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 certiorari under Rule 45 of the Revised Rules of Court is the decision dated September 24,
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2008 and the resolution dated April 30, 2009 of the Court of Appeals (CA) in CA-G.R. CV No. 82301. The appellate court affirmed
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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 200,000.00.

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.

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 200,000.00 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 200,000.00 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 "200,000.00". 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 200,000.00, 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. It found that the petitioner, in issuing the pre-signed blank checks, had
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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 200,000.00.

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 200,000.00 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 200,000.00 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. In the present case, the tribunals below arrived at two
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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. However, it must be written when the law requires a specific form, for example,
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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., that the requirement under Article 1878 of the Civil Code refers to
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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. Records do
1wphi 1

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)

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

WITNESS: No, sir. (T.S.N., Alvin Patrimonio, Nov. 11, 1999, p. 105) 8

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, involving a loan contracted by de Villa secured by real estate mortgages in the name of East Cordillera Mining
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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

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, where this court held:
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Petitioner submits that his following testimony suffices to establish that respondent had authorized Lilian to obtain a loan from him.

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. As we held in People v. Yabut:
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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. Article 1318 of the Civil Code enumerates the essential requisites
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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. It means that he does not have any knowledge of fact which would render it dishonest for him to take a
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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:

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

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

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. The only
22

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. Among such defenses is the filling up blank not within the authority.
23

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. To 1wphi 1

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 200,000 in this check?

A: No, sir.
Q: And lastly, did you authorize anyone including Nap Gutierrez to write the words 200,000 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.

Republic of the Philippines

Supreme Court
Manila

SECOND DIVISION

RIZAL COMMERCIAL BANKING G.R. No. 192413

CORPORATION,
Petitioner, Present:

CARPIO, J., Chairperson,

versus BRION,
PEREZ,
SERENO, and
HI-TRI DEVELOPMENT REYES, JJ.
CORPORATION and LUZ R.
BAKUNAWA, Promulgated:
Respondents.
June 13, 2012
x--------------------------------------------------x

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 1,019,514.29, maintained by RCBC in its Ermita Business Center
branch.

We quote the narration of facts of the CA[4] 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 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 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 1,019,514.29. However, Millan refused to accept back the
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 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 (1,019,514.29);

3. That the defendants be ordered to pay to plaintiffs spouses

moral damages in the amount of 2,000,000.00; and

4. That the defendants be ordered to pay plaintiffs attorneys fees

in the amount of 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] (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 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 1,019,514.29, [Spouses
Bakunawa] agreed to pay Rosmil and Millan the amount of 3,000,000.00,
[which is] inclusive [of] the amount of []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 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 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 party-defendants 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 assails[7] 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 Philippinesin 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.)

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.

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.

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]

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:

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 asserts[22] 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 allege[23] 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. [25] The
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.

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.
 SECOND DIVISION

[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 Company (FEBTC) at the latters Bel-
[1]

Air, Makati branch. The sole signatory to Samsung Constructions account

[2]

was Jong Kyu Lee (Jong), its Project Manager, while the checks remained in
[3]

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, she compared the signature appearing on
[5]

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. He reported the matter to Jong, who then
[7]

proceeded to the bank. Jong learned of the encashment of the check, and
realized that his signature had been forged.The Bank Manager reputedly told
Jong that he would be reimbursed for the amount of the check. Jong [8]

proceeded to the police station and consulted with his

lawyers. Subsequently, a criminal case for qualified theft was filed against
[9]

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. In response,
[11]

FEBTC said that it was still conducting an investigation on the matter.

Unsatisfied, Samsung Construction filed a Complaint on 10 June 1992 for
violation of Section 23 of the Negotiable Instruments Law, and prayed for the
payment of the amount debited as a result of the questioned check plus
interest, and attorneys fees. The case was docketed as Civil Case No. 92-
[12]

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), presented Rosario C. Perez, a document
[14]

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 Decision dated 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, reversing the RTC Decisionand absolving FEBTC from any
[16]

liability. The Court of Appeals held that the contradictory findings of the NBI
and the PNP created doubt as to whether there was forgery. Moreover, the
[17]

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. The Court of [18]

Appeals invoked the ruling in PNB v. National City Bank of New York that, if a
[19]

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. If payment is made, the drawee cannot
[21]

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. The rule has[22]

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. On the premise [26]

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. The forgery may
[27]

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 PNPCrime
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. This Court, in examining the signatures, makes a
[31]

similar finding. The PNP expert excused the noted differences by asserting
that they were mere variations, which are normal deviations found in
writing. Yet the RTC, which had the opportunity to examine the relevant
[32]

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, as if the mere conjuration of the word would sufficiently
[33]

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. However, unlike the questioned signature, the upward
[35]

strokes of eight (8) of these signatures are looped, while the upward stroke of
the seventh forms a severe forty-five degree (45) with the previous
[36]

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, the same excuse she proffered
[38]

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. She had trained with the Royal Hongkong Police
[40]

Laboratory and is a member of the International Association for

Identification. As of the time she testified, she had examined more than fifty
[41]

to fifty-five thousand questioned documents, on an average of fifteen to twenty

documents a day. In comparison, PNP document examiner Perez admitted
[42]

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. She compared the questioned
[44]

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. The NBI found that
[45]

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. The assertion may
[47]

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 succeeded or who put into the power of
[49]

the third person to perpetuate the wrong. Applying these rules, the Court of
[50]

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. Yet, [52]

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
Appeals applies in this case, to wit:
[53]

[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, and no contrary
[55]

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, and that the
[56]

ordinary course of business has been followed. Negligence is not presumed,

[57]

but must be proven by him who alleges it. While the complaint was lodged at
[58]

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, but necessarily
[59]

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, as relied upon by the Court of Appeals, deserves careful examination.
[60]

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. (Emphasis supplied)
[61]

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. And for another, in point
[62]

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, which was also cited by the
[64]

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. Moreover, the check was presented for
[68]

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. These circumstances are already suspicious if taken
[69]

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. She [70]

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. Even [71]

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. However, the
[72]

only proof of such allegations is the testimony of Gemma Velez, who also
testified that she did not know Sempio personally, and had met Sempio for
[73]

the first time only on the day the check was encashed. In fact, Velez had to
[74]

inquire with the other officers of the bank as to whether Sempio was actually
known to the employees of the bank. Obviously, Velez had no personal
[75]

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. A bank is liable, irrespective
[77]

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.
 SECOND DIVISION

[G.R. No. 107382. January 31, 1996]

ASSOCIATED BANK, petitioner, vs. HON. COURT OF APPEALS,

PROVINCE OF TARLAC and PHiLIPPINE NATIONAL
BANK, respondents.

[G.R. No. 107612. January 31, 1996]

PHILIPPINE NATIONAL BANK, petitioner, vs. HONORABLE COURT

OF APPEALS, PROVINCE OF TARLAC, and ASSOCIATED
BANK, respondents.
SYLLABUS
1. COMMERCIAL LAW; NEGOTIABLE INSTRUMENTS; A FORGED
SIGNATURE IS WHOLLY INOPERATIVE AND NO ONE CAN GAIN
TITLE TO THE INSTRUMENT THROUGH IT. - 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 aparty and never consented to the
contract which allegedly gave rise to such instrument. Section 23 does not
avoid the instrument but only the forged signature. Thus, a forged
indorsement does not operate as the payees indorsement.
2. ID.; ID.; ID.; EXCEPTION. - The exception to the general rule in Section 23
is where a party against whom it is sought to enforce a right is precluded
from setting up the forgery or want of authority. Parties who warrant or
admit the genuineness of the signature in question and those who, by their
acts, silence or negligence are estopped from setting up the defense of
forgery, are precluded from using this defense. Indorsers, persons
negotiating by delivery and acceptors are warrantors of the genuineness
of the signatures on the instrument.
3. ID.; ID.; BEARER INSTRUMENT; SIGNATURE OF PAYEE OR HOLDER,
NOT NECESSARY TO PASS TITLE TO THE INSTRUMENT. - 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.
4. ID.; ID.; ORDER INSTRUMENT; SIGNATURE OF HOLDER, ESSENTIAL
TO TRANSFER TITLE TO THE INSTRUMENT; EFFECT OF FORGED
INDORSEMENT OF HOLDER. - 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 holders indorsement is forged, all parties
prior to the forgery may raise the real defense of forgery against all parties
subsequent thereto.
5. ID.; ID.; ID.; LIABILITY OF GENERAL ENDORSER. - An indorser of an
order instrument warrants that the instrument is genuine and in all
respects what it purports to be; that he has a good title to it; that all prior
parties had capacity to contract; and that the instrument is at the time of
his indorsement valid and subsisting. He cannot interpose the defense that
signatures prior to him are forged.
6. ID.; ID.; ID.; ID.; COLLECTING BANK WHERE CHECK IS DEPOSITED
AND INDORSES CHECK, AN INDORSER. - 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 bankss 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.
7. ID.; ID.; ID.; PAYMENT UNDER A FORGED INDORSEMENT IS NOT TO
THE DRAWERS ORDER; REASON. - 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 drawers instructions are reflected on the
face and by the terms of the check. Payment under a forged indorsement
is not to the drawers 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 customers (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. The general rule then is that the drawee bank may not debit the
drawers account and is not entitled to indemnification from the drawer.
The risk of loss must perforce fall on the drawee bank.
8. ID.; ID.; ID.; ID.; EXCEPTIONS. - If the drawee bank can prove a failure by
the customer/drawer to exercise ordinary care that substantially
 contributed to the making of the forged signature, the drawer is precluded
from asserting the forgery. If at the same time the drawee bank was also
negligent to the point of substantially contributing to the loss, then such
loss from the forgery can be apportioned between the negligent drawer
and the negligent bank.
9. ID.; ID.; ID.; WHERE THE DRAWERS SIGNATURE IS FORGED, THE
DRAWER CAN RECOVER FROM THE DRAWEE BANK. - In cases
involving a forged check, where the drawers 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 drawers signature since
the latter is its customer.
10. ID.; ID.; ID.; IN CASES OF FORGED INDORSEMENTS, THE LOSS
FALLS ON THE PARTY WHO TOOK THE CHECK FROM THE FORGER
OR THE FORGER HIMSELF. 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. In other words, the drawee bank can seek
reimbursement or a return of the amount it paid from the presentor bank or
person. 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. 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.
11. ID.; ID.; ID.; ID.; CASE AT BAR. - 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 payees or holders indorsement,
the collecting bank is held liable, without prejudice to the latter proceeding
against the forger.
12. ID.; ID.; ID.; GENERAL INDORSER; COLLECTING BANK OR LAST
ENDORSER SUFFERS LOSS ON FORGED IN-DORSEMENT;
REASON. - More importantly, by reason of the statutory warranty of a
general indorser in Section 66 of the Negotiable Instruments Law, a
collecting bank which indorses a check bearing a forged indorsement and
 presents it to .the drawee bank guarantees all prior indorsements,
including the forged indorsement. It warrants that the instrument is
genuine, and that it is valid and subsisting at the time of his indorsement.
Because the indorsement is a forgery, the collecting bank commits a
breach of this warranty and will be accountable to the drawee bank. This
liability scheme operates without regard to fault on the part of the
collecting/presenting bank. Even if the latter bank was not negligent, it
would still be liable to the drawee bank because of its indorsement. The
Court has consistently ruled that the collecting bank or last endorser
generally suffers the loss because it has the duty to ascertain the
genuineness of all prior endorsements considering that the 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. 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.
13. ID.; ID.; ID.; DRAWEE BANK NOT LIABLE FOR LOSS ON FORGED
INDORSEMENT; REASON. - The drawee bank is not similarly situated as
the collecting bank because the former makes no warranty as to the
genuineness of any indorsement. The drawee banks duty is but to verify
the genuineness of the drawers signature and not of the indorsement
because the drawer is its client.
14. ID.; ID.; ID.; ID.; DUTY OF DRAWEE BANK TO PROMPTLY INFORM
PRESENTOR OF THE FORGERY UPON DISCOVERY; EFFECT OF
FAILURE TO PROMPTLY INFORM. 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.
15. ID.; ID.; ID.; ID.; ID.; ID.; EFFECT OF CON-TRIBUTORY NEGLIGENCE
IN CASE AT BAR. - 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 TarJac were
negligent, the loss should be properly apportioned between them. The loss
incurred by drawee bank-PNB can be passed on to the collecting bank-
Associated Bank which presented and indorsed the checks to it.
Associated Bank can, in turn, hold the forger, Fausto Pangilinan, liable. If
PNB negligently delayed in informing Associated Bank of the forgery, thus
depriving the latter of the opportunity to recover from the forger, it forfeits
its right to reimbursement and will be made to bear the loss. After careful
examination of the records, the Court finds that the Province of Tarlac was
equally negligent and should, therefore, share the burden of loss from the
checks bearing a forged indorsement. The Province of Tarlac permitted
Fausto Pangilinan to collect the checks when the latter, having already
retired from government service, was no longer connected with the
hospital. With the exception of the first check (dated January 17, 1978), all
the checks were issued and released after Pangilinans retirement on
February 28, 1978. After nearly three years, the Treasurers 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 Treasurers office of the fraud being
committed. There is also evidence indicating that the provincial employees
were aware of Pangilinans retirement and consequent dissociation from
the hospital. 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. 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 hospitals 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 payees indorsement.
16. ID.; ID.; ID.; FORGERY; DELAY IN INFORMING COLLECTING BANK
OF FORGERY BY THE DRAWEE BANK SIGNIFIES NEGLIGENCE. - 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.
17. ID.; ID.; ID.; RETURN OF FORGED INDORSEMENT; 24-HOUR PERIOD
BUT NOT BEYOND PERIOD FOR FILING LEGAL ACTION FOR BANKS
OUTSIDE METRO MANILA; CASE AT BAR. - Under Section 4(c) of CB
Circular No. 580, items bearing a forged endorsement shall be returned
within twenty-four (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 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.
18. ID.; ID.; ID.; ID.; RATIONALE. - 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.
19. ID.; ID.; ID.; ID.; FAILURE TO RETURN FORGED INDORSEMENT
WITHIN 24 HOURS FROM DISCOVERY DOES NOT PREJUDICE
COLLECTING BANK WHICH PRESENTED FORGER AS ITS
REBUTTAL WITNESS. 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 Treasurers 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. Associated Bank was also furnished a copy of the Provinces letter of
demand to PNB dated March 20, 1981, thus giving it notice of the
forgeries. At this time, however, Pangilinans account with Associated had
only P24.63 in it. Had Associated Bank decided to debit Pangilinans
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. Hence, Associated Bank
was not prejudiced by PNBs failure to comply with the twenty-four-hour
return rule.
20. REMEDIAL LAW; ACTIONS; ESTOPPEL; WILL NOT APPLY TO
DRAWEE BANK WHO FAID AND CLEARED CHECKS WITH FORGED
INDORSEMENT. - 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 payees Chief Officer who was supposed to have indorsed the
checks is also a customer of the drawee bank. PNBs duty was to verify the
genuineness of the drawers signature and not the genuineness of payees
indorsement. Associated Bank, as the collecting bank, is the entity with the
duty to verify the genuineness of the payees indorsement.
21. CIVIL LAW; OBLIGATIONS AND CON-TRACTS; THERE IS NO
PRIVITY OF CONTRACT BETWEEN THE DRAWER AND COLLECTING
BANK; DRAWER CAN RECOVER FROM DRAWEE BANK AND
DRAWEE BANK CAN SEEK REIMBURSEMENT FROM COLLECTING
BANK. - 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 client or customer of the PNB, not of
Associated Bank. There is no privity of contract between the drawer and
the collecting bank.
22. COMMERCIAL LAW; BANKS; BANK DEPOSITS ARE LOANS;
RECOVERY OF AMOUNT DEPOSITED IN CURRENT ACCOUNT
GIVEN 6% INTEREST PER ANNUM. - 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. 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 courts 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. The trial court did not err in granting legal interest
from March 20, 1981, the date of extrajudicial demand.
APPEARANCES OF COUNSEL
Jose A. Soluta, Jr. & Associates for Associated Bank.
Santiago, Jr., Vidad, Corpus & Associates for PNB.
The Solicitor General for public respondent.

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.3 Pangilinan sought to encash the first
check4 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 P8,000.00 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 Pangilinans wife are first cousins, the manager denied
having given Pangilinan preferential treatment on this account.8
On February 26, 1981, the Provincial Treasurer wrote the manager of the
PNB seeking the restoration of the various amounts debited from the current
account of the Province.9
In turn, the PNB manager demanded reimbursement from the Associated
Bank on May 15, 1981.10
As both banks resisted payment, the Province of Tarlac brought suit
against PNB which, in turn, impleaded Associated Bank as third-party
defendant. The latter then filed a fourth-party complaint against Adena Canlas
and Fausto Pangilinan.11
After trial on the merits, the lower court rendered its decision on March 21,
1988, disposing as follows:

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

1. On the basic complaint, in favor of plaintiff Province of Tarlac and against

defendant Philippine National Bank (PNB), ordering the latter to pay to the former,
the sum of Two Hundred Three Thousand Three Hundred (P203,300.00) Pesos with
legal interest thereon from March 20, 1981 until fully paid;

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

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

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

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

complaint, the same are hereby ordered dismissed for lack of merit.

