence, the present recourse under Rule 45.
Issues
The issues may be compressed to whether the subject checks are payable to order or
to bearer and who bears the loss?
PNB argues anew that when the spouses Rodriguez issued the disputed checks, they
did not intend for the named payees to receive the proceeds. Thus, they are bearer
instruments that could be validly negotiated by mere delivery. Further, testimonial and
documentary evidence presented during trial amply proved that spouses Rodriguez
and the officers of PEMSLA conspired with each other to defraud the bank.
Our Ruling
Prefatorily, amendment of decisions is more acceptable than an erroneous judgment
attaining finality to the prejudice of innocent parties. A court discovering an erroneous
judgment before it becomes final may, motu proprio or upon motion of the parties,
correct its judgment with the singular objective of achieving justice for the litigants.10
However, a word of caution to lower courts, the CA in Cebu in this particular case, is in
order. The Court does not sanction careless disposition of cases by courts of justice.
The highest degree of diligence must go into the study of every controversy submitted
for decision by litigants. Every issue and factual detail must be closely scrutinized and
analyzed, and all the applicable laws judiciously studied, before the promulgation of
every judgment by the court. Only in this manner will errors in judgments be avoided.
Now to the core of the petition.

As a rule, when the payee is fictitious or not intended to be the true recipient of the
proceeds, the check is considered as a bearer instrument. A check is "a bill of
exchange drawn on a bank payable on demand."11 It is either an order or a bearer
instrument. Sections 8 and 9 of the NIL states:
SEC. 8. When payable to order. The instrument is payable to order where it is drawn
payable to the order of a specified person or to him or his order. It may be drawn
payable to the order of
(a) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.
Where the instrument is payable to order, the payee must be named or otherwise
indicated therein with reasonable certainty.
SEC. 9. When payable to bearer. The instrument is payable to bearer
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or bearer; or
(c) When it is payable to the order of a fictitious or non-existing person, and
such fact is known to the person making it so payable; or
(d) When the name of the payee does not purport to be the name of any
person; or

(e) Where the only or last indorsement is an indorsement in

blank.12 (Underscoring supplied)
The distinction between bearer and order instruments lies in their manner of
negotiation. Under Section 30 of the NIL, an order instrument requires an indorsement
from the payee or holder before it may be validly negotiated. A bearer instrument, on
the other hand, does not require an indorsement to be validly negotiated. It is
negotiable by mere delivery. The provision reads:
SEC. 30. What constitutes negotiation. An instrument is negotiated when it is
transferred from one person to another in such manner as to constitute the transferee
the holder thereof. If payable to bearer, it is negotiated by delivery; if payable to order,
it is negotiated by the indorsement of the holder completed by delivery.
A check that is payable to a specified payee is an order instrument. However, under
Section 9(c) of the NIL, a check payable to a specified payee may nevertheless be
considered as a bearer instrument if it is payable to the order of a fictitious or nonexisting person, and such fact is known to the person making it so payable. Thus,
checks issued to "Prinsipe Abante" or "Si Malakas at si Maganda," who are wellknown characters in Philippine mythology, are bearer instruments because the named
payees are fictitious and non-existent.
We have yet to discuss a broader meaning of the term "fictitious" as used in the NIL. It
is for this reason that We look elsewhere for guidance. Court rulings in the United
States are a logical starting point since our law on negotiable instruments was directly
lifted from the Uniform Negotiable Instruments Law of the United States.13
A review of US jurisprudence yields that an actual, existing, and living payee may also
be "fictitious" if the maker of the check did not intend for the payee to in fact receive
the proceeds of the check. This usually occurs when the maker places a name of an
existing payee on the check for convenience or to cover up an illegal activity.14 Thus, a
check made expressly payable to a non-fictitious and existing person is not necessarily
an order instrument. If the payee is not the intended recipient of the proceeds of the
check, the payee is considered a "fictitious" payee and the check is a bearer
instrument.
In a fictitious-payee situation, the drawee bank is absolved from liability and the drawer
bears the loss. When faced with a check payable to a fictitious payee, it is treated as a
bearer instrument that can be negotiated by delivery. The underlying theory is that one

cannot expect a fictitious payee to negotiate the check by placing his indorsement
thereon. And since the maker knew this limitation, he must have intended for the
instrument to be negotiated by mere delivery. Thus, in case of controversy, the drawer
of the check will bear the loss. This rule is justified for otherwise, it will be most
convenient for the maker who desires to escape payment of the check to always deny
the validity of the indorsement. This despite the fact that the fictitious payee was
purposely named without any intention that the payee should receive the proceeds of
the check.15
The fictitious-payee rule is best illustrated in Mueller & Martin v. Liberty Insurance
Bank.16 In the said case, the corporation Mueller & Martin was defrauded by George L.
Martin, one of its authorized signatories. Martin drew seven checks payable to the
German Savings Fund Company Building Association (GSFCBA) amounting to
$2,972.50 against the account of the corporation without authority from the latter.
Martin was also an officer of the GSFCBA but did not have signing authority. At the
back of the checks, Martin placed the rubber stamp of the GSFCBA and signed his
own name as indorsement. He then successfully drew the funds from Liberty
Insurance Bank for his own personal profit. When the corporation filed an action
against the bank to recover the amount of the checks, the claim was denied.
The US Supreme Court held in Mueller that when the person making the check so
payable did not intend for the specified payee to have any part in the transactions, the
payee is considered as a fictitious payee. The check is then considered as a bearer
instrument to be validly negotiated by mere delivery. Thus, the US Supreme Court held
that Liberty Insurance Bank, as drawee, was authorized to make payment to the
bearer of the check, regardless of whether prior indorsements were genuine or not.17
The more recent Getty Petroleum Corp. v. American Express Travel Related Services
Company, Inc.18 upheld the fictitious-payee rule. The rule protects the depositary bank
and assigns the loss to the drawer of the check who was in a better position to prevent
the loss in the first place. Due care is not even required from the drawee or depositary
bank in accepting and paying the checks. The effect is that a showing of negligence
on the part of the depositary bank will not defeat the protection that is derived from this
rule.
However, there is a commercial bad faith exception to the fictitious-payee rule. A
showing of commercial bad faith on the part of the drawee bank, or any transferee of
the check for that matter, will work to strip it of this defense. The exception will cause it
to bear the loss. Commercial bad faith is present if the transferee of the check acts

dishonestly, and is a party to the fraudulent scheme. Said the US Supreme Court in
Getty:

situation that the maker of the check intended for the payee to have no interest in the
transaction.

Consequently, a transferees lapse of wary vigilance, disregard of suspicious

circumstances which might have well induced a prudent banker to investigate and
other permutations of negligence are not relevant considerations under Section 3-405
x x x. Rather, there is a "commercial bad faith" exception to UCC 3-405, applicable
when the transferee "acts dishonestly where it has actual knowledge of facts and
circumstances that amount to bad faith, thus itself becoming a participant in a
fraudulent scheme. x x x Such a test finds support in the text of the Code, which omits
a standard of care requirement from UCC 3-405 but imposes on all parties an
obligation to act with "honesty in fact." x x x19 (Emphasis added)

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

Getty also laid the principle that the fictitious-payee rule extends protection even to
non-bank transferees of the checks.
In the case under review, the Rodriguez checks were payable to specified payees. It is
unrefuted that the 69 checks were payable to specific persons. Likewise, it is
uncontroverted that the payees were actual, existing, and living persons who were
members of PEMSLA that had a rediscounting arrangement with spouses Rodriguez.
What remains to be determined is if the payees, though existing persons, were
"fictitious" in its broader context.
For the fictitious-payee rule to be available as a defense, PNB must show that the
makers did not intend for the named payees to be part of the transaction involving the
checks. At most, the banks thesis shows that the payees did not have knowledge of
the existence of the checks. This lack of knowledge on the part of the payees,
however, was not tantamount to a lack of intention on the part of respondents-spouses
that the payees would not receive the checks proceeds. Considering that
respondents-spouses were transacting with PEMSLA and not the individual payees, it
is understandable that they relied on the information given by the officers of PEMSLA
that the payees would be receiving the checks.
Verily, the subject checks are presumed order instruments. This is because, as found
by both lower courts, PNB failed to present sufficient evidence to defeat the claim of
respondents-spouses that the named payees were the intended recipients of the
checks proceeds. The bank failed to satisfy a requisite condition of a fictitious-payee

PNB was remiss in its duty as the drawee bank. It does not dispute the fact that its
teller or tellers accepted the 69 checks for deposit to the PEMSLA account even
without any indorsement from the named payees. It bears stressing that order
instruments can only be negotiated with a valid indorsement.
A bank that regularly processes checks that are neither payable to the customer nor
duly indorsed by the payee is apparently grossly negligent in its operations.21 This
Court has recognized the unique public interest possessed by the banking industry
and the need for the people to have full trust and confidence in their banks.22 For this
reason, banks are minded to treat their customers accounts with utmost care,
confidence, and honesty.23
In a checking transaction, the drawee bank has the duty to verify the genuineness of
the signature of the drawer and to pay the check strictly in accordance with the
drawers instructions, i.e., to the named payee in the check. It should charge to the
drawers accounts only the payables authorized by the latter. Otherwise, the drawee
will be violating the instructions of the drawer and it shall be liable for the amount
charged to the drawers account.24
In the case at bar, respondents-spouses were the banks depositors. The checks were
drawn against respondents-spouses accounts. PNB, as the drawee bank, had the
responsibility to ascertain the regularity of the indorsements, and the genuineness of
the signatures on the checks before accepting them for deposit. Lastly, PNB was
obligated to pay the checks in strict accordance with the instructions of the drawers.
Petitioner miserably failed to discharge this burden.
The checks were presented to PNB for deposit by a representative of PEMSLA absent
any type of indorsement, forged or otherwise. The facts clearly show that the bank did
not pay the checks in strict accordance with the instructions of the drawers,
respondents-spouses. Instead, it paid the values of the checks not to the named
payees or their order, but to PEMSLA, a third party to the transaction between the
drawers and the payees.alf-ITC

Moreover, PNB was negligent in the selection and supervision of its employees. The
trustworthiness of bank employees is indispensable to maintain the stability of the
banking industry. Thus, banks are enjoined to be extra vigilant in the management and
supervision of their employees. In Bank of the Philippine Islands v. Court of
Appeals,25 this Court cautioned thus:
Banks handle daily transactions involving millions of pesos. By the very nature of their
work the degree of responsibility, care and trustworthiness expected of their
employees and officials is far greater than those of ordinary clerks and employees. For
obvious reasons, the banks are expected to exercise the highest degree of diligence in
the selection and supervision of their employees.26
PNBs tellers and officers, in violation of banking rules of procedure, permitted the
invalid deposits of checks to the PEMSLA account. Indeed, when it is the gross
negligence of the bank employees that caused the loss, the bank should be held
liable.27
PNBs argument that there is no loss to compensate since no demand for payment
has been made by the payees must also fail. Damage was caused to respondentsspouses when the PEMSLA checks they deposited were returned for the reason
"Account Closed." These PEMSLA checks were the corresponding payments to the
Rodriguez checks. Since they could not encash the PEMSLA checks, respondentsspouses were unable to collect payments for the amounts they had advanced.
A bank that has been remiss in its duty must suffer the consequences of its
negligence. Being issued to named payees, PNB was duty-bound by law and by
banking rules and procedure to require that the checks be properly indorsed before
accepting them for deposit and payment. In fine, PNB should be held liable for the
amounts of the checks.
One Last Note
We note that the RTC failed to thresh out the merits of PNBs cross-claim against its
co-defendants PEMSLA and MPC. The records are bereft of any pleading filed by
these two defendants in answer to the complaint of respondents-spouses and crossclaim of PNB. The Rules expressly provide that failure to file an answer is a ground for
a declaration that defendant is in default.28 Yet, the RTC failed to sanction the failure of
both PEMSLA and MPC to file responsive pleadings. Verily, the RTC dismissal of

PNBs cross-claim has no basis. Thus, this judgment shall be without prejudice to
whatever action the bank might take against its co-defendants in the trial court.
To PNBs credit, it became involved in the controversial transaction not of its own
volition but due to the actions of some of its employees. Considering that moral
damages must be understood to be in concept of grants, not punitive or corrective in
nature, We resolve to reduce the award of moral damages to P50,000.00.29
WHEREFORE, the appealed Amended Decision is AFFIRMED with the
MODIFICATION that the award for moral damages is reduced to P50,000.00, and that
this is without prejudice to whatever civil, criminal, or administrative action PNB might
take against PEMSLA, MPC, and the employees involved.
SO ORDERED.

The facts are undisputed:

Since 1990, John Dy has been the distributor of W.L. Food Products (W.L. Foods) in
Naga City, Bicol, under the business name Dyna Marketing. Dy would pay W.L. Foods
in either cash or check upon pick up of stocks of snack foods at the latter's branch or
main office in Quezon City. At times, he would entrust the payment to one of his
drivers.
On June 24, 1992, Dy's driver went to the branch office of W.L. Foods to pick up
stocks of snack foods. He introduced himself to the checker, Mary Jane D. Maraca,
who upon confirming Dy's credit with the main office, gave him merchandise
worth P106,579.60. In return, the driver handed her a blank Far East Bank and Trust
Company (FEBTC) Check with Check No. 553602 postdated July 22, 1992. The check
was signed by Dy though it did not indicate a specific amount.
Yet again, on July 1, 1992, the same driver obtained snack foods from Maraca in the
amount ofP226,794.36 in exchange for a blank FEBTC Check with Check No. 553615
postdated July 31, 1992.
G.R. No. 158312

November 14, 2008

JOHN DY, petitioner,

vs.
PEOPLE OF THE PHILIPPINES and The HONORABLE COURT OF
APPEALS, respondents.
DECISION
QUISUMBING, Acting C.J.:
This appeal prays for the reversal of the Decision1 dated January 23, 2003 and the
Resolution2 dated May 14, 2003 of the Court of Appeals in CA-G.R. CR No. 23802.
The appellate court affirmed with modification the Decision3 dated November 17, 1999
of the Regional Trial Court (RTC), Branch 82 of Quezon City, which had convicted
petitioner John Dy of two counts of estafa in Criminal Cases Nos. Q-93-46711 and Q93-46713, and two counts of violation of Batas Pambansa Bilang 224 (B.P. Blg. 22) in
Criminal Cases Nos. Q-93-46712 and Q-93-46714.

In both instances, the driver was issued an unsigned delivery receipt. The amounts for
the purchases were filled in later by Evelyn Ong, accountant of W.L. Foods, based on
the value of the goods delivered.
When presented for payment, FEBTC dishonored the checks for insufficiency of funds.
Raul D. Gonzales, manager of FEBTC-Naga Branch, notified Atty. Rita Linda Jimeno,
counsel of W.L. Foods, of the dishonor. Apparently, Dy only had an available balance
of P2,000 as of July 22, 1992 and July 31, 1992.
Later, Gonzales sent Atty. Jimeno another letter5 advising her that FEBTC Check No.
553602 forP106,579.60 was returned to the drawee bank for the reasons stop
payment order and drawn against uncollected deposit (DAUD), and not because it was
drawn against insufficient funds as stated in the first letter. Dy's savings deposit
account ledger reflected a balance of P160,659.39 as of July 22, 1992. This, however,
included a regional clearing check for P55,000 which he deposited on July 20, 1992,
and which took five (5) banking days to clear. Hence, the inward check was drawn
against the yet uncollected deposit.

When William Lim, owner of W.L. Foods, phoned Dy about the matter, the latter
explained that he could not pay since he had no funds yet. This prompted the former to
send petitioner a demand letter, which the latter ignored.
On July 16, 1993, Lim charged Dy with two counts of estafa under Article 315,
paragraph 2(d)6 of the Revised Penal Code in two Informations, which except for the
dates and amounts involved, similarly read as follows:
That on or about the 24th day of June, 1992, in Quezon City, Philippines, the
said accused, did then and there [willfully] and feloniously defraud W.L.
PRODUCTS, a corporation duly organized and existing under the laws of
the Republic of the Philippines with business address at No. 531 Gen. Luis
St., Novaliches, this City, in the following manner, to wit: the said accused,
by means of false manifestations and fraudulent representation which he
made to complainant to the effect that Far East Bank and Trust Co. check
No. 553602 dated July 22, 1992 in the amount ofP106,579.60, payable to
W.L. Products is a good check and will be honored by the bank on its
maturity date, and by means of other deceit of similar import, induced and
succeeded in inducing the said complainant to receive and accept the
aforesaid check in payment of snack foods, the said accused knowing fully
well that all his manifestations and representations were false and untrue
and were made solely for the purpose of obtaining, as in fact he did obtain
the aforesaid snack foods valued at P106,579.60 from said complainant as
upon presentation of said check to the bank for payment, the same was
dishonored and payment thereof refused for the reason stop payment and
the said accused, once in possession of the aforesaid snack foods, with
intent to defraud, [willfully], unlawfully and feloniously misapplied,
misappropriated and converted the same or the value thereof to his own
personal use and benefit, to the damage and prejudice of said W.L.
Products, herein represented by RODOLFO BORJAL, in the aforementioned
amount of P106,579.60, Philippine Currency.
Contrary to law.7
On even date, Lim also charged Dy with two counts of violation of B.P. Blg. 22 in two
Informations which likewise save for the dates and amounts involved similarly read as
follows:

That on or about the 24th day of June, 1992, the said accused, did then and
there [willfully], unlawfully and feloniously make or draw and issue to W.L.
FOOD PRODUCTS to apply on account or for value a Far East Bank and
Trust Co. Check no. 553602 dated July 22, 1992 payable to W.L. FOOD
PRODUCTS in the amount of P106,579.60 Philippine Currency, said
accused knowing fully well that at the time of issue he/she/they did not have
sufficient funds in or credit with the drawee bank for payment of such check
in full upon its presentment, which check when presented 90 days from the
date thereof was subsequently dishonored by the drawee bank for the
reason "Payment stopped" but the same would have been dishonored for
insufficient funds had not the accused without any valid reason, ordered the
bank to stop payment, the said accused despite receipt of notice of such
dishonor, failed to pay said W.L. Food Products the amount of said check or
to make arrangement for payment in full of the same within five (5) banking
days after receiving said notice.
CONTRARY TO LAW.8
On November 23, 1994, Dy was arrested in Naga City. On arraignment, he pleaded
not guilty to all charges. Thereafter, the cases against him were tried jointly.
On November 17, 1999 the RTC convicted Dy on two counts each of estafa and
violation of B.P. Blg. 22. The trial court disposed of the case as follows:
WHEREFORE, accused JOHN JERRY DY ALDEN (JOHN DY) is hereby
found GUILTY beyond reasonable doubt of swindling (ESTAFA) as charged
in the Informations in Criminal Case No. 93-46711 and in Criminal Case No.
Q-93-46713, respectively. Accordingly, after applying the provisions of the
Indeterminate Sentence Law and P.D. No. 818, said accused is hereby
sentenced to suffer the indeterminate penalty of ten (10) years and one (1)
day to twelve (12) years of prision mayor, as minimum, to twenty (20) years
of reclusion temporal, as maximum, in Criminal Case No. Q-93-46711 and
of ten (10) years and one (1) day to twelve (12) years ofprision mayor, as
minimum, to thirty (30) years of reclusion perpetua, as maximum, in Criminal
Case No. Q-93-46713.
Likewise, said accused is hereby found GUILTY beyond reasonable doubt of
Violation of B.P. 22 as charged in the Informations in Criminal Case No. Q93-46712 and in Criminal Case No. Q-93-46714 and is accordingly

sentenced to imprisonment of one (1) year for each of the said offense and
to pay a fine in the total amount of P333,373.96, with subsidiary
imprisonment in case of insolvency.

Dy moved for reconsideration, but his motion was denied in the Resolution dated May
14, 2003.
Hence, this petition which raises the following issues:

FINALLY, judgment is hereby rendered in favor of private complainant, W. L.

Food Products, herein represented by Rodolfo Borjal, and against herein
accused JOHN JERRY DY ALDEN (JOHN DY), ordering the latter to pay to
the former the total sum of P333,373.96 plus interest thereon at the rate of
12% per annum from September 28, 1992 until fully paid; and, (2) the costs
of this suit.
SO ORDERED.9
Dy brought the case to the Court of Appeals. In the assailed Decision of January 23,
2003, the appellate court affirmed the RTC. It, however, modified the sentence and
deleted the payment of interests in this wise:
WHEREFORE, in view of the foregoing, the decision appealed from is
hereby AFFIRMED with MODIFICATION. In Criminal Case No. Q-9346711 (for estafa), the accused-appellant JOHN JERRY DY ALDEN (JOHN
DY) is hereby sentenced to suffer an indeterminate penalty of imprisonment
ranging from six (6) years and one (1) day of prision mayor as minimum to
twenty (20) years of reclusion temporal as maximum plus eight (8) years in
excess of [P]22,000.00. InCriminal Case No. Q-93-46712 (for violation of
BP 22), accused-appellant is sentenced to suffer an imprisonment of one (1)
year and to indemnify W.L. Food Products, represented by Rodolfo Borjal,
the amount of ONE HUNDRED SIX THOUSAND FIVE HUNDRED
SEVENTY NINE PESOS and 60/100 ([P]106,579.60). In Criminal Case No.
Q-93-46713 (for estafa), accused-appellant is hereby sentenced to suffer
an indeterminate penalty of imprisonment ranging from eight (8) years and
one (1) day of prision mayor as minimum to thirty (30) years as maximum.
Finally, in Criminal Case No. Q-93-46714 (for violation of BP 22),
accused-appellant is sentenced to suffer an imprisonment of one (1) year
and to indemnify W.L. Food Products, represented by Rodolfo Borjal, the
amount of TWO HUNDRED TWENTY SIX THOUSAND SEVEN HUNDRED
NINETY FOUR PESOS AND 36/100 ([P]226,794.36).
SO ORDERED.10

I.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS GRAVELY
ERRED IN FINDING THAT THE PROSECUTION HAS PROVEN THE
GUILT OF ACCUSED BEYOND REASONABLE DOUBT OF ESTAFA ON
TWO (2) COUNTS?
II.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS GRAVELY
ERRED IN FINDING THAT THE PROSECUTION HAS PROVEN THE
GUILT OF ACCUSED BEYOND REASONABLE DOUBT OF VIOLATION OF
BP 22 ON TWO (2) COUNTS?
III.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS GRAVELY
ERRED IN AWARDING DAMAGES TO PRIVATE COMPLAINANT, W.L.
FOOD PRODUCTS, THE TOTAL SUM OF [P]333,373.96?11
Essentially, the issue is whether John Dy is liable for estafa and for violation of B.P.
Blg. 22.
First, is petitioner guilty of estafa?
Mainly, petitioner contends that the checks were ineffectively issued. He stresses that
not only were the checks blank, but also that W.L. Foods' accountant had no authority
to fill the amounts. Dy also claims failure of consideration to negate any obligation to
W.L. Foods. Ultimately, petitioner denies having deceived Lim inasmuch as only the
two checks bounced since he began dealing with him. He maintains that it was his
long established business relationship with Lim that enabled him to obtain the goods,
and not the checks issued in payment for them. Petitioner renounces personal liability
on the checks since he was absent when the goods were delivered.

The Office of the Solicitor General (OSG), for the State, avers that the delivery of the
checks by Dy's driver to Maraca, constituted valid issuance. The OSG sustains
Ong's prima facie authority to fill the checks based on the value of goods taken. It
observes that nothing in the records showed that W.L. Foods' accountant filled up the
checks in violation of Dy's instructions or their previous agreement. Finally, the OSG
challenges the present petition as an inappropriate remedy to review the factual
findings of the trial court.
We find that the petition is partly meritorious.
Before an accused can be held liable for estafa under Article 315, paragraph 2(d) of
the Revised Penal Code, as amended by Republic Act No. 4885,12 the following
elements must concur: (1) postdating or issuance of a check in payment of an
obligation contracted at the time the check was issued; (2) insufficiency of funds to
cover the check; and (3) damage to the payee thereof.13 These elements are present
in the instant case.
Section 191 of the Negotiable Instruments Law14 defines "issue" as the first delivery of
an instrument, complete in form, to a person who takes it as a holder. Significantly,
delivery is the final act essential to the negotiability of an instrument. Delivery denotes
physical transfer of the instrument by the maker or drawer coupled with an intention to
convey title to the payee and recognize him as a holder.15 It means more than handing
over to another; it imports such transfer of the instrument to another as to enable the
latter to hold it for himself.16
In this case, even if the checks were given to W.L. Foods in blank, this alone did not
make its issuance invalid. When the checks were delivered to Lim, through his
employee, he became a holder with prima facie authority to fill the blanks. This was, in
fact, accomplished by Lim's accountant.
The pertinent provisions of Section 14 of the Negotiable Instruments Law are
instructive:
SEC. 14. Blanks; when may be filled.-Where the instrument is wanting in
any material particular,the person in possession thereof has a prima
facie authority to complete it by filling up the blanks therein. And a
signature on a blank paper delivered by the person making the signature in
order that the paper may be converted into a negotiable instrument operates

as aprima facie authority to fill it up as such for any amount. . (Emphasis

supplied.)
Hence, the law merely requires that the instrument be in the possession of a person
other than the drawer or maker. From such possession, together with the fact that the
instrument is wanting in a material particular, the law presumes agency to fill up the
blanks.17 Because of this, the burden of proving want of authority or that the authority
granted was exceeded, is placed on the person questioning such authority.18 Petitioner
failed to fulfill this requirement.
Next, petitioner claims failure of consideration. Nevertheless, in a letter 19 dated
November 10, 1992, he expressed willingness to pay W.L. Foods, or to replace the
dishonored checks. This was a clear acknowledgment of receipt of the goods, which
gave rise to his duty to maintain or deposit sufficient funds to cover the amount of the
checks.
More significantly, we are not swayed by petitioner's arguments that the single incident
of dishonor and his absence when the checks were delivered belie fraud. Indeed
damage and deceit are essential elements of the offense and must be established with
satisfactory proof to warrant conviction.20 Deceit as an element of estafa is a specie of
fraud. It is actual fraud which consists in any misrepresentation or contrivance where a
person deludes another, to his hurt. There is deceit when one is misled -- by guile,
trickery or by other means -- to believe as true what is really false.21
Prima facie evidence of deceit was established against petitioner with regard to
FEBTC Check No. 553615 which was dishonored for insufficiency of funds. The
letter22 of petitioner's counsel dated November 10, 1992 shows beyond reasonable
doubt that petitioner received notice of the dishonor of the said check for insufficiency
of funds. Petitioner, however, failed to deposit the amounts necessary to cover his
check within three banking days from receipt of the notice of dishonor. Hence, as
provided for by law,23 the presence of deceit was sufficiently proven.
Petitioner failed to overcome the said proof of deceit. The trial court found no preexisting obligation between the parties. The existence of prior transactions between
Lim and Dy alone did not rule out deceit because each transaction was separate, and
had a different consideration from the others. Even as petitioner was absent when the
goods were delivered, by the principle of agency, delivery of the checks by his driver
was deemed as his act as the employer. The evidence shows that as a matter of
course, Dy, or his employee, would pay W.L. Foods in either cash or check upon pick

up of the stocks of snack foods at the latter's branch or main office. Despite their twoyear standing business relations prior to the issuance of the subject check, W.L Foods
employees would not have parted with the stocks were it not for the simultaneous
delivery of the check issued by petitioner.24Aside from the existing business relations
between petitioner and W.L. Foods, the primary inducement for the latter to part with
its stocks of snack foods was the issuance of the check in payment of the value of the
said stocks.

Clearly, the estafa punished under Article 315, paragraph 2(d) of the Revised Penal
Code is committed when a check is dishonored for being drawn against insufficient
funds or closed account, and not against uncollected deposit.27 Corollarily, the issuer
of the check is not liable for estafa if the remaining balance and the uncollected
deposit, which was duly collected, could satisfy the amount of the check when
presented for payment.
Second, did petitioner violate B.P. Blg. 22?

In a number of cases,25 the Court has considered good faith as a defense to a charge
of estafa by postdating a check. This good faith may be manifested by making
arrangements for payment with the creditor and exerting best efforts to make good the
value of the checks. In the instant case petitioner presented no proof of good faith.
Noticeably absent from the records is sufficient proof of sincere and best efforts on the
part of petitioner for the payment of the value of the check that would constitute good
faith and negate deceit.
With the foregoing circumstances established, we find petitioner guilty of estafa with
regard to FEBTC Check No. 553615 for P226,794.36.
The same, however, does not hold true with respect to FEBTC Check No. 553602
for P106,579.60. This check was dishonored for the reason that it was drawn against
uncollected deposit. Petitioner had P160,659.39 in his savings deposit account ledger
as of July 22, 1992. We disagree with the conclusion of the RTC that since the balance
included a regional clearing check worth P55,000 deposited on July 20, 1992, which
cleared only five (5) days later, then petitioner had inadequate funds in this instance.
Since petitioner technically and retroactively had sufficient funds at the time Check No.
553602 was presented for payment then the second element (insufficiency of funds to
cover the check) of the crime is absent. Also there is no prima facie evidence of deceit
in this instance because the check was not dishonored for lack or insufficiency of
funds. Uncollected deposits are not the same as insufficient funds. The prima
facie presumption of deceit arises only when a check has been dishonored for lack or
insufficiency of funds. Notably, the law speaks of insufficiency of funds but not of
uncollected deposits. Jurisprudence teaches that criminal laws are strictly construed
against the Government and liberally in favor of the accused.26 Hence, in the instant
case, the law cannot be interpreted or applied in such a way as to expand its provision
to encompass the situation of uncollected deposits because it would make the law
more onerous on the part of the accused.

Petitioner argues that the blank checks were not valid orders for the bank to pay the
holder of such checks. He reiterates lack of knowledge of the insufficiency of funds
and reasons that the checks could not have been issued to apply on account or for
value as he did not obtain delivery of the goods.
The OSG maintains that the guilt of petitioner has been proven beyond reasonable
doubt. It cites pieces of evidence that point to Dy's culpability: Maraca's
acknowledgment that the checks were issued to W.L. Foods as consideration for the
snacks; Lim's testimony proving that Dy received a copy of the demand letter; the bank
manager's confirmation that petitioner had insufficient balance to cover the checks;
and Dy's failure to settle his obligation within five (5) days from dishonor of the checks.
Once again, we find the petition to be meritorious in part.
The elements of the offense penalized under B.P. Blg. 22 are as follows: (1) the
making, drawing and issuance of any check to apply to account or for value; (2) the
knowledge of the maker, drawer or issuer that at the time of issue he does not have
sufficient funds in or credit with the drawee bank for the payment of such check in full
upon its presentment; and (3) subsequent dishonor of the check by the drawee bank
for insufficiency of funds or credit or dishonor for the same reason had not the drawer,
without any valid cause, ordered the bank to stop payment.28 The case at bar satisfies
all these elements.
During the joint pre-trial conference of this case, Dy admitted that he issued the
checks, and that the signatures appearing on them were his.29 The facts reveal that the
checks were issued in blank because of the uncertainty of the volume of products to
be retrieved, the discount that can be availed of, and the deduction for bad orders.
Nevertheless, we must stress that what the law punishes is simply the issuance of a
bouncing check and not the purpose for which it was issued nor the terms and
conditions relating thereto.30 If inquiry into the reason for which the checks are issued,

or the terms and conditions of their issuance is required, the public's faith in the
stability and commercial value of checks as currency substitutes will certainly erode.31

balance more than enough to cover the face value of the subject check, had not been
collected by the bank.

Moreover, the gravamen of the offense under B.P. Blg. 22 is the act of making or
issuing a worthless check or a check that is dishonored upon presentment for
payment. The act effectively declares the offense to be one of malum prohibitum. The
only valid query, then, is whether the law has been breached, i.e., by the mere act of
issuing a bad check, without so much regard as to the criminal intent of the
issuer.32 Indeed, non-fulfillment of the obligation is immaterial. Thus, petitioner's
defense of failure of consideration must likewise fall. This is especially so since as
stated above, Dy has acknowledged receipt of the goods.

In Tan v. People,38 this Court acquitted the petitioner therein who was indicted under
B.P. Blg. 22, upon a check which was dishonored for the reason DAUD, among others.
We observed that:

On the second element, petitioner disputes notice of insufficiency of funds on the basis
of the check being issued in blank. He relies on Dingle v. Intermediate Appellate
Court33 and Lao v. Court of Appeals34 as his authorities. In both actions, however, the
accused were co-signatories, who were neither apprised of the particular transactions
on which the blank checks were issued, nor given notice of their dishonor. In the latter
case, Lao signed the checks without knowledge of the insufficiency of funds,
knowledge she was not expected or obliged to possess under the organizational
structure of the corporation.35 Lao was only a minor employee who had nothing to do
with the issuance, funding and delivery of checks.36 In contrast, petitioner was the
proprietor of Dyna Marketing and the sole signatory of the checks who received notice
of their dishonor.

To be liable under Section 140 of B.P. Blg. 22, the check must be dishonored by the
drawee bank for insufficiency of funds or credit or dishonored for the same reason had
not the drawer, without any valid cause, ordered the bank to stop payment.

Significantly, under Section 237 of B.P. Blg. 22, petitioner was prima facie presumed to
know of the inadequacy of his funds with the bank when he did not pay the value of
the goods or make arrangements for their payment in full within five (5) banking days
upon notice. His letter dated November 10, 1992 to Lim fortified such presumption.
Undoubtedly, Dy violated B.P. Blg. 22 for issuing FEBTC Check No. 553615. When
said check was dishonored for insufficient funds and stop payment order, petitioner did
not pay or make arrangements with the bank for its payment in full within five (5)
banking days.
Petitioner should be exonerated, however, for issuing FEBTC Check No. 553602,
which was dishonored for the reason DAUD or drawn against uncollected deposit.
When the check was presented for payment, it was dishonored by the bank because
the check deposit made by petitioner, which would make petitioner's bank account

In the second place, even without relying on the credit line, petitioner's bank
account covered the check she issued because even though there were
some deposits that were still uncollected the deposits became "good" and
the bank certified that the check was "funded."39

In the instant case, even though the check which petitioner deposited on July 20, 1992
became good only five (5) days later, he was considered by the bank to retroactively
have had P160,659.39 in his account on July 22, 1992. This was more than enough to
cover the check he issued to respondent in the amount of P106,579.60. Under the
circumstance obtaining in this case, we find the petitioner had issued the check, with
full ability to abide by his commitment41 to pay his purchases.
Significantly, like Article 315 of the Revised Penal Code, B.P. Blg. 22 also speaks only
of insufficiency of funds and does not treat of uncollected deposits. To repeat, we
cannot interpret the law in such a way as to expand its provision to encompass the
situation of uncollected deposits because it would make the law more onerous on the
part of the accused. Again, criminal statutes are strictly construed against the
Government and liberally in favor of the accused.42
As regards petitioner's civil liability, this Court has previously ruled that an accused
may be held civilly liable where the facts established by the evidence so warrant. 43 The
rationale for this is simple. The criminal and civil liabilities of an accused are separate
and distinct from each other. One is meant to punish the offender while the other is
intended to repair the damage suffered by the aggrieved party. So, for the purpose of
indemnifying the latter, the offense need not be proved beyond reasonable doubt but
only by preponderance of evidence.44

We therefore sustain the appellate court's award of damages to W.L. Foods in the total
amount ofP333,373.96, representing the sum of the checks petitioner issued for goods
admittedly delivered to his company.
As to the appropriate penalty, petitioner was charged with estafa under Article 315,
paragraph 2(d) of the Revised Penal Code, as amended by Presidential Decree No.
81845 (P.D. No. 818).
Under Section 146 of P.D. No. 818, if the amount of the fraud exceeds P22,000, the
penalty ofreclusin temporal is imposed in its maximum period, adding one year for
each additional P10,000 but the total penalty shall not exceed thirty (30) years, which
shall be termed reclusin perpetua.47Reclusin perpetua is not the prescribed penalty
for the offense, but merely describes the penalty actually imposed on account of the
amount of the fraud involved.
WHEREFORE, the petition is PARTLY GRANTED. John Dy is hereby ACQUITTED in
Criminal Case No. Q-93-46711 for estafa, and Criminal Case No. Q-93-46712 for
violation of B.P. Blg. 22, but he isORDERED to pay W.L. Foods the amount
of P106,579.60 for goods delivered to his company.
In Criminal Case No. Q-93-46713 for estafa, the Decision of the Court of Appeals
is AFFIRMED with MODIFICATION. Petitioner is sentenced to suffer an indeterminate
penalty of twelve (12) years ofprisin mayor, as minimum, to thirty (30) years
of reclusin perpetua, as maximum.
In Criminal Case No. Q-93-46714 for violation of B.P. Blg. 22, the Decision of the
Court of Appeals isAFFIRMED, and John Dy is hereby sentenced to one (1) year
imprisonment and ordered to indemnify W.L. Foods in the amount of P226,794.36.
SO ORDERED.

The Factual Background

The facts of the case, as shown by the records, are briefly summarized below.
The petitioner and the respondent Napoleon Gutierrez (Gutierrez) entered into a
business venture under the name of Slam Dunk Corporation (Slum Dunk), a
production outfit that produced mini-concerts and shows related to basketball.
Petitioner was already then a decorated professional basketball player while Gutierrez
was a well-known sports columnist.
In the course of their business, the petitioner pre-signed several checks to answer for
the expenses of Slam Dunk. Although signed, these checks had no payees name,
date or amount. The blank checks were entrusted to Gutierrez with the specific
instruction not to fill them out without previous notification to and approval by the
petitioner. According to petitioner, the arrangement was made so that he could verify
the validity of the payment and make the proper arrangements to fund the account.

G.R. No. 187769

June 4, 2014

ALVIN PATRIMONIO, Petitioner,

vs.
NAPOLEON GUTIERREZ and OCTAVIO MARASIGAN III, Respondents.
DECISION
BRION, J.:
Assailed in this petition for review on certiorari1 under Rule 45 of the Revised Rules of
Court is the decision2 dated September 24, 2008 and the resolution3 dated April 30,
2009 of the Court of Appeals (CA) in CA-G.R. CV No. 82301. The appellate court
affirmed the decision of the Regional Trial Court (RTC) of Quezon City, Branch 77,
dismissing the complaint for declaration of nullity of loan filed by petitioner Alvin
Patrimonio and ordering him to pay respondent Octavio Marasigan III (Marasigan) the
sum of P200,000.00.

In the middle of 1993, without the petitioners knowledge and consent, Gutierrez went
to Marasigan (the petitioners former teammate), to secure a loan in the amount
of P200,000.00 on the excuse that the petitioner needed the money for the
construction of his house. In addition to the payment of the principal, Gutierrez
assured Marasigan that he would be paid an interest of 5% per month from March to
May 1994.
After much contemplation and taking into account his relationship with the petitioner
and Gutierrez, Marasigan acceded to Gutierrez request and gave him P200,000.00
sometime in February 1994. Gutierrez simultaneously delivered to Marasigan one of
the blank checks the petitioner pre-signed with Pilipinas Bank, Greenhills Branch,
Check No. 21001764 with the blank portions filled out with the words "Cash" "Two
Hundred Thousand Pesos Only", and the amount of "P200,000.00". The upper right
portion of the check corresponding to the date was also filled out with the words "May
23, 1994" but the petitioner contended that the same was not written by Gutierrez.
On May 24, 1994, Marasigan deposited the check but it was dishonored for the reason
"ACCOUNT CLOSED." It was later revealed that petitioners account with the bank
had been closed since May 28, 1993.
Marasigan sought recovery from Gutierrez, to no avail. He thereafter sent several
demand letters to the petitioner asking for the payment of P200,000.00, but his

demands likewise went unheeded. Consequently, he filed a criminal case for violation
of B.P. 22 against the petitioner, docketed as Criminal Case No. 42816.
On September 10, 1997, the petitioner filed before the Regional Trial Court (RTC) a
Complaint for Declaration of Nullity of Loan and Recovery of Damages against
Gutierrez and co-respondent Marasigan. He completely denied authorizing the loan or
the checks negotiation, and asserted that he was not privy to the parties loan
agreement.
Only Marasigan filed his answer to the complaint. In the RTCs order dated December
22, 1997,Gutierrez was declared in default.
The Ruling of the RTC
The RTC ruled on February 3,2003 in favor of Marasigan.4 It found that the petitioner,
in issuing the pre-signed blank checks, had the intention of issuing a negotiable
instrument, albeit with specific instructions to Gutierrez not to negotiate or issue the
check without his approval. While under Section 14 of the Negotiable Instruments Law
Gutierrez had the prima facie authority to complete the checks by filling up the blanks
therein, the RTC ruled that he deliberately violated petitioners specific instructions and
took advantage of the trust reposed in him by the latter.
Nonetheless, the RTC declared Marasigan as a holder in due course and accordingly
dismissed the petitioners complaint for declaration of nullity of the loan. It ordered the
petitioner to pay Marasigan the face value of the check with a right to claim
reimbursement from Gutierrez.
The petitioner elevated the case to the Court of Appeals (CA), insisting that Marasigan
is not a holder in due course. He contended that when Marasigan received the check,
he knew that the same was without a date, and hence, incomplete. He also alleged
that the loan was actually between Marasigan and Gutierrez with his check being used
only as a security.
The Ruling of the CA
On September 24, 2008, the CA affirmed the RTC ruling, although premised on
different factual findings. After careful analysis, the CA agreed with the petitioner that
Marasigan is not a holder in due course as he did not receive the check in good faith.

The CA also concluded that the check had been strictly filled out by Gutierrez in
accordance with the petitioners authority. It held that the loan may not be nullified
since it is grounded on an obligation arising from law and ruled that the petitioner is
still liable to pay Marasigan the sum of P200,000.00.
After the CA denied the subsequent motion for reconsideration that followed, the
petitioner filed the present petition for review on certiorari under Rule 45 of the
Revised Rules of Court.
The Petition
The petitioner argues that: (1) there was no loan between him and Marasigan since he
never authorized the borrowing of money nor the checks negotiation to the latter; (2)
under Article 1878 of the Civil Code, a special power of attorney is necessary for an
individual to make a loan or borrow money in behalf of another; (3) the loan
transaction was between Gutierrez and Marasigan, with his check being used only as
a security; (4) the check had not been completely and strictly filled out in accordance
with his authority since the condition that the subject check can only be used provided
there is prior approval from him, was not complied with; (5) even if the check was
strictly filled up as instructed by the petitioner, Marasigan is still not entitled to claim the
checks value as he was not a holder in due course; and (6) by reason of the bad faith
in the dealings between the respondents, he is entitled to claim for damages.
The Issues
Reduced to its basics, the case presents to us the following issues:
1. Whether the contract of loan in the amount of P200,000.00 granted by
respondent Marasigan to petitioner, through respondent Gutierrez, may be
nullified for being void;
2. Whether there is basis to hold the petitioner liable for the payment of
the P200,000.00 loan;
3. Whether respondent Gutierrez has completely filled out the subject check
strictly under the authority given by the petitioner; and
4. Whether Marasigan is a holder in due course.

The Courts Ruling

The petition is impressed with merit.
We note at the outset that the issues raised in this petition are essentially factual in
nature. The main point of inquiry of whether the contract of loan may be nullified,
hinges on the very existence of the contract of loan a question that, as presented, is
essentially, one of fact. Whether the petitioner authorized the borrowing; whether
Gutierrez completely filled out the subject check strictly under the petitioners authority;
and whether Marasigan is a holder in due course are also questions of fact, that, as a
general rule, are beyond the scope of a Rule 45 petition.
The rule that questions of fact are not the proper subject of an appeal by certiorari, as
a petition for review under Rule 45 is limited only to questions of law, is not an absolute
rule that admits of no exceptions. One notable exception is when the findings off act of
both the trial court and the CA are conflicting, making their review necessary.5 In the
present case, the tribunals below arrived at two conflicting factual findings, albeit with
the same conclusion, i.e., dismissal of the complaint for nullity of the loan. Accordingly,
we will examine the parties evidence presented.
I. Liability Under the Contract of Loan
The petitioner seeks to nullify the contract of loan on the ground that he never
authorized the borrowing of money. He points to Article 1878, paragraph 7 of the Civil
Code, which explicitly requires a written authority when the loan is contracted through
an agent. The petitioner contends that absent such authority in writing, he should not
be held liable for the face value of the check because he was not a party or privy to
the agreement.
Contracts of Agency May be Oral Unless The Law Requires a Specific Form
Article 1868 of the Civil Code defines a contract of agency as a contract whereby a
person "binds himself to render some service or to do something in representation or
on behalf of another, with the consent or authority of the latter." Agency may be
express, or implied from the acts of the principal, from his silence or lack of action, or
his failure to repudiate the agency, knowing that another person is acting on his behalf
without authority.

As a general rule, a contract of agency may be oral.6 However, it must be written when
the law requires a specific form, for example, in a sale of a piece of land or any interest
therein through an agent.
Article 1878 paragraph 7 of the Civil Code expressly requires a special power of
authority before an agent can loan or borrow money in behalf of the principal, to wit:
Art. 1878. Special powers of attorney are necessary in the following cases:
xxxx
(7) To loan or borrow money, unless the latter act be urgent and indispensable for the
preservation of the things which are under administration. (emphasis supplied)
Article 1878 does not state that the authority be in writing. As long as the mandate is
express, such authority may be either oral or written. We unequivocably declared in
Lim Pin v. Liao Tian, et al.,7 that the requirement under Article 1878 of the Civil Code
refers to the nature of the authorization and not to its form. Be that as it may, the
authority must be duly established by competent and convincing evidence other than
the self serving assertion of the party claiming that such authority was verbally given,
thus:
The requirements of a special power of attorney in Article 1878 of the Civil Code and
of a special authority in Rule 138 of the Rules of Court refer to the nature of the
authorization and not its form. The requirements are met if there is a clear mandate
from the principal specifically authorizing the performance of the act. As early as 1906,
this Court in Strong v. Gutierrez-Repide (6 Phil. 680) stated that such a mandate may
be either oral or written, the one vital thing being that it shall be express. And more
recently, We stated that, if the special authority is not written, then it must be duly
established by evidence:
x x x the Rules require, for attorneys to compromise the litigation of their clients, a
special authority. And while the same does not state that the special authority be in
writing the Court has every reason to expect that, if not in writing, the same be duly
established by evidence other than the self-serving assertion of counsel himself that
such authority was verbally given him.(Home Insurance Company vs. United States
lines Company, et al., 21 SCRA 863; 866: Vicente vs. Geraldez, 52 SCRA 210; 225).
(emphasis supplied).

The Contract of Loan Entered Into by Gutierrez in Behalf of the Petitioner Should be
Nullified for Being Void; Petitioner is Not Bound by the Contract of Loan.
A review of the records reveals that Gutierrez did not have any authority to borrow
money in behalf of the petitioner.1wphi1Records do not show that the petitioner
executed any special power of attorney (SPA) in favor of Gutierrez. In fact, the
petitioners testimony confirmed that he never authorized Gutierrez (or anyone for that
matter), whether verbally or in writing, to borrow money in his behalf, nor was he
aware of any such transaction:
ALVIN PATRIMONIO (witness)

Therefore, on the first issue, the loan was personal to de Villa. There was no basis to
hold the corporation liable since there was no authority, express, implied or apparent,
given to de Villa to borrow money from petitioner. Neither was there any subsequent
ratification of his act.
xxxx
The liability arising from the loan was the sole indebtedness of de Villa (or of his estate
after his death). (citations omitted; emphasis supplied).
This principle was also reiterated in the case of Gozun v. Mercado,10 where this court
held:

ATTY. DE VERA: Did you give Nap Gutierrez any Special Power of Attorney in writing
authorizing him to borrow using your money?

Petitioner submits that his following testimony suffices to establish that respondent had
authorized Lilian to obtain a loan from him.

WITNESS: No, sir. (T.S.N., Alvin Patrimonio, Nov. 11, 1999, p. 105)8
xxxx
xxxx
Marasigan however submits that the petitioners acts of pre-signing the blank checks
and releasing them to Gutierrez suffice to establish that the petitioner had authorized
Gutierrez to fill them out and contract the loan in his behalf.
Marasigans submission fails to persuade us.
In the absence of any authorization, Gutierrez could not enter into a contract of loan in
behalf of the petitioner. As held in Yasuma v. Heirs of De Villa, 9 involving a loan
contracted by de Villa secured by real estate mortgages in the name of East Cordillera
Mining Corporation, in the absence of an SPA conferring authority on de Villa, there is
no basis to hold the corporation liable, to wit:
The power to borrow money is one of those cases where corporate officers as agents
of the corporation need a special power of attorney. In the case at bar, no special
power of attorney conferring authority on de Villa was ever presented. x x x There was
no showing that respondent corporation ever authorized de Villa to obtain the loans on
its behalf.
xxxx

Petitioners testimony failed to categorically state, however, whether the loan was
made on behalf of respondent or of his wife. While petitioner claims that Lilian was
authorized by respondent, the statement of account marked as Exhibit "A" states that
the amount was received by Lilian "in behalf of Mrs. Annie Mercado.
It bears noting that Lilian signed in the receipt in her name alone, without indicating
therein that she was acting for and in behalf of respondent. She thus bound herself in
her personal capacity and not as an agent of respondent or anyone for that matter.
It is a general rule in the law of agency that, in order to bind the principal by a
mortgage on real property executed by an agent, it must upon its face purport to be
made, signed and sealed in the name of the principal, otherwise, it will bind the agent
only. It is not enough merely that the agent was in fact authorized to make the
mortgage, if he has not acted in the name of the principal. x x x (emphasis supplied).
In the absence of any showing of any agency relations or special authority to act for
and in behalf of the petitioner, the loan agreement Gutierrez entered into with
Marasigan is null and void. Thus, the petitioner is not bound by the parties loan
agreement.

Furthermore, that the petitioner entrusted the blank pre-signed checks to Gutierrez is
not legally sufficient because the authority to enter into a loan can never be presumed.
The contract of agency and the special fiduciary relationship inherent in this contract
must exist as a matter of fact. The person alleging it has the burden of proof to show,
not only the fact of agency, but also its nature and extent.11 As we held in People v.
Yabut:12
Modesto Yambao's receipt of the bad checks from Cecilia Que Yabut or Geminiano
Yabut, Jr., in Caloocan City cannot, contrary to the holding of the respondent Judges,
be licitly taken as delivery of the checks to the complainant Alicia P. Andan at
Caloocan City to fix the venue there. He did not take delivery of the checks as holder,
i.e., as "payee" or "indorsee." And there appears to beno contract of agency between
Yambao and Andan so as to bind the latter for the acts of the former. Alicia P. Andan
declared in that sworn testimony before the investigating fiscal that Yambao is but her
"messenger" or "part-time employee." There was no special fiduciary relationship that
permeated their dealings. For a contract of agency to exist, the consent of both parties
is essential, the principal consents that the other party, the agent, shall act on his
behalf, and the agent consents so to act. It must exist as a fact. The law makes no
presumption thereof. The person alleging it has the burden of proof to show, not only
the fact of its existence, but also its nature and extent. This is more imperative when it
is considered that the transaction dealt with involves checks, which are not legal
tender, and the creditor may validly refuse the same as payment of obligation.(at p.
630). (emphasis supplied)
The records show that Marasigan merely relied on the words of Gutierrez without
securing a copy of the SPA in favor of the latter and without verifying from the
petitioner whether he had authorized the borrowing of money or release of the check.
He was thus bound by the risk accompanying his trust on the mere assurances of
Gutierrez.
No Contract of Loan Was Perfected Between Marasigan And Petitioner, as The
Latters Consent Was Not Obtained.
Another significant point that the lower courts failed to consider is that a contract of
loan, like any other contract, is subject to the rules governing the requisites and validity
of contracts in general.13 Article 1318 of the Civil Code14enumerates the essential
requisites for a valid contract, namely:
1. consent of the contracting parties;

2. object certain which is the subject matter of the contract; and

3. cause of the obligation which is established.
In this case, the petitioner denied liability on the ground that the contract lacked the
essential element of consent. We agree with the petitioner. As we explained above,
Gutierrez did not have the petitioners written/verbal authority to enter into a contract of
loan. While there may be a meeting of the minds between Gutierrez and Marasigan,
such agreement cannot bind the petitioner whose consent was not obtained and who
was not privy to the loan agreement. Hence, only Gutierrez is bound by the contract of
loan.
True, the petitioner had issued several pre-signed checks to Gutierrez, one of which
fell into the hands of Marasigan. This act, however, does not constitute sufficient
authority to borrow money in his behalf and neither should it be construed as
petitioners grant of consent to the parties loan agreement. Without any evidence to
prove Gutierrez authority, the petitioners signature in the check cannot be taken, even
remotely, as sufficient authorization, much less, consent to the contract of loan.
Without the consent given by one party in a purported contract, such contract could
not have been perfected; there simply was no contract to speak of.15
With the loan issue out of the way, we now proceed to determine whether the
petitioner can be made liable under the check he signed.
II. Liability Under the Instrument
The answer is supplied by the applicable statutory provision found in Section 14 of the
Negotiable Instruments Law (NIL) which states:
Sec. 14. Blanks; when may be filled.- Where the instrument is wanting in any material
particular, the person in possession thereof has a prima facie authority to complete it
by filling up the blanks therein. And a signature on a blank paper delivered by the
person making the signature in order that the paper may be converted into a
negotiable instrument operates as a prima facie authority to fill it up as such for any
amount. In order, however, that any such instrument when completed may be enforced
against any person who became a party thereto prior to its completion, it must be filled
up strictly in accordance with the authority given and within a reasonable time. But if
any such instrument, after completion, is negotiated to a holder in due course, it is

valid and effectual for all purposes in his hands, and he may enforce it as if it had been
filled up strictly in accordance with the authority given and within a reasonable time.
This provision applies to an incomplete but delivered instrument. Under this rule, if the
maker or drawer delivers a pre-signed blank paper to another person for the purpose
of converting it into a negotiable instrument, that person is deemed to have prima facie
authority to fill it up. It merely requires that the instrument be in the possession of a
person other than the drawer or maker and from such possession, together with the
fact that the instrument is wanting in a material particular, the law presumes agency to
fill up the blanks.16
In order however that one who is not a holder in due course can enforce the
instrument against a party prior to the instruments completion, two requisites must
exist: (1) that the blank must be filled strictly in accordance with the authority given;
and (2) it must be filled up within a reasonable time. If it was proven that the
instrument had not been filled up strictly in accordance with the authority given and
within a reasonable time, the maker can set this up as a personal defense and avoid
liability. However, if the holder is a holder in due course, there is a conclusive
presumption that authority to fill it up had been given and that the same was not in
excess of authority.17
In the present case, the petitioner contends that there is no legal basis to hold him
liable both under the contract and loan and under the check because: first, the subject
check was not completely filled out strictly under the authority he has given and
second, Marasigan was not a holder in due course.
Marasigan is Not a Holder in Due Course
The Negotiable Instruments Law (NIL) defines a holder in due course, thus:
Sec. 52 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.(emphasis
supplied)
Section 52(c) of the NIL states that a holder in due course is one who takes the
instrument "in good faith and for value." It also provides in Section 52(d) that in order
that one may be a holder in due course, it is necessary 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.
Acquisition in good faith means taking without knowledge or notice of equities of any
sort which could beset up against a prior holder of the instrument.18 It means that he
does not have any knowledge of fact which would render it dishonest for him to take a
negotiable paper. The absence of the defense, when the instrument was taken, is the
essential element of good faith.19
As held in De Ocampo v. Gatchalian:20
In order to show that the defendant had "knowledge of such facts that his action in
taking the instrument amounted to bad faith," it is not necessary to prove that the
defendant knew the exact fraud that was practiced upon the plaintiff by the defendant's
assignor, it being sufficient to show that the defendant had notice that there was
something wrong about his assignor's acquisition of title, although he did not have
notice of the particular wrong that was committed.
It is sufficient that the buyer of a note had notice or knowledge that the note was in
some way tainted with fraud. It is not necessary that he should know the particulars or
even the nature of the fraud, since all that is required is knowledge of such facts that
his action in taking the note amounted bad faith.
The term bad faith does not necessarily involve furtive motives, but means bad faith
in a commercial sense. The manner in which the defendants conducted their Liberty
Loan department provided an easy way for thieves to dispose of their plunder. It was a
case of "no questions asked." Although gross negligence does not of itself constitute
bad faith, it is evidence from which bad faith may be inferred. The circumstances thrust
the duty upon the defendants to make further inquiries and they had no right to shut
their eyes deliberately to obvious facts. (emphasis supplied).