SO ORDERED.12
 PNB and Associated Bank appealed to the Court of
AppealS.13 Respondent court affirmed the trial courts decision in toto on
September 30, 1992.
Hence these consolidated petitions which seek a reversal of respondent
appellate courts 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 hospitals 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 payees
indorsement before paying the check.17
 While both banks are innocent of the forgery, Associated Bank claims that
PNB was at fault and should solely bear the loss because it cleared and paid
the forged checks.
xxx xxx xxx
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 payees (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.19Thus, a forged indorsement does not operate as the payees
indorsement.
The exception to the general rule in Section 23 is where a party against
whom it is sought to enforce a right is precluded from setting up the forgery or
want of authority. Parties who warrant or admit the genuineness of the
signature in question and those who, by their acts, silence or negligence are
estopped from setting up the defense of forgery, are precluded from using this
defense. Indorsers, persons negotiating by delivery and acceptors are
warrantors of the genuineness of the signatures on the instIument.20
In bearer instruments, the signature of the payee or holder is unnecessary
to pass title to the instrument. Hence, when the indorsement is a forgery, only
the person whose signature is forged can raise the defense of forgery against
a holder in due course.21
 The checks involved in this case are order instruments, hence, the
following discussion is made with reference to the effects of a forged
indorsement on an instrument payable to order.
Where the instrument is payable to order at the time of the forgery, such
as the checks in this case, the signature of its rightful holder (here, the payee
hospital) is essential to transfer title to the same instrument. When the holders
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 bankss 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 drawers
instructions are reflected on the face and by the terms of the check. Payment
under a forged indorsement is not to the drawers 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 customers (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 drawers account and is not entitled to indemnification from the
drawer.25 The risk of loss must perforce fall on the drawee bank.
However, if the drawee bank can prove a failure by the customer/drawer to
exercise ordinary care that substantially contributed to the making of the
forged signature, the drawer is precluded from asserting the forgery.
If at the same time the drawee bank was also negligent to the point of
substantially contributing to the loss, then such loss from the forgery can be
apportioned between the negligent drawer and the negligent bank.26
In cases involving a forged check, where the drawers 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 drawers 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
can seek 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
payees or holders indorsement, the collecting bank is held liable, without
prejudice to the latter proceeding against the forger.
Since a forged indorsement is inoperative, the collecting bank had no right
to be paid by the drawee bank. The former must necessarily return the money
paid by the latter because it was paid wrongfully.30
More importantly, by reason of the statutory warranty of a general indorser
in Section 66 of the Negotiable Instruments Law, a collecting bank which
indorses a check bearing a forged indorsement and presents it to the drawee
bank guarantees all prior indorsements, including the forged indorsement. It
warrants that the instrument is genuine, and that it is valid and subsisting at
the time of his indorsement. Because the indorsement is a forgery, the
collecting bank commits a breach of this warranty and will be accountable to
the drawee bank. This liability scheme operates without regard to fault on the
part of the collecting/presenting bank. Even if the latter bank was not
negligent, it would still be liable to the drawee bank because of its
indorsement.
The Court has consistently ruled that the collecting bank or last endorser
generally suffers the loss because it has the duty to ascertain the
genuineness of all prior endorsements considering that the act of presenting
the check for payment to the drawee is an assertion that the party making the
presentment has done its duty to ascertain the genuineness of the
endorsements.31
 The drawee bank is not similarly situated as the collecting bank because
the former makes no warranty as to the genuineness of any
indorsement.32 The drawee banks duty is but to verify the genuineness of the
drawers signature and not of the indorsement because the drawer is its client.
Moreover, the collecting bank is made liable because it is privy to the
depositor who negotiated the check. The bank knows him, his address and
history because he is a client. It has taken a risk on his deposit. The bank is
also in a better position to detect forgery, fraud or irregularity in the
indorsement.
Hence, the drawee bank can recover the amount paid on the check
bearing a forged indorsement from the collecting bank. However, a drawee
bank has the duty to promptly inform the presentor of the forgery upon
discovery. If the drawee bank delays in informing the presentor of the forgery,
thereby depriving said presentor of the right to recover from the forger, the
former is deemed negligent and can no longer recover from the presentor.33
Applying these rules to the case at bench, PNB, the drawee bank, cannot
debit the current account of the Province of Tarlac because it paid checks
which bore forged indorsements. However, if the Province of Tarlac as drawer
was negligent to the point of substantially contributing to the loss, then the
drawee bank PNB can charge its account. If both drawee bank-PNB and
drawer-Province of Tarlac were negligent, the loss should be properly
apportioned between them.
The loss incurred by drawee bank-PNB can be passed on to the collecting
bank-Associated Bank which presented and indorsed the checks to it.
Associated Bank can, in turn, hold the forger, Fausto Pangilinan, liable.
If PNB negligently delayed in informing Associated Bank of the forgery,
thus depriving the latter of the opportunity to recover from the forger, it forfeits
its right to reimbursement and will be made to bear the loss.
After careful examination of the records, the Court finds that
the Province of Tarlac was equally negligent and should, therefore, share the
burden of loss from the checks bearing a forged indorsement.
The Province of Tarlac permitted Fausto Pangilinan to collect the checks
when the latter, having already retired from government service, was no
longer connected with the hospital. With the exception of the first check
(dated January 17, 1978), all the checks were issued and released after
Pangilinans retirement on February 28, 1978. After nearly three years, the
Treasurers 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 Treasurers office of
the fraud being committed. There is also evidence indicating that the
provincial employees were aware of Pangilinans 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 forgers 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 respondents account. xxx
 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 bahks 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 Banks 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-four (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 Banks 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 Treasurers 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 Provinces letter of
demand to PNB dated March 20, 1981, thus giving it notice of the forgeries. At
this time, however, Pangilinans account with Associated had only P24.63 in
it.37 Had Associated Bank decided to debit Pangilinans 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.38Hence, Associated Bank was not prejudiced by PNBs 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 payees Chief
Officer who was supposed to have indorsed the checks is also a customer of
the drawee bank.39 PNBs duty was to verify the genuineness of the drawers
signature and not the genuineness of payees indorsement. Associated Bank,
as the collecting bank, is the entity with the duty to verify the genuineness of
the payees 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 client or 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 courts 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 hospitals 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 payees 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.
Regalado (Chairman), Puno and Mendoza, JJ., concur.

FIRST DIVISION

ENGR. JOSE E. CAYANAN, G.R. No. 172954

Petitioner,
Present:

CORONA, C.J.,
- versus - Chairperson,
LEONARDO-DE CASTRO,
BERSAMIN,
DEL CASTILLO, and
NORTH STAR INTERNATIONAL VILLARAMA, JR., JJ.
TRAVEL, INC.,
Respondent. Promulgated:

October 5, 2011
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

VILLARAMA, JR., J.:

Petitioner Engr. Jose E. Cayanan appeals the May 31, 2006 Decision [1] 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.

The antecedent facts are as follows:

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$60,000[3] 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:
Check No : 246822
Drawn Against : Republic Planters Bank
Amount : P695,000.00
Dated/Postdated : May 15, 1994
Payable to : North Star International Travel, Inc.

Check No : 246823
Drawn Against : Republic Planters Bank
Amount : P278,000.00
Dated/Postdated : May 15, 1994
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, 1994[8] 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.

xxxx

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

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.

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. 246822 dated 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 and Check 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.

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 x[19]

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
Affidavit[20] 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.
8639[21] 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.

G.R. No. 185945 December 05, 2012

FIDELIZA J. AGLIBOT, Petitioner,

vs.
INGERSOL L. SANTIA, Respondent.

DECISION

REYES, J.:

Before the Court is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure seeking to annul and set
aside the Decision dated March I 8, 2008 of the Court of Appeals (CA) in CA-G.R. SP No. 100021, which reversed the
1

Decision dated April 3, 2007 of the Regional Trial Court (RTC) of Dagupan City, Branch 40, in Criminal Case Nos. 2006-0559-D to
2

2006-0569-D and entered a new judgment. The fallo reads as follows:

WHEREFORE, the instant petition is GRANTED and the assailed Joint Decision dated April 3, 2007 of the RTC of Dagupan City,
Branch 40, and its Order dated June 12, 2007 are REVERSED AND SET ASIDE and a new one is entered ordering private
respondent Fideliza J. Aglibot to pay petitioner the total amount of 3,000,000.00 with 12% interest per annum from the filing of the
Informations until the finality of this Decision, the sum of which, inclusive of interest, shall be subject thereafter to 12% annual
interest until fully paid.

SO ORDERED. 3

On December 23, 2008, the appellate court denied herein petitioners motion for reconsideration.

Antecedent Facts

Private respondent-complainant Engr. Ingersol L. Santia (Santia) loaned the amount of 2,500,000.00 to Pacific Lending & Capital
Corporation (PLCC), through its Manager, petitioner Fideliza J. Aglibot (Aglibot). The loan was evidenced by a Promissory Note
dated July 1, 2003, issued by Aglibot in behalf of PLCC, payable in one year subject to interest at 24% per annum. Allegedly as a
guaranty or security for the payment of the note, Aglibot also issued and delivered to Santia eleven (11) post-dated personal checks
drawn from her own demand account maintained at Metrobank, Camiling Branch. Aglibot is a major stockholder of PLCC, with
headquarters at 27 Casimiro Townhouse, Casimiro Avenue, Zapote, Las Pias, Metro Manila, where most of the stockholders also
reside.
4

Upon presentment of the aforesaid checks for payment, they were dishonored by the bank for having been drawn against
insufficient funds or closed account. Santia thus demanded payment from PLCC and Aglibot of the face value of the checks, but
neither of them heeded his demand. Consequently, eleven (11) Informations for violation of Batas Pambansa Bilang 22 (B.P. 22),
corresponding to the number of dishonored checks, were filed against Aglibot before the Municipal Trial Court in Cities (MTCC),
Dagupan City, Branch 3, docketed as Criminal Case Nos. 47664 to 47674. Each Information, except as to the amount, number and
date of the checks, and the reason for the dishonor, uniformly alleged, as follows:
That sometime in the month of September, 2003 in the City of Dagupan, Philippines and within the jurisdiction of this Honorable
Court, the above-named accused, FIDELIZA J. AGLIBOT, did then and there, willfully, unlawfully and criminally, draw, issue and
deliver to one Engr. Ingersol L. Santia, a METROBANK Check No. 0006766, Camiling Tarlac Branch, postdated November 1, 2003,
in the amount of 50,000.00, Philippine Currency, payable to and in payment of an obligation with the complainant, although the
said accused knew fully well that she did not have sufficient funds in or credit with the said bank for the payment of such check in full
upon its presentment, such that when the said check was presented to the drawee bank for payment within ninety (90) days from
the date thereof, the same was dishonored for reason "DAIF", and returned to the complainant, and despite notice of dishonor,
accused failed and/or refused to pay and/or make good the amount of said check within five (5) days banking days [sic], to the
damage and prejudice of one Engr. Ingersol L. Santia in the aforesaid amount of 50,000.00 and other consequential damages. 5

Aglibot, in her counter-affidavit, admitted that she did obtain a loan from Santia, but claimed that she did so in behalf of PLCC; that
before granting the loan, Santia demanded and obtained from her a security for the repayment thereof in the form of the aforesaid
checks, but with the understanding that upon remittance in cash of the face amount of the checks, Santia would correspondingly
return to her each check so paid; but despite having already paid the said checks, Santia refused to return them to her, although he
gave her assurance that he would not deposit them; that in breach of his promise, Santia deposited her checks, resulting in their
dishonor; that she did not receive any notice of dishonor of the checks; that for want of notice, she could not be held criminally liable
under B.P. 22 over the said checks; and that the reason Santia filed the criminal cases against her was because she refused to
agree to his demand for higher interest.

On August 18, 2006, the MTCC in its Joint Decision decreed as follows:

WHEREFORE, in view of the foregoing, the accused, FIDELIZA J. AGLIBOT, is hereby ACQUITTED of all counts of the crime of
violation of the bouncing checks law on reasonable doubt. However, the said accused is ordered to pay the private complainant the
sum of 3,000,000.00 representing the total face value of the eleven checks plus interest of 12% per annum from the filing of the
cases on November 2, 2004 until fully paid, attorneys fees of 30,000.00 as well as the cost of suit.

SO ORDERED. 6

On appeal, the RTC rendered a Decision dated April 3, 2007 in Criminal Case Nos. 2006-0559-D to 2006-0569-D, which further
absolved Aglibot of any civil liability towards Santia, to wit:

WHEREFORE, premises considered, the Joint Decision of the court a quo regarding the civil aspect of these cases is reversed and
set aside and a new one is entered dismissing the said civil aspect on the ground of failure to fulfill, a condition precedent of
exhausting all means to collect from the principal debtor.

SO ORDERED. 7

Santias motion for reconsideration was denied in the RTCs Order dated June 12, 2007. On petition for review to the CA docketed
8

as CA-G.R. SP No. 100021, Santia interposed the following assignment of errors, to wit:

"In brushing aside the law and jurisprudence on the matter, the Regional Trial Court seriously erred:

1. In reversing the joint decision of the trial court by dismissing the civil aspect of these cases;

2. In concluding that it is the Pacific Lending and Capital Corporation and not the private respondent which is principally
responsible for the amount of the checks being claimed by the petitioner;

3. In finding that the petitioner failed to exhaust all available legal remedies against the principal debtor Pacific Lending
and Capital Corporation;

4. In finding that the private respondent is a mere guarantor and not an accommodation party, and thus, cannot be
compelled to pay the petitioner unless all legal remedies against the Pacific Lending and Capital Corporation have been
exhausted by the petitioner;

5. In denying the motion for reconsideration filed by the petitioner." 9

In its now assailed decision, the appellate court rejected the RTCs dismissal of the civil aspect of the aforesaid B.P. 22 cases based
on the ground it cited, which is that the "failure to fulfill a condition precedent of exhausting all means to collect from the principal
debtor." The appellate court held that since Aglibots acquittal by the MTCC in Criminal Case Nos. 47664 to 47674 was upon a
reasonable doubt on whether the prosecution was able to satisfactorily establish that she did receive a notice of dishonor, a
10

requisite to hold her criminally liable under B.P. 22, her acquittal did not operate to bar Santias recovery of civil indemnity.
It is axiomatic that the "extinction of penal action does not carry with it the eradication of civil liability, unless the extinction proceeds
from a declaration in the final judgment that the fact from which the civil liability might arise did not exist. Acquittal will not bar a civil
action in the following cases: (1) where the acquittal is based on reasonable doubt as only preponderance of evidence is required in
civil cases; (2) where the court declared the accuseds liability is not criminal but only civil in nature[;] and (3) where the civil liability
does not arise from or is not based upon the criminal act of which the accused was acquitted." (Citation omitted)
11

The CA therefore ordered Aglibot to personally pay Santia 3,000,000.00 with interest at 12% per annum, from the filing of the
Informations until the finality of its decision. Thereafter, the sum due, to be compounded with the accrued interest, will in turn be
subject to annual interest of 12% from the finality of its judgment until full payment. It thus modified the MTCC judgment, which
simply imposed a straight interest of 12% per annum from the filing of the cases on November 2, 2004 until the 3,000,000.00 due
is fully paid, plus attorneys fees of 30,000.00 and the costs of the suit.

Issue

Now before the Court, Aglibot maintains that it was error for the appellate court to adjudge her personally liable for issuing her own
eleven (11) post-dated checks to Santia, since she did so in behalf of her employer, PLCC, the true borrower and beneficiary of the
loan. Still maintaining that she was a mere guarantor of the said debt of PLCC when she agreed to issue her own checks, Aglibot
insists that Santia failed to exhaust all means to collect the debt from PLCC, the principal debtor, and therefore he cannot now be
permitted to go after her subsidiary liability.

Ruling of the Court

The petition is bereft of merit.

Aglibot cannot invoke the benefit of excussion

The RTC in its decision held that, "It is obvious, from the face of the Promissory Note x x x that the accused-appellant signed the
same on behalf of PLCC as Manager thereof and nowhere does it appear therein that she signed as an accommodation party." The 12

RTC further ruled that what Aglibot agreed to do by issuing her personal checks was merely to guarantee the indebtedness of
PLCC. So now petitioner Aglibot reasserts that as a guarantor she must be accorded the benefit of excussion prior exhaustion of
the property of the debtor as provided under Article 2058 of the Civil Code, to wit:

Art. 2058. The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and
has resorted to all the legal remedies against the debtor.

It is settled that the liability of the guarantor is only subsidiary, and all the properties of the principal debtor, the PLCC in this case,
must first be exhausted before the guarantor may be held answerable for the debt. Thus, the creditor may hold the guarantor liable
13

only after judgment has been obtained against the principal debtor and the latter is unable to pay, "for obviously the exhaustion of
the principals property the benefit of which the guarantor claims cannot even begin to take place before judgment has been
obtained." This rule is contained in Article 2062 of the Civil Code, which provides that the action brought by the creditor must be
14 15

filed against the principal debtor alone, except in some instances mentioned in Article 2059 when the action may be brought against
16

both the guarantor and the principal debtor.

The Court must, however, reject Aglibots claim as a mere guarantor of the indebtedness of PLCC to Santia for want of proof, in
view of Article 1403(2) of the Civil Code, embodying the Statute of Frauds, which provides:

Art. 1403. The following contracts are unenforceable, unless they are ratified:

xxxx

(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement hereafter
made shall be unenforceable by action, unless the same, or some note or memorandum thereof, be in writing, and subscribed by
the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary
evidence of its contents:

a) An agreement that by its terms is not to be performed within a year from the making thereof;

b) A special promise to answer for the debt, default, or miscarriage of another;

c) An agreement made in consideration of marriage, other than a mutual promise to marry;

 d) An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless the
buyer accept and receive part of such goods and chattels, or the evidences, or some of them, or such things in action, or
pay at the time some part of the purchase money; but when a sale is made by auction and entry is made by the
auctioneer in his sales book, at the time of the sale, of the amount and kind of property sold, terms of sale, price, names
of purchasers and person on whose account the sale is made, it is a sufficient memorandum;

e) An agreement for the leasing of a longer period than one year, or for the sale of real property or of an interest therein;

f) A representation to the credit of a third person. (Italics ours)

Under the above provision, concerning a guaranty agreement, which is a promise to answer for the debt or default of another, the 17

law clearly requires that it, or some note or memorandum thereof, be in writing. Otherwise, it would be unenforceable unless
ratified, although under Article 1358 of the Civil Code, a contract of guaranty does not have to appear in a public
18 19

document. Contracts are generally obligatory in whatever form they may have been entered into, provided all the essential
20

requisites for their validity are present, and the Statute of Frauds simply provides the method by which the contracts enumerated in
Article 1403(2) may be proved, but it does not declare them invalid just because they are not reduced to writing. Thus, the form
required under the Statute is for convenience or evidentiary purposes only. 21

On the other hand, Article 2055 of the Civil Code also provides that a guaranty is not presumed, but must be express, and cannot
extend to more than what is stipulated therein. This is the obvious rationale why a contract of guarantee is unenforceable unless
made in writing or evidenced by some writing. For as pointed out by Santia, Aglibot has not shown any proof, such as a contract, a
secretarys certificate or a board resolution, nor even a note or memorandum thereof, whereby it was agreed that she would issue
her personal checks in behalf of the company to guarantee the payment of its debt to Santia. Certainly, there is nothing shown in the
Promissory Note signed by Aglibot herself remotely containing an agreement between her and PLCC resembling her guaranteeing
its debt to Santia. And neither is there a showing that PLCC thereafter ratified her act of "guaranteeing" its indebtedness by issuing
her own checks to Santia.