In the present case, Marasigans knowledge that the petitioner is not a party or a privy
to the contract of loan, and correspondingly had no obligation or liability to him,
renders him dishonest, hence, in bad faith. The following exchange is significant on
this point:

xxxx
Q: What was his reply?
A: Yes, it was Nap, pero tseke pa rin ni Alvin ang hawak ko at si Alvin ang maiipit dito.
(T.S.N., Ambet Nabus, July 27, 2000; pp.65-71; emphasis supplied)21

WITNESS: AMBET NABUS

Q: Now, I refer to the second call after your birthday. Tell us what you talked about?
A: Since I celebrated my birthday in that place where Nap and I live together with the
other crew, there were several visitors that included Danny Espiritu. So a week after
my birthday, Bong Marasigan called me up again and he was fuming mad.
Nagmumura na siya. Hinahanap niya si hinahanap niya si Nap, dahil pinagtataguan
na siya at sinabi na niya na kailangan I-settle na niya yung utang ni Nap, dahil
xxxx
WITNESS: Yes. Sinabi niya sa akin na kailangan ayusin na bago pa mauwi sa kung
saan ang tsekeng tumalbog (He told me that we have to fix it up before it) mauwi
pa kung saan
xxxx
Q: What was your reply, if any?
A: I actually asked him. Kanino ba ang tseke na sinasabi mo?
(Whose check is it that you are referring to or talking about?)
Q: What was his answer?
A: It was Alvins check.
Q: What was your reply, if any?
A: I told him do you know that it is not really Alvin who borrowed money from you or
what you want to appear

Since he knew that the underlying obligation was not actually for the petitioner, the rule
that a possessor of the instrument is prima facie a holder in due course is inapplicable.
As correctly noted by the CA, his inaction and failure to verify, despite knowledge of
that the petitioner was not a party to the loan, may be construed as gross negligence
amounting to bad faith.
Yet, it does not follow that simply because he is not a holder in due course, Marasigan
is already totally barred from recovery. The NIL does not provide that a holder who is
not a holder in due course may not in any case recover on the instrument.22 The only
disadvantage of a holder who is not in due course is that the negotiable instrument is
subject to defenses as if it were non-negotiable.23 Among such defenses is the filling
up blank not within the authority.
On this point, the petitioner argues that the subject check was not filled up strictly on
the basis of the authority he gave. He points to his instruction not to use the check
without his prior approval and argues that the check was filled up in violation of said
instruction.
Check Was Not Completed Strictly Under The Authority Given by The Petitioner
Our own examination of the records tells us that Gutierrez has exceeded the authority
to fill up the blanks and use the check.1wphi1 To repeat, petitioner gave Gutierrez
pre-signed checks to be used in their business provided that he could only use them
upon his approval. His instruction could not be any clearer as Gutierrez authority was
limited to the use of the checks for the operation of their business, and on the
condition that the petitioners prior approval be first secured.
While under the law, Gutierrez had a prima facie authority to complete the check, such
prima facie authority does not extend to its use (i.e., subsequent transfer or
negotiation)once the check is completed. In other words, only the authority to complete
the check is presumed. Further, the law used the term "prima facie" to underscore the
fact that the authority which the law accords to a holder is a presumption juris

tantumonly; hence, subject to subject to contrary proof. Thus, evidence that there was
no authority or that the authority granted has been exceeded may be presented by the
maker in order to avoid liability under the instrument.
In the present case, no evidence is on record that Gutierrez ever secured prior
approval from the petitioner to fill up the blank or to use the check. In his testimony,
petitioner asserted that he never authorized nor approved the filling up of the blank
checks, thus:
ATTY. DE VERA: Did you authorize anyone including Nap Gutierrez to write the date,
May 23, 1994?
WITNESS: No, sir.
Q: Did you authorize anyone including Nap Gutierrez to put the word cash? In the
check?
A: No, sir.
Q: Did you authorize anyone including Nap Gutierrez to write the figure P200,000 in
this check?
A: No, sir.
Q: And lastly, did you authorize anyone including Nap Gutierrez to write the
words P200,000 only xx in this check?
A: No, sir. (T.S.N., Alvin Patrimonio, November 11, 1999).24
Notably, Gutierrez was only authorized to use the check for business expenses; thus,
he exceeded the authority when he used the check to pay the loan he supposedly
contracted for the construction of petitioner's house. This is a clear violation of the
petitioner's instruction to use the checks for the expenses of Slam Dunk. It cannot
therefore be validly concluded that the check was completed strictly in accordance
with the authority given by the petitioner.
Considering that Marasigan is not a holder in due course, the petitioner can validly set
up the personal defense that the blanks were not filled up in accordance with the

authority he gave. Consequently, Marasigan has no right to enforce payment against

the petitioner and the latter cannot be obliged to pay the face value of the check.
WHEREFORE, in view of the foregoing, judgment is hereby rendered GRANTING the
petitioner Alvin Patrimonio's petition for review on certiorari. The appealed Decision
dated September 24, 2008 and the Resolution dated April 30, 2009 of the Court of
Appeals are consequently ANNULLED AND SET ASIDE. Costs against the
respondents.
SO ORDERED.

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.

G.R. No. 150228

July 30, 2009

BANK OF AMERICA NT & SA, Petitioner,

vs.
PHILIPPINE RACING CLUB, Respondent.
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).

It turned out that on December 16, 1988, a John Doe presented to defendantappellant bank for encashment a couple of plaintiff-appellee 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 drawerclient 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
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.
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
Explaining this provision in Lambert v. Heirs of Ray Castillon, 25 the Court held:
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
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.26 Indeed, 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 pre-signed 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.
Proportionate costs.
SO ORDERED.

G.R. No. 192413

June 13, 2012

Rizal Commercial Banking Corporation, Petitioner,

vs.
Hi-Tri Development Corporation and Luz R. Bakunawa, Respondents.
DECISION
SERENO, J.:
Before the Court is a Rule 45 Petition for Review on Certiorari filed by petitioner Rizal
Commercial Banking Corporation (RCBC) against respondents Hi-Tri Development
Corporation (Hi-Tri) and Luz R. Bakunawa (Bakunawa). Petitioner seeks to appeal
from the 26 November 2009 Decision and 27 May 2010 Resolution of the Court of
Appeals (CA),1 which reversed and set aside the 19 May 2008 Decision and 3
November 2008 Order of the Makati City Regional Trial Court (RTC) in Civil Case No.
06-244.2 The case before the RTC involved the Complaint for Escheat filed by the

Republic of the Philippines (Republic) pursuant to Act No. 3936, as amended by

Presidential Decree No. 679 (P.D. 679), against certain deposits, credits, and
unclaimed balances held by the branches of various banks in the Philippines. The trial
court declared the amounts, subject of the special proceedings, escheated to the
Republic and ordered them deposited with the Treasurer of the Philippines (Treasurer)
and credited in favor of the Republic.3 The assailed RTC judgments included an
unclaimed balance in the amount of P 1,019,514.29, maintained by RCBC in its Ermita
Business Center branch.
We quote the narration of facts of the CA4 as follows:
x x x Luz [R.] Bakunawa and her husband Manuel, now deceased ("Spouses
Bakunawa") are registered owners of six (6) parcels of land covered by TCT Nos.
324985 and 324986 of the Quezon City Register of Deeds, and TCT Nos. 103724,
98827, 98828 and 98829 of the Marikina Register of Deeds. These lots were
sequestered by the Presidential Commission on Good Government [(PCGG)].
Sometime in 1990, a certain Teresita Millan ("Millan"), through her representative,
Jerry Montemayor, offered to buy said lots for "P 6,724,085.71", with the promise that
she will take care of clearing whatever preliminary obstacles there may[]be to effect a
"completion of the sale". The Spouses Bakunawa gave to Millan the Owners Copies of
said TCTs and in turn, Millan made a down[]payment of "P 1,019,514.29" for the
intended purchase. However, for one reason or another, Millan was not able to clear
said obstacles. As a result, the Spouses Bakunawa rescinded the sale and offered to
return to Millan her down[]payment of P 1,019,514.29. However, Millan refused to
accept back the P 1,019,514.29 down[]payment. Consequently, the Spouses
Bakunawa, through their company, the Hi-Tri Development Corporation ("Hi-Tri") took
out on October 28, 1991, a Managers Check from RCBC-Ermita in the amount
of P 1,019,514.29, payable to Millans company Rosmil Realty and Development
Corporation ("Rosmil") c/o Teresita Millan and used this as one of their basis for a
complaint against Millan and Montemayor which they filed with the Regional Trial
Court of Quezon City, Branch 99, docketed as Civil Case No. Q-91-10719 [in 1991],
praying that:
1. That the defendants Teresita Mil[l]an and Jerry Montemayor may be
ordered to return to plaintiffs spouses the Owners Copies of Transfer
Certificates of Title Nos. 324985, 324986, 103724, 98827, 98828 and
98829;

2. That the defendant Teresita Mil[l]an be correspondingly ordered to receive

the amount of One Million Nineteen Thousand Five Hundred Fourteen
Pesos and Twenty Nine Centavos (P 1,019,514.29);
3. That the defendants be ordered to pay to plaintiffs spouses moral
damages in the amount of P2,000,000.00; and
4. That the defendants be ordered to pay plaintiffs attorneys fees in the
amount of P 50,000.00.
Being part and parcel of said complaint, and consistent with their prayer in Civil Case
No. Q-91-10719 that "Teresita Mil[l]an be correspondingly ordered to receive the
amount of One Million Nineteen Thousand Five Hundred Fourteen Pesos and Twenty
Nine [Centavos] ("P 1,019,514.29")["], the Spouses Bakunawa, upon advice of their
counsel, retained custody of RCBC Managers Check No. ER 034469 and refrained
from canceling or negotiating it.
All throughout the proceedings in Civil Case No. Q-91-10719, especially during
negotiations for a possible settlement of the case, Millan was informed that the
Managers Check was available for her withdrawal, she being the payee.
On January 31, 2003, during the pendency of the abovementioned case and without
the knowledge of [Hi-Tri and Spouses Bakunawa], x x x RCBC reported the
"P 1,019,514.29-credit existing in favor of Rosmil" to the Bureau of Treasury as among
its "unclaimed balances" as of January 31, 2003. Allegedly, a copy of the Sworn
Statement executed by Florentino N. Mendoza, Manager and Head of RCBCs Asset
Management, Disbursement & Sundry Department ("AMDSD") was posted within the
premises of RCBC-Ermita.
On December 14, 2006, x x x Republic, through the [Office of the Solicitor General
(OSG)], filed with the RTC the action below for Escheat [(Civil Case No. 06-244)].
On April 30, 2008, [Spouses Bakunawa] settled amicably their dispute with Rosmil and
Millan. Instead of only the amount of "P 1,019,514.29", [Spouses Bakunawa] agreed to
pay Rosmil and Millan the amount of "P 3,000,000.00", [which is] inclusive [of] the
amount of ["]P 1,019,514.29". But during negotiations and evidently prior to said
settlement, [Manuel Bakunawa, through Hi-Tri] inquired from RCBC-Ermita the
availability of the P 1,019,514.29 under RCBC Managers Check No. ER 034469. [Hi-

Tri and Spouses Bakunawa] were however dismayed when they were informed that
the amount was already subject of the escheat proceedings before the RTC.
On April 17, 2008, [Manuel Bakunawa, through Hi-Tri] wrote x x x RCBC, viz:
"We understand that the deposit corresponding to the amount of Php 1,019,514.29
stated in the Managers Check is currently the subject of escheat proceedings pending
before Branch 150 of the Makati Regional Trial Court.
Please note that it was our impression that the deposit would be taken from [Hi-Tris]
RCBC bank account once an order to debit is issued upon the payees presentation of
the Managers Check. Since the payee rejected the negotiated Managers Check,
presentation of the Managers Check was never made.
Consequently, the deposit that was supposed to be allocated for the payment of the
Managers Check was supposed to remain part of the Corporation[s] RCBC bank
account, which, thereafter, continued to be actively maintained and operated. For this
reason, We hereby demand your confirmation that the amount of Php 1,019,514.29
continues to form part of the funds in the Corporations RCBC bank account, since
pay-out of said amount was never ordered. We wish to point out that if there was any
attempt on the part of RCBC to consider the amount indicated in the Managers Check
separate from the Corporations bank account, RCBC would have issued a statement
to that effect, and repeatedly reminded the Corporation that the deposit would be
considered dormant absent any fund movement. Since the Corporation never received
any statements of account from RCBC to that effect, and more importantly, never
received any single letter from RCBC noting the absence of fund movement and
advising the Corporation that the deposit would be treated as dormant."
On April 28, 2008, [Manuel Bakunawa] sent another letter to x x x RCBC reiterating
their position as above-quoted.
In a letter dated May 19, 2008, x x x RCBC replied and informed [Hi-Tri and Spouses
Bakunawa] that:
"The Banks Ermita BC informed Hi-Tri and/or its principals regarding the inclusion of
Managers Check No. ER034469 in the escheat proceedings docketed as Civil Case
No. 06-244, as well as the status thereof, between 28 January 2008 and 1 February
2008.

xxx

xxx

xxx

Contrary to what Hi-Tri hopes for, the funds covered by the Managers Check No.
ER034469 does not form part of the Banks own account. By simple operation of law,
the funds covered by the managers check in issue became a deposit/credit
susceptible for inclusion in the escheat case initiated by the OSG and/or Bureau of
Treasury.
xxx

xxx

xxx

Granting arguendo that the Bank was duty-bound to make good the check, the Banks
obligation to do so prescribed as early as October 2001."
(Emphases, citations, and annotations were omitted.)
The RTC Ruling
The escheat proceedings before the Makati City RTC continued. On 19 May 2008, the
trial court rendered its assailed Decision declaring the deposits, credits, and
unclaimed balances subject of Civil Case No. 06-244 escheated to the Republic.
Among those included in the order of forfeiture was the amount of P 1,019,514.29 held
by RCBC as allocated funds intended for the payment of the Managers Check issued
in favor of Rosmil. The trial court ordered the deposit of the escheated balances with
the Treasurer and credited in favor of the Republic. Respondents claim that they were
not able to participate in the trial, as they were not informed of the ongoing escheat
proceedings.
Consequently, respondents filed an Omnibus Motion dated 11 June 2008, seeking the
partial reconsideration of the RTC Decision insofar as it escheated the fund allocated
for the payment of the Managers Check. They asked that they be included as partydefendants or, in the alternative, allowed to intervene in the case and their motion
considered as an answer-in-intervention. Respondents argued that they had
meritorious grounds to ask reconsideration of the Decision or, alternatively, to seek
intervention in the case. They alleged that the deposit was subject of an ongoing
dispute (Civil Case No. Q-91-10719) between them and Rosmil since 1991, and that
they were interested parties to that case.5
On 3 November 2008, the RTC issued an Order denying the motion of respondents.
The trial court explained that the Republic had proven compliance with the

requirements of publication and notice, which served as notice to all those who may
be affected and prejudiced by the Complaint for Escheat. The RTC also found that the
motion failed to point out the findings and conclusions that were not supported by the
law or the evidence presented, as required by Rule 37 of the Rules of Court. Finally, it
ruled that the alternative prayer to intervene was filed out of time.
The CA Ruling
On 26 November 2009, the CA issued its assailed Decision reversing the 19 May 2008
Decision and 3 November 2008 Order of the RTC. According to the appellate
court,6 RCBC failed to prove that the latter had communicated with the purchaser of
the Managers Check (Hi-Tri and/or Spouses Bakunawa) or the designated payee
(Rosmil) immediately before the bank filed its Sworn Statement on the dormant
accounts held therein. The CA ruled that the banks failure to notify respondents
deprived them of an opportunity to intervene in the escheat proceedings and to
present evidence to substantiate their claim, in violation of their right to due process.
Furthermore, the CA pronounced that the Makati City RTC Clerk of Court failed to
issue individual notices directed to all persons claiming interest in the unclaimed
balances, as well as to require them to appear after publication and show cause why
the unclaimed balances should not be deposited with the Treasurer of the Philippines.
It explained that the jurisdictional requirement of individual notice by personal service
was distinct from the requirement of notice by publication. Consequently, the CA held
that the Decision and Order of the RTC were void for want of jurisdiction.
Issue
After a perusal of the arguments presented by the parties, we cull the main issues as
follows:
I. Whether the Decision and Order of the RTC were void for failure to send
separate notices to respondents by personal service
II. Whether petitioner had the obligation to notify respondents immediately
before it filed its Sworn Statement with the Treasurer
III. Whether or not the allocated funds may be escheated in favor of the
Republic
Discussion

Petitioner bank assails7 the CA judgments insofar as they ruled that notice by personal
service upon respondents is a jurisdictional requirement in escheat proceedings.
Petitioner contends that respondents were not the owners of the unclaimed balances
and were thus not entitled to notice from the RTC Clerk of Court. It hinges its claim on
the theory that the funds represented by the Managers Check were deemed
transferred to the credit of the payee or holder upon its issuance.
We quote the pertinent provision of Act No. 3936, as amended, on the rule on service
of processes, to wit:
Sec. 3. Whenever the Solicitor General shall be informed of such unclaimed balances,
he shall commence an action or actions in the name of the People of the Republic of
the Philippines in the Court of First Instance of the province or city where the bank,
building and loan association or trust corporation is located, in which shall be joined as
parties the bank, building and loan association or trust corporation and all such
creditors or depositors. All or any of such creditors or depositors or banks, building
and loan association or trust corporations may be included in one action. Service of
process in such action or actions shall be made by delivery of a copy of the complaint
and summons to the president, cashier, or managing officer of each defendant bank,
building and loan association or trust corporation and by publication of a copy of such
summons in a newspaper of general circulation, either in English, in Filipino, or in a
local dialect, published in the locality where the bank, building and loan association or
trust corporation is situated, if there be any, and in case there is none, in the City of
Manila, at such time as the court may order. Upon the trial, the court must hear all
parties who have appeared therein, and if it be determined that such unclaimed
balances in any defendant bank, building and loan association or trust corporation are
unclaimed as hereinbefore stated, then the court shall render judgment in favor of the
Government of the Republic of the Philippines, declaring that said unclaimed balances
have escheated to the Government of the Republic of the Philippines and commanding
said bank, building and loan association or trust corporation to forthwith deposit the
same with the Treasurer of the Philippines to credit of the Government of the Republic
of the Philippines to be used as the National Assembly may direct.
At the time of issuing summons in the action above provided for, the clerk of court shall
also issue a notice signed by him, giving the title and number of said action, and
referring to the complaint therein, and directed to all persons, other than those named
as defendants therein, claiming any interest in any unclaimed balance mentioned in
said complaint, and requiring them to appear within sixty days after the publication or
first publication, if there are several, of such summons, and show cause, if they have
any, why the unclaimed balances involved in said action should not be deposited with

the Treasurer of the Philippines as in this Act provided and notifying them that if they
do not appear and show cause, the Government of the Republic of the Philippines will
apply to the court for the relief demanded in the complaint. A copy of said notice shall
be attached to, and published with the copy of, said summons required to be
published as above, and at the end of the copy of such notice so published, there shall
be a statement of the date of publication, or first publication, if there are several, of
said summons and notice. Any person interested may appear in said action and
become a party thereto. Upon the publication or the completion of the publication, if
there are several, of the summons and notice, and the service of the summons on the
defendant banks, building and loan associations or trust corporations, the court shall
have full and complete jurisdiction in the Republic of the Philippines over the said
unclaimed balances and over the persons having or claiming any interest in the said
unclaimed balances, or any of them, and shall have full and complete jurisdiction to
hear and determine the issues herein, and render the appropriate judgment thereon.
(Emphasis supplied.)

Escheat proceedings refer to the judicial process in which the state, by virtue of its
sovereignty, steps in and claims abandoned, left vacant, or unclaimed property,
without there being an interested person having a legal claim thereto.15 In the case of
dormant accounts, the state inquires into the status, custody, and ownership of the
unclaimed balance to determine whether the inactivity was brought about by the fact of
death or absence of or abandonment by the depositor.16 If after the proceedings the
property remains without a lawful owner interested to claim it, the property shall be
reverted to the state "to forestall an open invitation to self-service by the first
comers."17 However, if interested parties have come forward and lain claim to the
property, the courts shall determine whether the credit or deposit should pass to the
claimants or be forfeited in favor of the state.18 We emphasize that escheat is not a
proceeding to penalize depositors for failing to deposit to or withdraw from their
accounts. It is a proceeding whereby the state compels the surrender to it of
unclaimed deposit balances when there is substantial ground for a belief that they
have been abandoned, forgotten, or without an owner.19

Hence, insofar as banks are concerned, service of processes is made by delivery of a

copy of the complaint and summons upon the president, cashier, or managing officer
of the defendant bank.8 On the other hand, as to depositors or other claimants of the
unclaimed balances, service is made by publication of a copy of the summons in a
newspaper of general circulation in the locality where the institution is situated.9 A
notice about the forthcoming escheat proceedings must also be issued and published,
directing and requiring all persons who may claim any interest in the unclaimed
balances to appear before the court and show cause why the dormant accounts
should not be deposited with the Treasurer.

Act No. 3936, as amended, outlines the proper procedure to be followed by banks and
other similar institutions in filing a sworn statement with the Treasurer concerning
dormant accounts:

Accordingly, the CA committed reversible error when it ruled that the issuance of
individual notices upon respondents was a jurisdictional requirement, and that failure
to effect personal service on them rendered the Decision and the Order of the RTC
void for want of jurisdiction. Escheat proceedings are actions in rem,10 whereby an
action is brought against the thing itself instead of the person.11 Thus, an action may
be instituted and carried to judgment without personal service upon the depositors or
other claimants.12 Jurisdiction is secured by the power of the court over the
res.13 Consequently, a judgment of escheat is conclusive upon persons notified by
advertisement, as publication is considered a general and constructive notice to all
persons interested.14
Nevertheless, we find sufficient grounds to affirm the CA on the exclusion of the funds
allocated for the payment of the Managers Check in the escheat proceedings.

Sec. 2. Immediately after the taking effect of this Act and within the month of January
of every odd year, all banks, building and loan associations, and trust corporations
shall forward to the Treasurer of the Philippines a statement, under oath, of their
respective managing officers, of all credits and deposits held by them in favor of
persons known to be dead, or who have not made further deposits or withdrawals
during the preceding ten years or more, arranged in alphabetical order according to
the names of creditors and depositors, and showing:
(a) The names and last known place of residence or post office addresses
of the persons in whose favor such unclaimed balances stand;
(b) The amount and the date of the outstanding unclaimed balance and
whether the same is in money or in security, and if the latter, the nature of
the same;
(c) The date when the person in whose favor the unclaimed balance stands
died, if known, or the date when he made his last deposit or withdrawal; and

(d) The interest due on such unclaimed balance, if any, and the amount
thereof.
A copy of the above sworn statement shall be posted in a conspicuous place in the
premises of the bank, building and loan association, or trust corporation concerned for
at least sixty days from the date of filing thereof: Provided, That immediately before
filing the above sworn statement, the bank, building and loan association, and trust
corporation shall communicate with the person in whose favor the unclaimed balance
stands at his last known place of residence or post office address.
It shall be the duty of the Treasurer of the Philippines to inform the Solicitor General
from time to time the existence of unclaimed balances held by banks, building and
loan associations, and trust corporations. (Emphasis supplied.)
As seen in the afore-quoted provision, the law sets a detailed system for notifying
depositors of unclaimed balances. This notification is meant to inform them that their
deposit could be escheated if left unclaimed. Accordingly, before filing a sworn
statement, banks and other similar institutions are under obligation to communicate
with owners of dormant accounts. The purpose of this initial notice is for a bank to
determine whether an inactive account has indeed been unclaimed, abandoned,
forgotten, or left without an owner. If the depositor simply does not wish to touch the
funds in the meantime, but still asserts ownership and dominion over the dormant
account, then the bank is no longer obligated to include the account in its sworn
statement.20 It is not the intent of the law to force depositors into unnecessary litigation
and defense of their rights, as the state is only interested in escheating balances that
have been abandoned and left without an owner.
In case the bank complies with the provisions of the law and the unclaimed balances
are eventually escheated to the Republic, the bank "shall not thereafter be liable to any
person for the same and any action which may be brought by any person against in
any bank xxx for unclaimed balances so deposited xxx shall be defended by the
Solicitor General without cost to such bank."21 Otherwise, should it fail to comply with
the legally outlined procedure to the prejudice of the depositor, the bank may not raise
the defense provided under Section 5 of Act No. 3936, as amended.
Petitioner asserts22 that the CA committed a reversible error when it required RCBC to
send prior notices to respondents about the forthcoming escheat proceedings
involving the funds allocated for the payment of the Managers Check. It explains that,
pursuant to the law, only those "whose favor such unclaimed balances stand" are

entitled to receive notices. Petitioner argues that, since the funds represented by the
Managers Check were deemed transferred to the credit of the payee upon issuance of
the check, the proper party entitled to the notices was the payee Rosmil and not
respondents. Petitioner then contends that, in any event, it is not liable for failing to
send a separate notice to the payee, because it did not have the address of Rosmil.
Petitioner avers that it was not under any obligation to record the address of the payee
of a Managers Check.
In contrast, respondents Hi-Tri and Bakunawa allege23 that they have a legal interest in
the fund allocated for the payment of the Managers Check. They reason that, since
the funds were part of the Compromise Agreement between respondents and Rosmil
in a separate civil case, the approval and eventual execution of the agreement
effectively reverted the fund to the credit of respondents. Respondents further posit
that their ownership of the funds was evidenced by their continued custody of the
Managers Check.
An ordinary check refers to a bill of exchange drawn by a depositor (drawer) on a bank
(drawee),24 requesting the latter to pay a person named therein (payee) or to the order
of the payee or to the bearer, a named sum of money.25The issuance of the check
does not of itself operate as an assignment of any part of the funds in the bank to the
credit of the drawer.26 Here, the bank becomes liable only after it accepts or certifies
the check.27 After the check is accepted for payment, the bank would then debit the
amount to be paid to the holder of the check from the account of the depositor-drawer.
There are checks of a special type called managers or cashiers checks. These are
bills of exchange drawn by the banks manager or cashier, in the name of the bank,
against the bank itself.28 Typically, a managers or a cashiers check is procured from
the bank by allocating a particular amount of funds to be debited from the depositors
account or by directly paying or depositing to the bank the value of the check to be
drawn. Since the bank issues the check in its name, with itself as the drawee, the
check is deemed accepted in advance.29 Ordinarily, the check becomes the primary
obligation of the issuing bank and constitutes its written promise to pay upon
demand.30
Nevertheless, the mere issuance of a managers check does not ipso facto work as an
automatic transfer of funds to the account of the payee. In case the procurer of the
managers or cashiers check retains custody of the instrument, does not tender it to
the intended payee, or fails to make an effective delivery, we find the following

provision on undelivered instruments under the Negotiable Instruments Law

applicable:31
Sec. 16. Delivery; when effectual; when presumed. Every contract on a negotiable
instrument is incomplete and revocable until delivery of the instrument for the purpose
of giving effect thereto. As between immediate parties and as regards a remote party
other than a holder in due course, the delivery, in order to be effectual, must be made
either by or under the authority of the party making, drawing, accepting, or indorsing,
as the case may be; and, in such case, the delivery may be shown to have been
conditional, or for a special purpose only, and not for the purpose of transferring the
property in the instrument. But where the instrument is in the hands of a holder in due
course, a valid delivery thereof by all parties prior to him so as to make them liable to
him is conclusively presumed. And where the instrument is no longer in the
possession of a party whose signature appears thereon, a valid and intentional
delivery by him is presumed until the contrary is proved. (Emphasis supplied.)
Petitioner acknowledges that the Managers Check was procured by respondents, and
that the amount to be paid for the check would be sourced from the deposit account of
Hi-Tri.32 When Rosmil did not accept the Managers Check offered by respondents, the
latter retained custody of the instrument instead of cancelling it. As the Managers
Check neither went to the hands of Rosmil nor was it further negotiated to other
persons, the instrument remained undelivered. Petitioner does not dispute the fact that
respondents retained custody of the instrument.33
Since there was no delivery, presentment of the check to the bank for payment did not
occur. An order to debit the account of respondents was never made. In fact, petitioner
confirms that the Managers Check was never negotiated or presented for payment to
its Ermita Branch, and that the allocated fund is still held by the bank.34 As a result, the
assigned fund is deemed to remain part of the account of Hi-Tri, which procured the
Managers Check. The doctrine that the deposit represented by a managers check
automatically passes to the payee is inapplicable, because the instrument although
accepted in advance remains undelivered. Hence, respondents should have been
informed that the deposit had been left inactive for more than 10 years, and that it may
be subjected to escheat proceedings if left unclaimed.1wphi1
After a careful review of the RTC records, we find that it is no longer necessary to
remand the case for hearing to determine whether the claim of respondents was valid.
There was no contention that they were the procurers of the Managers Check. It is
undisputed that there was no effective delivery of the check, rendering the instrument

incomplete. In addition, we have already settled that respondents retained ownership

of the funds. As it is obvious from their foregoing actions that they have not abandoned
their claim over the fund, we rule that the allocated deposit, subject of the Managers
Check, should be excluded from the escheat proceedings. We reiterate our
pronouncement that the objective of escheat proceedings is state forfeiture of
unclaimed balances. We further note that there is nothing in the records that would
show that the OSG appealed the assailed CA judgments. We take this failure to
appeal as an indication of disinterest in pursuing the escheat proceedings in favor of
the Republic.
WHEREFORE the Petition is DENIED. The 26 November 2009 Decision and 27 May
2010 Resolution of the Court of Appeals in CA-G.R. SP No. 107261 are hereby
AFFIRMED.
SO ORDERED.