Thus did the CA reject the RTCs ruling that Aglibot was a mere guarantor of the indebtedness of PLCC, and as such could not "be
compelled to pay [Santia], unless the latter has exhausted all the property of PLCC, and has resorted to all the legal remedies
against PLCC x x x." 22

Aglibot is an accommodation party and therefore liable to Santia

Section 185 of the Negotiable Instruments Law defines a check as "a bill of exchange drawn on a bank payable on demand," while
Section 126 of the said law defines a bill of exchange as "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."

The appellate court ruled that by issuing her own post-dated checks, Aglibot thereby bound herself personally and solidarily to pay
Santia, and dismissed her claim that she issued her said checks in her official capacity as PLCCs manager merely to guarantee the
investment of Santia. It noted that she could have issued PLCCs checks, but instead she chose to issue her own checks, drawn
against her personal account with Metrobank. It concluded that Aglibot intended to personally assume the repayment of the loan,
pointing out that in her Counter-Affidavit, she even admitted that she was personally indebted to Santia, and only raised payment as
her defense, a clear admission of her liability for the said loan.

The appellate court refused to give credence to Aglibots claim that she had an understanding with Santia that the checks would not
be presented to the bank for payment, but were to be returned to her once she had made cash payments for their face values on
maturity. It noted that Aglibot failed to present any proof that she had indeed paid cash on the above checks as she claimed. This is
precisely why Santia decided to deposit the checks in order to obtain payment of his loan.

The facts below present a clear situation where Aglibot, as the manager of PLCC, agreed to accommodate its loan to Santia by
issuing her own post-dated checks in payment thereof. She is what the Negotiable Instruments Law calls an accommodation
party. Concerning the liability of an accommodation party, Section 29 of the said law provides:
23

Sec. 29. Liability of an accommodation party. An accommodation party is one who has signed the instrument as maker, drawer,
acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person
is liable on the instrument to a holder for value notwithstanding such holder at the time of taking the instrument knew him to be only
an accommodation party.

As elaborated in The Phil. Bank of Commerce v. Aruego: 24

An accommodation party is one who has signed the instrument as maker, drawer, indorser, without receiving value therefor and for
the purpose of lending his name to some other person. Such person is liable on the instrument to a holder for value, notwithstanding
such holder, at the time of the taking of the instrument knew him to be only an accommodation party. In lending his name to the
accommodated party, the accommodation party is in effect a surety for the latter. He lends his name to enable the accommodated
party to obtain credit or to raise money. He receives no part of the consideration for the instrument but assumes liability to the other
parties thereto because he wants to accommodate another. x x x. (Citation omitted)
25

The relation between an accommodation party and the party accommodated is, in effect, one of principal and surety the
accommodation party being the surety. It is a settled rule that a surety is bound equally and absolutely with the principal and is
deemed an original promisor and debtor from the beginning. The liability is immediate and direct. It is not a valid defense that the
26

accommodation party did not receive any valuable consideration when he executed the instrument; nor is it correct to say that the
holder for value is not a holder in due course merely because at the time he acquired the instrument, he knew that the indorser was
only an accommodation party. 27
1wphi1

Moreover, it was held in Aruego that unlike in a contract of suretyship, the liability of the accommodation party remains not only
primary but also unconditional to a holder for value, such that even if the accommodated party receives an extension of the period
for payment without the consent of the accommodation party, the latter is still liable for the whole obligation and such extension does
not release him because as far as a holder for value is concerned, he is a solidary co-debtor.

The mere fact, then, that Aglibot issued her own checks to Santia made her personally liable to the latter on her checks without the
need for Santia to first go after PLCC for the payment of its loan. It would have been otherwise had it been shown that Aglibot was a
28

mere guarantor, except that since checks were issued ostensibly in payment for the loan, the provisions of the Negotiable
Instruments Law must take primacy in application.

WHEREFORE, premises considered, the Petition for Review on Certiorari is DENIED and the Decision dated March 18, 2008 of the
Court of Appeals in CA-G.R. SP No. I 00021 is hereby AFFIRMED.

SO ORDERED.

Republic of the Philippines

SUPREME COURT

Manila

FIRST DIVISION

EUSEBIO GONZALES, G.R. No. 180257

Petitioner,
Present:

- versus - CORONA, C.J., Chairperson,

VELASCO, JR.,
NACHURA,*
DEL CASTILLO, and
PHILIPPINE COMMERCIAL AND PEREZ, JJ.
INTERNATIONAL BANK, EDNA
OCAMPO, and ROBERTO NOCEDA, Promulgated:
Respondents.
 February 23, 2011
x-----------------------------------------------------------------------------------------x

DECISION

VELASCO, JR., J.:

The Case

This is an appeal via a Petition for Review on Certiorari under Rule 45 from
the Decision[1] dated October 22, 2007 of the Court of Appeals (CA) in CA-G.R.
CV No. 74466, which denied petitioners appeal from the December 10, 2001
Decision[2] in Civil Case No. 99-1324 of the Regional Trial Court (RTC), Branch
138 in Makati City. The RTC found justification for respondents dishonor of
petitioners check and found petitioner solidarily liable with the spouses Jose and
Jocelyn Panlilio (spouses Panlilio) for the three promissory notes they executed in
favor of respondent Philippine Commercial and International Bank (PCIB).

The Facts

Petitioner Eusebio Gonzales (Gonzales) was a client of PCIB for a good 15

years before he filed the instant case. His account with PCIB was handled by
respondent Edna Ocampo (Ocampo) until she was replaced by respondent Roberto
Noceda (Noceda).

In October 1992, PCIB granted a credit line to Gonzales through the

execution of a Credit-On-Hand Loan Agreement[3] (COHLA), in which the
aggregate amount of the accounts of Gonzales with PCIB served as collateral for
and his availment limit under the credit line. Gonzales drew from said credit line
through the issuance of check. At the institution of the instant case, Gonzales had a
Foreign Currency Deposit (FCD) of USD 8,715.72 with PCIB.

On October 30, 1995, Gonzales and his wife obtained a loan for PhP
500,000. Subsequently, on December 26, 1995 and January 3, 1999, the spouses
Panlilio and Gonzales obtained two additional loans from PCIB in the amounts of
PhP 1,000,000 and PhP 300,000, respectively. These three loans amounting to PhP
1,800,000 were covered by three promissory notes.[4] To secure the loans, a real
estate mortgage (REM) over a parcel of land covered by Transfer Certificate of
Title (TCT) No. 38012 was executed by Gonzales and the spouses
Panlilio. Notably, the promissory notes specified, among others, the solidary
liability of Gonzales and the spouses Panlilio for the payment of the
loans. However, it was the spouses Panlilio who received the loan proceeds of PhP
1,800,000.

The monthly interest dues of the loans were paid by the spouses Panlilio
through the automatic debiting of their account with PCIB. But the spouses
Panlilio, from the month of July 1998, defaulted in the payment of the periodic
interest dues from their PCIB account which apparently was not maintained with
enough deposits. PCIB allegedly called the attention of Gonzales regarding the
July 1998 defaults and the subsequent accumulating periodic interest dues which
were left still left unpaid.

In the meantime, Gonzales issued a check dated September 30, 1998 in favor
of Rene Unson (Unson) for PhP 250,000 drawn against the credit line
(COHLA). However, on October 13, 1998, upon presentment for payment by
Unson of said check, it was dishonored by PCIB due to the termination by PCIB of
the credit line under COHLA on October 7, 1998 for the unpaid periodic interest
dues from the loans of Gonzales and the spouses Panlilio. PCIB likewise froze the
FCD account of Gonzales.

Consequently, Gonzales had a falling out with Unson due to the dishonor of
the check. They had a heated argument in the premises of the Philippine
Columbian Association (PCA) where they are both members, which caused great
embarrassment and humiliation to Gonzales. Thereafter, on November 5, 1998,
Unson sent a demand letter[5] to Gonzales for the PhP 250,000. And on December
3, 1998, the counsel of Unson sent a second demand letter[6] to Gonzales with the
threat of legal action. With his FCD account that PCIB froze, Gonzales was forced
to source out and pay the PhP 250,000 he owed to Unson in cash.

On January 28, 1999, Gonzales, through counsel, wrote PCIB insisting that
the check he issued had been fully funded, and demanded the return of the
proceeds of his FCD as well as damages for the unjust dishonor of the
check.[7] PCIB replied on March 22, 1999 and stood its ground in freezing
Gonzales accounts due to the outstanding dues of the loans.[8] On May 26, 1999,
Gonzales reiterated his demand, reminding PCIB that it knew well that the actual
borrowers were the spouses Panlilio and he never benefited from the proceeds of
the loans, which were serviced by the PCIB account of the spouses Panlilio.[9]
 PCIBs refusal to heed his demands compelled Gonzales to file the instant
case for damages with the RTC, on account of the alleged unjust dishonor of the
check issued in favor of Unson.

The Ruling of the RTC

After due trial, on December 10, 2001, the RTC rendered a Decision in favor
of PCIB. The decretal portion reads:

WHEREFORE, judgment is rendered as follows

(a) on the first issue, plaintiff is liable to pay defendant Bank as

principal under the promissory notes, Exhibits A, B and C;

(b) on the second issue, the Court finds that there is justification
on part of the defendant Bank to dishonor the check, Exhibit H;

(c) on the third issue, plaintiff and defendants are not entitled to
damages from each other.

No pronouncement as to costs.
SO ORDERED.[10]

The RTC found Gonzales solidarily liable with the spouses Panlilio on the
three promissory notes relative to the outstanding REM loan. The trial court found
no fault in the termination by PCIB of the COHLA with Gonzales and in freezing
the latters accounts to answer for the past due PhP 1,800,000 loan. The trial court
ruled that the dishonor of the check issued by Gonzales in favor of Unson was
proper considering that the credit line under the COHLA had already been
terminated or revoked before the presentment of the check.
Aggrieved, Gonzales appealed the RTC Decision before the CA.
The Ruling of the CA

On September 26, 2007, the appellate court rendered its Decision dismissing
Gonzales appeal and affirming in toto the RTC Decision. The fallo reads:

WHEREFORE, in view of the foregoing, the decision, dated

December 10, 2001, in Civil Case No. 99-1324 is hereby AFFIRMED in
toto.
 SO ORDERED.[11]

In dismissing Gonzales appeal, the CA, first, confirmed the RTCs findings
that Gonzales was indeed solidarily liable with the spouses Panlilio for the three
promissory notes executed for the REM loan; second, it likewise found neither
fault nor negligence on the part of PCIB in dishonoring the check issued by
Gonzales in favor of Unson, ratiocinating that PCIB was merely exercising its
rights under the contractual stipulations in the COHLA brought about by the
outstanding past dues of the REM loan and interests for which Gonzales was
solidarily liable with the spouses Panlilio to pay under the promissory notes.

Thus, we have this petition.

The Issues

Gonzales, as before the CA, raises again the following assignment of errors:

I - IN NOT CONSIDERING THAT THE LIABILITY ARISING FROM

PROMISSORY NOTES (EXHIBITS A, B AND C, PETITIONER;
EXHIBITS 1, 2 AND 3, RESPONDENT) PERTAINED TO
BORROWER JOSE MA. PANLILIO AND NOT TO APPELLANT AS
RECOGNIZED AND ACKNOWLEDGE[D] BY RESPONDENT
PHILIPPINE COMMERCIAL & INDUSTRIAL BANK
(RESPONDENT BANK).

II - IN FINDING THAT THE RESPONDENTS WERE NOT AT

FAULT NOR GUILTY OF GROSS NEGLIGENCE IN
DISHONORING PETITIONERS CHECK DATED 30 SEPTEMBER
1998 IN THE AMOUNT OF P250,000.00 FOR THE REASON
ACCOUNT CLOSED, INSTEAD OF MERELY REFER TO DRAWER
GIVEN THE FACT THAT EVEN AFTER DISHONOR,
RESPONDENT SIGNED A CERTIFICATION DATED 7 DECEMBER
1998 THAT CREDIT ON HAND (COH) LOAN AGREEMENT WAS
STILL VALID WITH A COLLATERAL OF FOREIGN CURRENCY
DEPOSIT (FCD) OF [USD] 48,715.72.
 III - IN NOT AWARDING DAMAGES AGAINST RESPONDENTS
DESPITE PRESENTATION OF CLEAR PROOF TO SUPPORT
ACTION FOR DAMAGES.[12]

The Courts Ruling

The core issues can be summarized, as follows: first, whether Gonzales is

liable for the three promissory notes covering the PhP 1,800,000 loan he made with
the spouses Panlilio where a REM over a parcel of land covered by TCT No.
38012 was constituted as security; and second, whether PCIB properly dishonored
the check of Gonzales drawn against the COHLA he had with the bank.

The petition is partly meritorious.

First Issue: Solidarily Liability on Promissory Notes

A close perusal of the records shows that the courts a quo correctly found
Gonzales solidarily liable with the spouses Panlilio for the three promissory notes.

The promissory notes covering the PhP 1,800,000 loan show the following:

(1) Promissory Note BD-090-1766-95,[13] dated October 30, 1995, for PhP
500,000 was signed by Gonzales and his wife, Jessica Gonzales;
(2) Promissory Note BD-090-2122-95,[14] dated December 26, 1995, for PhP
1,000,000 was signed by Gonzales and the spouses Panlilio; and

(3) Promissory Note BD-090-011-96,[15] dated January 3, 1996, for PhP

300,000 was signed by Gonzales and the spouses Panlilio.

Clearly, Gonzales is liable for the loans covered by the above promissory
notes. First, Gonzales admitted that he is an accommodation party which PCIB did
not dispute. In his testimony, Gonzales admitted that he merely accommodated
the spouses Panlilio at the suggestion of Ocampo, who was then handling his
accounts, in order to facilitate the fast release of the loan. Gonzales testified:

ATTY. DE JESUS:
 Now in this case you filed against the bank you mentioned there was a loan also applied
for by the Panlilios in the sum of P1.8 Million Pesos. Will you please tell this Court how
this came about?

GONZALES:
Mr. Panlilio requested his account officer . . . . at that time it is a P42.0 Million loan and
if he secures another P1.8 Million loan the release will be longer because it has to pass
to XO.

Q: After that what happened?

A: So as per suggestion since Mr. Panlilio is a good friend of mine and we co-owned the
property I agreed initially to use my name so that the loan can be utilized
immediately by Mr. Panlilio.

Q: Who is actually the borrower of this P1.8 Million Pesos?

A: Well, in paper me and Mr. Panlilio.

Q: Who received the proceeds of said loan?

A: Mr. Panlilio.

Q: Do you have any proof that it was Mr. Panlilio who actually received the proceeds of
this P1.8 Million Pesos loan?
A: A check was deposited in the account of Mr. Panlilio.[16]

xxxx

Q: By the way upon whose suggestion was the loan of Mr. Panlilio also placed under
your name initially?
A: Well it was actually suggested by the account officer at that time Edna Ocampo.
Q: How about this Mr. Rodolfo Noceda?
A: As you look at the authorization aspect of the loan Mr. Noceda is the boss of Edna so
he has been familiar with my account ever since its inception.

Q: So these two officers Ocampo and Noceda knew that this was actually the account of
Mr. Panlilio and not your account?
A: Yes, sir. In fact even if there is a change of account officer they are always informing
me that the account will be debited to Mr. Panlilios account.[17]

Moreover, the first note for PhP 500,000 was signed by Gonzales and his
wife as borrowers, while the two subsequent notes showed the spouses Panlilio
sign as borrowers with Gonzales. It is, thus, evident that Gonzales signed, as
borrower, the promissory notes covering the PhP 1,800,000 loan despite not
receiving any of the proceeds.
 Second, the records of PCIB indeed bear out, and was admitted by Noceda,
that the PhP 1,800,000 loan proceeds went to the spouses Panlilio, thus:

ATTY. DE JESUS: [on Cross-Examination]

Is it not a fact that as far as the records of the bank [are] concerned the proceeds of the
1.8 million loan was received by Mr. Panlilio?

NOCEDA:
Yes sir.[18]

The fact that the loans were undertaken by Gonzales when he signed as
borrower or co-borrower for the benefit of the spouses Panlilioas shown by the
fact that the proceeds went to the spouses Panlilio who were servicing or paying
the monthly duesis beside the point. For signing as borrower and co-borrower on
the promissory notes with the proceeds of the loans going to the spouses Panlilio,
Gonzales has extended an accommodation to said spouses.

Third, as an accommodation party, Gonzales is solidarily liable with the

spouses Panlilio for the loans. In Ang v. Associated Bank,[19] quoting the definition
of an accommodation party under Section 29 of the Negotiable Instruments Law,
the Court cited that an accommodation party is a person who has signed the
instrument as maker, drawer, acceptor, or indorser, without receiving value
therefor, and for the purpose of lending his name to some other person.[20] The
Court further explained:

[A]n accommodation party is one who meets all the three requisites, viz: (1) he
must be a party to the instrument, signing as maker, drawer, acceptor, or indorser; (2)
he must not receive value therefor; and (3) he must sign for the purpose of lending his
name or credit to some other person. An accommodation party lends his name to
enable the accommodated party to obtain credit or to raise money; he receives no part
of the consideration for the instrument but assumes liability to the other party/ies
thereto. The accommodation party is liable on the instrument to a holder for value even
though the holder, at the time of taking the instrument, knew him or her to be merely
an accommodation party, as if the contract was not for accommodation.