G.R. No. 85419 March 9, 1993

DEVELOPMENT BANK OF RIZAL, plaintiff-petitioner,
vs.
SIMA WEI and/or LEE KIAN HUAT, MARY CHENG UY, SAMSON TUNG, ASIAN
INDUSTRIAL PLASTIC CORPORATION and PRODUCERS BANK OF THE
PHILIPPINES, defendants-respondents.
Yngson & Associates for petitioner.
Henry A. Reyes & Associates for Samso Tung & Asian Industrial Plastic Corporation.
Eduardo G. Castelo for Sima Wei.
Monsod, Tamargo & Associates for Producers Bank.
Rafael S. Santayana for Mary Cheng Uy.

CAMPOS, JR., J.:

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

Corporation for short) and the Producers Bank of the Philippines, on two causes of
action:
(1) To enforce payment of the balance of P1,032,450.02 on a
promissory note executed by respondent Sima Wei on June 9,
1983; and
(2) To enforce payment of two checks executed by Sima Wei,
payable to petitioner, and drawn against the China Banking
Corporation, to pay the balance due on the promissory note.
Except for Lee Kian Huat, defendants filed their separate Motions to Dismiss alleging a
common ground that the complaint states no cause of action. The trial court granted
the defendants' Motions to Dismiss. The Court of Appeals affirmed this decision, * to
which the petitioner Bank, represented by its Legal Liquidator, filed this Petition for
Review by Certiorari, assigning the following as the alleged errors of the Court of
Appeals: 1
(1) THE COURT OF APPEALS ERRED IN HOLDING THAT THE
PLAINTIFF-PETITIONER HAS NO CAUSE OF ACTION
AGAINST DEFENDANTS-RESPONDENTS HEREIN.
(2) THE COURT OF APPEALS ERRED IN HOLDING THAT
SECTION 13, RULE 3 OF THE REVISED RULES OF COURT
ON ALTERNATIVE DEFENDANTS IS NOT APPLICABLE TO
HEREIN DEFENDANTS-RESPONDENTS.
The antecedent facts of this case are as follows:
In consideration for a loan extended by petitioner Bank to respondent Sima Wei, the
latter executed and delivered to the former a promissory note, engaging to pay the
petitioner Bank or order the amount of P1,820,000.00 on or before June 24, 1983 with
interest at 32% per annum. Sima Wei made partial payments on the note, leaving a
balance of P1,032,450.02. On November 18, 1983, Sima Wei issued two crossed
checks payable to petitioner Bank drawn against China Banking Corporation, bearing
respectively the serial numbers 384934, for the amount of P550,000.00 and 384935,
for the amount of P500,000.00. The said checks were allegedly issued in full
settlement of the drawer's account evidenced by the promissory note. These two
checks were not delivered to the petitioner-payee or to any of its authorized

representatives. For reasons not shown, these checks came into the possession of
respondent Lee Kian Huat, who deposited the checks without the petitioner-payee's
indorsement (forged or otherwise) to the account of respondent Plastic Corporation, at
the Balintawak branch, Caloocan City, of the Producers Bank. Cheng Uy, Branch
Manager of the Balintawak branch of Producers Bank, relying on the assurance of
respondent Samson Tung, President of Plastic Corporation, that the transaction was
legal and regular, instructed the cashier of Producers Bank to accept the checks for
deposit and to credit them to the account of said Plastic Corporation, inspite of the fact
that the checks were crossed and payable to petitioner Bank and bore no indorsement
of the latter. Hence, petitioner filed the complaint as aforestated.
The main issue before Us is whether petitioner Bank has a cause of action against any
or all of the defendants, in the alternative or otherwise.
A cause of action is defined as an act or omission of one party in violation of the legal
right or rights of another. The essential elements are: (1) legal right of the plaintiff; (2)
correlative obligation of the defendant; and (3) an act or omission of the defendant in
violation of said legal right. 2
The normal parties to a check are the drawer, the payee and the drawee bank. Courts
have long recognized the business custom of using printed checks where blanks are
provided for the date of issuance, the name of the payee, the amount payable and the
drawer's signature. All the drawer has to do when he wishes to issue a check is to
properly fill up the blanks and sign it. However, the mere fact that he has done these
does not give rise to any liability on his part, until and unless the check is delivered to
the payee or his representative. A negotiable instrument, of which a check is, is not
only a written evidence of a contract right but is also a species of property. Just as a
deed to a piece of land must be delivered in order to convey title to the grantee, so
must a negotiable instrument be delivered to the payee in order to evidence its
existence as a binding contract. Section 16 of the Negotiable Instruments Law, which
governs checks, provides in part:
Every contract on a negotiable instrument is incomplete and
revocable until delivery of the instrument for the purpose of giving
effect thereto. . . .
Thus, the payee of a negotiable instrument acquires no interest with respect thereto
until its delivery to him. 3Delivery of an instrument means transfer of possession, actual
or constructive, from one person to another. 4 Without the initial delivery of the

instrument from the drawer to the payee, there can be no liability on the instrument.
Moreover, such delivery must be intended to give effect to the instrument.
The allegations of the petitioner in the original complaint show that the two (2) China
Bank checks, numbered 384934 and 384935, were not delivered to the payee, the
petitioner herein. Without the delivery of said checks to petitioner-payee, the former did
not acquire any right or interest therein and cannot therefore assert any cause of
action, founded on said checks, whether against the drawer Sima Wei or against the
Producers Bank or any of the other respondents.
In the original complaint, petitioner Bank, as plaintiff, sued respondent Sima Wei on
the promissory note, and the alternative defendants, including Sima Wei, on the two
checks. On appeal from the orders of dismissal of the Regional Trial Court, petitioner
Bank alleged that its cause of action was not based on collecting the sum of money
evidenced by the negotiable instruments stated but on quasi-delict a claim for
damages on the ground of fraudulent acts and evident bad faith of the alternative
respondents. This was clearly an attempt by the petitioner Bank to change not only the
theory of its case but the basis of his cause of action. It is well-settled that a party
cannot change his theory on appeal, as this would in effect deprive the other party of
his day in court. 5

respect to said checks could not have prejudiced petitioner Bank. It had no right or
interest in the checks which could have been violated by said respondents. Petitioner
Bank has therefore no cause of action against said respondents, in the alternative or
otherwise. If at all, it is Sima Wei, the drawer, who would have a cause of action
against her
co-respondents, if the allegations in the complaint are found to be true.
With respect to the second assignment of error raised by petitioner Bank regarding the
applicability of Section 13, Rule 3 of the Rules of Court, We find it unnecessary to
discuss the same in view of Our finding that the petitioner Bank did not acquire any
right or interest in the checks due to lack of delivery. It therefore has no cause of action
against the respondents, in the alternative or otherwise.
In the light of the foregoing, the judgment of the Court of Appeals dismissing the
petitioner's complaint is AFFIRMED insofar as the second cause of action is
concerned. On the first cause of action, the case is REMANDED to the trial court for a
trial on the merits, consistent with this decision, in order to determine whether
respondent Sima Wei is liable to the Development Bank of Rizal for any amount under
the promissory note allegedly signed by her.
SO ORDERED.

Notwithstanding the above, it does not necessarily follow that the drawer Sima Wei is
freed from liability to petitioner Bank under the loan evidenced by the promissory note
agreed to by her. Her allegation that she has paid the balance of her loan with the two
checks payable to petitioner Bank has no merit for, as We have earlier explained,
these checks were never delivered to petitioner Bank. And even granting, without
admitting, that there was delivery to petitioner Bank, the delivery of checks in payment
of an obligation does not constitute payment unless they are cashed or their value is
impaired through the fault of the creditor. 6 None of these exceptions were alleged by
respondent Sima Wei.
Therefore, unless respondent Sima Wei proves that she has been relieved from
liability on the promissory note by some other cause, petitioner Bank has a right of
action against her for the balance due thereon.
However, insofar as the other respondents are concerned, petitioner Bank has no
privity with them. Since petitioner Bank never received the checks on which it based its
action against said respondents, it never owned them (the checks) nor did it acquire
any interest therein. Thus, anything which the respondents may have done with

G.R. No. 129015

August 13, 2004

SAMSUNG CONSTRUCTION COMPANY PHILIPPINES, INC., petitioner,

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

DECISION

TINGA, J.:
Called to fore in the present petition is a classic textbook question if a bank pays out
on a forged check, is it liable to reimburse the drawer from whose account the funds
were paid out? The Court of Appeals, in reversing a trial court decision adverse to the
bank, invoked tenuous reasoning to acquit the bank of liability. We reverse, applying
time-honored principles of law.
The salient facts follow.
Plaintiff Samsung Construction Company Philippines, Inc. ("Samsung Construction"),
while based in Bian, Laguna, maintained a current account with defendant Far East
Bank and Trust Company1 ("FEBTC") at the latters Bel-Air, Makati branch.2 The sole
signatory to Samsung Constructions account was Jong Kyu Lee ("Jong"), its Project
Manager,3 while the checks remained in the custody of the companys accountant, Kyu
Yong Lee ("Kyu").4
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 Justiani, first checked the balance of Samsung Constructions account. After
ascertaining there were enough funds to cover the check,5 she compared the
signature appearing on the check with the specimen signature of Jong as contained in
the specimen signature card with the bank. After comparing the two signatures,

Justiani was satisfied as to the authenticity of the signature appearing on the check.
She then asked Gonzaga to submit proof of his identity, and the latter presented three
(3) identification cards.6
At the same time, Justiani forwarded the check to the branch Senior Assistant Cashier
Gemma Velez, as it was bank policy that two bank branch officers approve checks
exceeding One Hundred Thousand Pesos, for payment or encashment. Velez likewise
counterchecked the signature on the check as against that on the signature card. He
too concluded that the check was indeed signed by Jong. Velez then forwarded the
check and signature card to Shirley Syfu, another bank officer, for approval. Syfu then
noticed that Jose Sempio III ("Sempio"), the assistant accountant of Samsung
Construction, was also in the bank. Sempio was well-known to Syfu and the other
bank officers, he being the assistant accountant of Samsung Construction. Syfu
showed the check to Sempio, who 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, the accountant of Samsung Construction, Kyu, examined the
balance of the bank account and discovered that a check in the amount of Nine
Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00) had been
encashed. Aware that he had not prepared such a check for Jongs signature, Kyu
perused the checkbook and found that the last blank check was missing.7 He reported
the matter to Jong, who then proceeded to the bank. Jong learned of the encashment
of the check, and realized that his signature had been forged. The Bank Manager
reputedly told Jong that he would be reimbursed for the amount of the check.8 Jong
proceeded to the police station and consulted with his lawyers.9 Subsequently, a
criminal case for qualified theft was filed against Sempio before the Laguna court.10
In a letter dated 6 May 1992, Samsung Construction, through counsel, demanded that
FEBTC credit to it the amount of Nine Hundred Ninety Nine Thousand Five Hundred
Pesos (P999,500.00), with interest.11 In response, FEBTC said that it was still
conducting an investigation on the matter. Unsatisfied, Samsung Construction filed
aComplaint on 10 June 1992 for violation of Section 23 of the Negotiable Instruments
Law, and prayed for the payment of the amount debited as a result of the questioned
check plus interest, and attorneys fees.12 The case was docketed as Civil Case No.
92-61506 before the Regional Trial Court ("RTC") of Manila, Branch 9. 13

During the trial, both sides presented their respective expert witnesses to testify on the
claim that 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),14 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.15
Confronted with conflicting expert testimony, the RTC chose to believe the findings of
the NBI expert. In a Decisiondated 25 April 1994, the RTC held that Jongs signature
on the check was forged and accordingly directed the bank to pay or credit back to
Samsung Constructions account the amount of Nine Hundred Ninety Nine Thousand
Five Hundred Pesos (P999,500.00), together with interest tolled from the time the
complaint was filed, and attorneys fees in the amount of Fifteen Thousand Pesos
(P15,000.00).
FEBTC timely appealed to the Court of Appeals. On 28 November 1996, the Special
Fourteenth Division of the Court of Appeals rendered a Decision,16 reversing the
RTC Decision and absolving FEBTC from any liability. The Court of Appeals held that
the contradictory findings of the NBI and the PNP created doubt as to whether there
was forgery.17 Moreover, the appellate court also held that assuming there was forgery,
it occurred due to the negligence of Samsung Construction, imputing blame on the
accountant Kyu for lack of care and prudence in keeping the checks, which if observed
would have prevented Sempio from gaining access thereto.18 The Court of Appeals
invoked the ruling in PNB v. National City Bank of New York19 that, if a loss, which
must be borne by one or two innocent persons, can be traced to the neglect or fault of
either, such loss would be borne by the negligent party, even if innocent of intentional
fraud.20
Samsung Construction now argues that the Court of Appeals had seriously
misapprehended the facts when it overturned the RTCs finding of forgery. It also
contends that the appellate court erred in finding that it had been negligent in
safekeeping the check, and in applying the equity principle enunciated in PNB v.
National City Bank of New York.
Since the trial court and the Court of Appeals arrived at contrary findings on questions
of fact, the Court is obliged to examine the record to draw out the correct conclusions.

Upon examination of the record, and based on the applicable laws and jurisprudence,
we reverse the Court of Appeals.
Section 23 of the Negotiable Instruments Law states:
When a signature is forged or made without the authority of the person
whose signature it purports to be, it is wholly inoperative, and no right to
retain the instrument, or to give a discharge therefor, or to enforce payment
thereof against any party thereto, can be acquired through or under such
signature, unless the party against whom it is sought to enforce such right
is precluded from setting up the forgery or want of authority. (Emphasis
supplied)
The general rule is to the effect that a forged signature is "wholly inoperative," and
payment made "through or under such signature" is ineffectual or does not discharge
the instrument.21 If payment is made, the drawee cannot charge it to the drawers
account. The traditional justification for the result is that the drawee is in a superior
position to detect a forgery because he has the makers signature and is expected to
know and compare it.22 The rule has a healthy cautionary effect on banks by
encouraging care in the comparison of the signatures against those on the signature
cards they have on file. Moreover, the very opportunity of the drawee to insure and to
distribute the cost among its customers who use checks makes the drawee an ideal
party to spread the risk to insurance.23
Brady, in his treatise The Law of Forged and Altered Checks, elucidates:
When a person deposits money in a general account in a bank, against
which he has the privilege of drawing checks in the ordinary course of
business, the relationship between the bank and the depositor is that of
debtor and creditor. So far as the legal relationship between the two is
concerned, the situation is the same as though the bank had borrowed
money from the depositor, agreeing to repay it on demand, or had bought
goods from the depositor, agreeing to pay for them on demand. The bank
owes the depositor money in the same sense that any debtor owes money
to his creditor. Added to this, in the case of bank and depositor, there is, of
course, the banks obligation to pay checks drawn by the depositor in proper
form and presented in due course. When the bank receives the deposit, it
impliedly agrees to pay only upon the depositors order. When the bank pays

a check, on which the depositors signature is a forgery, it has failed to

comply with its contract in this respect. Therefore, the bank is held liable.
The fact that the forgery is a clever one is immaterial. The forged signature
may so closely resemble the genuine as to defy detection by the depositor
himself. And yet, if a bank pays the check, it is paying out its own money
and not the depositors.
The forgery may be committed by a trusted employee or confidential agent.
The bank still must bear the loss. Even in a case where the forged check
was drawn by the depositors partner, the loss was placed upon the bank.
The case referred to is Robinson v. Security Bank, Ark., 216 S. W. Rep. 717.
In this case, the plaintiff brought suit against the defendant bank for money
which had been deposited to the plaintiffs credit and which the bank had
paid out on checks bearing forgeries of the plaintiffs signature.
xxx
It was held that the bank was liable. It was further held that the fact that the
plaintiff waited eight or nine months after discovering the forgery, before
notifying the bank, did not, as a matter of law, constitute a ratification of the
payment, so as to preclude the plaintiff from holding the bank liable. xxx
This rule of liability can be stated briefly in these words: "A bank is bound to
know its depositors signature." The rule is variously expressed in the many
decisions in which the question has been considered. But they all sum up to
the proposition that a bank must know the signatures of those whose
general deposits it carries.24
By no means is the principle rendered obsolete with the advent of modern commercial
transactions. Contemporary texts still affirm this well-entrenched standard. Nickles, in
his book Negotiable Instruments and Other Related Commercial Paper wrote, thus:
The deposit contract between a payor bank and its customer determines
who can draw against the customers account by specifying whose signature
is necessary on checks that are chargeable against the customers account.
Therefore, a check drawn against the account of an individual customer that
is signed by someone other than the customer, and without authority from
her, is not properly payable and is not chargeable to the customers account,

inasmuch as any "unauthorized signature on an instrument is ineffective" as

the signature of the person whose name is signed.25
Under Section 23 of the Negotiable Instruments Law, forgery is a real or absolute
defense by the party whose signature is forged.26 On the premise that Jongs signature
was indeed forged, FEBTC is liable for the loss since it authorized the discharge of the
forged check. Such liability attaches even if the bank exerts due diligence and care in
preventing such faulty discharge. Forgeries often deceive the eye of the most cautious
experts; and when a bank has been so deceived, it is a harsh rule which compels it to
suffer although no one has suffered by its being deceived.27 The forgery may be so
near like the genuine as to defy detection by the depositor himself, and yet the bank is
liable to the depositor if it pays the check.28
Thus, the first matter of inquiry is into whether the check was indeed forged. A
document formally presented is presumed to be genuine until it is proved to be
fraudulent. In a forgery trial, this presumption must be overcome but this can only be
done by convincing testimony and effective illustrations.29
In ruling that forgery was not duly proven, the Court of Appeals held:
[There] is ground to doubt the findings of the trial court sustaining the
alleged forgery in view of the conflicting conclusions made by handwriting
experts from the NBI and the PNP, both agencies of the government.
xxx
These contradictory findings create doubt on whether there was indeed a
forgery. In the case of Tenio-Obsequio v. Court of Appeals, 230 SCRA 550,
the Supreme Court held that forgery cannot be presumed; it must be proved
by clear, positive and convincing evidence.
This reasoning is pure sophistry. Any litigator worth his or her salt would never allow
an opponents expert witness to stand uncontradicted, thus the spectacle of competing
expert witnesses is not unusual. The trier of fact will have to decide which version to
believe, and explain why or why not such version is more credible than the other.
Reliance therefore cannot be placed merely on the fact that there are colliding
opinions of two experts, both clothed with the presumption of official duty, in order to
draw a conclusion, especially one which is extremely crucial. Doing so is tantamount
to a jurisprudential cop-out.

Much is expected from the Court of Appeals as it occupies the penultimate tier in the
judicial hierarchy. This Court has long deferred to the appellate court as to its findings
of fact in the understanding that it has the appropriate skill and competence to plough
through the minutiae that scatters the factual field. In failing to thoroughly evaluate the
evidence before it, and relying instead on presumptions haphazardly drawn, the Court
of Appeals was sadly remiss. Of course, courts, like humans, are fallible, and not
every error deserves a stern rebuke. Yet, the appellate courts error in this case
warrants special attention, as it is absurd and even dangerous as a precedent. If this
rationale were adopted as a governing standard by every court in the land, barely any
actionable claim would prosper, defeated as it would be by the mere invocation of the
existence of a contrary "expert" opinion.
On the other hand, the RTC did adjudge the testimony of the NBI expert as more
credible than that of the PNP, and explained its reason behind the conclusion:
After subjecting the evidence of both parties to a crucible of analysis, the
court arrived at the conclusion that the testimony of the NBI document
examiner is more credible because the testimony of the PNP Crime
Laboratory Services document examiner reveals that there are a lot of
differences in the questioned signature as compared to the standard
specimen signature. Furthermore, as testified to by Ms. Rhoda Flores, NBI
expert, the manner of execution of the standard signatures used reveals that
it is a free rapid continuous execution or stroke as shown by the tampering
terminal stroke of the signatures whereas the questioned signature is a
hesitating slow drawn execution stroke. Clearly, the person who executed
the questioned signature was hesitant when the signature was made.30
During the testimony of PNP expert Rosario Perez, the RTC bluntly noted that
"apparently, there [are] differences on that questioned signature and the standard
signatures."31 This Court, in examining the signatures, makes a similar finding. The
PNP expert excused the noted "differences" by asserting that they were mere
"variations," which are normal deviations found in writing.32 Yet the RTC, which had the
opportunity to examine the relevant documents and to personally observe the expert
witness, clearly disbelieved the PNP expert. The Court similarly finds the testimony of
the PNP expert as unconvincing. During the trial, she was confronted several times
with apparent differences between strokes in the questioned signature and the
genuine samples. Each time, she would just blandly assert that these differences were
just "variations,"33 as if the mere conjuration of the word would sufficiently disquiet
whatever doubts about the deviations. Such conclusion, standing alone, would be of

little or no value unless supported by sufficiently cogent reasons which might amount
almost to a demonstration.34
The most telling difference between the questioned and genuine signatures examined
by the PNP is in the final upward stroke in the signature, or "the point to the short
stroke of the terminal in the capital letter L," as referred to by the PNP examiner who
had marked it in her comparison chart as "point no. 6." To the plain eye, such upward
final stroke consists of a vertical line which forms a ninety degree (90) angle with the
previous stroke. Of the twenty one (21) other genuine samples examined by the PNP,
at least nine (9) ended with an upward stroke.35 However, unlike the questioned
signature, the upward strokes of eight (8) of these signatures are looped, while the
upward stroke of the seventh36 forms a severe forty-five degree (45) with the previous
stroke. The difference is glaring, and indeed, the PNP examiner was confronted with
the inconsistency in point no. 6.
Q: Now, in this questioned document point no. 6, the "s" stroke is directly
upwards.
A: Yes, sir.
Q: Now, can you look at all these standard signature (sic) were (sic) point 6
is repeated or the last stroke "s" is pointing directly upwards?
A: There is none in the standard signature, sir.37
Again, the PNP examiner downplayed the uniqueness of the final stroke in the
questioned signature as a mere variation,38 the same excuse she proffered for the
other marked differences noted by the Court and the counsel for petitioner.39
There is no reason to doubt why the RTC gave credence to the testimony of the NBI
examiner, and not the PNP experts. The NBI expert, Rhoda Flores, clearly qualifies as
an expert witness. A document examiner for fifteen years, she had been promoted to
the rank of Senior Document Examiner with the NBI, and had held that rank for twelve
years prior to her testimony. She had placed among the top five examinees in the
Competitive Seminar in Question Document Examination, conducted by the NBI
Academy, which qualified her as a document examiner.40She had trained with the
Royal Hongkong Police Laboratory and is a member of the International Association
for Identification.41 As of the time she testified, she had examined more than fifty to
fifty-five thousand questioned documents, on an average of fifteen to twenty

documents a day.42 In comparison, PNP document examiner Perez admitted to having

examined only around five hundred documents as of her testimony.43
In analyzing the signatures, NBI Examiner Flores utilized the scientific comparative
examination method consisting of analysis, recognition, comparison and evaluation of
the writing habits with the use of instruments such as a magnifying lense, a
stereoscopic microscope, and varied lighting substances. She also prepared enlarged
photographs of the signatures in order to facilitate the necessary comparisons. 44 She
compared the questioned signature as against ten (10) other sample signatures of
Jong. Five of these signatures were executed on checks previously issued by Jong,
while the other five contained in business letters Jong had signed.45 The NBI found
that there were significant differences in the handwriting characteristics existing
between the questioned and the sample signatures, as to manner of execution,
link/connecting strokes, proportion characteristics, and other identifying details.46
The RTC was sufficiently convinced by the NBI examiners testimony, and explained
her reasons in its Decisions. While the Court of Appeals disagreed and upheld the
findings of the PNP, it failed to convincingly demonstrate why such findings were more
credible than those of the NBI expert. As a throwaway, the assailed Decision noted
that the PNP, not the NBI, had the opportunity to examine the specimen signature card
signed by Jong, which was relied upon by the employees of FEBTC in authenticating
Jongs signature. The distinction is irrelevant in establishing forgery. Forgery can be
established comparing the contested signatures as against those of any sample
signature duly established as that of the persons whose signature was forged.
FEBTC lays undue emphasis on the fact that the PNP examiner did compare the
questioned signature against the bank signature cards. The crucial fact in question
is whether or not the check was forged, not whether the bank could have
detected the forgery. The latter issue becomes relevant only if there is need to
weigh the comparative negligence between the bank and the party whose
signature was forged.
At the same time, the Court of Appeals failed to assess the effect of Jongs testimony
that the signature on the check was not his.47 The assertion may seem self-serving at
first blush, yet it cannot be ignored that Jong was in the best position to know whether
or not the signature on the check was his. While his claim should not be taken at face
value, any averments he would have on the matter, if adjudged as truthful, deserve
primacy in consideration. Jongs testimony is supported by the findings of the NBI
examiner. They are also backed by factual circumstances that support the conclusion

that the assailed check was indeed forged. Judicial notice can be taken that is highly
unusual in practice for a business establishment to draw a check for close to a million
pesos and make it payable to cash or bearer, and not to order. Jong immediately
reported the forgery upon its discovery. He filed the appropriate criminal charges
against Sempio, the putative forger.48
Now for determination is whether Samsung Construction was precluded from setting
up the defense of forgery under Section 23 of the Negotiable Instruments Law. The
Court of Appeals concluded that Samsung Construction was negligent, and invoked
the doctrines that "where a loss must be borne by one of two innocent person, can be
traced to the neglect or fault of either, it is reasonable that it would be borne by him,
even if innocent of any intentional fraud, through whose means it has succeeded49 or
who put into the power of the third person to perpetuate the wrong."50 Applying these
rules, the Court of Appeals determined that it was the negligence of Samsung
Construction that allowed the encashment of the forged check.
In the case at bar, the forgery appears to have been made possible through
the acts of one Jose Sempio III, an assistant accountant employed by the
plaintiff Samsung [Construction] Co. Philippines, Inc. who supposedly stole
the blank check and who presumably is responsible for its encashment
through a forged signature of Jong Kyu Lee. Sempio was assistant to the
Korean accountant who was in possession of the blank checks and who
through negligence, enabled Sempio to have access to the same. Had the
Korean accountant been more careful and prudent in keeping the blank
checks Sempio would not have had the chance to steal a page thereof and
to effect the forgery. Besides, Sempio was an employee who appears to
have had dealings with the defendant Bank in behalf of the plaintiff
corporation and on the date the check was encashed, he was there to certify
that it was a genuine check issued to purchase equipment for the
company.51
We recognize that Section 23 of the Negotiable Instruments Law bars a party from
setting up the defense of forgery if it is guilty of negligence.52 Yet, we are unable to
conclude that Samsung Construction was guilty of negligence in this case. The
appellate court failed to explain precisely how the Korean accountant was negligent or
how more care and prudence on his part would have prevented the forgery. We cannot
sustain this "tar and feathering" resorted to without any basis.

The bare fact that the forgery was committed by an employee of the party whose
signature was forged cannot necessarily imply that such partys negligence was the
cause for the forgery. Employers do not possess the preternatural gift of cognition as
to the evil that may lurk within the hearts and minds of their employees. The Courts
pronouncement in PCI Bank v. Court of Appeals53 applies in this case, to wit:
[T]he mere fact that the forgery was committed by a drawer-payors
confidential employee or agent, who by virtue of his position had unusual
facilities for perpetrating the fraud and imposing the forged paper upon the
bank, does not entitle the bank to shift the loss to the drawer-payor, in the
absence of some circumstance raising estoppel against the drawer.54
Admittedly, the record does not clearly establish what measures Samsung
Construction employed to safeguard its blank checks. Jong did testify that his
accountant, Kyu, kept the checks inside a "safety box,"55 and no contrary version was
presented by FEBTC. However, such testimony cannot prove that the checks were
indeed kept in a safety box, as Jongs testimony on that point is hearsay, since Kyu,
and not Jong, would have the personal knowledge as to how the checks were kept.
Still, in the absence of evidence to the contrary, we can conclude that there was no
negligence on Samsung Constructions part. The presumption remains that every
person takes ordinary care of his concerns,56 and that the ordinary course of business
has been followed.57 Negligence is not presumed, but must be proven by him who
alleges it.58 While the complaint was lodged at the instance of Samsung Construction,
the matter it had to prove was the claim it had alleged - whether the check was forged.
It cannot be required as well to prove that it was not negligent, because the legal
presumption remains that ordinary care was employed.
Thus, it was incumbent upon FEBTC, in defense, to prove the negative fact that
Samsung Construction was negligent. While the payee, as in this case, may not have
the personal knowledge as to the standard procedures observed by the drawer, it well
has the means of disputing the presumption of regularity. Proving a negative fact may
be "a difficult office,"59 but necessarily so, as it seeks to overcome a presumption in
law. FEBTC was unable to dispute the presumption of ordinary care exercised by
Samsung Construction, hence we cannot agree with the Court of Appeals finding of
negligence.
The assailed Decision replicated the extensive efforts which FEBTC devoted to
establish that there was no negligence on the part of the bank in its acceptance and

payment of the forged check. However, the degree of diligence exercised by the bank
would be irrelevant if the drawer is not precluded from setting up the defense of forgery
under Section 23 by his own negligence. The rule of equity enunciated in PNB v.
National City Bank of New York, 60 as relied upon by the Court of Appeals, deserves
careful examination.
The point in issue has sometimes been said to be that of negligence. The
drawee who has paid upon the forged signature is held to bear the
loss, because he has been negligent in failing to recognize that the
handwriting is not that of his customer. But it follows obviously that if the
payee, holder, or presenter of the forged paper has himself been in default,
if he has himself been guilty of a negligence prior to that of the banker, or if
by any act of his own he has at all contributed to induce the banker's
negligence, then he may lose his right to cast the loss upon the
banker.61 (Emphasis supplied)
Quite palpably, the general rule remains that the drawee who has paid upon the forged
signature bears the loss. The exception to this rule arises only when negligence can
be traced on the part of the drawer whose signature was forged, and the need arises
to weigh the comparative negligence between the drawer and the drawee to determine
who should bear the burden of loss. The Court finds no basis to conclude that
Samsung Construction was negligent in the safekeeping of its checks. For one, the
settled rule is that the mere fact that the depositor leaves his check book lying around
does not constitute such negligence as will free the bank from liability to him, where a
clerk of the depositor or other persons, taking advantage of the opportunity, abstract
some of the check blanks, forges the depositors signature and collect on the checks
from the bank.62 And for another, in point of fact Samsung Construction was not
negligent at all since it reported the forgery almost immediately upon discovery. 63
It is also worth noting that the forged signatures in PNB v. National City Bank of New
York were not of the drawer, but of indorsers. The same circumstance attends PNB v.
Court of Appeals,64 which was also cited by the Court of Appeals. It is accepted that a
forged signature of the drawer differs in treatment than a forged signature of the
indorser.
The justification for the distinction between forgery of the signature of the
drawer and forgery of an indorsement is that the drawee is in a position to
verify the drawers signature by comparison with one in his hands, but has
ordinarily no opportunity to verify an indorsement.65

Thus, a drawee bank is generally liable to its depositor in paying a check

which bears either a forgery of the drawers signature or a forged
indorsement. But the bank may, as a general rule, recover back the money
which it has paid on a check bearing a forged indorsement, whereas it has
not this right to the same extent with reference to a check bearing a forgery
of the drawers signature.66
The general rule imputing liability on the drawee who paid out on the forgery holds in
this case.
Since FEBTC puts into issue the degree of care it exercised before paying out on the
forged check, we might as well comment on the banks performance of its duty. It
might be so that the bank complied with its own internal rules prior to paying out on the
questionable check. Yet, there are several troubling circumstances that lead us to
believe that the bank itself was remiss in its duty.
The fact that the check was made out in the amount of nearly one million pesos is
unusual enough to require a higher degree of caution on the part of the bank. Indeed,
FEBTC confirms this through its own internal procedures. Checks below twenty-five
thousand pesos require only the approval of the teller; those between twenty-five
thousand to one hundred thousand pesos necessitate the approval of one bank officer;
and should the amount exceed one hundred thousand pesos, the concurrence of two
bank officers is required.67
In this case, not only did the amount in the check nearly total one million pesos, it was
also payable to cash. That latter circumstance should have aroused the suspicion of
the bank, as it is not ordinary business practice for a check for such large amount to
be made payable to cash or to bearer, instead of to the order of a specified
person.68Moreover, the check was presented for payment by one Roberto Gonzaga,
who was not designated as the payee of the check, and who did not carry with him any
written proof that he was authorized by Samsung Construction to encash the check.
Gonzaga, a stranger to FEBTC, was not even an employee of Samsung
Construction.69 These circumstances are already suspicious if taken independently,
much more so if they are evaluated in concurrence. Given the shadiness attending
Gonzagas presentment of the check, it was not sufficient for FEBTC to have merely
complied with its internal procedures, but mandatory that all earnest efforts be
undertaken to ensure the validity of the check, and of the authority of Gonzaga to
collect payment therefor.

According to FEBTC Senior Assistant Cashier Gemma Velez, the bank tried, but
failed, to contact Jong over the phone to verify the check.70 She added that calling the
issuer or drawer of the check to verify the same was not part of the standard
procedure of the bank, but an "extra effort."71 Even assuming that such personal
verification is tantamount to extraordinary diligence, it cannot be denied that FEBTC
still paid out the check despite the absence of any proof of verification from the drawer.
Instead, the bank seems to have relied heavily on the say-so of Sempio, who was
present at the bank at the time the check was presented.
FEBTC alleges that Sempio was well-known to the bank officers, as he had regularly
transacted with the bank in behalf of Samsung Construction. It was even claimed that
everytime FEBTC would contact Jong about problems with his account, Jong would
hand the phone over to Sempio.72 However, the only proof of such allegations is the
testimony of Gemma Velez, who also testified that she did not know Sempio
personally,73 and had met Sempio for the first time only on the day the check was
encashed.74 In fact, Velez had to inquire with the other officers of the bank as to
whether Sempio was actually known to the employees of the bank.75 Obviously, Velez
had no personal knowledge as to the past relationship between FEBTC and Sempio,
and any averments of her to that effect should be deemed hearsay evidence.
Interestingly, FEBTC did not present as a witness any other employee of their Bel-Air
branch, including those who supposedly had transacted with Sempio before.
Even assuming that FEBTC had a standing habit of dealing with Sempio, acting in
behalf of Samsung Construction, the irregular circumstances attending the
presentment of the forged check should have put the bank on the highest degree of
alert. The Court recently emphasized that the highest degree of care and diligence is
required of banks.
Banks are engaged in a business impressed with public interest, and it is
their duty to protect in return their many clients and depositors who transact
business with them. They have the obligation to treat their 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.76
Given the circumstances, extraordinary diligence dictates that FEBTC should have
ascertained from Jong personally that the signature in the questionable check was his.

Still, even if the bank performed with utmost diligence, the drawer whose signature
was forged may still recover from the bank as long as he or she is not precluded from
setting up the defense of forgery. After all, Section 23 of the Negotiable Instruments
Law plainly states that no right to enforce the payment of a check can arise out of a
forged signature. Since the drawer, Samsung Construction, is not precluded by
negligence from setting up the forgery, the general rule should apply. Consequently, if
a bank pays a forged check, it must be considered as paying out of its funds and
cannot charge the amount so paid to the account of the depositor.77 A bank is liable,
irrespective of its good faith, in paying a forged check.78
WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals dated
28 November 1996 is REVERSED, and the Decision of the Regional Trial Court of
Manila, Branch 9, dated 25 April 1994 is REINSTATED. Costs against respondent.
SO ORDERED.

G.R. No. 107382/G.R. No. 107612

January 31, 1996

ASSOCIATED BANK, petitioner,

vs.
HON. COURT OF APPEALS, PROVINCE OF TARLAC and PHILIPPINE NATIONAL
BANK, respondents.
xxxxxxxxxxxxxxxxxxxxx
G.R. No. 107612

January 31, 1996

PHILIPPINE NATIONAL BANK, petitioner,

vs.
HONORABLE COURT OF APPEALS, PROVINCE OF TARLAC, and ASSOCIATED
BANK, respondents.
DECISION
ROMERO, J.:
Where thirty checks bearing forged endorsements are paid, who bears the loss, the
drawer, the drawee bank or the collecting bank?
This is the main issue in these consolidated petitions for review assailing the decision
of the Court of Appeals in "Province of Tarlac v. Philippine National Bank v. Associated
Bank v. Fausto Pangilinan, et. al." (CA-G.R. No. CV No. 17962). 1
The facts of the case are as follows:
The Province of Tarlac maintains a current account with the Philippine National Bank
(PNB) Tarlac Branch where the provincial funds are deposited. Checks issued by the
Province are signed by the Provincial Treasurer and countersigned by the Provincial
Auditor or the Secretary of the Sangguniang Bayan.

A portion of the funds of the province is allocated to the Concepcion Emergency

Hospital. 2 The allotment checks for said government hospital are drawn to the order of
"Concepcion Emergency Hospital, Concepcion, Tarlac" or "The Chief, Concepcion
Emergency Hospital, Concepcion, Tarlac." The checks are released by the Office of
the Provincial Treasurer and received for the hospital by its administrative officer and
cashier.
In January 1981, the books of account of the Provincial Treasurer were post-audited
by the Provincial Auditor. It was then discovered that the hospital did not receive
several allotment checks drawn by the Province.
On February 19, 1981, the Provincial Treasurer requested the manager of the PNB to
return all of its cleared checks which were issued from 1977 to 1980 in order to verify
the regularity of their encashment. After the checks were examined, the Provincial
Treasurer learned that 30 checks amounting to P203,300.00 were encashed by one
Fausto Pangilinan, with the Associated Bank acting as collecting bank.
It turned out that Fausto Pangilinan, who was the administrative officer and cashier of
payee hospital until his retirement on February 28, 1978, collected the questioned
checks from the office of the Provincial Treasurer. He claimed to be assisting or
helping the hospital follow up the release of the checks and had official
receipts. 3Pangilinan sought to encash the first check 4 with Associated Bank.
However, the manager of Associated Bank refused and suggested that Pangilinan
deposit the check in his personal savings account with the same bank. Pangilinan was
able to withdraw the money when the check was cleared and paid by the drawee bank,
PNB.
After forging the signature of Dr. Adena Canlas who was chief of the payee hospital,
Pangilinan followed the same procedure for the second check, in the amount of
P5,000.00 and dated April 20, 1978, 5 as well as for twenty-eight other checks of
various amounts and on various dates. The last check negotiated by Pangilinan was
for f8,000.00 and dated February 10, 1981. 6 All the checks bore the stamp of
Associated Bank which reads "All prior endorsements guaranteed ASSOCIATED
BANK."
Jesus David, the manager of Associated Bank testified that Pangilinan made it appear
that the checks were paid to him for certain projects with the hospital. 7 He did not find
as irregular the fact that the checks were not payable to Pangilinan but to the
Concepcion Emergency Hospital. While he admitted that his wife and Pangilinan's wife

are first cousins, the manager denied having given Pangilinan preferential treatment
on this account. 8
On February 26, 1981, the Provincial Treasurer wrote the manager of the PNB seeking
the restoration of the various amounts debited from the current account of the
Province. 9
In turn, the PNB manager demanded reimbursement from the Associated Bank on
May 15, 1981. 10
As both banks resisted payment, the Province of Tarlac brought suit against PNB
which, in turn, impleaded Associated Bank as third-party defendant. The latter then
filed a fourth-party complaint against Adena Canlas and Fausto Pangilinan. 11
After trial on the merits, the lower court rendered its decision on March 21, 1988,
disposing as follows:
WHEREFORE, in view of the foregoing, judgment is hereby rendered:
1. On the basic complaint, in favor of plaintiff Province of Tarlac and against
defendant Philippine National Bank (PNB), ordering the latter to pay to the
former, the sum of Two Hundred Three Thousand Three Hundred
(P203,300.00) Pesos with legal interest thereon from March 20, 1981 until
fully paid;
2. On the third-party complaint, in favor of defendant/third-party plaintiff
Philippine National Bank (PNB) and against third-party defendant/fourthparty plaintiff Associated Bank ordering the latter to reimburse to the former
the amount of Two Hundred Three Thousand Three Hundred (P203,300.00)
Pesos with legal interests thereon from March 20, 1981 until fully paid;.
3. On the fourth-party complaint, the same is hereby ordered dismissed for
lack of cause of action as against fourth-party defendant Adena Canlas and
lack of jurisdiction over the person of fourth-party defendant Fausto
Pangilinan as against the latter.
4. On the counterclaims on the complaint, third-party complaint and fourthparty complaint, the same are hereby ordered dismissed for lack of merit.

SO ORDERED. 12
PNB and Associated Bank appealed to the Court of Appeals. 13 Respondent court
affirmed the trial court's decision in toto on September 30, 1992.
Hence these consolidated petitions which seek a reversal of respondent appellate
court's decision.
PNB assigned two errors. First, the bank contends that respondent court erred in
exempting the Province of Tarlac from liability when, in fact, the latter was negligent
because it delivered and released the questioned checks to Fausto Pangilinan who
was then already retired as the hospital's cashier and administrative officer. PNB also
maintains its innocence and alleges that as between two innocent persons, the one
whose act was the cause of the loss, in this case the Province of Tarlac, bears the
loss.
Next, PNB asserts that it was error for the court to order it to pay the province and then
seek reimbursement from Associated Bank. According to petitioner bank, respondent
appellate Court should have directed Associated Bank to pay the adjudged liability
directly to the Province of Tarlac to avoid circuity. 14
Associated Bank, on the other hand, argues that the order of liability should be totally
reversed, with the drawee bank (PNB) solely and ultimately bearing the loss.
Respondent court allegedly erred in applying Section 23 of the Philippine Clearing
House Rules instead of Central Bank Circular No. 580, which, being an administrative
regulation issued pursuant to law, has the force and effect of law. 15 The PCHC Rules
are merely contractual stipulations among and between member-banks. As such, they
cannot prevail over the aforesaid CB Circular.
It likewise contends that PNB, the drawee bank, is estopped from asserting the
defense of guarantee of prior indorsements against Associated Bank, the collecting
bank. In stamping the guarantee (for all prior indorsements), it merely followed a
mandatory requirement for clearing and had no choice but to place the stamp of
guarantee; otherwise, there would be no clearing. The bank will be in a "no-win"
situation and will always bear the loss as against the drawee bank. 16
Associated Bank also claims that since PNB already cleared and paid the value of the
forged checks in question, it is now estopped from asserting the defense that

Associated Bank guaranteed prior indorsements. The drawee bank allegedly has the
primary duty to verify the genuineness of payee's indorsement before paying the
check. 17

forgery, are precluded from using this defense. Indorsers, persons negotiating by
delivery and acceptors are warrantors of the genuineness of the signatures on the
instrument. 20

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

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

xxx

xxx

xxx

The case at bench concerns checks payable to the order of Concepcion Emergency
Hospital or its Chief. They were properly issued and bear the genuine signatures of
the drawer, the Province of Tarlac. The infirmity in the questioned checks lies in the
payee's (Concepcion Emergency Hospital) indorsements which are forgeries. At the
time of their indorsement, the checks were order instruments.
Checks having forged indorsements should be differentiated from forged checks or
checks bearing the forged signature of the drawer.
Section 23 of the Negotiable Instruments Law (NIL) provides:
Sec. 23. FORGED SIGNATURE, EFFECT OF. When a signature is
forged or made without authority of the person whose signature it purports
to be, it is wholly inoperative, and no right to retain the instrument, or to give
a discharge therefor, or to enforce payment thereof against any party
thereto, can be acquired through or under such signature unless the party
against whom it is sought to enforce such right is precluded from setting up
the forgery or want of authority.
A forged signature, whether it be that of the drawer or the payee, is wholly inoperative
and no one can gain title to the instrument through it. A person whose signature to an
instrument was forged was never a party and never consented to the contract which
allegedly gave rise to such instrument. 18 Section 23 does not avoid the instrument but
only the forged signature. 19 Thus, a forged indorsement does not operate as the
payee's indorsement.
The exception to the general rule in Section 23 is where "a party against whom it is
sought to enforce a right is precluded from setting up the forgery or want of authority."
Parties who warrant or admit the genuineness of the signature in question and those
who, by their acts, silence or negligence are estopped from setting up the defense of

The checks involved in this case are order instruments, hence, the following
discussion is made with reference to the effects of a forged indorsement on an
instrument payable to order.
Where the instrument is payable to order at the time of the forgery, such as the checks
in this case, the signature of its rightful holder (here, the payee hospital) is essential to
transfer title to the same instrument. When the holder's indorsement is forged, all
parties prior to the forgery may raise the real defense of forgery against all parties
subsequent thereto. 22
An indorser of an order instrument warrants "that the instrument is genuine and in all
respects what it purports to be; that he has a good title to it; that all prior parties had
capacity to contract; and that the instrument is at the time of his indorsement valid and
subsisting." 23 He cannot interpose the defense that signatures prior to him are forged.
A collecting bank where a check is deposited and which indorses the check upon
presentment with the drawee bank, is such an indorser. So even if the indorsement on
the check deposited by the banks's client is forged, the collecting bank is bound by his
warranties as an indorser and cannot set up the defense of forgery as against the
drawee bank.
The bank on which a check is drawn, known as the drawee bank, is under strict
liability to pay the check to the order of the payee. The drawer's instructions are
reflected on the face and by the terms of the check. Payment under a forged
indorsement is not to the drawer's order. When the drawee bank pays a person other
than the payee, it does not comply with the terms of the check and violates its duty to
charge its customer's (the drawer) account only for properly payable items. Since the
drawee bank did not pay a holder or other person entitled to receive payment, it has no
right to reimbursement from the drawer. 24 The general rule then is that the drawee
bank may not debit the drawer's account and is not entitled to indemnification from the
drawer. 25 The risk of loss must perforce fall on the drawee bank.

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

will be accountable to the drawee bank. This liability scheme operates without regard
to fault on the part of the collecting/presenting bank. Even if the latter bank was not
negligent, it would still be liable to the drawee bank because of its indorsement.

If at the same time the drawee bank was also negligent to the point of substantially
contributing to the loss, then such loss from the forgery can be apportioned between
the negligent drawer and the negligent bank. 26

The Court has consistently ruled that "the collecting bank or last endorser generally
suffers the loss because it has the duty to ascertain the genuineness of all prior
endorsements considering that the act of presenting the check for payment to the
drawee is an assertion that the party making the presentment has done its duty to
ascertain the genuineness of the endorsements." 31

In cases involving a forged check, where the drawer's signature is forged, the drawer
can recover from the drawee bank. No drawee bank has a right to pay a forged check.
If it does, it shall have to recredit the amount of the check to the account of the drawer.
The liability chain ends with the drawee bank whose responsibility it is to know the
drawer's signature since the latter is its customer. 27
In cases involving checks with forged indorsements, such as the present petition, the
chain of liability does not end with the drawee bank. The drawee bank may not debit
the account of the drawer but may generally pass liability back through the collection
chain to the party who took from the forger and, of course, to the forger himself, if
available. 28 In other words, the drawee bank canseek reimbursement or a return of the
amount it paid from the presentor bank or person. 29 Theoretically, the latter can
demand reimbursement from the person who indorsed the check to it and so on. The
loss falls on the party who took the check from the forger, or on the forger himself.
In this case, the checks were indorsed by the collecting bank (Associated Bank) to the
drawee bank (PNB). The former will necessarily be liable to the latter for the checks
bearing forged indorsements. If the forgery is that of the payee's or holder's
indorsement, the collecting bank is held liable, without prejudice to the latter
proceeding against the forger.
Since a forged indorsement is inoperative, the collecting bank had no right to be paid
by the drawee bank. The former must necessarily return the money paid by the latter
because it was paid wrongfully. 30
More importantly, by reason of the statutory warranty of a general indorser in section
66 of the Negotiable Instruments Law, a collecting bank which indorses a check
bearing a forged indorsement and presents it to the drawee bank guarantees all prior
indorsements, including the forged indorsement. It warrants that the instrument is
genuine, and that it is valid and subsisting at the time of his indorsement. Because the
indorsement is a forgery, the collecting bank commits a breach of this warranty and

The drawee bank is not similarly situated as the collecting bank because the former
makes no warranty as to the genuineness. of any indorsement. 32 The drawee bank's
duty is but to verify the genuineness of the drawer's signature and not of the
indorsement because the drawer is its client.
Moreover, the collecting bank is made liable because it is privy to the depositor who
negotiated the check. The bank knows him, his address and history because he is a
client. It has taken a risk on his deposit. The bank is also in a better position to detect
forgery, fraud or irregularity in the indorsement.
Hence, the drawee bank can recover the amount paid on the check bearing a forged
indorsement from the collecting bank. However, a drawee bank has the duty to
promptly inform the presentor of the forgery upon discovery. If the drawee bank delays
in informing the presentor of the forgery, thereby depriving said presentor of the right
to recover from the forger, the former is deemed negligent and can no longer recover
from the presentor. 33
Applying these rules to the case at bench, PNB, the drawee bank, cannot debit the
current account of the Province of Tarlac because it paid checks which bore forged
indorsements. However, if the Province of Tarlac as drawer was negligent to the point
of substantially contributing to the loss, then the drawee bank PNB can charge its
account. If both drawee bank-PNB and drawer-Province of Tarlac were negligent, the
loss should be properly apportioned between them.
The loss incurred by drawee bank-PNB can be passed on to the collecting bankAssociated Bank which presented and indorsed the checks to it. Associated Bank can,
in turn, hold the forger, Fausto Pangilinan, liable.

If PNB negligently delayed in informing Associated Bank of the forgery, thus depriving
the latter of the opportunity to recover from the forger, it forfeits its right to
reimbursement and will be made to bear the loss.
After careful examination of the records, the Court finds that the Province of Tarlac
was equally negligent and should, therefore, share the burden of loss from the checks
bearing a forged indorsement.
The Province of Tarlac permitted Fausto Pangilinan to collect the checks when the
latter, having already retired from government service, was no longer connected with
the hospital. With the exception of the first check (dated January 17, 1978), all the
checks were issued and released after Pangilinan's retirement on February 28, 1978.
After nearly three years, the Treasurer's office was still releasing the checks to the
retired cashier. In addition, some of the aid allotment checks were released to
Pangilinan and the others to Elizabeth Juco, the new cashier. The fact that there were
now two persons collecting the checks for the hospital is an unmistakable sign of an
irregularity which should have alerted employees in the Treasurer's office of the fraud
being committed. There is also evidence indicating that the provincial employees were
aware of Pangilinan's retirement and consequent dissociation from the hospital. Jose
Meru, the Provincial Treasurer, testified:.
ATTY. MORGA:
Q Now, is it true that for a given month there were two releases of checks,
one went to Mr. Pangilinan and one went to Miss Juco?
JOSE MERU:
A Yes, sir.
Q Will you please tell us how at the time (sic) when the authorized
representative of Concepcion Emergency Hospital is and was supposed to
be Miss Juco?
A Well, as far as my investigation show (sic) the assistant cashier told me
that Pangilinan represented himself as also authorized to help in the release
of these checks and we were apparently misled because they accepted the
representation of Pangilinan that he was helping them in the release of the
checks and besides according to them they were, Pangilinan, like the rest,

was able to present an official receipt to acknowledge these receipts and

according to them since this is a government check and believed that it will
eventually go to the hospital following the standard procedure of negotiating
government checks, they released the checks to Pangilinan aside from Miss
Juco.34
The failure of the Province of Tarlac to exercise due care contributed to a significant
degree to the loss tantamount to negligence. Hence, the Province of Tarlac should be
liable for part of the total amount paid on the questioned checks.
The drawee bank PNB also breached its duty to pay only according to the terms of the
check. Hence, it cannot escape liability and should also bear part of the loss.
As earlier stated, PNB can recover from the collecting bank.
In the case of Associated Bank v. CA, 35 six crossed checks with forged indorsements
were deposited in the forger's account with the collecting bank and were later paid by
four different drawee banks. The Court found the collecting bank (Associated) to be
negligent and held:
The Bank should have first verified his right to endorse the crossed checks,
of which he was not the payee, and to deposit the proceeds of the checks to
his own account. The Bank was by reason of the nature of the checks put
upon notice that they were issued for deposit only to the private
respondent's account. . . .
The situation in the case at bench is analogous to the above case, for it was not the
payee who deposited the checks with the collecting bank. Here, the checks were all
payable to Concepcion Emergency Hospital but it was Fausto Pangilinan who
deposited the checks in his personal savings account.
Although Associated Bank claims that the guarantee stamped on the checks (All prior
and/or lack of endorsements guaranteed) is merely a requirement forced upon it by
clearing house rules, it cannot but remain liable. The stamp guaranteeing prior
indorsements is not an empty rubric which a bank must fulfill for the sake of
convenience. A bank is not required to accept all the checks negotiated to it. It is within
the bank's discretion to receive a check for no banking institution would consciously or
deliberately accept a check bearing a forged indorsement. When a check is deposited