As petitioner acknowledged it to be, the relation between an accommodation

party and the accommodated party is one of principal and suretythe accommodation
party being the surety. As such, he is deemed an original promisor and debtor from the
beginning; he is considered in law as the same party as the debtor in relation to
whatever is adjudged touching the obligation of the latter since their liabilities are
interwoven as to be inseparable. Although a contract of suretyship is in essence
 accessory or collateral to a valid principal obligation, the suretys liability to the creditor
is immediate, primary and absolute; he is directly and equally bound with the
principal. As an equivalent of a regular party to the undertaking, a surety becomes liable
to the debt and duty of the principal obligor even without possessing a direct or
personal interest in the obligations nor does he receive any benefit therefrom.[21]

Thus, the knowledge, acquiescence, or even demand by Ocampo for an

accommodation by Gonzales in order to extend the credit or loan of PhP
1,800,000 to the spouses Panlilio does not exonerate Gonzales from liability on
the three promissory notes.

Fourth, the solidary liability of Gonzales is clearly stipulated in the

promissory notes which uniformly begin, For value received, the undersigned (the
BORROWER) jointly and severally promise to pay x x x. Solidary liability cannot be
presumed but must be established by law or contract.[22] Article 1207 of the Civil
Code pertinently states that there is solidary liability only when the obligation
expressly so states, or when the obligation requires solidarity. This is true in the
instant case where Gonzales, as accommodation party, is immediately, equally,
and absolutely bound with the spouses Panlilio on the promissory notes which
indubitably stipulated solidary liability for all the borrowers. Moreover, the three
promissory notes serve as the contract between the parties. Contracts have the
force of law between the parties and must be complied with in good faith.[23]

Second Issue: Improper Dishonor of Check

Having ruled that Gonzales is solidarily liable for the three promissory
notes, We shall now touch upon the question of whether it was proper for PCIB to
dishonor the check issued by Gonzales against the credit line under the COHLA.

We answer in the negative.

As a rule, an appeal by certiorari under Rule 45 of the Rules of Court is

limited to review of errors of law.[24] The factual findings of the trial court,
especially when affirmed by the appellate court, are generally binding on us
unless there was a misapprehension of facts or when the inference drawn from
the facts was manifestly mistaken.[25]The instant case falls within the exception.
 The courts a quo found and held that there was a proper dishonor of the
PhP 250,000 check issued by Gonzales against the credit line, because the credit
line was already closed prior to the presentment of the check by Unson; and the
closing of the credit line was likewise proper pursuant to the stipulations in the
promissory notes on the banks right to set off or apply all moneys of the debtor in
PCIBs hand and the stipulations in the COHLA on the PCIBs right to terminate the
credit line on grounds of default by Gonzales.

Gonzales argues otherwise, pointing out that he was not informed about
the default of the spouses Panlilio and that the September 21, 1998 account
statement of the credit line shows a balance of PhP 270,000 which was likewise
borne out by the December 7, 1998 PCIBs certification that he has USD 8,715.72
in his FCD account which is more than sufficient collateral to guarantee the PhP
250,000 check, dated September 30, 1998, he issued against the credit line.

A careful scrutiny of the records shows that the courts a quo committed
reversible error in not finding negligence by PCIB in the dishonor of the PhP
250,000 check.

First. There was no proper notice to Gonzales of the default and

delinquency of the PhP 1,800,000 loan. It must be borne in mind that while
solidarily liable with the spouses Panlilio on the PhP 1,800,000 loan covered by
the three promissory notes, Gonzales is only an accommodation party and as such
only lent his name and credit to the spouses Panlilio. While not exonerating his
solidary liability, Gonzales has a right to be properly apprised of the default or
delinquency of the loan precisely because he is a co-signatory of the promissory
notes and of his solidary liability.

We note that it is indeed understandable for Gonzales to push the spouses

Panlilio to pay the outstanding dues of the PhP 1,800,000 loan, since he was only
an accommodation party and was not personally interested in the loan. Thus, a
meeting was set by Gonzales with the spouses Panlilio and the PCIB officers,
Noceda and Ocampo, in the spouses Panlilios jewelry shop in SM Megamall on
October 5, 1998. Unfortunately, the meeting did not push through due to the
heavy traffic Noceda and Ocampo encountered.
 Such knowledge of the default by Gonzales was, however, not enough to
properly apprise Gonzales about the default and the outstanding dues. Verily, it is
not enough to be merely informed to pay over a hundred thousand without being
formally apprised of the exact aggregate amount and the corresponding dues
pertaining to specific loans and the dates they became due.

Gonzales testified that he was not duly notified about the outstanding
interest dues of the loan:

ATTY. DE JESUS:
Now when Mr. Panlilios was encountering problems with the bank did the defendant
bank [advise] you of any problem with the same account?

GONZALES:
They never [advised] me in writing.

Q: How did you come to know that there was a problem?

A: When my check bounced sir.[26]

On the other hand, the PCIB contends otherwise, as Corazon Nepomuceno

testified:

ATTY. PADILLA:
Can you tell this Honorable Court what is it that you told Mr. Gonzales when you spoke
to him at the celphone?

NEPOMUCENO:
I just told him to update the interest so that we would not have to cancel the COH Line
and he could withdraw the money that was in the deposit because technically, if an
account is past due we are not allowed to let the client withdraw funds because they
are allowed to offset funds so, just to help him get his money, just to update the interest
so that we could allow him to withdraw.
Q: Withdraw what?
A: His money on the COH, whatever deposit he has with us.

Q: Did you inform him that if he did not update the interest he would not be able to
withdraw his money?
A: Yes sir, we will be forced to hold on to any assets that he has with us so thats why we
suggested just to update the interest because at the end of everything, he
would be able to withdraw more funds than the interest that the money he
would be needed to update the interest.[27]
 From the foregoing testimonies, between the denial of Gonzales and the
assertion by PCIB that Gonzales was properly apprised, we find for Gonzales. We
find the testimonies of the former PCIB employees to be self-serving and tenuous
at best, for there was no proper written notice given by the bank. The record is
bereft of any document showing that, indeed, Gonzales was formally informed by
PCIB about the past due periodic interests.

PCIB is well aware and did not dispute the fact that Gonzales is an
accommodation party. It also acted in accordance with such fact by releasing the
proceeds of the loan to the spouses Panlilio and likewise only informed the
spouses Panlilio of the interest dues. The spouses Panlilio, through their
account[28] with PCIB, were paying the periodic interest dues and were the ones
periodically informed by the bank of the debiting of the amounts for the periodic
interest payments. Gonzales never paid any of the periodic interest dues. PCIBs
Noceda admitted as much in his cross-examination:

ATTY. DE JESUS: [on Cross-Examination]

And there was no instance that Mr. Gonzales ever made even interest for this loan, is it
not, its always Mr. Panlilio who was paying the interest for this loan?

NOCEDA:
Yes sir.[29]

Indeed, no evidence was presented tending to show that Gonzales was

periodically sent notices or notified of the various periodic interest dues covering
the three promissory notes. Neither do the records show that Gonzales was
aware of amounts for the periodic interests and the payment for them. Such were
serviced by the spouses Panlilio.

Thus, PCIB ought to have notified Gonzales about the status of the default
or delinquency of the interest dues that were not paid starting July 1998. And
such notification must be formal or in written form considering that the
outstanding periodic interests became due at various dates, i.e., on July 8, 17, and
28, 1998, and the various amounts have to be certain so that Gonzales is not only
properly apprised but is given the opportunity to pay them being solidarily liable
for the loans covered by the promissory notes.
 It is the bank which computes these periodic interests and such dues must
be put into writing and formally served to Gonzales if he were asked to pay them,
more so when the payments by the spouses Panlilio were charged through the
account of the spouses Panlilio where the interest dues were simply debited. Such
arrangement did not cover Gonzales bank account with PCIB, since he is only an
accommodation party who has no personal interest in the PhP 1,800,000
loan. Without a clear and determinate demand through a formal written notice
for the exact periodic interest dues for the loans, Gonzales cannot be expected to
pay for them.

In business, more so for banks, the amounts demanded from the debtor or
borrower have to be definite, clear, and without ambiguity. It is not sufficient
simply to be informed that one must pay over a hundred thousand aggregate
outstanding interest dues without clear and certain figures. Thus, We find PCIB
negligent in not properly informing Gonzales, who is an accommodation party,
about the default and the exact outstanding periodic interest dues. Without being
properly apprised, Gonzales was not given the opportunity to properly act on
them.

It was only through a letter[30] sent by PCIB dated October 2, 1998 but
incongruously showing the delinquencies of the PhP 1,800,000 loan at a much
later date, i.e., as of October 31, 1998, when Gonzales was formally apprised by
PCIB. In it, the interest due was PhP 106,1616.71 and penalties for the unpaid
interest due of PhP 64,766.66, or a total aggregate due of PhP 171,383.37. But it
is not certain and the records do not show when the letter was sent and when
Gonzales received it. What is clear is that such letter was belatedly sent by PCIB
and received by Gonzales after the fact that the latters FCD was already frozen,
his credit line under the COHLA was terminated or suspended, and his PhP
250,000 check in favor of Unson was dishonored.

And way much later, or on May 4, 1999, was a demand letter from the
counsel of PCIB sent to Gonzales demanding payment of the PhP 1,800,000
loan. Obviously, these formal written notices sent to Gonzales were too late in
the day for Gonzales to act properly on the delinquency and he already suffered
the humiliation and embarrassment from the dishonor of his check drawn against
the credit line.
 To reiterate, a written notice on the default and deficiency of the PhP
1,800,000 loan covered by the three promissory notes was required to apprise
Gonzales, an accommodation party. PCIB is obliged to formally inform and apprise
Gonzales of the defaults and the outstanding obligations, more so when PCIB was
invoking the solidary liability of Gonzales. This PCIB failed to do.

Second. PCIB was grossly negligent in not giving prior notice to Gonzales
about its course of action to suspend, terminate, or revoke the credit line, thereby
violating the clear stipulation in the COHLA.

The COHLA, in its effectivity clause, clearly provides:

4. EFFECTIVITY The COH shall be effective for a period of one (1) year
commencing from the receipt by the CLIENT of the COH checkbook issued by the BANK,
subject to automatic renewals for same periods unless terminated by the BANK upon
prior notice served on CLIENT.[31] (Emphasis ours.)

It is undisputed that the bank unilaterally revoked, suspended, and

terminated the COHLA without giving Gonzales prior notice as required by the
above stipulation in the COHLA. Noceda testified on cross-examination on the
Offering Ticket[32] recommending the termination of the credit line, thus:

ATTY. DE JESUS: [on Cross-Examination]

This Exhibit 8, you have not furnished at anytime a copy to the plaintiff Mr. Gonzales is it
not?

NOCEDA:
No sir but verbally it was relayed to him.

Q: But you have no proof that Mr. Gonzales came to know about this Exhibit 8?
A: It was relayed to him verbally.

Q: But there is no written proof?

A: No sir.

Q: And it is only now that you claim that it was verbally relayed to him, its only now
when you testified in Court?
A: Before . . .

Q: To whom did you relay this information?

A: It was during the time that we were going to Megamall, it was relayed by Liza that he
has to pay his obligations or else it will adversely affect the status of the
account.[33]
On the other hand, the testimony of Corazon Nepomuceno shows:

ATTY. DE JESUS: [on Cross-Examination]

Now we go to the other credit facility which is the credit on hand extended solely of
course to Mr. Eusebio Gonzales who is the plaintiff here, Mr. Panlilio is not included in
this credit on hand facility. Did I gather from you as per your Exhibit 7 as of October 2,
1998 you were the one who recommended the cancellation of this credit on hand
facility?

NEPOMUCENO:
It was recommended by the account officer and I supported it.

Q: And you approved it?

A: Yes sir.

Q: Did you inform Mr. Gonzales that you have already cancelled his credit on hand facility?
A: As far as I know, it is the account officer who will inform him.

Q: But you have no record that he was informed?

A: I dont recall and we have to look at the folder to determine if they were informed.

Q: If you will notice, this letter . . . what do you call this letter of yours?
A: That is our letter advising them or reminding them of their unpaid interest and that if
he is able to update his interest he can extend the promissory note or
restructure the outstanding.

Q: Now, I call your attention madam witness, there is nothing in this letter to the clients
advising them or Mr. Gonzales that his credit on hand facility was already
cancelled?
A: I dont know if there are other letters aside from this.

Q: So in this letter there is nothing to inform or to make Mr. Eusebio aware that his
credit on hand facility was already cancelled?
A: No actually he can understand it from the last sentence. If you will be able to update
your outstanding interest, we can apply the extention of your promissory note
so in other words we are saying that if you dont, you cannot extend the
promissory note.

Q: You will notice that the subject matter of this October 2, 1998 letter is only the loan
of 1.8 million is it not, as you can see from the letter? Okay?
A: Ah . . .

Q: Okay. There is nothing there that will show that that also refers to the credit on hand
facility which was being utilized by Mr. Gonzales is it not?
A: But I dont know if there are other letters that are not presented to me now.[34]
 The foregoing testimonies of PCIB officers clearly show that not only did
PCIB fail to give prior notice to Gonzales about the Offering Ticket for the process
of termination, suspension, or revocation of the credit line under the COHLA, but
PCIB likewise failed to inform Gonzales of the fact that his credit line has been
terminated. Thus, we find PCIB grossly negligent in the termination, revocation, or
suspension of the credit line under the COHLA. While PCIB invokes its right on the
so-called cross default provisions, it may not with impunity ignore the rights of
Gonzales under the COHLA.

Indeed, the business of banking is impressed with public interest and great
reliance is made on the banks sworn profession of diligence and meticulousness
in giving irreproachable service. Like a common carrier whose business is imbued
with public interest, a bank should exercise extraordinary diligence to negate its
liability to the depositors.[35] In this instance, PCIB is sorely remiss in the diligence
required in treating with its client, Gonzales. It may not wantonly exercise its
rights without respecting and honoring the rights of its clients.

Art. 19 of the New Civil Code clearly provides that [e]very person must, in
the exercise of his rights and in the performance of his duties, act with justice,
give everyone his due, and observe honesty and good faith. This is the basis of the
principle of abuse of right which, in turn, is based upon the maxim suum jus
summa injuria (the abuse of right is the greatest possible wrong).[36]

In order for Art. 19 to be actionable, the following elements must be

present: (1) the existence of a legal right or duty, (2) which is exercised in bad
faith, and (3) for the sole intent of prejudicing or injuring another.[37] We find that
such elements are present in the instant case. The effectivity clause of the COHLA
is crystal clear that termination of the COH should be done only upon prior notice
served on the CLIENT. This is the legal duty of PCIBto inform Gonzales of the
termination. However, as shown by the above testimonies, PCIB failed to give
prior notice to Gonzales.

Malice or bad faith is at the core of Art. 19. Malice or bad faith implies a
conscious and intentional design to do a wrongful act for a dishonest purpose or
moral obliquity.[38] In the instant case, PCIB was able to send a letter advising
Gonzales of the unpaid interest on the loans[39] but failed to mention anything
about the termination of the COHLA. More significantly, no letter was ever sent to
him about the termination of the COHLA. The failure to give prior notice on the
part of PCIB is already prima facie evidence of bad faith.[40] Therefore, it is
abundantly clear that this case falls squarely within the purview of the principle of
abuse of rights as embodied in Art. 19.

Third. There is no dispute on the right of PCIB to suspend, terminate, or

revoke the COHLA under the cross default provisions of both the promissory
notes and the COHLA. However, these cross default provisions do not confer
absolute unilateral right to PCIB, as they are qualified by the other stipulations in
the contracts or specific circumstances, like in the instant case of an
accommodation party.

The promissory notes uniformly provide:

The lender is hereby authorized, at its option and without notice, to set off or
apply to the payment of this Note any and all moneys which may be in its hands on
deposit or otherwise belonging to the Borrower. The Borrower irrevocably appoint/s
the Lender, effective upon the nonpayment of this Note on demand/at maturity or upon
the happening of any of the events of default, but without any obligation on the Lenders
part should it choose not to perform this mandate, as the attorney-in-fact of the
Borrower, to sell and dispose of any property of the Borrower, which may be in the
Lenders possession by public or private sale, and to apply the proceeds thereof to the
payment of this Note; the Borrower, however, shall remain liable for any
deficiency.[41] (Emphasis ours.)

The above provisos are indeed qualified with the specific circumstance of
an accommodation party who, as such, has not been servicing the payment of the
dues of the loans, and must first be properly apprised in writing of the
outstanding dues in order to answer for his solidary obligation.

The same is true for the COHLA, which in its default clause provides:
16. DEFAULT The CLIENT shall be considered in default under the COH if any of the
following events shall occur:

1. x x x
 2. Violation of the terms and conditions of this Agreement or any contract of the CLIENT
with the BANK or any bank, persons, corporations or entities for the payment of
borrowed money, or any other event of default in such contracts.[42]

The above pertinent default clause must be read in conjunction with the
effectivity clause (No. 4 of the COHLA, quoted above), which expressly provides
for the right of client to prior notice. The rationale is simple: in cases where the
bank has the right to terminate, revoke, or suspend the credit line, the client must
be notified of such intent in order for the latter to act accordinglywhether to
correct any ground giving rise to the right of the bank to terminate the credit line
and to dishonor any check issued or to act in accord with such termination, i.e.,
not to issue any check drawn from the credit line or to replace any checks that
had been issued. This, the bankwith gross negligencefailed to accord Gonzales, a
valued client for more than 15 years.