with the collecting bank, it takes a risk on its depositor. It is only logical that this bank
be held accountable for checks deposited by its customers.
A delay in informing the collecting bank (Associated Bank) of the forgery, which
deprives it of the opportunity to go after the forger, signifies negligence on the part of
the drawee bank (PNB) and will preclude it from claiming reimbursement.
It is here that Associated Bank's assignment of error concerning C.B. Circular No. 580
and Section 23 of the Philippine Clearing House Corporation Rules comes to fore.
Under Section 4(c) of CB Circular No. 580, items bearing a forged endorsement shall
be returned within twenty-Sour (24) hours after discovery of the forgery but in no event
beyond the period fixed or provided by law for filing of a legal action by the returning
bank. Section 23 of the PCHC Rules deleted the requirement that items bearing a
forged endorsement should be returned within twenty-four hours. Associated Bank
now argues that the aforementioned Central Bank Circular is applicable. Since PNB
did not return the questioned checks within twenty-four hours, but several days later,
Associated Bank alleges that PNB should be considered negligent and not entitled to
reimbursement of the amount it paid on the checks.
The Court deems it unnecessary to discuss Associated Bank's assertions that CB
Circular No. 580 is an administrative regulation issued pursuant to law and as such,
must prevail over the PCHC rule. The Central Bank circular was in force for all banks
until June 1980 when the Philippine Clearing House Corporation (PCHC) was set up
and commenced operations. Banks in Metro Manila were covered by the PCHC while
banks located elsewhere still had to go through Central Bank Clearing. In any event,
the twenty-four-hour return rule was adopted by the PCHC until it was changed in
1982. The contending banks herein, which are both branches in Tarlac province, are
therefore not covered by PCHC Rules but by CB Circular No. 580. Clearly then, the
CB circular was applicable when the forgery of the checks was discovered in 1981.
The rule mandates that the checks be returned within twenty-four hours after discovery
of the forgery but in no event beyond the period fixed by law for filing a legal action.
The rationale of the rule is to give the collecting bank (which indorsed the check)
adequate opportunity to proceed against the forger. If prompt notice is not given, the
collecting bank maybe prejudiced and lose the opportunity to go after its depositor.
The Court finds that even if PNB did not return the questioned checks to Associated
Bank within twenty-four hours, as mandated by the rule, PNB did not commit negligent
delay. Under the circumstances, PNB gave prompt notice to Associated Bank and the

latter bank was not prejudiced in going after Fausto Pangilinan. After the Province of
Tarlac informed PNB of the forgeries, PNB necessarily had to inspect the checks and
conduct its own investigation. Thereafter, it requested the Provincial Treasurer's office
on March 31, 1981 to return the checks for verification. The Province of Tarlac
returned the checks only on April 22, 1981. Two days later, Associated Bank received
the checks from PNB. 36
Associated Bank was also furnished a copy of the Province's letter of demand to PNB
dated March 20, 1981, thus giving it notice of the forgeries. At this time, however,
Pangilinan's account with Associated had only P24.63 in it. 37Had Associated Bank
decided to debit Pangilinan's account, it could not have recovered the amounts paid on
the questioned checks. In addition, while Associated Bank filed a fourth-party
complaint against Fausto Pangilinan, it did not present evidence against Pangilinan
and even presented him as its rebuttal witness. 38 Hence, Associated Bank was not
prejudiced by PNB's failure to comply with the twenty-four-hour return rule.
Next, Associated Bank contends that PNB is estopped from requiring reimbursement
because the latter paid and cleared the checks. The Court finds this contention
unmeritorious. Even if PNB cleared and paid the checks, it can still recover from
Associated Bank. This is true even if the payee's Chief Officer who was supposed to
have indorsed the checks is also a customer of the drawee bank. 39 PNB's duty was to
verify the genuineness of the drawer's signature and not the genuineness of payee's
indorsement. Associated Bank, as the collecting bank, is the entity with the duty to
verify the genuineness of the payee's indorsement.
PNB also avers that respondent court erred in adjudging circuitous liability by directing
PNB to return to the Province of Tarlac the amount of the checks and then directing
Associated Bank to reimburse PNB. The Court finds nothing wrong with the mode of
the award. The drawer, Province of Tarlac, is a clientor customer of the PNB, not of
Associated Bank. There is no privity of contract between the drawer and the collecting
bank.
The trial court made PNB and Associated Bank liable with legal interest from March
20, 1981, the date of extrajudicial demand made by the Province of Tarlac on PNB.
The payments to be made in this case stem from the deposits of the Province of Tarlac
in its current account with the PNB. Bank deposits are considered under the law as
loans. 40 Central Bank Circular No. 416 prescribes a twelve percent (12%) interest per
annum for loans, forebearance of money, goods or credits in the absence of express
stipulation. Normally, current accounts are likewise interest-bearing, by express

contract, thus excluding them from the coverage of CB Circular No. 416. In this case,
however, the actual interest rate, if any, for the current account opened by the Province
of Tarlac with PNB was not given in evidence. Hence, the Court deems it wise to affirm
the trial court's use of the legal interest rate, or six percent (6%) per annum. The
interest rate shall be computed from the date of default, or the date of judicial or
extrajudicial demand. 41 The trial court did not err in granting legal interest from March
20, 1981, the date of extrajudicial demand.
The Court finds as reasonable, the proportionate sharing of fifty percent - fifty percent
(50%-50%). Due to the negligence of the Province of Tarlac in releasing the checks to
an unauthorized person (Fausto Pangilinan), in allowing the retired hospital cashier to
receive the checks for the payee hospital for a period close to three years and in not
properly ascertaining why the retired hospital cashier was collecting checks for the
payee hospital in addition to the hospital's real cashier, respondent Province
contributed to the loss amounting to P203,300.00 and shall be liable to the PNB for
fifty (50%) percent thereof. In effect, the Province of Tarlac can only recover fifty
percent (50%) of P203,300.00 from PNB.
The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%) percent of
P203,300.00. It is liable on its warranties as indorser of the checks which were
deposited by Fausto Pangilinan, having guaranteed the genuineness of all prior
indorsements, including that of the chief of the payee hospital, Dr. Adena Canlas.
Associated Bank was also remiss in its duty to ascertain the genuineness of the
payee's indorsement.
IN VIEW OF THE FOREGOING, the petition for review filed by the Philippine National
Bank (G.R. No. 107612) is hereby PARTIALLY GRANTED. The petition for review filed
by the Associated Bank (G.R. No. 107382) is hereby DENIED. The decision of the trial
court is MODIFIED. The Philippine National Bank shall pay fifty percent (50%) of
P203,300.00 to the Province of Tarlac, with legal interest from March 20, 1981 until the
payment thereof. Associated Bank shall pay fifty percent (50%) of P203,300.00 to the
Philippine National Bank, likewise, with legal interest from March 20, 1981 until
payment is made.
SO ORDERED

G.R. No. 138510

October 10, 2002

TRADERS ROYAL BANK, petitioner,

vs.
RADIO PHILIPPINES NETWORK, INC.,
INTERCONTINENTAL BROADCASTING CORPORATION and
BANAHAW BROADCASTING CORPORATION,
through the BOARD OF ADMINISTRATORS,
and SECURITY BANK AND TRUST COMPANY, respondents.
DECISION

CORONA, J.:
Petitioner seeks the review and prays for the reversal of the Decision1 of April 30, 1999
of Court of Appeals in CA-G.R. CV No. 54656, the dispositive portion of which reads:
WHEREFORE, the appealed decision is AFFIRMED with modification in the sense
that appellant SBTC is hereby absolved from any liability. Appellant TRB is solely liable
to the appellees for the damages and costs of suit specified in the dispositive portion
of the appealed decision. Costs against appellant TRB.
SO ORDERED.2
As found by the Court of Appeals, the antecedent facts of the case are as follows:
On April 15, 1985, the Bureau of Internal Revenue (BIR) assessed plaintiffs Radio
Philippines Network (RPN), Intercontinental Broadcasting Corporation (IBC), and
Banahaw Broadcasting Corporation (BBC) of their tax obligations for the taxable years
1978 to 1983.
On March 25, 1987, Mrs. Lourdes C. Vera, plaintiffs comptroller, sent a letter to the
BIR requesting settlement of plaintiffs tax obligations.
The BIR granted the request and accordingly, on June 26, 1986, plaintiffs purchased
from defendant Traders Royal Bank (TRB) three (3) managers checks to be used as
payment for their tax liabilities, to wit:
Check Number

Amount

Sometime in September, 1988, the BIR again assessed plaintiffs for their tax liabilities
for the years 1979-82. It was then they discovered that the three (3) managers checks
(Nos. 30652, 30650 and 30796) intended as payment for their taxes were never
delivered nor paid to the BIR by Mrs. Vera. Instead, the checks were presented for
payment by unknown persons to defendant Security Bank and Trust Company
(SBTC), Taytay Branch as shown by the banks routing symbol transit number (BRSTN
01140027) or clearing code stamped on the reverse sides of the checks.
Meanwhile, for failure of the plaintiffs to settle their obligations, the BIR issued
warrants of levy, distraint and garnishment against them. Thus, they were constrained
to enter into a compromise and paid BIR P18,962,225.25 in settlement of their unpaid
deficiency taxes.
Thereafter, plaintiffs sent letters to both defendants, demanding that the amounts
covered by the checks be reimbursed or credited to their account. The defendants
refused, hence, the instant suit.3
On February 17, 1985, the trial court rendered its decision, thus:
WHEREFORE, in view of the foregoing considerations, judgment is hereby rendered
in favor of the plaintiffs and against the defendants by :
a) Condemning the defendant Traders Royal Bank to pay actual damages in
the sum of Nine Million Seven Hundred Ninety Thousand and Seven
Hundred Sixteen Pesos and Eighty-Seven Centavos (P9,790,716.87)
broken down as follows:
1) To plaintiff RPN-9 - P4,155,835.00

30652

P4,155.835.00

30650

3,949,406.12

30796

1,685,475.75

2) To Plaintiff IBC-13 - P3,949,406.12

3) To Plaintiff BBC-2 - P1,685,475.72
plus interest at the legal rate from the filing of this case in court.

Defendant TRB, through Aida Nuez, TRB Branch Manager at Broadcast City Branch,
turned over the checks to Mrs. Vera who was supposed to deliver the same to the BIR
in payment of plaintiffs taxes.

b) Condemning the defendant Security Bank and Trust Company, being

collecting bank, to reimburse the defendant Traders Royal Bank, all the
amounts which the latter would pay to the aforenamed plaintiffs;

c) Condemning both defendants to pay to each of the plaintiffs the sum of

Three Hundred Thousand (P300,000.00) Pesos as exemplary damages and
attorneys fees equivalent to twenty-five percent of the total amount
recovered; and
d) Costs of suit.
SO ORDERED.4
Defendants Traders Royal Bank and Security Bank and Trust Company, Inc. both
appealed the trial courts decision to the Court of Appeals. However, as quoted in the
beginning hereof, the appellate court absolved defendant SBTC from any liability and
held TRB solely liable to respondent networks for damages and costs of suit.
In the instant petition for review on certiorari of the Court of Appeals decision,
petitioner TRB assigns the following errors: (a) the Honorable Court of Appeals
manifestly overlooked facts which would justify the conclusion that negligence on the
part of RPN, IBC and BBC bars them from recovering anything from TRB, (b) the
Honorable Court of Appeals plainly erred and misapprehended the facts in relieving
SBTC of its liability to TRB as collecting bank and indorser by overturning the trial
courts factual finding that SBTC did endorse the three (3) managers checks subject of
the instant case, and (c) the Honorable Court of Appeals plainly misapplied the law in
affirming the award of exemplary damages in favor of RPN, IBC and BBC.
In reply, respondents RPN, IBC, and BBC assert that TRBs petition raises questions
of fact in violation of Rule 45 of the 1997 Revised Rules on Civil Procedure which
restricts petitions for review on certiorari of the decisions of the Court of Appeals on
pure questions of law. RPN, IBC and BBC maintain that the issue of whether or not
respondent networks had been negligent were already passed upon both by the trial
and appellate courts, and that the factual findings of both courts are binding and
conclusive upon this Court.
Likewise, respondent SBTC denies liability on the ground that it had no participation in
the negotiation of the checks, emphasizing that the BRSTN imprints at the back of the
checks cannot be considered as proof that respondent SBTC accepted the disputed
checks and presented them to Philippine Clearing House Corporation for clearing.
Setting aside the factual ramifications of the instant case, the threshold issue now is
whether or not TRB should be held solely liable when it paid the amount of the checks

in question to a person other than the payee indicated on the face of the check, the
Bureau of Internal Revenue.
"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."5 Consequently, if a bank
pays a forged check, it must be considered as paying out of its funds and cannot
charge the amount so paid to the account of the depositor.
In the instant case, the 3 checks were payable to the BIR. It was established, however,
that said checks were never delivered or paid to the payee BIR but were in fact
presented for payment by some unknown persons who, in order to receive payment
therefor, forged the name of the payee. Despite this fraud, petitioner TRB paid the 3
checks in the total amount of P9,790,716.87.
Petitioner ought to have known that, where a check is drawn payable to the order of
one person and is presented for payment by another and purports upon its face to
have been duly indorsed by the payee of the check, it is the primary duty of petitioner
to know that the check was duly indorsed by the original payee and, where it pays the
amount of the check to a third person who has forged the signature of the payee, the
loss falls upon petitioner who cashed the check. Its only remedy is against the person
to whom it paid the money.6
It should be noted further that one of the subject checks was crossed. The crossing of
one of the subject checks should have put petitioner on guard; it was duty-bound to
ascertain the indorsers title to the check or the nature of his possession. Petitioner
should have known the effects of a crossed check: (a) the check may not be encashed
but only deposited in the bank; (b) the check may be negotiated only once to one who
has an account with a bank and (c) the act of crossing the check serves as a warning
to the holder that the check has been issued for a definite purpose so that he must
inquire if he has received the check pursuant to that purpose, otherwise, he is not a
holder in due course.7
By encashing in favor of unknown persons checks which were on their face payable to
the BIR, a government agency which can only act only through its agents, petitioner
did so at its peril and must suffer the consequences of the unauthorized or wrongful
endorsement.8 In this light, petitioner TRB cannot exculpate itself from liability by
claiming that respondent networks were themselves negligent.

A bank is engaged in a business impressed with public interest and it is its duty to
protect its many clients and depositors who transact business with it. It is under the
obligation to treat the accounts of the depositors and clients with meticulous care,
whether such accounts consist only of a few hundreds or millions of pesos.9
Petitioner argues that respondent SBTC, as the collecting bank and indorser, should
be held responsible instead for the amount of the checks.
The Court of Appeals addressed exactly the same issue and made the following
findings and conclusions:
As to the alleged liability of appellant SBTC, a close examination of the records
constrains us to deviate from the lower courts finding that SBTC, as a collecting bank,
should similarly bear the loss.
"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."
To hold appellant SBTC liable, it is necessary to determine whether it is a party to the
disputed transactions.
Section 3 of the Negotiable Instruments Law reads:
"SECTION 63. When person deemed indorser. - A person placing his signature upon
an instrument otherwise than as maker, drawer, or acceptor, is deemed to be an
indorser unless he clearly indicates by appropriate words his intention to be bound in
some other capacity."
Upon the other hand, the Philippine Clearing House Corporation (PCHC) rules
provide:
"Sec. 17.- BANK GUARANTEE. All checks cleared through the PCHC shall bear the
guarantee affixed thereto by the Presenting Bank/Branch which shall read as follows:

"Cleared thru the Philippine Clearing House Corporation. All prior endorsements
and/or lack of endorsement guaranteed. NAME OF BANK/BRANCH BRSTN (Date of
clearing)."
Here, not one of the disputed checks bears the requisite endorsement of appellant
SBTC. What appears to be a guarantee stamped at the back of the checks is that of
the Philippine National Bank, Buendia Branch, thereby indicating that it was the latter
Bank which received the same.
It was likewise established during the trial that whenever appellant SBTC receives a
check for deposit, its practice is to stamp on its face the words, "non-negotiable". Lana
Echevarrias testimony is relevant:
"ATTY. ROMANO: Could you tell us briefly the procedure you follow in receiving
checks?
"A: First of all, I verify the check itself, the place, the date, the amount in words and
everything. And then, if all these things are in order and verified in the data sheet I
stamp my non-negotiable stamp at the face of the check."
Unfortunately, the words "non-negotiable" do not appear on the face of either of the
three (3) disputed checks.
Moreover, the aggregate amount of the checks is not reflected in the clearing
documents of appellant SBTC. Section 19 of the Rules of the PCHC states:
"Section 19 Regular Item Procedure:
Each clearing participant, through its authorized representatives, shall deliver to the
PCHC fully qualified MICR checks grouped in 200 or less items to a batch and
supported by an add-list, a batch control slip, and a delivery statement.
It bears stressing that through the add-list, the PCHC can countercheck and determine
which checks have been presented on a particular day by a particular bank for
processing and clearing. In this case, however, the add-list submitted by appellant
SBTC together with the checks it presented for clearing on August 3, 1987 does not
show that Check No. 306502 in the sum of P3,949,406.12 was among those that
passed for clearing with the PCHC on that date. The same is true with Check No.

30652 with a face amount of P4,155,835.00 presented for clearing on August 11, 1987
and Check No. 30796 with a face amount of P1,685,475.75.
The foregoing circumstances taken altogether create a serious doubt on whether the
disputed checks passed through the hands of appellant SBTC."10
We subscribe to the foregoing findings and conclusions of the Court of Appeals.
A collecting bank which indorses a check bearing a forged indorsement and presents
it to the drawee bank guarantees all prior indorsements, including the forged
indorsement itself, and ultimately should be held liable therefor. However, it is doubtful
if the subject checks were ever presented to and accepted by SBTC so as to hold it
liable as a collecting bank, as held by the Court of Appeals.
Since TRB did not pay the rightful holder or other person or entity entitled to receive
payment, it has no right to reimbursement. Petitioner TRB was remiss in its duty and
obligation, and must therefore suffer the consequences of its own negligence and
disregard of established banking rules and procedures.
We agree with petitioner, however, that it should not be made to pay exemplary
damages to RPN, IBC and BBC because its wrongful act was not done in bad faith,
and it did not act in a wanton, fraudulent, reckless or malevolent manner.11
We find the award of attorneys fees, 25% of P10 million, to be manifestly
exorbitant.12 Considering the nature and extent of the services rendered by respondent
networks counsel, however, the Court deems it appropriate to award the amount of
P100,000 as attorneys fees.
WHEREFORE, the appealed decision is MODIFIED by deleting the award of
exemplary damages. Further, respondent networks are granted the amount of
P100,000 as attorneys fees. In all other respects, the Court of Appeals decision is
hereby AFFIRMED.
SO ORDERED.

CASA MONTESSORI INTERNATIONALE, petitioner,

vs.
BANK OF THE PHILIPPINE ISLANDS, respondent.
DECISION
PANGANIBAN, J.:
By the nature of its functions, a bank is required to take meticulous care of the
deposits of its clients, who have the right to expect high standards of integrity and
performance from it.
Among its obligations in furtherance thereof is knowing the signatures of its clients.
Depositors are not estopped from questioning wrongful withdrawals, even if they have
failed to question those errors in the statements sent by the bank to them for
verification.
The Case
Before us are two Petitions for Review1 under Rule 45 of the Rules of Court, assailing
the March 23, 2001 Decision2and the August 17, 2001 Resolution3 of the Court of
Appeals (CA) in CA-GR CV No. 63561. The decretal portion of the assailed Decision
reads as follows:

G.R. No. 149454

May 28, 2004

BANK OF THE PHILIPPINE ISLANDS, petitioner,

vs.
CASA MONTESSORI INTERNATIONALE LEONARDO T. YABUT, respondents.
x ----------------------------- x
G.R. No. 149507

"WHEREFORE, upon the premises, the decision appealed from

is AFFIRMED with the modification that defendant bank [Bank of the
Philippine Islands (BPI)] is held liable only for one-half of the value of the
forged checks in the amount of P547,115.00 after deductions subject to
REIMBURSEMENT from third party defendant Yabut who is
likewise ORDERED to pay the other half to plaintiff corporation [Casa
Montessori Internationale (CASA)]."4
The assailed Resolution denied all the parties Motions for Reconsideration.
The Facts

May 28, 2004

The facts of the case are narrated by the CA as follows:

"On November 8, 1982, plaintiff CASA Montessori International 5 opened

Current Account No. 0291-0081-01 with defendant BPI[,] with CASAs
President Ms. Ma. Carina C. Lebron as one of its authorized signatories.

"On March 4, 1991, plaintiff filed the herein Complaint for Collection with
Damages against defendant bank praying that the latter be ordered to
reinstate the amount of P782,500.007 in the current and savings accounts of
the plaintiff with interest at 6% per annum.

"In 1991, after conducting an investigation, plaintiff discovered that nine (9)
of its checks had been encashed by a certain Sonny D. Santos since 1990
in the total amount of P782,000.00, on the following dates and amounts:
Check No.

Date

1. 839700

April 24, 1990

2. 839459

Nov. 2, 1990

3. 839609

Oct. 17, 1990

4. 839549

April 7, 1990

5. 839569

Sept. 23, 1990

6. 729149

Mar. 22, 1990

7. 729129

Mar. 16, 1990

8. 839684

Dec. 1, 1990

9. 729034

Mar. 2, 1990

Total -"It turned out that Sonny D. Santos with account at BPIs Greenbelt Branch
[was] a fictitious name used by third party defendant Leonardo T. Yabut who
worked as external auditor of CASA. Third party defendant voluntarily
admitted that he forged the signature of Ms. Lebron and encashed the
checks. "The PNP Crime Laboratory conducted an examination of the nine
(9) checks and concluded that the handwritings thereon compared to the
standard signature of Ms. Lebron were not written by the latter.

"On February 16, 1999, the RTC rendered the appealed decision in favor of
the plaintiff."8
Ruling of the Court of Appeals

Amount

Modifying the Decision of the Regional Trial Court (RTC), the CA apportioned the loss
between BPI and CASA. The appellate court took into account CASAs contributory
negligence that resulted in the undetected forgery. It then ordered Leonardo T. Yabut
to reimburse BPI half the total amount claimed; and CASA, the other half. It also
disallowed attorneys fees and moral and exemplary damages.
Hence, these Petitions.9
Issues
In GR No. 149454, Petitioner BPI submits the following issues for our consideration:
"I. The Honorable Court of Appeals erred in deciding this case NOT in
accord with the applicable decisions of this Honorable Court to the
effect that forgery cannot be presumed; that it must be proved by clear,
positive and convincing evidence; and that the burden of proof lies on the
party alleging the forgery.
P

"II. The Honorable Court of Appeals erred in deciding this case not in
accord with applicable laws, in particular the Negotiable Instruments Law
(NIL) which precludes CASA, on account of its own negligence, from
asserting its forgery claim against BPI, specially taking into account the
absence of any negligence on the part of BPI."10
In GR No. 149507, Petitioner CASA submits the following issues:
"1. The Honorable Court of Appeals erred when it ruled that there is no
showing that [BPI], although negligent, acted in bad faith x x x thus denying

the prayer for the award of attorneys fees, moral damages and exemplary
damages to [CASA]. The Honorable Court also erred when it did not order
[BPI] to pay interest on the amounts due to [CASA].
"2. The Honorable Court of Appeals erred when it declared that [CASA] was
likewise negligent in the case at bar, thus warranting its conclusion that the
loss in the amount of P547,115.00 be apportioned between [CASA] and
[BPI] x x x."11
These issues can be narrowed down to three. First, was there forgery under the
Negotiable Instruments Law (NIL)?Second, were any of the parties negligent and
therefore precluded from setting up forgery as a defense? Third,should moral and
exemplary damages, attorneys fees, and interest be awarded?
The Courts Ruling
The Petition in GR No. 149454 has no merit, while that in GR No. 149507 is partly
meritorious.
First Issue:
Forged Signature Wholly Inoperative
Section 23 of the NIL provides:
"Section 23. Forged signature; effect of. -- When a signature is forged or
made without the authority of the person whose signature it purports to be, it
is wholly inoperative, and no right x x x to enforce payment thereof against
any party thereto, can be acquired through or under such signature, unless
the party against whom it is sought to enforce such right is precluded from
setting up the forgery or want of authority."12
Under this provision, a forged signature is a real13 or absolute defense,14 and a person
whose signature on a negotiable instrument is forged is deemed to have never
become a party thereto and to have never consented to the contract that allegedly
gave rise to it.15

The counterfeiting of any writing, consisting in the signing of anothers name with
intent to defraud, is forgery.16
In the present case, we hold that there was forgery of the drawers signature on the
check.
First, both the CA17 and the RTC18 found that Respondent Yabut himself had voluntarily
admitted, through an Affidavit, that he had forged the drawers signature and encashed
the checks.19 He never refuted these findings.20That he had been coerced into
admission was not corroborated by any evidence on record.21
Second, the appellate and the trial courts also ruled that the PNP Crime Laboratory,
after its examination of the said checks,22 had concluded that the handwritings thereon
-- compared to the standard signature of the drawer -- were not hers.23 This conclusion
was the same as that in the Report24 that the PNP Crime Laboratory had earlier issued
to BPI -- the drawee bank -- upon the latters request.
Indeed, we respect and affirm the RTCs factual findings, especially when affirmed by
the CA, since these are supported by substantial evidence on record.25
Voluntary Admission Not Violative of Constitutional Rights
The voluntary admission of Yabut did not violate his constitutional rights (1) on
custodial investigation, and (2) against self-incrimination.
In the first place, he was not under custodial investigation.26 His Affidavit was executed
in private and before private individuals.27 The mantle of protection under Section 12 of
Article III of the 1987 Constitution28 covers only the period "from the time a person is
taken into custody for investigation of his possible participation in the commission of a
crime or from the time he is singled out as a suspect in the commission of a crime
although not yet in custody."29
Therefore, to fall within the ambit of Section 12, quoted above, there must be an arrest
or a deprivation of freedom, with "questions propounded on him by the police
authorities for the purpose of eliciting admissions, confessions, or any
information."30 The said constitutional provision does "not apply to spontaneous
statements made in a voluntary manner"31 whereby an individual orally admits to
authorship of a crime.32 "What the Constitution proscribes is the compulsory or
coercive disclosure of incriminating facts."33

Moreover, the right against self-incrimination34 under Section 17 of Article III35 of the
Constitution, which is ordinarily available only in criminal prosecutions, extends to all
other government proceedings -- including civil actions, legislative investigations,36 and
administrative proceedings that possess a criminal or penal aspect37 -- but not to
private investigations done by private individuals. Even in such government
proceedings, this right may be waived,38 provided the waiver is certain; unequivocal;
and intelligently, understandingly and willingly made.39
If in these government proceedings waiver is allowed, all the more is it so in private
investigations. It is of no moment that no criminal case has yet been filed against
Yabut. The filing thereof is entirely up to the appropriate authorities or to the private
individuals upon whom damage has been caused. As we shall also explain later, it is
not mandatory for CASA -- the plaintiff below -- to implead Yabut in the civil case
before the lower court.
Under these two constitutional provisions, "[t]he Bill of Rights 40 does not concern itself
with the relation between a private individual and another individual. It governs the
relationship between the individual and the State."41Moreover, the Bill of Rights "is a
charter of liberties for the individual and a limitation upon the power of the
[S]tate."42 These rights43 are guaranteed to preclude the slightest coercion by the State
that may lead the accused "to admit something false, not prevent him from freely and
voluntarily telling the truth."44
Yabut is not an accused here. Besides, his mere invocation of the aforesaid rights
"does not automatically entitle him to the constitutional protection."45 When he freely
and voluntarily executed46 his Affidavit, the State was not even involved. Such Affidavit
may therefore be admitted without violating his constitutional rights while under
custodial investigation and against self-incrimination.
Clear, Positive and Convincing Examination and Evidence
The examination by the PNP, though inconclusive, was nevertheless clear, positive
and convincing.
Forgery "cannot be presumed."47 It must be established by clear, positive and
convincing evidence.48 Under the best evidence rule as applied to documentary
evidence like the checks in question, no secondary or substitutionary evidence may
inceptively be introduced, as the original writing itself must be produced in court. 49 But
when, without bad faith on the part of the offeror, the original checks have already

been destroyed or cannot be produced in court, secondary evidence may be

produced.50 Without bad faith on its part, CASA proved the loss or destruction of the
original checks through the Affidavit of the one person who knew of that fact 51 -- Yabut.
He clearly admitted to discarding the paid checks to cover up his misdeed. 52 In such a
situation, secondary evidence like microfilm copies may be introduced in court.
The drawers signatures on the microfilm copies were compared with the standard
signature. PNP Document Examiner II Josefina de la Cruz testified on crossexamination that two different persons had written them.53Although no conclusive
report could be issued in the absence of the original checks,54 she affirmed that her
findings were 90 percent conclusive.55 According to her, even if the microfilm copies
were the only basis of comparison, the differences were evident.56 Besides, the RTC
explained that although the Report was inconclusive, no conclusive report could have
been given by the PNP, anyway, in the absence of the original checks.57 This
explanation is valid; otherwise, no such report can ever be relied upon in court.
Even with respect to documentary evidence, the best evidence rule applies only when
the contents of a document -- such as the drawers signature on a check -- is the
subject of inquiry.58 As to whether the document has been actually executed, this rule
does not apply; and testimonial as well as any other secondary evidence is
admissible.59Carina Lebron herself, the drawers authorized signatory, testified many
times that she had never signed those checks. Her testimonial evidence is admissible;
the checks have not been actually executed. The genuineness of her handwriting is
proved, not only through the courts comparison of the questioned handwritings and
admittedly genuine specimens thereof,60 but above all by her.
The failure of CASA to produce the original checks neither gives rise to the
presumption of suppression of evidence61 nor creates an unfavorable inference against
it.62 Such failure merely authorizes the introduction of secondary evidence63 in the form
of microfilm copies. Of no consequence is the fact that CASA did not present the
signature card containing the signatures with which those on the checks were
compared.64 Specimens of standard signatures are not limited to such a card.
Considering that it was not produced in evidence, other documents that bear the
drawers authentic signature may be resorted to.65 Besides, that card was in the
possession of BPI -- the adverse party.
We have held that without the original document containing the allegedly forged
signature, one cannot make a definitive comparison that would establish forgery;66 and
that a comparison based on a mere reproduction of the document under controversy

cannot produce reliable results.67 We have also said, however, that a judge cannot
merely rely on a handwriting experts testimony,68 but should also exercise
independent judgment in evaluating the authenticity of a signature under scrutiny. 69 In
the present case, both the RTC and the CA conducted independent examinations of
the evidence presented and arrived at reasonable and similar conclusions. Not only
did they admit secondary evidence; they also appositely considered testimonial and
other documentary evidence in the form of the Affidavit.

pays a forged check, it must be considered as making the payment out of its own
funds, and cannot ordinarily charge the amount so paid to the account of the depositor
whose name was forged."79 In fact, BPI was the same bank involved when we issued
this ruling seventy years ago.