Fourth. We find the testimony[43] of Ocampo incredible on the point that

the principal borrower of the PhP 1,800,000 loan covered by the three promissory
notes is Gonzales for which the bank officers had special instructions to grant and
that it was through the instructions of Gonzales that the payment of the periodic
interest dues were debited from the account of the spouses Panlilio.

For one, while the first promissory note dated October 30, 1995 indeed
shows Gonzales as the principal borrower, the other promissory notes dated
December 26, 1995 and January 3, 1996 evidently show that it was Jose Panlilio
who was the principal borrower with Gonzales as co-borrower. For another,
Ocampo cannot feign ignorance on the arrangement of the payments by the
spouses Panlilio through the debiting of their bank account. It is incredulous that
the payment arrangement is merely at the behest of Gonzales and at a mere
verbal directive to do so. The fact that the spouses Panlilio not only received the
proceeds of the loan but were servicing the periodic interest dues reinforces the
fact that Gonzales was only an accommodation party.

Thus, due to PCIBs negligence in not giving Gonzalesan accommodation

partyproper notice relative to the delinquencies in the PhP 1,800,000 loan
covered by the three promissory notes, the unjust termination, revocation, or
suspension of the credit line under the COHLA from PCIBs gross negligence in not
honoring its obligation to give prior notice to Gonzales about such termination
and in not informing Gonzales of the fact of such termination, treating Gonzales
account as closed and dishonoring his PhP 250,000 check, was certainly a reckless
act by PCIB. This resulted in the actual injury of PhP 250,000 to Gonzales whose
FCD account was frozen and had to look elsewhere for money to pay Unson.

With banks, the degree of diligence required is more than that of a good
father of the family considering that the business of banking is imbued with public
interest due to the nature of their function. The law imposes on banks a high
degree of obligation to treat the accounts of its depositors with meticulous care,
always having in mind the fiduciary nature of banking.[44] Had Gonzales been
properly notified of the delinquencies of the PhP 1,800,000 loan and the process
of terminating his credit line under the COHLA, he could have acted accordingly
and the dishonor of the check would have been avoided.

Third Issue: Award of Damages

The banking system has become an indispensable institution in the modern

world and plays a vital role in the economic life of every civilized societybanks
have attained a ubiquitous presence among the people, who have come to regard
them with respect and even gratitude and most of all, confidence, and it is for this
reason, banks should guard against injury attributable to negligence or bad faith
on its part.[45]

In the instant case, Gonzales suffered from the negligence and bad faith of
PCIB. From the testimonies of Gonzales witnesses, particularly those of
Dominador Santos[46]and Freddy Gomez,[47] the embarrassment and humiliation
Gonzales has to endure not only before his former close friend Unson but more
from the members and families of his friends and associates in the PCA, which he
continues to experience considering the confrontation he had with Unson and the
consequent loss of standing and credibility among them from the fact of the
apparent bouncing check he issued. Credit is very important to businessmen and
its loss or impairment needs to be recognized and compensated.[48]

The termination of the COHLA by PCIB without prior notice and the
subsequent dishonor of the check issued by Gonzales constitute acts of contra
bonus mores. Art. 21 of the Civil Code refers to such acts when it says, Any person
who willfully causes loss or injury to another in a manner that is contrary to
morals, good customs or public policy shall compensate the latter for damage.
 Accordingly, this Court finds that such acts warrant the payment of
indemnity in the form of nominal damages. Nominal damages are recoverable
where a legal right is technically violated and must be vindicated against an
invasion that has produced no actual present loss of any kind x x x.[49] We further
explained the nature of nominal damages in Almeda v. Cario:
x x x Its award is thus not for the purpose of indemnification for a loss but for
the recognition and vindication of a right. Indeed, nominal damages are damages in
name only and not in fact. When granted by the courts, they are not treated as an
equivalent of a wrong inflicted but simply a recognition of the existence of a technical
injury. A violation of the plaintiffs right, even if only technical, is sufficient to support an
award of nominal damages. Conversely, so long as there is a showing of a violation of
the right of the plaintiff, an award of nominal damages is proper.[50] (Emphasis Ours.)

In the present case, Gonzales had the right to be informed of the accrued
interest and most especially, for the suspension of his COHLA. For failure to do so,
the bank is liable to pay nominal damages. The amount of such damages is
addressed to the sound discretion of the court, taking into account the relevant
circumstances.[51] In this case, the Court finds that the grant of PhP 50,000 as
nominal damages is proper.

Moreover, as We held in MERALCO v. CA,[52] failure to give prior notice

when required, such as in the instant case, constitutes a breach of contract and is
a clear violation of Art. 21 of the Code. In cases such as this, Art. 2219 of the Code
provides that moral damages may be recovered in acts referred to in its Art. 21.
Further, Art. 2220 of the Code provides that [w]illful injury to property may be a
legal ground for awarding moral damages if the court should find that, under the
circumstances, such damages are justly due. The same rule applies to breaches of
contract where the defendant acted fraudulently or in bad faith. Similarly, every
person who, contrary to law, willfully or negligently causes damage to another,
shall indemnify the latter for the same.[53] Evidently, Gonzales is entitled to
recover moral damages.

Even in the absence of malice or bad faith, a depositor still has the right to
recover reasonable moral damages, if the depositor suffered mental anguish,
serious anxiety, embarrassment, and humiliation.[54] Although incapable of
pecuniary estimation, moral damages are certainly recoverable if they are the
proximate result of the defendants wrongful act or omission. The factual
antecedents bolstered by undisputed testimonies likewise show the mental
anguish and anxiety Gonzales had to endure with the threat of Unson to file a
suit. Gonzales had to pay Unson PhP 250,000, while his FCD account in PCIB was
frozen, prompting Gonzales to demand from PCIB and to file the instant suit.

The award of moral damages is aimed at a restoration within the limits of

the possible, of the spiritual status quo anteit must always reasonably
approximate the extent of injury and be proportional to the wrong
committed.[55] Thus, an award of PhP 50,000 is reasonable moral damages for the
unjust dishonor of the PhP 250,000 which was the proximate cause of the
consequent humiliation, embarrassment, anxiety, and mental anguish suffered by
Gonzales from his loss of credibility among his friends, colleagues and peers.

Furthermore, the initial carelessness of the banks omission in not properly

informing Gonzales of the outstanding interest duesaggravated by its gross
neglect in omitting to give prior notice as stipulated under the COHLA and in not
giving actual notice of the termination of the credit linejustifies the grant of
exemplary damages of PhP 10,000. Such an award is imposed by way of example
or correction for the public good.

Finally, an award for attorneys fees is likewise called for from PCIBs
negligence which compelled Gonzales to litigate to protect his interest. In
accordance with Art. 2208(1) of the Code, attorneys fees may be recovered when
exemplary damages are awarded. We find that the amount of PhP 50,000 as
attorneys fees is reasonable.

WHEREFORE, this petition is PARTLY GRANTED. Accordingly, the CA

Decision dated October 22, 2007 in CA-G.R. CV No. 74466 is
hereby REVERSED and SET ASIDE. The Philippine Commercial and International
Bank (now Banco De Oro) is ORDERED to pay Eusebio Gonzales PhP 50,000 as
nominal damages, PhP 50,000 as moral damages, PhP 10,000 as exemplary
damages, and PhP 50,000 as attorneys fees.

No pronouncement as to costs.

SO ORDERED.
 FIRST DIVISION
TOMAS ANG, G.R. No. 146511
Petitioner,
Present:
PUNO, C.J., Chairperson,
- versus - SANDOVAL-GUTIERREZ,
CORONA,
AZCUNA, and
GARCIA, JJ.
ASSOCIATED BANK AND
ANTONIO ANG ENG LIONG, Promulgated:
Respondents.
September 5, 2007

X -------------------------------------------------------------------------------------- X

DECISION
AZCUNA, J.:
This petition for certiorari under Rule 45 of the Rules on Civil Procedure
seeks to review the October 9, 2000 Decision[1] and December 26, 2000
Resolution[2] of the Court of Appeals in CA-G.R. CV No. 53413 which reversed
and set aside the January 5, 1996 Decision[3] of the Regional Trial Court, Branch
16, Davao City, in Civil Case No. 20,299-90, dismissing the complaint filed by
respondents for collection of a sum of money.

On August 28, 1990, respondent Associated Bank (formerly Associated

Banking Corporation and now known as United Overseas Bank Philippines) filed a
collection suit against Antonio Ang Eng Liong and petitioner Tomas Ang for the
two (2) promissory notes that they executed as principal debtor and co-maker,
respectively.

In the Complaint,[4] respondent Bank alleged that on October 3 and 9, 1978,

the defendants obtained a loan of P50,000, evidenced by a promissory note bearing
PN-No. DVO-78-382, and P30,000, evidenced by a promissory note bearing PN-
No. DVO-78-390. As agreed, the loan would be payable, jointly and severally,
on January 31, 1979 and December 8, 1978, respectively. In addition, subsequent
amendments[5] to the promissory notes as well as the disclosure
statements[6] stipulated that the loan would earn 14% interest rate per annum, 2%
service charge per annum, 1% penalty charge per month from due date until fully
paid, and attorneys fees equivalent to 20% of the outstanding obligation.

Despite repeated demands for payment, the latest of which were

on September 13, 1988 and September 9, 1986, on Antonio Ang Eng Liong and
Tomas Ang, respectively, respondent Bank claimed that the defendants failed and
refused to settle their obligation, resulting in a total indebtedness of P539,638.96 as
of July 31, 1990, broken down as follows:

PN-No. DVO-78-382 PN-No. DVO-78-390

Outstanding Balance P50,000.00 P30,000.00

Add Past due charges for 4,199 Past due charges for 4,253
days (from 01-31-79 to 07-31- days (from 12-8-78 to 07-31-
90) 90)
14% Interest P203,538.98 P125,334.41
2% Service Charge P11,663.89 P7,088.34
12% Overdue Charge P69,983.34 P42,530.00
Total P285,186.21 P174,952.75
Less: Charges paid P500.00 None
Amount Due P334,686.21 P204,952.75

In his Answer,[7] Antonio Ang Eng Liong only admitted to have secured a
loan amounting to P80,000. He pleaded though that the bank be ordered to submit
a more reasonable computation considering that there had been no correct and
reasonable statement of account sent to him by the bank, which was allegedly
collecting excessive interest, penalty charges, and attorneys fees despite knowledge
that his business was destroyed by fire, hence, he had no source of income for
several years.

For his part, petitioner Tomas Ang filed an Answer with Counterclaim and
Cross-claim.[8] He interposed the affirmative defenses that: the bank is not the real
party in interest as it is not the holder of the promissory notes, much less a holder
for value or a holder in due course; the bank knew that he did not receive any
valuable consideration for affixing his signatures on the notes but merely lent his
name as an accommodation party; he accepted the promissory notes in blank, with
only the printed provisions and the signature of Antonio Ang Eng Liong appearing
therein; it was the bank which completed the notes upon the orders, instructions, or
representations of his co-defendant; PN-No. DVO-78-382 was completed in excess
of or contrary to the authority given by him to his co-defendant who represented
that he would only borrow P30,000 from the bank; his signature in PN-No. DVO-
78-390 was procured through fraudulent means when his co-defendant claimed
that his first loan did not push through; the promissory notes did not indicate in
what capacity he was intended to be bound; the bank granted his co-defendant
successive extensions of time within which to pay, without his (Tomas Ang)
knowledge and consent; the bank imposed new and additional stipulations on
interest, penalties, services charges and attorneys fees more onerous than the terms
of the notes, without his knowledge and consent, in the absence of legal and factual
basis and in violation of the Usury Law; the bank caused the inclusion in the
promissory notes of stipulations such as waiver of presentment for payment and
notice of dishonor which are against public policy; and the notes had been
impaired since they were never presented for payment and demands were made
only several years after they fell due when his co-defendant could no longer pay
them.

Regarding his counterclaim, Tomas Ang argued that by reason of the banks
acts or omissions, it should be held liable for the amount of P50,000 for attorneys
fees and expenses of litigation. Furthermore, on his cross-claim against Antonio
Ang Eng Liong, he averred that he should be reimbursed by his co-defendant any
and all sums that he may be adjudged liable to pay, plus P30,000, P20,000
and P50,000 for moral and exemplary damages, and attorneys fees, respectively.

In its Reply,[9] respondent Bank countered that it is the real party in interest
and is the holder of the notes since the Associated Banking Corporation and
Associated Citizens Bank are its predecessors-in-interest. The fact that Tomas Ang
never received any moneys in consideration of the two (2) loans and that such was
known to the bank are immaterial because, as an accommodation maker, he is
considered as a solidary debtor who is primarily liable for the payment of the
promissory notes. Citing Section 29 of the Negotiable Instruments Law (NIL), the
bank posited that absence or failure of consideration is not a matter of defense;
neither is the fact that the holder knew him to be only an accommodation party.

Respondent Bank likewise retorted that the promissory notes were

completely filled up at the time of their delivery. Assuming that such was not the
case, Sec. 14 of the NIL provides that the bank has the prima facie authority to
complete the blank form. Moreover, it is presumed that one who has signed as a
maker acted with care and had signed the document with full knowledge of its
content. The bank noted that Tomas Ang is a prominent businessman
in Davao City who has been engaged in the auto parts business for several years,
hence, certainly he is not so nave as to sign the notes without knowing or bothering
to verify the amounts of the loans covered by them. Further, he is already in
estoppel since despite receipt of several demand letters there was not a single
protest raised by him that he signed for only one note in the amount of P30,000.

It was denied by the bank that there were extensions of time for payment
accorded to Antonio Ang Eng Liong. Granting that such were the case, it said that
the same would not relieve Tomas Ang from liability as he would still be liable for
the whole obligation less the share of his co-debtor who received the extended
term.

The bank also asserted that there were no additional or new stipulations
imposed other than those agreed upon. The penalty charge, service charge, and
attorneys fees were reflected in the amendments to the promissory notes and
disclosure statements. Reference to the Usury Law was misplaced as usury is
legally non-existent; at present, interest can be charged depending on the
agreement of the lender and the borrower.

Lastly, the bank contended that the provisions on presentment for payment
and notice of dishonor were expressly waived by Tomas Ang and that such waiver
is not against public policy pursuant to Sections 82 (c) and 109 of the NIL. In fact,
there is even no necessity therefor since being a solidary debtor he is absolutely
required to pay and primarily liable on both promissory notes.

On October 19, 1990, the trial court issued a preliminary pre-trial order
directing the parties to submit their respective pre-trial guide.[10] When Antonio
Ang Eng Liong failed to submit his brief, the bank filed an ex-parte motion to
declare him in default.[11] Per Order of November 23, 1990, the court granted the
motion and set the ex-partehearing for the presentation of the banks
evidence.[12] Despite Tomas Angs motion[13] to modify the Order so as to exclude
or cancel the ex-parte hearing based on then Sec. 4, Rule 18 of the old Rules of
Court (now Sec. 3[c.], Rule 9 of the Revised Rules on Civil Procedure), the
hearing nonetheless proceeded.[14]

Eventually, a decision[15] was rendered by the trial court on February 21, 1991. For
his supposed bad faith and obstinate refusal despite several demands from the
bank, Antonio Ang Eng Liong was ordered to pay the principal amount of P80,000
plus 14% interest per annum and 2% service charge per annum. The overdue
penalty charge and attorneys fees were, however, reduced for being excessive,
thus:

WHEREFORE, judgment is rendered against defendant Antonio

Ang Eng Liong and in favor of plaintiff, ordering the former to pay the
latter:

On the first cause of action:

1) the amount of P50,000.00 representing the principal

obligation with 14% interest per annum from June 27,
1983 with 2% service charge and 6% overdue penalty
charges per annum until fully paid;

2) P11,663.89 as accrued service charge; and

3) P34,991.67 as accrued overdue penalty charge.

On the second cause of action:

1) the amount of P50,000.00 (sic) representing the principal

account with 14% interest from June 27, 1983 with 2%
service charge and 6% overdue penalty charges per annum
until fully paid;
2) P7,088.34 representing accrued service charge;
3) P21,265.00 as accrued overdue penalty charge;
4) the amount of P10,000.00 as attorneys fees; and
5) the amount of P620.00 as litigation expenses and to pay
the costs.

SO ORDERED.[16]

The decision became final and executory as no appeal was taken therefrom.
Upon the banks ex-parte motion, the court accordingly issued a writ of execution
on April 5, 1991.[17]

Thereafter, on June 3, 1991, the court set the pre-trial conference between
the bank and Tomas Ang,[18] who, in turn, filed a Motion to Dismiss[19] on the
ground of lack of jurisdiction over the case in view of the alleged finality of the
February 21, 1991 Decision. He contended that Sec. 4, Rule 18 of the old Rules
sanctions only one judgment in case of several defendants, one of whom is
declared in default. Moreover, in his Supplemental Motion to Dismiss,[20] Tomas
Ang maintained that he is released from his obligation as a solidary guarantor and
accommodation party because, by the banks actions, he is now precluded from
asserting his cross-claim against Antonio Ang Eng Liong, upon whom a final and
executory judgment had already been issued.

The court denied the motion as well as the motion for reconsideration
thereon.[21] Tomas Ang subsequently filed a petition for certiorari and prohibition
before this Court, which, however, resolved to refer the same to the Court of
Appeals.[22] In accordance with the prayer of Tomas Ang, the appellate court
promulgated its Decision on January 29, 1992 in CA G.R. SP No. 26332, which
annulled and set aside the portion of the Order dated November 23, 1990 setting
the ex-parte presentation of the banks evidence against Antonio Ang Eng Liong,
the Decision dated February 21, 1991 rendered against him based on such
evidence, and the Writ of Execution issued on April 5, 1991.[23]

Trial then ensued between the bank and Tomas Ang. Upon the latters motion
during the pre-trial conference, Antonio Ang Eng Liong was again declared in
default for his failure to answer the cross-claim within the reglementary period.[24]

When Tomas Ang was about to present evidence in his behalf, he filed a Motion
for Production of Documents,[25] reasoning:

xxx

2. That corroborative to, and/or preparatory or incident to his

testimony[,] there is [a] need for him to examine original records in the
custody and possession of plaintiff, viz:

a. original Promissory Note (PN for brevity) # DVO-78-382

dated October 3, 1978[;]
b. original of Disclosure Statement in reference to PN #
DVO-78-382;
c. original of PN # DVO-78-390 dated October 9, 1978;
d. original of Disclosure Statement in reference to PN #
DVO-78-390;
e. Statement or Record of Account with the Associated
Banking Corporation or its successor, of Antonio Ang in
 CA No. 470 (cf. Exh. O) including bank records,
withdrawal slips, notices, other papers and relevant dates
relative to the overdraft of Antonio Eng Liong in CA No.
470;
f. Loan Applications of Antonio Ang Eng Liong or
borrower relative to PN Nos. DVO-78-382 and DVO-78-
390 (supra);
g. Other supporting papers and documents submitted by
Antonio Ang Eng Liong relative to his loan application vis-
-vis PN. Nos. DVO-78-382 and DVO-78-390 such as
financial statements, income tax returns, etc. as required by
the Central Bank or bank rules and regulations.

3. That the above matters are very material to the defenses of

defendant Tomas Ang, viz:

- the bank is not a holder in due course when it accepted the

[PNs] in blank.
- The real borrower is Antonio Ang Eng Liong which fact is
known to the bank.
- That the PAYEE not being a holder in due course and
knowing that defendant Tomas Ang is merely an
accommodation party, the latter may raise against such
payee or holder or successor-in-interest (of the notes)
PERSONAL and EQUITABLE DEFENSES such as
FRAUD in INDUCEMENT, DISCHARGE ON NOTE,
Application of [Articles] 2079, 2080 and 1249 of the Civil
Code, NEGLIGENCE in delaying collection despite Eng
Liongs OVERDRAFT in C.A. No. 470, etc.[26]

In its Order dated May 16, 1994,[27] the court denied the motion stating that
the promissory notes and the disclosure statements have already been shown to and
inspected by Tomas Ang during the trial, as in fact he has already copies of the
same; the Statements or Records of Account of Antonio Ang Eng Liong in CA No.
470, relative to his overdraft, are immaterial since, pursuant to the previous ruling
of the court, he is being sued for the notes and not for the overdraft which is
personal to Antonio Ang Eng Liong; and besides its non-existence in the banks
records, there would be legal obstacle for the production and inspection of the
income tax return of Antonio Ang Eng Liong if done without his consent.
When the motion for reconsideration of the aforesaid Order was denied, Tomas
Ang filed a petition for certiorari and prohibition with application for preliminary
injunction and restraining order before the Court of Appeals docketed as CA G.R.
SP No. 34840.[28] On August 17, 1994, however, the Court of Appeals denied the
issuance of a Temporary Restraining Order.[29]

Meanwhile, notwithstanding its initial rulings that Tomas Ang was deemed to have
waived his right to present evidence for failure to appear during the pendency of
his petition before the Court of Appeals, the trial court decided to continue with the
hearing of the case.[30]

After the trial, Tomas Ang offered in evidence several documents, which included
a copy of the Trust Agreement between the Republic of the Philippines and the
Asset Privatization Trust, as certified by the notary public, and news clippings
from the Manila Bulletin dated May 18, 1994 and May 30, 1994.[31] All the
documentary exhibits were admitted for failure of the bank to submit its comment
to the formal offer.[32] Thereafter, Tomas Ang elected to withdraw his petition in
CA G.R. SP No. 34840 before the Court of Appeals, which was then granted.[33]

On January 5, 1996, the trial court rendered judgment against the bank,
dismissing the complaint for lack of cause of action.[34] It held that:

Exh. 9 and its [sub-markings], the Trust Agreement dated 27

February 1987 for the defense shows that: the Associated Bank as of
June 30, 1986 is one of DBPs or Development Bank of the [Philippines]
non-performing accounts for transfer; on February 27, 1987 through
Deeds of Transfer executed by and between the Philippine National
Bank and Development Bank of the Philippines and the National
Government, both financial institutions assigned, transferred and
conveyed their non-performing assets to the National Government; the
National Government in turn and as TRUSTOR, transferred, conveyed
and assigned by way of trust unto the Asset Privatization Trust said non-
performing assets, [which] took title to and possession of, [to] conserve,
provisionally manage and dispose[,] of said assets identified for
privatization or disposition; one of the powers and duties of the APT
with respect to trust properties consisting of receivables is to handle the
administration, collection and enforcement of the receivables; to bring
suit to enforce payment of the obligations or any installment thereof or to
settle or compromise any of such obligations, or any other claim or
demand which the government may have against any person or
persons[.]
 The Manila Bulletin news clippings dated May 18, 1994 and May
30, 1994, Exh. 9-A, 9-B, 9-C, and 9-D, show that the Monetary Board of
the Bangko Sentral ng Pilipinas approved the rehabilitation plan of the
Associated Bank. One main feature of the rehabilitation plan included
the financial assistance for the bank by the Philippine Deposit Insurance
Corporation (PDIC) by way of the purchase of AB Assets worth P1.3945
billion subject to a buy-back arrangement over a 10 year period. The
PDIC had approved of the rehab scheme, which included the purchase of
ABs bad loans worth P1.86 at 25% discount. This will then be paid by
AB within a 10-year period plus a yield comparable to the prevailing
market rates x x x.

Based then on the evidence presented by the defendant Tomas

Ang, it would readily appear that at the time this suit for Sum of Money
was filed which was on August [28], 1990, the notes were held by the
Asset Privatization Trust by virtue of the Deeds of Transfer and Trust
Agreement, which was empowered to bring suit to enforce payment of
the obligations. Consequently, defendant Tomas Ang has sufficiently
established that plaintiff at the time this suit was filed was not the holder
of the notes to warrant the dismissal of the complaint.[35]

Respondent Bank then elevated the case to the Court of Appeals. In the
appellants brief captioned, ASSOCIATED BANK, Plaintiff-Appellant versus
ANTONIO ANG ENG LIONG and TOMAS ANG, Defendants, TOMAS ANG,
Defendant-Appellee, the following errors were alleged:

I.

THE LOWER COURT ERRED IN NOT HOLDING DEFENDANT

ANTONIO ANG ENG LIONG AND DEFENDANT-APPELLEE
TOMAS ANG LIABLE TO PLAINTIFF-APPELLANT ON THEIR
UNPAID LOANS DESPITE THE LATTERS DOCUMENTARY
EXHIBITS PROVING THE SAID OBLIGATIONS.

II.

THE LOWER COURT ERRED IN DISMISSING PLAINTIFF-

APPELLANTS COMPLAINT ON THE BASIS OF NEWSPAPER
CLIPPINGS WHICH WERE COMPLETELY HEARSAY IN
CHARACTER AND IMPROPER FOR JUDICIAL NOTICE.[36]
 The bank stressed that it has established the causes of action outlined in its
Complaint by a preponderance of evidence. As regards the Deed of Transfer and
Trust Agreement, it contended that the same were never authenticated by any
witness in the course of the trial; the Agreement, which was not even legible, did
not mention the promissory notes subject of the Complaint; the bank is not a party
to the Agreement, which showed that it was between the Government of the
Philippines, acting through the Committee on Privatization represented by the
Secretary of Finance as trustor and the Asset Privatization Trust, which was
created by virtue of Proclamation No. 50; and the Agreement did not reflect the
signatures of the contracting parties. Lastly, the bank averred that the news items
appearing in the Manila Bulletin could not be the subject of judicial notice since
they were completely hearsay in character.[37]

On October 9, 2000, the Court of Appeals reversed and set aside the trial
courts ruling. The dispositive portion of the Decision[38] reads:

WHEREFORE, premises considered, the Decision of

the Regional Trial Court of Davao City, Branch 16, in Civil Case No.
20,299-90 is hereby REVERSED AND SET ASIDE and another one
entered ordering defendant-appellee Tomas Ang to pay plaintiff-
appellant Associated Bank the following:

1. P50,000.00 representing the principal amount of the loan

under PN-No. DVO-78-382 plus 14% interest thereon per annum
computed from January 31, 1979 until the full amount thereof is paid;

2. P30,000.00 representing the principal amount of the loan

under PN-No. DVO-78-390 plus 14% interest thereon per annum
computed from December 8, 1978 until the full amount thereof is paid;

All other claims of the plaintiff-appellant are DISMISSED for

lack of legal basis. Defendant-appellees counterclaim is likewise
DISMISSED for lack of legal and factual bases.

No pronouncement as to costs.

SO ORDERED.[39]

The appellate court disregarded the banks first assigned error for being
irrelevant in the final determination of the case and found its second assigned error
as not meritorious. Instead, it posed for resolution the issue of whether the trial
court erred in dismissing the complaint for collection of sum of money for lack of
cause of action as the bank was said to be not the holder of the notes at the time the
collection case was filed.

In answering the lone issue, the Court of Appeals held that the bank is a
holder under Sec. 191 of the NIL. It concluded that despite the execution of the
Deeds of Transfer and Trust Agreement, the Asset Privatization Trust cannot be
declared as the holder of the subject promissory notes for the reason that it is
neither the payee or indorsee of the notes in possession thereof nor is it the bearer
of said notes. The Court of Appeals observed that the bank, as the payee, did not
indorse the notes to the Asset Privatization Trust despite the execution of the
Deeds of Transfer and Trust Agreement and that the notes continued to remain
with the bank until the institution of the collection suit.

With the bank as the holder of the promissory notes, the Court of Appeals
held that Tomas Ang is accountable therefor in his capacity as an accommodation
party. Citing Sec. 29 of the NIL, he is liable to the bank in spite of the latters
knowledge, at the time of taking the notes, that he is only an accommodation party.
Moreover, as a co-maker who agreed to be jointly and severally liable on the
promissory notes, Tomas Ang cannot validly set up the defense that he did not
receive any consideration therefor as the fact that the loan was granted to the
principal debtor already constitutes a sufficient consideration.

Further, the Court of Appeals agreed with the bank that the experience of Tomas
Ang in business rendered it implausible that he would just sign the promissory
notes as a co-maker without even checking the real amount of the debt to be
incurred, or that he merely acted on the belief that the first loan application was
cancelled. According to the appellate court, it is apparent that he was negligent in
falling for the alibi of Antonio Ang Eng Liong and such fact would not serve to
exonerate him from his responsibility under the notes.

Nonetheless, the Court of Appeals denied the claims of the bank for service,
penalty and overdue charges as well as attorneys fees on the ground that the
promissory notes made no mention of such charges/fees.

In his motion for reconsideration,[40] Tomas Ang raised for the first time the
assigned errors as follows:

xxx
2) Related to the above jurisdictional issues, defendant-appellee Tomas
Ang has recently discovered that upon the filing of the complaint
on August 28, 1990, under the jurisdictional rule laid down in BP
Blg. 129, appellant bank fraudulently failed to specify the amount
of compounded interest at 14% per annum, service charges at 2%
per annum and overdue penalty charges at 12% per annum in the
prayer of the complaint as of the time of its filing, paying a total
of only P640.00(!!!) as filing and court docket fees although the
total sum involved as of that time was P647,566.75 including 20%
attorneys fees. In fact, the stated interest in the body of the
complaint alone amount to P328,373.39 (which is
actually compounded and capitalized) in both causes of action and
the total service and overdue penalties and charges and attorneys
fees further amount to P239,193.36 in both causes of action, as of
July 31, 1990, the time of filing of the complaint. Significantly,
appellant fraudulently misled the Court, describing the 14%
imposition as interest, when in fact the same was capitalized as
principal by appellant bank every month to earn more interest, as
stated in the notes. In view thereof, the trial court never acquired
jurisdiction over the case and the same may not be now corrected
by the filing of deficiency fees because the causes of action had
already prescribed and more importantly, the jurisdiction of the
Municipal Trial Court had been increased to P100,000.00
in principal claims last March 20, 1999, pursuant to SC Circular
No. 21-99, section 5 of RA No. 7691, and section 31, Book I of
the 1987 Administrative Code. In other words, as of today,
jurisdiction over the subject falls within the exclusive jurisdiction
of the MTC, particularly if the bank foregoes capitalization of the
stipulated interest.

3) BY FAILING TO GIVE NOTICE OF ITS APPEAL AND APPEAL

BRIEF TO APPELLEE ANG ENG LIONG, THE APPEALED
JUDGMENT OF THE TRIAL COURT WHICH LEFT OUT
TOMAS ANGS CROSS-CLAIM AGAINST ENG LIONG
(BECAUSE IT DISMISSED THE MAIN CLAIM), HAD LONG
BECOME FINAL AND EXECUTORY, AS AGAINST ENG
LIONG. Accordingly, Tomas Angs right of subrogation against
Ang Eng Liong, expressed in his cross-claim, is now SEVERAL
TIMES foreclosed because of the fault or negligence of appellant
bank since 1979 up to its insistence of an ex-parte trial, and now
when it failed to serve notice of appeal and appellants brief upon
 him. Accordingly, appellee Tomas Ang should be released from
his suretyship obligation pursuant to Art. 2080 of the Civil Code.
The above is related to the issues above-stated.

4) This Court may have erred in ADDING or ASSIGNING its own bill
of error for the benefit of appellant bank which defrauded the
judiciary by the payment of deficient docket fees.[41]

Finding no cogent or compelling reason to disturb the Decision, the Court of

Appeals denied the motion in its Resolution dated December 26, 2000.[42]
Petitioner now submits the following issues for resolution:

1. Is [A]rticle 2080 of the Civil Code applicable to discharge

petitioner Tomas Ang as accommodation maker or surety because
of the failure of [private] respondent bank to serve its notice of
appeal upon the principal debtor, respondent Eng Liong?

2. Did the trial court have jurisdiction over the case at all?

3. Did the Court of Appeals [commit] error in assigning its own

error and raising its own issue?

4. Are petitioners other real and personal defenses such as

successive extensions coupled with fraudulent collusion to hide
Eng Liongs default, the payees grant of additional burdens,
coupled with the insolvency of the principal debtor, and the
defense of incomplete but delivered instrument, meritorious? [43]

Petitioner allegedly learned after the promulgation of the Court of Appeals

decision that, pursuant to the parties agreement on the compounding of interest
with the principal amount (per month in case of default), the interest on the
promissory notes as of July 31, 1990 should have been only P81,647.22 for PN No.
DVO-78-382 (instead of P203,538.98) and P49,618.33 for PN No. DVO-78-390
(instead of P125,334.41) while the principal debt as of said date should increase
to P647,566.75 (instead of P539,638.96). He submits that the bank carefully and
shrewdly hid the fact by describing the amounts as interest instead of being part of
either the principal or penalty in order to pay a lesser amount of docket fees.
According to him, the total fees that should have been paid at the time of the filing
of the complaint on August 28, 1990 was P2,216.30 and not P614.00 or a shortage
of 71%. Petitioner contends that the bank may not now pay the deficiency because
the last demand letter sent to him was dated September 9, 1986, or more than
twenty years have elapsed such that prescription had already set in. Consequently,
the banks claim must be dismissed as the trial court loses jurisdiction over the case.

Petitioner also argues that the Court of Appeals should not have assigned its
own error and raised it as an issue of the case, contending that no question should
be entertained on appeal unless it has been advanced in the court below or is within
the issues made by the parties in the pleadings. At any rate, he opines that the
appellate courts decision that the bank is the real party in interest because it is the
payee named in the note or the holder thereof is too simplistic since: (1) the power
and control of Asset Privatization Trust over the bank are clear from the explicit
terms of the duly certified trust documents and deeds of transfer and are confirmed
by the newspaper clippings; (2) even under P.D. No. 902-A or the General
Banking Act, where a corporation or a bank is under receivership, conservation or
rehabilitation, it is only the representative (liquidator, receiver, trustee or
conservator) who may properly act for said entity, and, in this case, the bank was
held by Asset Privatization Trust as trustee; and (3) it is not entirely accurate to say
that the payee who has not indorsed the notes in all cases is the real party in
interest because the rights of the payee may be subject of an assignment of
incorporeal rights under Articles 1624 and 1625 of the Civil Code.

Lastly, petitioner maintains that when respondent Bank served its notice of
appeal and appellants brief only on him, it rendered the judgment of the trial court
final and executory with respect to Antonio Ang Eng Liong, which, in effect,
released him (Antonio Ang Eng Liong) from any and all liability under the
promissory notes and, thereby, foreclosed petitioners cross-claims. By such act, the
bank, even if it be the holder of the promissory notes, allegedly discharged a
simple contract for the payment of money (Sections 119 [d] and 122, NIL [Act No.
2031]), prevented a surety like petitioner from being subrogated in the shoes of his
principal (Article 2080, Civil Code), and impaired the notes, producing the effect
of payment (Article 1249, Civil Code).

The petition is unmeritorious.

Procedurally, it is well within the authority of the Court of Appeals to raise,
if it deems proper under the circumstances obtaining, error/s not assigned on an
appealed case. In Mendoza v. Bautista,[44] this Court recognized the broad
discretionary power of an appellate court to waive the lack of proper assignment of
errors and to consider errors not assigned, thus:
 As a rule, no issue may be raised on appeal unless it has been
brought before the lower tribunal for its consideration. Higher courts are
precluded from entertaining matters neither alleged in the pleadings nor
raised during the proceedings below, but ventilated for the first time only
in a motion for reconsideration or on appeal.