The best evidence rule admits of exceptions and, as we have discussed earlier, the
first of these has been met.70The result of examining a questioned handwriting, even
with the aid of experts and scientific instruments, may be inconclusive;71 but it is a non
sequitur to say that such result is not clear, positive and convincing. The
preponderance of evidence required in this case has been satisfied.72

The monthly statements issued by BPI to its clients contain a notice worded as follows:
"If no error is reported in ten (10) days, account will be correct."80 Such notice cannot
be considered a waiver, even if CASA failed to report the error. Neither is it estopped
from questioning the mistake after the lapse of the ten-day period.

Second Issue:
Negligence Attributable to BPI Alone
Having established the forgery of the drawers signature, BPI -- the drawee -- erred in
making payments by virtue thereof. The forged signatures are wholly inoperative, and
CASA -- the drawer whose authorized signatures do not appear on the negotiable
instruments -- cannot be held liable thereon. Neither is the latter precluded from setting
up forgery as a real defense.
Clear Negligence in Allowing Payment Under a Forged Signature
We have repeatedly emphasized that, since the banking business is impressed with
public interest, of paramount importance thereto is the trust and confidence of the
public in general. Consequently, the highest degree of diligence73 is expected,74 and
high standards of integrity and performance are even required, of it.75 By the nature of
its functions, a bank is "under obligation to treat the accounts of its depositors with
meticulous care,76 always having in mind the fiduciary nature of their relationship."77
BPI contends that it has a signature verification procedure, in which checks are
honored only when the signatures therein are verified to be the same with or similar to
the specimen signatures on the signature cards. Nonetheless, it still failed to detect the
eight instances of forgery. Its negligence consisted in the omission of that degree of
diligence required78 of a bank. It cannot now feign ignorance, for very early on we have
already ruled that a bank is "bound to know the signatures of its customers; and if it

Neither Waiver nor Estoppel Results from Failure to Report Error in Bank
Statement

This notice is a simple confirmation81 or "circularization" -- in accounting parlance -that requests client-depositors to affirm the accuracy of items recorded by the
banks.82 Its purpose is to obtain from the depositors a direct corroboration of the
correctness of their account balances with their respective banks.83 Internal or external
auditors of a bank use it as a basic audit procedure84 -- the results of which its clientdepositors are neither interested in nor privy to -- to test the details of transactions and
balances in the banks records.85 Evidential matter obtained from independent sources
outside a bank only serves to provide greater assurance of reliability86 than that
obtained solely within it for purposes of an audit of its own financial statements, not
those of its client-depositors.
Furthermore, there is always the audit risk that errors would not be detected87 for
various reasons. One, materiality is a consideration in audit planning;88 and two, the
information obtained from such a substantive test is merely presumptive and cannot
be the basis of a valid waiver.89 BPI has no right to impose a condition unilaterally and
thereafter consider failure to meet such condition a waiver. Neither may CASA
renounce a right90 it has never possessed.91
Every right has subjects -- active and passive. While the active subject is entitled to
demand its enforcement, the passive one is duty-bound to suffer such enforcement.92
On the one hand, BPI could not have been an active subject, because it could not
have demanded from CASA a response to its notice. Besides, the notice was a measly
request worded as follows: "Please examine x x x and report x x x."93 CASA, on the
other hand, could not have been a passive subject, either, because it had no obligation
to respond. It could -- as it did -- choose not to respond.

Estoppel precludes individuals from denying or asserting, by their own deed or

representation, anything contrary to that established as the truth, in legal
contemplation.94 Our rules on evidence even make a juris et de jurepresumption95 that
whenever one has, by ones own act or omission, intentionally and deliberately led
another to believe a particular thing to be true and to act upon that belief, one cannot
-- in any litigation arising from such act or omission -- be permitted to falsify that
supposed truth.96
In the instant case, CASA never made any deed or representation that misled BPI.
The formers omission, if any, may only be deemed an innocent mistake oblivious to
the procedures and consequences of periodic audits. Since its conduct was due to
such ignorance founded upon an innocent mistake, estoppel will not arise. 97 A person
who has no knowledge of or consent to a transaction may not be estopped by
it.98 "Estoppel cannot be sustained by mere argument or doubtful inference x x
x."99 CASA is not barred from questioning BPIs error even after the lapse of the period
given in the notice.
Loss Borne by Proximate Source of Negligence
For allowing payment100 on the checks to a wrongful and fictitious payee, BPI -- the
drawee bank -- becomes liable to its depositor-drawer. Since the encashing bank is
one of its branches,101 BPI can easily go after it and hold it liable for
reimbursement.102 It "may not debit the drawers account103 and is not entitled to
indemnification from the drawer."104 In both law and equity, when one of two innocent
persons "must suffer by the wrongful act of a third person, the loss must be borne by
the one whose negligence was the proximate cause of the loss or who put it into the
power of the third person to perpetrate the wrong."105
Proximate cause is determined by the facts of the case.106 "It is that cause which, in
natural and continuous sequence, unbroken by any efficient intervening cause,
produces the injury, and without which the result would not have occurred."107
Pursuant to its prime duty to ascertain well the genuineness of the signatures of its
client-depositors on checks being encashed, BPI is "expected to use reasonable
business prudence."108 In the performance of that obligation, it is bound by its internal
banking rules and regulations that form part of the contract it enters into with its
depositors.109

Unfortunately, it failed in that regard. First, Yabut was able to open a bank account in
one of its branches without privity;110 that is, without the proper verification of his
corresponding identification papers. Second, BPI was unable to discover early on not
only this irregularity, but also the marked differences in the signatures on the checks
and those on the signature card. Third, despite the examination procedures it
conducted, the Central Verification Unit111of the bank even passed off these evidently
different signatures as genuine. Without exercising the required prudence on its part,
BPI accepted and encashed the eight checks presented to it. As a result, it proximately
contributed to the fraud and should be held primarily liable112 for the "negligence of its
officers or agents when acting within the course and scope of their employment."113 It
must bear the loss.
CASA Not Negligent in Its Financial Affairs
In this jurisdiction, the negligence of the party invoking forgery is recognized as an
exception114 to the general rule that a forged signature is wholly
inoperative.115 Contrary to BPIs claim, however, we do not find CASA negligent in
handling its financial affairs. CASA, we stress, is not precluded from setting up forgery
as a real defense.
Role of Independent Auditor
The major purpose of an independent audit is to investigate and determine objectively
if the financial statements submitted for audit by a corporation have been prepared in
accordance with the appropriate financial reporting practices116 of private entities. The
relationship that arises therefrom is both legal and moral.117 It begins with the
execution of the engagement letter118 that embodies the terms and conditions of the
audit and ends with the fulfilled expectation of the auditors ethical 119 and competent
performance in all aspects of the audit.120
The financial statements are representations of the client; but it is the auditor who has
the responsibility for the accuracy in the recording of data that underlies their
preparation, their form of presentation, and the opinion121expressed therein.122 The
auditor does not assume the role of employee or of management in the clients
conduct of operations123 and is never under the control or supervision124 of the client.
Yabut was an independent auditor125 hired by CASA. He handled its monthly bank
reconciliations and had access to all relevant documents and checkbooks.126 In him
was reposed the clients127 trust and confidence128 that he would perform precisely

those functions and apply the appropriate procedures in accordance with generally
accepted auditing standards.129 Yet he did not meet these expectations. Nothing could
be more horrible to a client than to discover later on that the person tasked to detect
fraud was the same one who perpetrated it.
Cash Balances Open to Manipulation
It is a non sequitur to say that the person who receives the monthly bank statements,
together with the cancelled checks and other debit/credit memoranda, shall examine
the contents and give notice of any discrepancies within a reasonable time. Awareness
is not equipollent with discernment.
Besides, in the internal accounting control system prudently installed by CASA, 130 it
was Yabut who should examine those documents in order to prepare the bank
reconciliations.131 He owned his working papers,132 and his output consisted of his
opinion as well as the clients financial statements and accompanying notes thereto.
CASA had every right to rely solely upon his output -- based on the terms of the audit
engagement -- and could thus be unwittingly duped into believing that everything was
in order. Besides, "[g]ood faith is always presumed and it is the burden of the party
claiming otherwise to adduce clear and convincing evidence to the contrary."133
Moreover, there was a time gap between the period covered by the bank statement
and the date of its actual receipt. Lebron personally received the December 1990 bank
statement only in January 1991134 -- when she was also informed of the forgery for the
first time, after which she immediately requested a "stop payment order." She cannot
be faulted for the late detection of the forged December check. After all, the bank
account with BPI was not personal but corporate, and she could not be expected to
monitor closely all its finances. A preschool teacher charged with molding the minds of
the youth cannot be burdened with the intricacies or complexities of corporate
existence.
There is also a cutoff period such that checks issued during a given month, but not
presented for payment within that period, will not be reflected therein.135 An
experienced auditor with intent to defraud can easily conceal any devious scheme
from a client unwary of the accounting processes involved by manipulating the cash
balances on record -- especially when bank transactions are numerous, large and
frequent. CASA could only be blamed, if at all, for its unintelligent choice in the
selection and appointment of an auditor -- a fault that is not tantamount to negligence.

Negligence is not presumed, but proven by whoever alleges it.136 Its mere existence "is
not sufficient without proof that it, and no other cause,"137 has given rise to
damages.138 In addition, this fault is common to, if not prevalent among, small and
medium-sized business entities, thus leading the Professional Regulation Commission
(PRC), through the Board of Accountancy (BOA), to require today not only
accreditation for the practice of public accountancy,139 but also the registration of firms
in the practice thereof. In fact, among the attachments now required upon registration
are the code of good governance140 and a sworn statement on adequate and effective
training.141
The missing checks were certainly reported by the bookkeeper142 to the
accountant143 -- her immediate supervisor -- and by the latter to the auditor. However,
both the accountant and the auditor, for reasons known only to them, assured the
bookkeeper that there were no irregularities.
The bookkeeper144 who had exclusive custody of the checkbooks145 did not have to go
directly to CASAs president or to BPI. Although she rightfully reported the matter,
neither an investigation was conducted nor a resolution of it was arrived at, precisely
because the person at the top of the helm was the culprit. The vouchers, invoices and
check stubs in support of all check disbursements could be concealed or fabricated -even in collusion -- and management would still have no way to verify its cash
accountabilities.
Clearly then, Yabut was able to perpetrate the wrongful act through no fault of CASA. If
auditors may be held liable for breach of contract and negligence,146 with all the more
reason may they be charged with the perpetration of fraud upon an unsuspecting
client. CASA had the discretion to pursue BPI alone under the NIL, by reason of
expediency or munificence or both. Money paid under a mistake may rightfully be
recovered,147 and under such terms as the injured party may choose.
Third Issue:
Award of Monetary Claims
Moral Damages Denied
We deny CASAs claim for moral damages.

In the absence of a wrongful act or omission,148 or of fraud or bad faith,149 moral

damages cannot be awarded.150The adverse result of an action does not per se make
the action wrongful, or the party liable for it. One may err, but error alone is not a
ground for granting such damages.151 While no proof of pecuniary loss is necessary
therefor -- with the amount to be awarded left to the courts discretion152 -- the claimant
must nonetheless satisfactorily prove the existence of its factual basis153 and causal
relation154 to the claimants act or omission.155
Regrettably, in this case CASA was unable to identify the particular instance -enumerated in the Civil Code -- upon which its claim for moral damages is
predicated.156 Neither bad faith nor negligence so gross that it amounts to
malice157 can be imputed to BPI. Bad faith, under the law, "does not simply connote
bad judgment or negligence;158 it imports a dishonest purpose or some moral obliquity
and conscious doing of a wrong, a breach of a known duty through some motive or
interest or ill will that partakes of the nature of fraud."159
As a general rule, a corporation -- being an artificial person without feelings, emotions
and senses, and having existence only in legal contemplation -- is not entitled to moral
damages,160 because it cannot experience physical suffering and mental
anguish.161 However, for breach of the fiduciary duty required of a bank, a corporate
client may claim such damages when its good reputation is besmirched by such
breach, and social humiliation results therefrom.162 CASA was unable to prove that BPI
had debased the good reputation of,163 and consequently caused incalculable
embarrassment to, the former. CASAs mere allegation or supposition thereof, without
any sufficient evidence on record,164 is not enough.
Exemplary Damages Also Denied
We also deny CASAs claim for exemplary damages.
Imposed by way of correction165 for the public good,166 exemplary damages cannot be
recovered as a matter of right.167 As we have said earlier, there is no bad faith on the
part of BPI for paying the checks of CASA upon forged signatures. Therefore, the
former cannot be said to have acted in a wanton, fraudulent, reckless, oppressive or
malevolent manner.168 The latter, having no right to moral damages, cannot demand
exemplary damages.169
Attorneys Fees Granted

Although it is a sound policy not to set a premium on the right to litigate, 170 we find that
CASA is entitled to reasonable attorneys fees based on "factual, legal, and equitable
justification."171
When the act or omission of the defendant has compelled the plaintiff to incur
expenses to protect the latters interest,172 or where the court deems it just and
equitable,173 attorneys fees may be recovered. In the present case, BPI persistently
denied the claim of CASA under the NIL to recredit the latters account for the value of
the forged checks. This denial constrained CASA to incur expenses and exert effort for
more than ten years in order to protect its corporate interest in its bank account.
Besides, we have already cautioned BPI on a similar act of negligence it had
committed seventy years ago, but it has remained unrelenting. Therefore, the Court
deems it just and equitable to grant ten percent (10%)174 of the total value adjudged to
CASA as attorneys fees.
Interest Allowed
For the failure of BPI to pay CASA upon demand and for compelling the latter to resort
to the courts to obtain payment, legal interest may be adjudicated at the discretion of
the Court, the same to run from the filing175 of the Complaint.176 Since a court judgment
is not a loan or a forbearance of recovery, the legal interest shall be at six percent
(6%) per annum.177 "If the obligation consists in the payment of a sum of money, and
the debtor incurs in delay, the indemnity for damages, there being no stipulation to the
contrary, shall be the payment of x x x legal interest, which is six percent per
annum."178 The actual base for its computation shall be "on the amount finally
adjudged,"179 compounded180 annually to make up for the cost of money181 already lost
to CASA.
Moreover, the failure of the CA to award interest does not prevent us from granting it
upon damages awarded for breach of contract.182 Because BPI evidently breached its
contract of deposit with CASA, we award interest in addition to the total amount
adjudged. Under Section 196 of the NIL, any case not provided for shall be "governed
by the provisions of existing legislation or, in default thereof, by the rules of the law
merchant."183 Damages are not provided for in the NIL. Thus, we resort to the Code of
Commerce and the Civil Code. Under Article 2 of the Code of Commerce, acts of
commerce shall be governed by its provisions and, "in their absence, by the usages of
commerce generally observed in each place; and in the absence of both rules, by
those of the civil law."184 This law being silent, we look at Article 18 of the Civil Code,
which states: "In matters which are governed by the Code of Commerce and special

laws, their deficiency shall be supplied" by its provisions. A perusal of these three
statutes unmistakably shows that the award of interest under our civil law is justified.
WHEREFORE, the Petition in GR No. 149454 is hereby DENIED, and that in GR No.
149507 PARTLY GRANTED. The assailed Decision of the Court of Appeals
is AFFIRMED with modification: BPI is held liable for P547,115, the total value of the
forged checks less the amount already recovered by CASA from Leonardo T. Yabut,
plus interest at the legal rate of six percent (6%) per annum -- compounded annually,
from the filing of the complaint until paid in full; and attorneys fees of ten percent
(10%) thereof, subject to reimbursement from Respondent Yabut for the entire
amount, excepting attorneys fees. Let a copy of this Decision be furnished the Board
of Accountancy of the Professional Regulation Commission for such action as it may
deem appropriate against Respondent Yabut. No costs.

North Star International Travel Incorporated (North Star) is a corporation engaged in

the travel agency business while petitioner is the owner/general manager of JEAC
International Management and Contractor Services, a recruitment agency.
On March 17,2 1994, Virginia Balagtas, the General Manager of North Star, in
accommodation and upon the instruction of its client, petitioner herein, sent the
amount of US$60,0003 to View Sea Ventures Ltd., in Nigeria from her personal
account in Citibank Makati. On March 29, 1994, Virginia again sent US$40,000 to
View Sea Ventures by telegraphic transfer,4 with US$15,000 coming from petitioner.
Likewise, on various dates, North Star extended credit to petitioner for the airplane
tickets of his clients, with the total amount of such indebtedness under the credit
extensions eventually reaching P510,035.47.5
To cover payment of the foregoing obligations, petitioner issued the following five
checks to North Star:

SO ORDERED.

Check No : 246822
Drawn Against : Republic Planters Bank
Amount : P695,000.00
Dated/Postdated : May 15, 1994
G.R. No. 172954

October 5, 2011

Payable to : North Star International Travel, Inc.

ENGR. JOSE E. CAYANAN, Petitioner,

vs.
NORTH STAR INTERNATIONAL TRAVEL, INC., Respondent.

Check No : 246823

VILLARAMA, JR., J.:

Amount : P278,000.00

Petitioner Engr. Jose E. Cayanan appeals the May 31, 2006 Decision1 of the Court of
Appeals (CA) in CA-G.R. SP No. 65538 finding him civilly liable for the value of the five
checks which are the subject of Criminal Case Nos. 166549-53.

Dated/Postdated : May 15, 1994

The antecedent facts are as follows:

Drawn Against : Republic Planters Bank

Payable to : North Star International Travel, Inc.

Check No : 246824

Drawn Against : Republic Planters Bank

Amount : P22,703.00
Dated/Postdated : May 15, 1994
Payable to : North Star International Travel, Inc.
Check No : 687803
Drawn Against : PCIB
Amount : P1,500,000.00
Dated/Postdated : April 14, 1994
Payable to : North Star International Travel, Inc.
Check No : 687804
Drawn Against : PCIB
Amount : P35,000.00
Dated/Postdated : April 14, 1994
Payable to : North Star International Travel, Inc.6
When presented for payment, the checks in the amount of P1,500,000 and P35,000
were dishonored for insufficiency of funds while the other three checks were
dishonored because of a stop payment order from petitioner.7 North Star, through its
counsel, wrote petitioner on September 14, 19948 informing him that the checks he
issued had been dishonored. North Star demanded payment, but petitioner failed to
settle his obligations. Hence, North Star instituted Criminal Case Nos. 166549-53
charging petitioner with violation of Batas Pambansa Blg. 22, or the Bouncing Checks
Law, before the Metropolitan Trial Court (MeTC) of Makati City.

The Informations,9 which were similarly worded except as to the check numbers, the
dates and amounts of the checks, alleged:
That on or about and during the month of March 1994 in the Municipality of Makati,
Metro Manila, Philippines, a place within the jurisdiction of this Honorable Court, the
above-named accused, being the authorized signatory of [JEAC] Intl Mgt & Cont.
Serv. did then and there willfully, unlawfully and feloniously make out[,] draw and issue
to North Star Intl. Travel Inc. herein rep. by Virginia D. Balagtas to apply on account or
for value the checks described below:
xxxx
said accused well knowing that at the time of issue thereof, did not have sufficient
funds in or credit with the drawee bank for the payment in full of the face amount of
such check upon its presentment, which check when presented for payment within
ninety (90) days from the date thereof was subsequently dishonored by the drawee
bank for the reason PAYMENT STOPPED/DAIF and despite receipt of notice of such
dishonor the accused failed to pay the payee the face amount of said check or to make
arrangement for full payment thereof within five (5) banking days after receiving notice.
Contrary to law.
Upon arraignment, petitioner pleaded not guilty to the charges.
After trial, the MeTC found petitioner guilty beyond reasonable doubt of violation of
B.P. 22. Thus:
WHEREFORE, finding the accused, ENGR. JOSE E. CAYANAN GUILTY beyond
reasonable doubt of Violation of Batas Pambansa Blg. 22 he is hereby sentenced to
suffer imprisonment of one (1) year for each of the offense committed.
Accused is likewise ordered to indemnify the complainant North Star International
Travel, Inc. represented in this case by Virginia Balagtas, the sum of TWO MILLION
FIVE HUNDRED THIRTY THOUSAND AND SEVEN HUNDRED THREE PESOS
(P2,530,703.00) representing the total value of the checks in [question] plus FOUR
HUNDRED EIGHTY[-]FOUR THOUSAND SEVENTY[-]EIGHT PESOS AND
FORTY[-]TWO CENTAVOS (P484,078.42) as interest of the value of the checks
subject matter of the instant case, deducting therefrom the amount of TWO
HUNDRED TWENTY THOUSAND PESOS (P220,000.00) paid by the accused as

interest on the value of the checks duly receipted by the complainant and marked as
Exhibit "FF" of the record.

that said amount was taken from Virginias personal dollar account in Citibank and not
from North Stars corporate account.

xxxx

Respondent North Star, for its part, counters that petitioner is liable for the value of the
five subject checks as they were issued for value. Respondent insists that petitioner
owes North Star P2,530,703 plus interest of P264,078.45, and that the P220,000
petitioner paid to North Star is conclusive proof that the checks were issued for value.

SO ORDERED.10
On appeal, the Regional Trial Court (RTC) acquitted petitioner of the criminal charges.
The RTC also held that there is no basis for the imposition of the civil liability on
petitioner. The RTC ratiocinated that:
In the instant cases, the checks issued by the accused were presented beyond the
period of NINETY (90) DAYS and therefore, there is no violation of the provision of
Batas Pambansa Blg. 22 and the accused is not considered to have committed the
offense. There being no offense committed, accused is not criminally liable and there
would be no basis for the imposition of the civil liability arising from the offense. 11
Aggrieved, North Star elevated the case to the CA. On May 31, 2006, the CA reversed
the decision of the RTC insofar as the civil aspect is concerned and held petitioner
civilly liable for the value of the subject checks. The falloof the CA decision reads:
WHEREFORE, the petition is GRANTED. The assailed Decision of the RTC insofar as
Cayanan's civil liability is concerned, is NULLIFIED and SET ASIDE. The indemnity
awarded by the MeTC in its September 1, 1999 Decision is REINSTATED.
SO ORDERED.12
The CA ruled that although Cayanan was acquitted of the criminal charges, he may
still be held civilly liable for the checks he issued since he never denied having issued
the five postdated checks which were dishonored.
Petitioner now assails the CA decision raising the lone issue of whether the CA erred
in holding him civilly liable to North Star for the value of the checks. 13
Petitioner argues that the CA erred in holding him civilly liable to North Star for the
value of the checks since North Star did not give any valuable consideration for the
checks. He insists that the US$85,000 sent to View Sea Ventures was not sent for the
account of North Star but for the account of Virginia as her investment. He points out

The petition is bereft of merit.

We have held that upon issuance of a check, in the absence of evidence to the
contrary, it is presumed that the same was issued for valuable consideration which
may consist either in some right, interest, profit or benefit accruing to the party who
makes the contract, or some forbearance, detriment, loss or some responsibility, to
act, or labor, or service given, suffered or undertaken by the other side.14 Under
the Negotiable Instruments Law, it is presumed that every party to an instrument
acquires the same for a consideration or for value.15 As petitioner alleged that there
was no consideration for the issuance of the subject checks, it devolved upon him to
present convincing evidence to overthrow the presumption and prove that the checks
were in fact issued without valuable consideration.16 Sadly, however, petitioner has not
presented any credible evidence to rebut the presumption, as well as North Stars
assertion, that the checks were issued as payment for the US$85,000 petitioner owed.
Notably, petitioner anchors his defense of lack of consideration on the fact that he did
not personally receive the US$85,000 from Virginia. However, we note that in his
pleadings, he never denied having instructed Virginia to remit the US$85,000 to View
Sea Ventures. Evidently, Virginia sent the money upon the agreement that petitioner
will give to North Star the peso equivalent of the amount remitted plus interest. As
testified to by Virginia, Check No. 246822dated May 15, 1994 in the amount
of P695,000.00 is equivalent to US$25,000; Check No. 246823 dated May 15, 1994 in
the amount of P278,000 is equivalent to US$10,000; Check No. 246824 in the amount
of P22,703 represents the one month interest for P695,000 and P278,000 at the rate
of twenty-eight (28%) percent per annum;17 Check No. 687803 dated April 14, 1994 in
the amount of P1,500,000 is equivalent to US$50,000 andCheck No. 687804 dated 14
April 1994 in the amount of P35,000 represents the one month interest for P1,500,000
at the rate of twenty-eight (28%) percent per annum.18 Petitioner has not substantially
refuted these averments.1avvphi1

Concomitantly, petitioners assertion that the dollars sent to Nigeria was for the
account of Virginia Balagtas and as her own investment with View Sea Ventures
deserves no credence. Virginia has not been shown to have any business transactions
with View Sea Ventures and from all indications, she only remitted the money upon the
request and in accordance with petitioners instructions. The evidence shows that it
was petitioner who had a contract with View Sea Ventures as he was sending contract
workers to Nigeria; Virginia Balagtass participation was merely to send the money
through telegraphic transfer in exchange for the checks issued by petitioner to North
Star. Indeed, the transaction between petitioner and North Star is actually in the nature
of a loan and the checks were issued as payment of the principal and the interest.
As aptly found by the trial court:
It is to be noted that the checks subject matter of the instant case were issued in the
name of North Star International Inc., represented by private complainant Virginia
Balagtas in replacement of the amount of dollars remitted by the latter to Vie[w] Sea
Ventures in Nigeria. x x x But Virginia Balagtas has no business transaction with
Vie[w] Sea Ventures where accused has been sending his contract workers and the
North Star provided the trip tickets for said workers sent by the accused. North Star
International has no participation at all in the transaction between accused and the
Vie[w] Sea Ventures except in providing plane ticket used by the contract workers of
the accused upon its understanding with the latter. The contention of the accused that
the dollars were sent by Virginia Balagtas to Nigeria as business investment has not
been shown by any proof to set aside the foregoing negative presumptions, thus
negates accused contentions regarding the absence of consideration for the issuance
of checks. x x x19
Petitioner claims that North Star did not give any valuable consideration for the checks
since the US$85,000 was taken from the personal dollar account of Virginia and not
the corporate funds of North Star. The contention, however, deserves scant
consideration. The subject checks, bearing petitioners signature, speak for
themselves. The fact that petitioner himself specifically named North Star as the payee
of the checks is an admission of his liability to North Star and not to Virginia Balagtas,
who as manager merely facilitated the transfer of funds. Indeed, it is highly
inconceivable that an experienced businessman like petitioner would issue various
checks in sizeable amounts to a payee if these are without consideration. Moreover,
we note that Virginia Balagtas averred in her Affidavit20 that North Star caused the
payment of the US$60,000 and US$25,000 to View Sea Ventures to accommodate
petitioner, which statement petitioner failed to refute. In addition, petitioner did not
question the Statement of Account No. 863921 dated August 31, 1994 issued by North

Star which contained itemized amounts including the US$60,000 and US$25,000 sent
through telegraphic transfer to View Sea Ventures per his instruction. Thus, the
inevitable conclusion is that when petitioner issued the subject checks to North Star as
payee, he did so to settle his obligation with North Star for the US$85,000. And since
the only payment petitioner made to North Star was in the amount of P220,000.00,
which was applied to interest due, his liability is not extinguished. Having failed to fully
settle his obligation under the checks, the appellate court was correct in holding
petitioner liable to pay the value of the five checks he issued in favor of North Star.
WHEREFORE, the present appeal by way of a petition for review on certiorari is
DENIED for lack of merit. The Decision dated May 31, 2006 of the Court of Appeals in
CA-G.R. SP No. 65538 is AFFIRMED.
With costs against petitioner. SO ORDERED.

G.R. No. 154947

August 11, 2004

LEODEGARIO BAYANI, petitioner,

vs.
PEOPLE OF THE PHILIPPINES, respondent.
CALLEJO, SR., J.:
This is a petition for review on certiorari of the Decision1 of the Court of Appeals in CAG.R. CR No. 22861 affirming on appeal the Decision2 of the Regional Trial Court of
Lucena City, Branch 59, in Criminal Case No. 93-135 convicting the accused therein,
now the petitioner, for violation of Batas Pambansa (B.P.) Blg. 22.
On February 9, 1993, Leodegario Bayani was charged with violation of B.P. Blg. 22 in
an Information which reads:
That on or about the 20th day of August 1992, in the Municipality of
Candelaria, Province of Quezon, Philippines, and within the jurisdiction of
this Honorable Court, the above-named accused did then and there willfully,
unlawfully and feloniously issue and make out Check No. 054936 dated
August 29, 1992, in the amount of FIFTY-FIVE THOUSAND PESOS

(P55,000.00) Philippine Currency, drawn against the PSBank, Candelaria

Branch, Candelaria, Quezon, payable to "Cash" and give the said check to
one Dolores Evangelista in exchange for cash although the said accused
knew fully well at the time of issuance of said check that he did not have
sufficient funds in or credit with the drawee bank for payment of said check
in full upon presentment; that upon presentation of said check to the bank
for payment, the same was dishonored and refused payment for the reason
that the drawer thereof, the herein accused, had no sufficient fund therein,
and that despite due notice, said accused failed to deposit the necessary
amount to cover said check or to pay in full the amount of said check, to the
damage and prejudice of said Dolores Evangelista in the aforesaid amount.
Contrary to law.3
The Case for the Prosecution
At about noon on August 20, 1992, Alicia Rubia arrived at the grocery store of Dolores
Evangelista in Candelaria, Quezon, and asked the latter to rediscount Philippine
Savings Bank (PSBank) Check No. 054936 in the amount ofP55,000.00. The check
was drawn by Leodegario Bayani against his account with the PSBank and postdated
August 29, 1992.4 Rubia told Evangelista that Bayani asked her to rediscount the
check for him because he needed the money.5 Considering that Rubia and Bayani
were long-time customers at the store and she knew Bayani to be a good man,
Evangelista agreed to rediscount the check.6 After Rubia endorsed the check,
Evangelista gave her the amount of P55,000.00.7 However, when Evangelista
deposited the check in her account with the Far East Bank & Trust Company on
September 11, 1992, it was dishonored by the drawee bank for the reason that on
September 1, 1992, Bayani closed his account with the PSBank.8 The reason for the
dishonor of the check was stamped at its dorsal portion. As of August 27, 1992, the
balance of Bayanis account with the bank was P2,414.96.9 Evangelista then informed
Rubia of the dishonor of the check and demanded the return of her P55,000.00. Rubia
replied that she was only requested by Bayani to have the check rediscounted and
advised Evangelista to see him. When Evangelista talked to Bayani, she was told that
Rubia borrowed the check from him.10
Thereafter, Evangelista, Rubia, Bayani and his wife, Aniceta, had a conference in the
office of Atty. Emmanuel Velasco, Evangelistas lawyer. Later, in the Office of the
Barangay Captain Nestor Baera, Evangelista showed Bayani a photocopy of the
dishonored check and demanded payment thereof. Bayani and Aniceta, on one hand,

and Rubia, on the other, pointed to each other and denied liability thereon. Aniceta told
Rubia that she should be the one to pay since the P55,000.00 was with her, but the
latter insisted that the said amount was in payment of the pieces of jewelry Aniceta
purchased from her.11 Upon Atty. Velascos prodding, Evangelista suggested Bayani
and Rubio to pay P25,000.00 each. Still, Bayani and Rubio pointed to the other as the
one solely liable for the amount of the check.12 Rubia reminded Aniceta that she was
given the check as payment of the pieces of jewelry Aniceta bought from her.
The Case for the Petitioner
Bayani testified that he was the proprietor of a funeral parlor in Candelaria, Quezon.
He maintained an account with the PSBank in Candelaria, Quezon, and was issued a
checkbook which was kept by his wife, Aniceta Bayani. Sometime in 1992, he changed
his residence. In the process, his wife lost four (4) blank checks, one of which was
Check No. 05493613 which formed part of the checks in the checkbook issued to him
by the PSBank.14 He did not report the loss to the police authorities. He reported such
loss to the bank after Evangelista demanded the refund of the P55,000.00 from his
wife.15 He then closed his account with the bank on September 11, 1992, but was
informed that he had closed his account much earlier. He denied ever receiving the
amount of P55,000.00 from Rubia.16
Bayani further testified that his wife discovered the loss of the checks when he brought
his wife to the office of Atty. Emmanuel Velasco.17 He did not see Evangelista in the
office of the lawyer, and was only later informed by his wife that she had a conference
with Evangelista. His wife narrated that according to Evangelista, Rubia had
rediscounted a check he issued, which turned out to be the check she (Aniceta) had
lost. He was also told that Evangelista had demanded the refund of the amount of the
check.18 He later tried to contact Rubia but failed. He finally testified that he could not
recall having affixed his signature on the check.19
Aniceta Bayani corroborated the testimony of her husband. She testified that she was
invited to go to the office of Atty. Velasco where she, Rubia and Evangelista had a
conference. It was only then that she met Evangelista. Rubia admitted that she
rediscounted the complainants check with Evangelista. When Evangelista asked her
to pay the amount of the check, she asked that the check be shown to her, but
Evangelista refused to do so. She further testified that her husband was not with her
and was in their office at the time.

At the conclusion of the trial, the court rendered judgment finding Bayani guilty beyond
reasonable doubt of violation of Section 1 of B.P. Blg. 22. The decretal portion of the
decision reads:
WHEREFORE, premises considered, the Court finds the accused
Leodegario Bayani guilty beyond reasonable doubt of violation of Section 1,
Batas Pambansa Bilang 22 and hereby sentences him to suffer an
imprisonment of ONE (1) YEAR, or to pay a fine of ONE HUNDRED TEN
THOUSAND PESOS (P110,000.00), to pay to complaining witness Dolores
Evangelista the sum of FIFTY-FIVE THOUSAND PESOS (P55,000.00), the
value of the check and to pay the costs.
SO ORDERED.20
On appeal, the petitioner averred that the prosecution failed to adduce evidence that
he affixed his signature on the check, or received from Rubia the amount
of P55,000.00, thus negating his guilt of the crime charged.
The petitioner asserts that even Teresita Macabulag, the bank manager of PSB who
authenticated his specimen signatures on the signature card he submitted upon
opening his account with the bank, failed to testify that the signature on the check was
his genuine signature.
On January 30, 2002, the Court of Appeals rendered judgment21 affirming the decision
of the RTC with modification as to the penalty imposed on the petitioner.
The petitioner asserts in the petition at bar that
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN
AFFIRMING WITH MODIFICATION THE CONVICTION OF PETITIONER
BY THE TRIAL COURT FOR ALLEGED VIOLATION OF BATAS
PAMBANSA BLG. 22 NOTWITHSTANDING THAT THE PROSECUTION
MISERABLY FAILED TO PROVE THAT THE CHECK WAS ISSUED FOR A
VALUABLE CONSIDERATION.22
The petitioner contends that the prosecution failed to prove all the essential elements
of the crime of violation of Section 1, B.P. Blg. 22. He asserts that the prosecution
failed to prove that he issued the check. He avers that even assuming that he issued
the check, the prosecution failed to prove that it was issued for valuable consideration,

and that he received the amount of P55,000.00 from Rubia. Hence, in light of the
ruling of this Court in Magno vs. Court of Appeals,23 he is entitled to an acquittal on
such grounds.
The petitioner further contends that Evangelistas testimony, that Rubia told her that it
was the petitioner who asked her to have the check rediscounted, is hearsay and, as
such, even if he did not object thereto is inadmissible in evidence against him. He
avers that the prosecution failed to present Rubia as a witness, depriving him of his
right to cross-examine her. He contends that any declaration made by Rubia to
Evangelista is inadmissible in evidence against him.
The petition is denied.
We agree with the submission of the petitioner that Evangelistas testimony, that Rubia
told her that the petitioner requested that the subject check be rediscounted, is
hearsay. Evangelista had no personal knowledge of such request of the petitioner to
Rubia. Neither is the information relayed by Rubia to Evangelista as to the petitioners
request admissible in evidence against the latter, because the prosecution failed to
present Rubia as a witness, thus, depriving the petitioner of his right of crossexamination.
However, the evidence belies the petitioners assertion that the prosecution failed to
adduce evidence that he issued the subject check. Evangelista testified that when she
talked to the petitioner upon Rubias suggestion, the petitioner admitted that he gave
the check to Rubia, but claimed that the latter "borrowed" the check from him.
Q When this check in question was returned to you because of the closed
account, what did you do, if you did anything?
A I talked to Alicia Rubia, Sir.
Q And what did Alicia Rubia tell you in connection with the check in
question?
A Alicia Rubia told me that she was just requested by Leodegario Bayani,
Sir.
Q And what else did she tell you?

A She advised me to go to Leodegario Bayani, Sir.

A They told me they owned the check but they were pointing to each other
as to who will pay the amount, Sir.25

Q Did you go to Leodegario Bayani as per instruction of Alicia Rubia?

A Yes, Sir.
Q And what did Leodegario Bayani tell you in connection with this check?
A He told me that Alicia Rubia borrowed the check from him, Sir.

24

Evangelista testified that she showed to the petitioner and his wife, Aniceta, a
photocopy of the subject check in the office of Atty. Velasco, where they admitted to
her that they owned the check:
ATTY. ALZAGA (TO WITNESS)
Q When you shown (sic) the check to Leodegario Bayani and his wife in the
law office of Atty. Velasco, what did they tell you?
ATTY. VELASCO:
Misleading. The question is misleading because according to the
question, Your Honor, he had shown the check but that was not
the testimony. The testimony was the xerox copy of the check was
the one shown.
ATTY. ALZAGA
"The xerox copy of the check."
COURT
As modified, answer the question.
WITNESS

The petitioner cannot escape criminal liability by denying that he received the amount
of P55,000.00 from Rubia after he issued the check to her. As we ruled in Lozano vs.
Martinez:26
The gravamen of the offense punished by BP 22 is the act of making and
issuing a worthless check or a check that is dishonored upon its
presentation for payment. It is not the non-payment of an obligation which
the law punishes. The law is not intended or designed to coerce a debtor to
pay his debt. The thrust of the law is to prohibit, under pain of penal
sanctions, the making of worthless checks and putting them in circulation.
Because of its deleterious effects on the public interest, the practice is
proscribed by the law. The law punishes the act not as an offense against
property, but an offense against public order.27
The evidence on record shows that Evangelista rediscounted the check and
gave P55,000.00 to Rubia after the latter endorsed the same. As such, Evangelista is
a holder of the check in due course.28 Under Section 28 of the Negotiable Instruments
Law (NIL), absence or failure of consideration is a matter of defense only as against
any person not a holder in due course, thus:
SECTION 28. Effect of want of consideration. Absence or failure of
consideration is a matter of defense as against any person not a holder in
due course; and partial failure of consideration is a defense pro tanto,
whether the failure is an ascertained and liquidated amount or otherwise.
Moreover, Section 24 of the NIL provides the presumption of consideration, viz:
SECTION 24. Presumption of consideration. Every negotiable instrument
is deemed prima facie to have been issued for a valuable consideration; and
every person whose signature appears thereon to have become a party
thereto for value.
Such presumption cannot be overcome by the petitioners bare denial of receipt of the
amount of P55,000.00 from Rubia.

The petitioner cannot, likewise, seek refuge in the ruling of this Court in Magno vs.
Court of Appeals29 because the facts and issues raised therein are substantially
different from those extant in this case. Indeed, the Court ruled in the said case that:
It is intriguing to realize that Mrs. Teng did not want the petitioner to know
that it was she who "accommodated" petitioners request for Joey Gomez, to
source out the needed funds for the "warranty deposit." Thus, it unfolds the
kind of transaction that is shrouded with mystery, gimmickry and doubtful
legality. It is in simple language, a scheme whereby Mrs. Teng as the
supplier of the equipment in the name of her corporation, Mancor, would be
able to "sell or lease" its goods as in this case, and at the same time,
privately financing those who desperately need petty accommodations as
this one. This modus operandi has in so many instances victimized
unsuspecting businessmen, who likewise need protection from the law, by
availing of the deceptively called "warranty deposit" not realizing that they
also fall prey to leasing equipment under the guise of lease-purchase
agreement when it is a scheme designed to skim off business clients.30
Equally futile is the petitioners contention that the prosecution failed to prove the crime
charged. For the accused to be guilty of violation of Section 1 of B.P. Blg. 22, the
prosecution is mandated to prove the essential elements thereof, to wit:
1. That a person makes or draws and issues any check.
2. That the check is made or drawn and issued to apply on account or for
value.
3. That the person who makes or draws and issues the check knows at the
time of issue that he does not have sufficient funds in or credit with the
drawee bank for the payment of such check in full upon its presentment.
4. That the check is subsequently dishonored by the drawee bank for
insufficiency of funds or credit, or would have been dishonored for the same
reason had not the drawer, without any valid reason, ordered the bank to
stop payment.31
In this case, the prosecution adduced documentary evidence that when the petitioner
issued the subject check on or about August 20, 1992, the balance of his account with
the drawee bank was only P2,414.96. During the conference in the office of Atty.

Emmanuel Velasco, Evangelista showed to the petitioner and his wife a photocopy of
the subject check, with the notation at its dorsal portion that it was dishonored for the
reason "account closed." Despite Evangelistas demands, the petitioner refused to pay
the amount of the check and, with his wife, pointed to Rubia as the one liable for the
amount. The collective evidence of the prosecution points to the fact that at the time
the petitioner drew and issued the check, he knew that the residue of the funds in his
account with the drawee bank was insufficient to pay the amount of the check.
IN LIGHT OF ALL THE FOREOING, the petition is DENIED DUE COURSE. The
decision of the Court of Appeals is AFFIRMED.
No costs.
SO ORDERED.

The case arose from the following facts:

On January 10, 2002, Pacifico S. Brobio (Pacifico) died intestate, leaving three parcels
of land. He was survived by his wife, respondent Eufrocina A. Brobio, and four
legitimate and three illegitimate children; petitioner Carmela Brobio Mangahas is one
of the illegitimate children.
On May 12, 2002, the heirs of the deceased executed a Deed of Extrajudicial
Settlement of Estate of the Late Pacifico Brobio with Waiver. In the Deed, petitioner
and Pacificos other children, in consideration of their love and affection for respondent
and the sum of P150,000.00, waived and ceded their respective shares over the three
parcels of land in favor of respondent. According to petitioner, respondent promised to
give her an additional amount for her share in her fathers estate. Thus, after the
signing of the Deed, petitioner demanded from respondent the promised additional
amount, but respondent refused to pay, claiming that she had no more money.3

G.R. No. 183852

October 20, 2010

CARMELA BROBIO MANGAHAS, Petitioner,

vs.
EUFROCINA A. BROBIO, Respondent.

A year later, while processing her tax obligations with the Bureau of Internal Revenue
(BIR), respondent was required to submit an original copy of the Deed. Left with no
more original copy of the Deed, respondent summoned petitioner to her office on May
31, 2003 and asked her to countersign a copy of the Deed. Petitioner refused to
countersign the document, demanding that respondent first give her the additional
amount that she promised. Considering the value of the three parcels of land (which
she claimed to be worth P20M), petitioner asked for P1M, but respondent begged her
to lower the amount. Petitioner agreed to lower it to P600,000.00. Because respondent
did not have the money at that time and petitioner refused to countersign the Deed
without any assurance that the amount would be paid, respondent executed a
promissory note. Petitioner agreed to sign the Deed when respondent signed the
promissory note which read
31 May 2003

RESOLUTION
NACHURA, J.:
This petition for review on certiorari seeks to set aside the Court of Appeals (CA)
Decision1 dated February 21, 2008, which dismissed petitioners action to enforce
payment of a promissory note issued by respondent, and Resolution2 dated July 9,
2008, which denied petitioners motion for reconsideration.

This is to promise that I will give a Financial Assistance to CARMELA B. MANGAHAS

the amount of P600,000.00 Six Hundred Thousand only on June 15, 2003.
(SGD)
EUFROCINA A. BROBIO4

When the promissory note fell due, respondent failed and refused to pay despite
demand. Petitioner made several more demands upon respondent but the latter kept
on insisting that she had no money.
On January 28, 2004, petitioner filed a Complaint for Specific Performance with
Damages5 against respondent, alleging in part
2. That plaintiff and defendant are legal heirs of the deceased, Pacifico S.
Brobio[,] who died intestate and leaving without a will, on January 10, 2002,
but leaving several real and personal properties (bank deposits), and some
of which were the subject of the extra-judicial settlement among them,
compulsory heirs of the deceased, Pacifico Brobio. x x x.
3. That in consideration of the said waiver of the plaintiff over the listed
properties in the extra-judicial settlement, plaintiff received the sum
of P150,000.00, and the defendant executed a "Promissory Note" on June
15, 2003, further committing herself to give plaintiff a financial assistance in
the amount of P600,000.00. x x x.
4. That on its due date, June 15, 2003, defendant failed to make good of her
promise of delivering to the plaintiff the sum of P600,000.00 pursuant to her
"Promissory Note" dated May 31, 2003, and despite repeated demands,
defendant had maliciously and capriciously refused to deliver to the plaintiff
the amount [of]P600,000.00, and the last of which demands was on October
29, 2003. x x x.6
In her Answer with Compulsory Counterclaim,7 respondent admitted that she signed
the promissory note but claimed that she was forced to do so. She also claimed that
the undertaking was not supported by any consideration. More specifically, she
contended that
10. Defendant was practically held "hostage" by the demand of the plaintiff.
At that time, defendant was so much pressured and was in [a] hurry to
submit the documents to the Bureau of Internal Revenue because of the
deadline set and for fear of possible penalty if not complied with. Defendant
pleaded understanding but plaintiff was adamant. Her hand could only move
in exchange for 1 million pesos.

11. Defendant, out of pressure and confused disposition, was constrained to

make a promissory note in a reduced amount in favor of the plaintiff. The
circumstances in the execution of the promissory note were obviously
attended by involuntariness and the same was issued without consideration
at all or for illegal consideration.8
On May 15, 2006, the Regional Trial Court (RTC) rendered a decision in favor of
petitioner. The RTC found that the alleged "pressure and confused disposition"
experienced by respondent and the circumstances that led to the execution of the
promissory note do not constitute undue influence as would vitiate respondents
consent thereto. On the contrary, the RTC observed that
It is clear from all the foregoing that it is the defendant who took improper advantage of
the plaintiffs trust and confidence in her by resorting to a worthless written promise,
which she was intent on reneging. On the other hand, plaintiff did not perform an
unlawful conduct when she insisted on a written commitment from the defendant, as
embodied in the promissory note in question, before affixing her signature that was
asked of her by the defendant because, as already mentioned, that was the only
opportunity available to her or which suddenly and unexpectedly presented itself to her
in order to press her demand upon the defendant to satisfy the correct amount of
consideration due to her. In other words, as the defendant had repeatedly rebuffed her
plea for additional consideration by claiming lack of money, it is only natural for the
plaintiff to seize the unexpected opportunity that suddenly presented itself in order to
compel the defendant to give to her [what is] due [her]. And by executing the
promissory note which the defendant had no intention of honoring, as testified to by
her, the defendant clearly acted in bad faith and took advantage of the trust and
confidence that plaintiff had reposed in her.9
The RTC also brushed aside respondents claim that the promissory note was not
supported by valuable consideration. The court maintained that the promissory note
was an additional consideration for the waiver of petitioners share in the three
properties in favor of respondent. Its conclusion was bolstered by the fact that the
promissory note was executed after negotiation and haggling between the parties. The
dispositive portion of the RTC decision reads:
WHEREFORE, judgment is hereby rendered as follows:
1. Ordering the defendant to pay to plaintiff the sum of Six Hundred
Thousand Pesos (P600,000.00) which she committed to pay to plaintiff

under the promissory note in question, plus interest thereon at the rate of
12% per annum computed from the date of the filing of the complaint;

2. The Honorable Court of Appeals erred when it found that the promissory
note was without consideration.

2. Ordering the defendant to pay to plaintiff the sum of P50,000.00 as

attorneys fees; and

3. The Honorable Court of Appeals erred when it stated that petitioner

should have filed [an action] for partition instead of a case for specific
performance.13

3. Ordering the defendant to pay to plaintiff the costs of this suit.

The petition is meritorious.
SO ORDERED.

10

On February 21, 2008, the CA reversed the RTC decision and dismissed the
complaint.11 The CA found that there was a complete absence of consideration in the
execution of the promissory note, which made it inexistent and without any legal force
and effect. The court noted that "financial assistance" was not the real reason why
respondent executed the promissory note, but only to secure petitioners signature.
The CA held that the waiver of petitioners share in the three properties, as expressed
in the deed of extrajudicial settlement, may not be considered as the consideration of
the promissory note, considering that petitioner signed the Deed way back in 2002 and
she had already received the consideration of P150,000.00 for signing the same. The
CA went on to hold that if petitioner disagreed with the amount she received, then she
should have filed an action for partition.
Further, the CA found that intimidation attended the signing of the promissory note.
Respondent needed the Deed countersigned by petitioner in order to comply with a
BIR requirement; and, with petitioners refusal to sign the said document, respondent
was forced to sign the promissory note to assure petitioner that the money promised to
her would be paid.
Petitioner moved for the reconsideration of the CA Decision. In a Resolution dated July
9, 2008, the CA denied petitioners motion.12
In this petition for review, petitioner raises the following issues:
1. The Honorable Court of Appeals erred in the appreciation of the facts of
this case when it found that intimidation attended the execution of the
promissory note subject of this case.

Contracts are voidable where consent thereto is given through mistake, violence,
intimidation, undue influence, or fraud. In determining whether consent is vitiated by
any of these circumstances, courts are given a wide latitude in weighing the facts or
circumstances in a given case and in deciding in favor of what they believe actually
occurred, considering the age, physical infirmity, intelligence, relationship, and conduct
of the parties at the time of the execution of the contract and subsequent thereto,
irrespective of whether the contract is in a public or private writing.14
Nowhere is it alleged that mistake, violence, fraud, or intimidation attended the
execution of the promissory note. Still, respondent insists that she was "forced" into
signing the promissory note because petitioner would not sign the document required
by the BIR. In one case, the Court in characterizing a similar argument by
respondents therein held that such allegation is tantamount to saying that the other
party exerted undue influence upon them. However, the Court said that the fact that
respondents were "forced" to sign the documents does not amount to vitiated
consent.15
There is undue influence when a person takes improper advantage of his power over
the will of another, depriving the latter of a reasonable freedom of choice.16 For undue
influence to be present, the influence exerted must have so overpowered or
subjugated the mind of a contracting party as to destroy his free agency, making him
express the will of another rather than his own.17
Respondent may have desperately needed petitioners signature on the Deed, but
there is no showing that she was deprived of free agency when she signed the
promissory note. Being forced into a situation does not amount to vitiated consent
where it is not shown that the party is deprived of free will and choice. Respondent still
had a choice: she could have refused to execute the promissory note and resorted to
judicial means to obtain petitioners signature. Instead, respondent chose to execute

the promissory note to obtain petitioners signature, thereby agreeing to pay the
amount demanded by petitioner.
The fact that respondent may have felt compelled, under the circumstances, to
execute the promissory note will not negate the voluntariness of the act. As rightly
observed by the trial court, the execution of the promissory note in the amount
of P600,000.00 was, in fact, the product of a negotiation between the parties.
Respondent herself testified that she bargained with petitioner to lower the amount:
ATTY. VILLEGAS:
Q And is it not that there was even a bargaining from P1-M to P600,000.00
before you prepare[d] and [sign[ed] that promissory note marked as Exhibit
"C"?
A Yes, sir.
Q And in fact, you were the one [who] personally wrote the amount
of P600,000.00 only as indicated in the said promissory note?
A Yes, sir.
COURT:
Q So, just to clarify. Carmela was asking an additional amount of P1-M for
her to sign this document but you negotiated with her and asked that it be
lowered to P600,000.00 to which she agreed, is that correct?
A Yes, Your Honor. Napilitan na po ako.
Q But you negotiated and asked for its reduction from P1-M
to P600,000.00?
A Yes, Your Honor.18
Contrary to the CAs findings, the situation did not amount to intimidation that vitiated
consent.1awphil There is intimidation when one of the contracting parties is compelled
to give his consent by a reasonable and well-grounded fear of an imminent and grave

evil upon his person or property, or upon the person or property of his spouse,
descendants, or ascendants.19 Certainly, the payment of penalties for delayed payment
of taxes would not qualify as a "reasonable and well-grounded fear of an imminent and
grave evil."
We join the RTC in holding that courts will not set aside contracts merely because
solicitation, importunity, argument, persuasion, or appeal to affection was used to
obtain the consent of the other party. Influence obtained by persuasion or argument or
by appeal to affection is not prohibited either in law or morals and is not obnoxious
even in courts of equity.20
On the issue that the promissory note is void for not being supported by a
consideration, we likewise disagree with the CA.
A contract is presumed to be supported by cause or consideration.21 The presumption
that a contract has sufficient consideration cannot be overthrown by a mere assertion
that it has no consideration. To overcome the presumption, the alleged lack of
consideration must be shown by preponderance of evidence.22 The burden to prove
lack of consideration rests upon whoever alleges it, which, in the present case, is
respondent.
Respondent failed to prove that the promissory note was not supported by any
consideration. From her testimony and her assertions in the pleadings, it is clear that
the promissory note was issued for a cause or consideration, which, at the very least,
was petitioners signature on the document.1avvphi1
It may very well be argued that if such was the consideration, it was inadequate.
Nonetheless, even if the consideration is inadequate, the contract would not be
invalidated, unless there has been fraud, mistake, or undue influence.23 As previously
stated, none of these grounds had been proven present in this case.
The foregoing discussion renders the final issue insignificant. Be that as it may, we
would like to state that the remedy suggested by the CA is not the proper one under
the circumstances. An action for partition implies that the property is still owned in
common.24 Considering that the heirs had already executed a deed of extrajudicial
settlement and waived their shares in favor of respondent, the properties are no longer
under a state of co-ownership; there is nothing more to be partitioned, as ownership
had already been merged in one person.

WHEREFORE, premises considered, the CA Decision dated February 21, 2008 and
its Resolution dated July 9, 2008 are REVERSED and SET ASIDE. The RTC decision
dated May 15, 2006 is REINSTATED.
SO ORDERED.