However, as with most procedural rules, this maxim is subject to

exceptions. Indeed, our rules recognize the broad discretionary power of
an appellate court to waive the lack of proper assignment of errors and to
consider errors not assigned. Section 8 of Rule 51 of the Rules of Court
provides:

SEC. 8. Questions that may be decided. No error which does not

affect the jurisdiction over the subject matter or the validity of the
judgment appealed from or the proceedings therein will be considered,
unless stated in the assignment of errors, or closely related to or
dependent on an assigned error and properly argued in the brief, save as
the court may pass upon plain errors and clerical errors.
Thus, an appellate court is clothed with ample authority to review
rulings even if they are not assigned as errors in the appeal in these
instances: (a) grounds not assigned as errors but affecting jurisdiction
over the subject matter; (b) matters not assigned as errors on appeal but
are evidently plain or clerical errors within contemplation of law; (c)
matters not assigned as errors on appeal but consideration of which is
necessary in arriving at a just decision and complete resolution of the
case or to serve the interests of justice or to avoid dispensing piecemeal
justice; (d) matters not specifically assigned as errors on appeal but
raised in the trial court and are matters of record having some bearing on
the issue submitted which the parties failed to raise or which the lower
court ignored; (e) matters not assigned as errors on appeal but closely
related to an error assigned; and (f) matters not assigned as errors on
appeal but upon which the determination of a question properly assigned
is dependent. (Citations omitted)[45]

To the Courts mind, even if the Court of Appeals regarded petitioners two
assigned errors as irrelevant and not meritorious, the issue of whether the trial
court erred in dismissing the complaint for collection of sum of money for lack of
cause of action (on the ground that the bank was not the holder of the notes at the
time of the filing of the action) is in reality closely related to and determinant
of the resolution of whether the lower court correctly ruled in not holding Antonio
Ang Eng Liong and petitioner Tomas Ang liable to the bank on their unpaid loans
despite documentary exhibits allegedly proving their obligations and in dismissing
the complaint based on newspaper clippings. Hence, no error could be ascribed to
the Court of Appeals on this point.

Now, the more relevant question is: who is the real party in interest at the
time of the institution of the complaint, is it the bank or the Asset Privatization
Trust?

To answer the query, a brief history on the creation of the Asset

Privatization Trust is proper.

Taking into account the imperative need of formally launching a program for
the rationalization of the government corporate sector, then President Corazon C.
Aquino issued Proclamation No. 50[46] on December 8, 1986. As one of the twin
cornerstones of the program was to establish the privatization of a good number of
government corporations, the proclamation created the Asset Privatization
Trust, which would, for the benefit of the National Government, take title to and possession of, conserve,
[47]
provisionally manage and dispose of transferred assets that were identified for privatization or disposition.

In accordance with the provisions of Section 23[48] of the proclamation, then

President Aquino subsequently issued Administrative Order No. 14 on February 3,
1987, which approved the identification of and transfer to the National
Government of certain assets (consisting of loans, equity investments, accrued
interest receivables, acquired assets and other assets) and liabilities (consisting of
deposits, borrowings, other liabilities and contingent guarantees) of
the Development Bank of the Philippines (DBP) and the Philippine National Bank
(PNB). The transfer of assets was implemented through a Deed of Transfer
executed on February 27, 1987 between the National Government, on one hand,
and the DBP and PNB, on the other. In turn, the National Government designated
the Asset Privatization Trust to act as its trustee through a Trust Agreement,
whereby the non-performing accounts of DBP and PNB, including, among others,
the DBPs equity with respondent Bank, were entrusted to the Asset Privatization
Trust.[49] As provided for in the Agreement, among the powers and duties of the
Asset Privatization Trust with respect to the trust properties consisting of
receivables was to handle their administration and collection by bringing suit to
enforce payment of the obligations or any installment thereof or settling or
compromising any of such obligations or any other claim or demand which the
Government may have against any person or persons, and to do all acts, institute
all proceedings, and to exercise all other rights, powers, and privileges of
ownership that an absolute owner of the properties would otherwise have the right
to do.[50]

Incidentally, the existence of the Asset Privatization Trust would have

expired five (5) years from the date of issuance of Proclamation No.
50.[51] However, its original term was extended from December 8, 1991 up to
August 31, 1992,[52] and again from December 31, 1993 until June 30, 1995,[53] and
then from July 1, 1995 up to December 31, 1999,[54] and further from January 1,
2000 until December 31, 2000.[55] Thenceforth, the Privatization and Management
Office was established and took over, among others, the powers, duties and
functions of the Asset Privatization Trust under the proclamation.[56]

Based on the above backdrop, respondent Bank does not appear to be the real party
in interest when it instituted the collection suit on August 28, 1990 against Antonio
Ang Eng Liong and petitioner Tomas Ang. At the time the complaint was filed in
the trial court, it was the Asset Privatization Trust which had the authority to
enforce its claims against both debtors. In fact, during the pre-trial conference,
Atty. Roderick Orallo, counsel for the bank, openly admitted that it was under the
trusteeship of the Asset Privatization Trust.[57] The Asset Privatization Trust, which
should have been represented by the Office of the Government Corporate Counsel,
had the authority to file and prosecute the case.

The foregoing notwithstanding, this Court can not, at present, readily subscribe to
petitioners insistence that the case must be dismissed. Significantly, it stands
without refute, both in the pleadings as well as in the evidence presented during the
trial and up to the time this case reached the Court, that the issue had been rendered
moot with the occurrence of a supervening event the buy-back of the bank by its
former owner, Leonardo Ty, sometime in October 1993. By such re-acquisition
from the Asset Privatization Trust when the case was still pending in the lower
court, the bank reclaimed its real and actual interest over the unpaid promissory
notes; hence, it could rightfully qualify as a holder[58] thereof under the NIL.

Notably, Section 29 of the NIL defines an accommodation party as a person

"who has signed the instrument as maker, drawer, acceptor, or indorser, without
receiving value therefor, and for the purpose of lending his name to some other
person." As gleaned from the text, an accommodation party is one who meets all
the three requisites, viz: (1) he must be a party to the instrument, signing as maker,
drawer, acceptor, or indorser; (2) he must not receive value therefor; and (3) he
must sign for the purpose of lending his name or credit to some other person.[59] An
accommodation party lends his name to enable the accommodated party to obtain
credit or to raise money; he receives no part of the consideration for the instrument
but assumes liability to the other party/ies thereto.[60] The accommodation party is
liable on the instrument to a holder for value even though the holder, at the
time of taking the instrument, knew him or her to be merely an
accommodation party, as if the contract was not for accommodation.[61]

As petitioner acknowledged it to be, the relation between an accommodation

party and the accommodated party is one of principal and surety the
accommodation party being the surety.[62] As such, he is deemed an original
promisor and debtor from the beginning;[63] he is considered in law as the same
party as the debtor in relation to whatever is adjudged touching the obligation of
the latter since their liabilities are interwoven as to be inseparable.[64] Although a
contract of suretyship is in essence accessory or collateral to a valid principal
obligation, the surety's liability to the creditor is immediate, primary and absolute;
he is directly and equally bound with the principal.[65] As an equivalent of a regular
party to the undertaking, a surety becomes liable to the debt and duty of the
principal obligor even without possessing a direct or personal interest in the
obligations nor does he receive any benefit therefrom.[66]

Contrary to petitioners adamant stand, however, Article 2080[67] of the Civil

Code does not apply in a contract of suretyship.[68] Art. 2047 of the Civil Code
states that if a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I, Book IV of the Civil Code must be
observed. Accordingly, Articles 1207 up to 1222 of the Code (on joint and solidary
obligations) shall govern the relationship of petitioner with the bank.

The case of Inciong, Jr. v. CA[69] is illuminating:

Petitioner also argues that the dismissal of the complaint against

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

"The guarantors, even though they be solidary, are released from

their obligation whenever by come act of the creditor, they cannot be
subrogated to the rights, mortgages, and preferences of the latter."
 It is to be noted, however, that petitioner signed the promissory
note as a solidary co-maker and not as a guarantor. This is patent even
from the first sentence of the promissory note which states as follows:

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

A solidary or joint and several obligation is one in which each

debtor is liable for the entire obligation, and each creditor is entitled to
demand the whole obligation. On the other hand, Article 2047 of the
Civil Code states:

"By guaranty a person, called the guarantor, binds himself to the

creditor to fulfill the obligation of the principal debtor in case the latter
should fail to do so.

If a person binds himself solidarily with the principal debtor, the

provisions of Section 4, Chapter 3, Title I of this Book shall be observed.
In such a case the contract is called a suretyship." (Italics supplied.)

While a guarantor may bind himself solidarily with the principal

debtor, the liability of a guarantor is different from that of a solidary
debtor. Thus, Tolentino explains:

"A guarantor who binds himself in solidum with the principal

debtor under the provisions of the second paragraph does not become a
solidary co-debtor to all intents and purposes. There is a difference
between a solidary co-debtor, and a fiador in solidum (surety). The later,
outside of the liability he assumes to pay the debt before the property of
the principal debtor has been exhausted, retains all the other rights,
actions and benefits which pertain to him by reason of rights of
the fiansa; while a solidary co-debtor has no other rights than those
bestowed upon him in Section 4, Chapter 3, title I, Book IV of the Civil
Code."
Section 4, Chapter 3, Title I, Book IV of the Civil Code states the
law on joint and several obligations. Under Art. 1207 thereof, when there
are two or more debtors in one and the same obligation, the presumption
 is that obligation is joint so that each of the debtors is liable only for a
proportionate part of the debt. There is a solidarily liability only when
the obligation expressly so states, when the law so provides or when the
nature of the obligation so requires.
Because the promissory note involved in this case expressly states
that the three signatories therein are jointly and severally liable, any one,
some or all of them may be proceeded against for the entire obligation.
The choice is left to the solidary creditor to determine against whom he
will enforce collection. (Citations omitted)[70]

In the instant case, petitioner agreed to be jointly and severally liable under
the two promissory notes that he co-signed with Antonio Ang Eng Liong as the
principal debtor. This being so, it is completely immaterial if the bank would opt to
proceed only against petitioner or Antonio Ang Eng Liong or both of them since
the law confers upon the creditor the prerogative to choose whether to enforce the
entire obligation against any one, some or all of the debtors. Nonetheless,
petitioner, as an accommodation party, may seek reimbursement from Antonio
Ang Eng Liong, being the party accommodated.[71]

It is plainly mistaken for petitioner to say that just because the bank failed to
serve the notice of appeal and appellants brief to Antonio Ang Eng Liong, the trial
courts judgment, in effect, became final and executory as against the latter and,
thereby, bars his (petitioners) cross-claims against him: First, although no notice of
appeal and appellants brief were served to Antonio Ang Eng Liong, he was
nonetheless impleaded in the case since his name appeared in the caption of both
the notice and the brief as one of the defendants-appellees;[72] Second, despite
including in the caption of the appellees brief his co-debtor as one of the
defendants-appellees, petitioner did not also serve him a copy thereof;[73] Third, in
the caption of the Court of Appeals decision, Antonio Ang Eng Liong was
expressly named as one of the defendants-appellees;[74] and Fourth, it was only in
his motion for reconsideration from the adverse judgment of the Court of Appeals
that petitioner belatedly chose to serve notice to the counsel of his co-defendant-
appellee.[75]

Likewise, this Court rejects the contention of Antonio Ang Eng Liong, in his
special appearance through counsel, that the Court of Appeals, much less this
Court, already lacked jurisdiction over his person or over the subject matter
relating to him because he was not a party in CA-G.R. CV No. 53413. Stress must
be laid of the fact that he had twice put himself in default one, in not filing a pre-
trial brief and another, in not filing his answer to petitioners cross-claims. As a
matter of course, Antonio Ang Eng Liong, being a party declared in default,
already waived his right to take part in the trial proceedings and had to contend
with the judgment rendered by the court based on the evidence presented by the
bank and petitioner. Moreover, even without considering these default judgments,
Antonio Ang Eng Liong even categorically admitted having secured a loan
totaling P80,000. In his Answer to the complaint, he did not deny such liability but
merely pleaded that the bank be ordered to submit a more reasonable computation
instead of collecting excessive interest, penalty charges, and attorneys fees. For
failing to tender an issue and in not denying the material allegations stated in the
complaint, a judgment on the pleadings[76] would have also been proper since not a
single issue was generated by the Answer he filed.

As the promissory notes were not discharged or impaired through any act or
omission of the bank, Sections 119 (d)[77] and 122[78] of the NIL as well as Art.
1249[79] of the Civil Code would necessarily find no application. Again, neither
was petitioners right of reimbursement barred nor was the banks right to proceed
against Antonio Ang Eng Liong expressly renounced by the omission to serve
notice of appeal and appellants brief to a party already declared in default.

Consequently, in issuing the two promissory notes, petitioner as

accommodating party warranted to the holder in due course that he would pay the
same according to its tenor.[80] It is no defense to state on his part that he did not
receive any value therefor[81] because the phrase "without receiving value
therefor" used in Sec. 29 of the NIL means "without receiving value by virtue of
the instrument" and not as it is apparently supposed to mean, "without receiving
payment for lending his name."[82] Stated differently, when a third person advances
the face value of the note to the accommodated party at the time of its creation, the
consideration for the note as regards its maker is the money advanced to the
accommodated party. It is enough that value was given for the note at the time of
its creation.[83] As in the instant case, a sum of money was received by virtue of the
notes, hence, it is immaterial so far as the bank is concerned whether one of the
signers, particularly petitioner, has or has not received anything in payment of the
use of his name.[84]

Under the law, upon the maturity of the note, a surety may pay the debt,
demand the collateral security, if there be any, and dispose of it to his benefit, or, if
applicable, subrogate himself in the place of the creditor with the right to enforce
the guaranty against the other signers of the note for the reimbursement of what he
is entitled to recover from them.[85] Regrettably, none of these were prudently done
by petitioner. When he was first notified by the bank sometime in 1982 regarding
his accountabilities under the promissory notes, he lackadaisically relied on
Antonio Ang Eng Liong, who represented that he would take care of the matter,
instead of directly communicating with the bank for its settlement.[86] Thus,
petitioner cannot now claim that he was prejudiced by the supposed extension of
time given by the bank to his co-debtor.

Furthermore, since the liability of an accommodation party remains not

only primary but also unconditional to a holder for value, even if the
accommodated party receives an extension of the period for payment without the
consent of the accommodation party, the latter is still liable for the whole
obligation and such extension does not release him because as far as a holder for
value is concerned, he is a solidary co-debtor.[87] In Clark v. Sellner,[88] this Court
held:

x x x The mere delay of the creditor in enforcing the guaranty has

not by any means impaired his action against the defendant. It should not
be lost sight of that the defendant's signature on the note is an assurance
to the creditor that the collateral guaranty will remain good, and that
otherwise, he, the defendant, will be personally responsible for the
payment.

True, that if the creditor had done any act whereby the guaranty
was impaired in its value, or discharged, such an act would have wholly
or partially released the surety; but it must be born in mind that it is a
recognized doctrine in the matter of suretyship that with respect to the
surety, the creditor is under no obligation to display any diligence in the
enforcement of his rights as a creditor. His mere inaction indulgence,
passiveness, or delay in proceeding against the principal debtor, or the
fact that he did not enforce the guaranty or apply on the payment of such
funds as were available, constitute no defense at all for the surety, unless
the contract expressly requires diligence and promptness on the part of
the creditor, which is not the case in the present action. There is in some
decisions a tendency toward holding that the creditor's laches may
discharge the surety, meaning by laches a negligent forbearance. This
theory, however, is not generally accepted and the courts almost
universally consider it essentially inconsistent with the relation of the
parties to the note. (21 R.C.L., 1032-1034)[89]

Neither can petitioner benefit from the alleged insolvency of Antonio Ang
Eng Liong for want of clear and convincing evidence proving the same. Assuming
it to be true, he also did not exercise diligence in demanding security to protect
himself from the danger thereof in the event that he (petitioner) would eventually
be sued by the bank. Further, whether petitioner may or may not obtain security
from Antonio Ang Eng Liong cannot in any manner affect his liability to the bank;
the said remedy is a matter of concern exclusively between themselves as
accommodation party and accommodated party. The fact that petitioner stands only
as a surety in relation to Antonio Ang Eng Liong is immaterial to the claim of the
bank and does not a whit diminish nor defeat the rights of the latter as a holder for
value. To sanction his theory is to give unwarranted legal recognition to the patent
absurdity of a situation where a co-maker, when sued on an instrument by a holder
in due course and for value, can escape liability by the convenient expedient of
interposing the defense that he is a merely an accommodation party.[90]

In sum, as regards the other issues and errors alleged in this petition, the
Court notes that these were the very same questions of fact raised on appeal before
the Court of Appeals, although at times couched in different terms and explained
more lengthily in the petition. Suffice it to say that the same, being factual, have
been satisfactorily passed upon and considered both by the trial and appellate
courts. It is doctrinal that only errors of law and not of fact are reviewable by this
Court in petitions for review on certiorariunder Rule 45 of the Rules of Court.
Save for the most cogent and compelling reason, it is not our function under the
rule to examine, evaluate or weigh the probative value of the evidence presented
by the parties all over again.[91]

WHEREFORE, the October 9, 2000 Decision and December 26,

2000 Resolution of the Court of Appeals in CA-G.R. CV No. 53413
are AFFIRMED. The petition is DENIED for lack of merit.

No costs.

SO ORDERED.

SECOND DIVISION

CLAUDE P. BAUTISTA, G.R. No. 166405

Petitioner,
Present:
QUISUMBING, J., Chairperson,
PUNO, C.J.,
- versus - TINGA,
VELASCO, JR., and
BRION, JJ.

AUTO PLUS TRADERS, Promulgated:

INCORPORATED and COURT OF
APPEALS (Twenty-First Division), August 6, 2008
Respondents.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION
QUISUMBING, J.:

This petition for review on certiorari assails the Decision [1] dated August 10,
2004 of the Court of Appeals in CA-G.R. CR No. 28464 and the
Resolution[2] dated October 29, 2004, which denied petitioners motion for
reconsideration. The Court of Appeals affirmed the February 24, 2004 Decision
and May 11, 2004 Order of the Regional Trial Court (RTC), Davao City, Branch
16, in Criminal Case Nos. 52633-03 and 52634-03.

The antecedent facts are as follows:

Petitioner Claude P. Bautista, in his capacity as President and Presiding

Officer of Cruiser Bus Lines and Transport Corporation, purchased various spare
parts from private respondent Auto Plus Traders, Inc. and issued two postdated
checks to cover his purchases. The checks were subsequently dishonored. Private
respondent then executed an affidavit-complaint for violation of Batas
Pambansa Blg. 22[3] against petitioner. Consequently, two Informations for
violation of BP Blg. 22 were filed with the Municipal Trial Court in Cities
(MTCC) of Davao City against the petitioner. These were docketed as Criminal
Case Nos. 102,004-B-2001 and 102,005-B-2001. The Informations[4] read:
Criminal Case No. 102,004-B-2001:
The undersigned accuses the above-named accused for violation
of Batas Pambansa Bilang 22, committed as follows:
 That on or about December 15, 2000, in the City of Davao,
Philippines, and within the jurisdiction of this Honorable Court, the
above-mentioned accused, knowing fully well that he had no sufficient
funds and/or credit with the drawee bank, wilfully, unlawfully and
feloniously issued and made out Rural Bank of Digos, Inc. Check No.
058832, dated December 15, 2000, in the amount of P151,200.00, in
favor of Auto Plus Traders, Inc., but when said check was presented to
the drawee bank for encashment, the same was dishonored for the reason
DRAWN AGAINST INSUFFICIENT FUNDS and despite notice of
dishonor and demands upon said accused to make good the check,
accused failed and refused to make payment to the damage and prejudice
of herein complainant.
CONTRARY TO LAW.

Criminal Case No. 102,005-B-2001:

The undersigned accuses the above-named accused for violation
of Batas Pambansa Bilang 22, committed as follows:
That on or about October 30, 2000, in the City of Davao,
Philippines, and within the jurisdiction of this Honorable Court, the
above-mentioned accused, knowing fully well that he had no sufficient
funds and/or credit with the drawee bank, wilfully, unlawfully and
feloniously issued and made out Rural Bank of Digos, Inc. Check No.
059049, dated October 30, 2000, in the amount of P97,500.00, in favor
of Auto Plus Traders, [Inc.], but when said check was presented to the
drawee bank for encashment, the same was dishonored for the reason
DRAWN AGAINST INSUFFICIENT FUNDS and despite notice of
dishonor and demands upon said accused to make good the check,
accused failed and refused to make payment, to the damage and
prejudice of herein complainant.
CONTRARY TO LAW.

Petitioner pleaded not guilty. Trial on the merits ensued. After the
presentation of the prosecutions evidence, petitioner filed a demurrer to
evidence. On April 21, 2003, the MTCC granted the demurrer, thus:
WHEREFORE, the demurrer to evidence is granted, premised on
reasonable doubt as to the guilt of the accused. Cruiser Bus Line[s] and
Transport Corporation, through the accused is directed to pay the
complainant the sum of P248,700.00 representing the value of the two
 checks, with interest at the rate of 12% per annum to be computed from
the time of the filing of these cases in Court, until the account is paid in
full; ordering further Cruiser Bus Line[s] and Transport Corporation,
through the accused, to reimburse complainant the expense representing
filing fees amounting to P1,780.00 and costs of litigation which this
Court hereby fixed at P5,000.00.
SO ORDERED.[5]

Petitioner moved for partial reconsideration but his motion was

denied. Thereafter, both parties appealed to the RTC. On February 24, 2004, the
trial court ruled:
WHEREFORE, the assailed Order dated April 21, 2003 is hereby
MODIFIED to read as follows: Accused is directed to pay and/or
reimburse the complainant the following sums: (1) P248,700.00
representing the value of the two checks, with interest at the rate of 12%
per annum to be computed from the time of the filing of these cases in
Court, until the account is paid in full; (2) P1,780.00 for filing fees
and P5,000.00 as cost of litigation.
SO ORDERED.[6]

Petitioner moved for reconsideration, but his motion was denied on May 11,
2004. Petitioner elevated the case to the Court of Appeals, which affirmed the
February 24, 2004 Decision and May 11, 2004 Order of the RTC:
WHEREFORE, premises considered, the instant petition
is DENIED. The assailed Decision of the Regional Trial Court, Branch
16, Davao City, dated February 24, 2004 and its Order dated May 11,
2004 are AFFIRMED.
SO ORDERED.[7]

Petitioner now comes before us, raising the sole issue of whether the Court of
Appeals erred in upholding the RTCs ruling that petitioner, as an officer of the
corporation, is personally and civilly liable to the private respondent for the value
of the two checks.[8]

Petitioner asserts that BP Blg. 22 merely pertains to the criminal liability of

the accused and that the corporation, which has a separate personality from its
officers, is solely liable for the value of the two checks.
 Private respondent counters that petitioner should be held personally liable
for both checks. Private respondent alleged that petitioner issued two postdated
checks: a personal check in his name for the amount of P151,200 and a corporation
check under the account of Cruiser Bus Lines and Transport Corporation for the
amount of P97,500.According to private respondent, petitioner, by issuing his
check to cover the obligation of the corporation, became an accommodation
party. Under Section 29[9] of the Negotiable Instruments Law, an accommodation
party is liable on the instrument to a holder for value. Private respondent adds that
petitioner should also be liable for the value of the corporation check because
instituting another civil action against the corporation would result in multiplicity
of suits and delay.

At the outset, we note that private respondents allegation that petitioner

issued a personal check disputes the factual findings of the MTCC. The MTCC
found that the two checks belong to Cruiser Bus Lines and Transport Corporation
while the RTC found that one of the checks was a personal check of the
petitioner. Generally this Court, in a petition for review on certiorari under Rule 45
of the Rules of Court, has no jurisdiction over questions of facts. But, considering
that the findings of the MTCC and the RTC are at variance,[10] we are compelled to
settle this issue.

A perusal of the two check return slips[11] in conjunction with the Current
Account Statements[12] would show that the check for P151,200 was drawn against
the current account of Claude Bautista while the check for P97,500 was drawn
against the current account of Cruiser Bus Lines and Transport
Corporation. Hence, we sustain the factual finding of the RTC.

Nonetheless, we find the appellate court in error for affirming the decision of
the RTC holding petitioner liable for the value of the checks considering that
petitioner was acquitted of the crime charged and that the debts are clearly
corporate debts for which only Cruiser Bus Lines and Transport Corporation
should be held liable.

Juridical entities have personalities separate and distinct from its officers and
the persons composing it.[13] Generally, the stockholders and officers are not
personally liable for the obligations of the corporation except only when the veil of
corporate fiction is being used as a cloak or cover for fraud or illegality, or to work
injustice.[14] These situations, however, do not exist in this case. The evidence
shows that it is Cruiser Bus Lines and Transport Corporation that has obligations to
Auto Plus Traders, Inc. for tires.There is no agreement that petitioner shall be held
liable for the corporations obligations in his personal capacity. Hence, he cannot be
held liable for the value of the two checks issued in payment for the corporations
obligation in the total amount of P248,700.

Likewise, contrary to private respondents contentions, petitioner cannot be

considered liable as an accommodation party for Check No. 58832. Section 29 of
the Negotiable Instruments Law defines an accommodation party as a person who
has signed the instrument as maker, drawer, acceptor, or indorser, without
receiving value therefor, and for the purpose of lending his name to some other
person. As gleaned from the text, an accommodation party is one who meets all the
three requisites, viz: (1) he must be a party to the instrument, signing as maker,
drawer, acceptor, or indorser; (2) he must not receive value therefor; and (3) he
must sign for the purpose of lending his name or credit to some other
person.[15] An accommodation party lends his name to enable the accommodated
party to obtain credit or to raise money; he receives no part of the consideration for
the instrument but assumes liability to the other party/ies thereto.[16] The first two
elements are present here, however there is insufficient evidence presented in the
instant case to show the presence of the third requisite. All that the evidence shows
is that petitioner signed Check No. 58832, which is drawn against his personal
account. The said check, dated December 15, 2000, corresponds to the value of 24
sets of tires received by Cruiser Bus Lines and Transport Corporation on August
29, 2000.[17] There is no showing of when petitioner issued the check and in what
capacity. In the absence of concrete evidence it cannot just be assumed that
petitioner intended to lend his name to the corporation.Hence, petitioner cannot be
considered as an accommodation party.

Cruiser Bus Lines and Transport Corporation, however, remains liable for the
checks especially since there is no evidence that the debts covered by the subject
checks have been paid.

WHEREFORE, the petition is GRANTED. The Decision dated August 10,

2004 and the Resolution dated October 29, 2004 of the Court of Appeals in CA-
G.R. CR No. 28464 are REVERSED and SET ASIDE. Criminal Case Nos.
52633-03 and 52634-03 are DISMISSED, without prejudice to the right of private
respondent Auto Plus Traders, Inc., to file the proper civil action against Cruiser
Bus Lines and Transport Corporation for the value of the two checks.

No pronouncement as to costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

ALLIED BANKING G.R. No. 133179

CORPORATION,
Petitioner, Present:
QUISUMBING, J., Chairperson,
- versus - CARPIO MORALES,
TINGA,
VELASCO, JR., and
CHICO-NAZARIO, JJ.
LIM SIO WAN, METROPOLITAN
BANK AND TRUST CO., and Promulgated:
PRODUCERS BANK,
Respondents. March 27, 2008
x-----------------------------------------------------------------------------------------x

DECISION

VELASCO, JR., J.:

To ingratiate themselves to their valued depositors, some banks at times

bend over backwards that they unwittingly expose themselves to great risks.
The Case

This Petition for Review on Certiorari under Rule 45 seeks to reverse the
Court of Appeals (CAs) Decision promulgated on March 18, 1998[1] in CA-G.R.
CV No. 46290 entitled Lim Sio Wan v. Allied Banking Corporation, et al. The CA
Decision modified the Decision dated November 15, 1993[2] of the Regional Trial
Court (RTC), Branch 63 in Makati City rendered in Civil Case No. 6757.
 The Facts

The facts as found by the RTC and affirmed by the CA are as follows:

On November 14, 1983, respondent Lim Sio Wan deposited with petitioner Allied
Banking Corporation (Allied) at its Quintin Paredes Branch in Manila a money
market placement of PhP 1,152,597.35 for a term of 31 days to mature
on December 15, 1983,[3] as evidenced by Provisional Receipt No. 1356
dated November 14, 1983.[4]

On December 5, 1983, a person claiming to be Lim Sio Wan called up Cristina So,
an officer of Allied, and instructed the latter to pre-terminate Lim Sio Wans money
market placement, to issue a managers check representing the proceeds of the
placement, and to give the check to one Deborah Dee Santos who would pick up
the check.[5] Lim Sio Wan described the appearance of Santos so that So could
easily identify her.[6]

Later, Santos arrived at the bank and signed the application form for a managers
check to be issued.[7] The bank issued Managers Check No. 035669 for PhP
1,158,648.49, representing the proceeds of Lim Sio Wans money market
placement in the name of Lim Sio Wan, as payee.[8] The check was cross-checked
For Payees Account Only and given to Santos.[9]

Thereafter, the managers check was deposited in the account of Filipinas Cement
Corporation (FCC) at respondent Metropolitan Bank and Trust Co.
(Metrobank),[10] with the forged signature of Lim Sio Wan as indorser.[11]

Earlier, on September 21, 1983, FCC had deposited a money market placement for
PhP 2 million with respondent Producers Bank. Santos was the money market
trader assigned to handle FCCs account.[12] Such deposit is evidenced by Official
Receipt No. 317568[13] and a Letter dated September 21, 1983 of Santos addressed
to Angie Lazo of FCC, acknowledging receipt of the placement.[14] The placement
matured on October 25, 1983 and was rolled-over until December 5, 1983 as
evidenced by a Letter dated October 25, 1983.[15] When the placement matured,
FCC demanded the payment of the proceeds of the placement.[16] On December 5,
1983, the same date that So received the phone call instructing her to pre-terminate
Lim Sio Wans placement, the managers check in the name of Lim Sio Wan was
deposited in the account of FCC, purportedly representing the proceeds of FCCs
money market placement with Producers Bank.[17] In other words, the Allied check
was deposited with Metrobank in the account of FCC as Producers Banks payment
of its obligation to FCC.

To clear the check and in compliance with the requirements of the Philippine
Clearing House Corporation (PCHC) Rules and Regulations, Metrobank stamped a
guaranty on the check, which reads: All prior endorsements and/or lack of
endorsement guaranteed.[18]

The check was sent to Allied through the PCHC. Upon the presentment of the
check, Allied funded the check even without checking the authenticity of Lim Sio
Wans purported indorsement. Thus, the amount on the face of the check was
credited to the account of FCC.[19]

On December 9, 1983, Lim Sio Wan deposited with Allied a second money market
placement to mature on January 9, 1984.[20]

On December 14, 1983, upon the maturity date of the first money market
placement, Lim Sio Wan went to Allied to withdraw it.[21] She was then informed
that the placement had been pre-terminated upon her instructions. She denied
giving any instructions and receiving the proceeds thereof. She desisted from
further complaints when she was assured by the banks manager that her money
would be recovered.[22]

When Lim Sio Wans second placement matured on January 9, 1984, So called Lim
Sio Wan to ask for the latters instructions on the second placement. Lim Sio Wan
instructed So to roll-over the placement for another 30 days.[23] On January 24,
1984, Lim Sio Wan, realizing that the promise that her money would be recovered
would not materialize, sent a demand letter to Allied asking for the payment of the
first placement.[24] Allied refused to pay Lim Sio Wan, claiming that the latter had
authorized the pre-termination of the placement and its subsequent release
to Santos.[25]

Consequently, Lim Sio Wan filed with the RTC a Complaint dated February 13,
1984[26] docketed as Civil Case No. 6757 against Allied to recover the proceeds of
her first money market placement. Sometime in February 1984, she withdrew her
second placement from Allied.

Allied filed a third party complaint[27] against Metrobank and Santos. In turn,
Metrobank filed a fourth party complaint[28] against FCC. FCC for its part filed a
fifth party complaint[29] against Producers Bank. Summonses were duly served
upon all the parties except for Santos, who was no longer connected with
Producers Bank.[30]

On May 15, 1984, or more than six (6) months after funding the check, Allied
informed Metrobank that the signature on the check was forged.[31] Thus,
Metrobank withheld the amount represented by the check from FCC. Later on,
Metrobank agreed to release the amount to FCC after the latter executed an
Undertaking, promising to indemnify Metrobank in case it was made to reimburse
the amount.[32]

Lim Sio Wan thereafter filed an amended complaint to include Metrobank as

a party-defendant, along with Allied.[33] The RTC admitted the amended complaint
despite the opposition of Metrobank.[34] Consequently, Allieds third party
complaint against Metrobank was converted into a cross-claim and the latters
fourth party complaint against FCC was converted into a third party complaint.[35]

After trial, the RTC issued its Decision, holding as follows:

WHEREFORE, judgment is hereby rendered as follows:

1. Ordering defendant Allied Banking Corporation to pay plaintiff the

amount of P1,158,648.49 plus 12% interest per annum from March 16,
1984 until fully paid;
2. Ordering defendant Allied Bank to pay plaintiff the amount of
P100,000.00 by way of moral damages;
3. Ordering defendant Allied Bank to pay plaintiff the amount of
P173,792.20 by way of attorneys fees; and,
4. Ordering defendant Allied Bank to pay the costs of suit.

Defendant Allied Banks cross-claim against defendant Metrobank is

DISMISSED.

Likewise defendant Metrobanks third-party complaint as against

Filipinas Cement Corporation is DISMISSED.

Filipinas Cement Corporations fourth-party complaint against Producers

Bank is also DISMISSED.

SO ORDERED.[36]
 The Decision of the Court of Appeals

Allied appealed to the CA, which in turn issued the assailed Decision on March 18,
1998, modifying the RTC Decision, as follows:

WHEREFORE, premises considered, the decision appealed from is

MODIFIED. Judgment is rendered ordering and sentencing defendant-
appellant Allied Banking Corporation to pay sixty (60%) percent and
defendant-appellee Metropolitan Bank and Trust Company forty (40%)
of the amount of P1,158,648.49 plus 12% interest per annum from
March 16, 1984 until fully paid. The moral damages, attorneys fees and
costs of suit adjudged shall likewise be paid by defendant-appellant
Allied Banking Corporation and defendant-appellee Metropolitan Bank
and Trust Company in the same proportion of 60-40. Except as thus
modified, the decision appealed from is AFFIRMED.

SO ORDERED.[37]

Hence, Allied filed the instant petition.

The Issues

Allied raises the following issues for our consideration:

The Honorable Court of Appeals erred in holding that Lim Sio

Wan did not authorize [Allied] to pre-terminate the initial placement and
to deliver the check to Deborah Santos.

The Honorable Court of Appeals erred in absolving Producers

Bank of any liability for the reimbursement of amount adjudged
demandable.

The Honorable Court of Appeals erred in holding [Allied] liable

to the extent of 60% of amount adjudged demandable in clear disregard
to the ultimate liability of Metrobank as guarantor of all endorsement on
the check, it being the collecting bank.[38]
The petition is partly meritorious.

A Question of Fact

Allied questions the finding of both the trial and appellate courts that Allied was
not authorized to release the proceeds of Lim Sio Wans money market placement
to Santos.Allied clearly raises a question of fact. When the CA affirms the findings
of fact of the RTC, the factual findings of both courts are binding on this Court.[39]

We also agree with the CA when it said that it could not disturb the trial courts
findings on the credibility of witness So inasmuch as it was the trial court that
heard the witness and had the opportunity to observe closely her deportment and
manner of testifying. Unless the trial court had plainly overlooked facts of
substance or value, which, if considered, might affect the result of the case, [40] we
find it best to defer to the trial court on matters pertaining to credibility of
witnesses.
Additionally, this Court has held that the matter of negligence is also a factual
question.[41] Thus, the finding of the RTC, affirmed by the CA, that the respective
parties were negligent in the exercise of their obligations is also conclusive upon
this Court.

The Liability of the Parties

As to the liability of the parties, we find that Allied is liable to Lim Sio
Wan. Fundamental and familiar is the doctrine that the relationship between a bank
and a client is one of debtor-creditor.

Articles 1953 and 1980 of the Civil Code provide:

Art. 1953. A person who receives a loan of money or any other fungible
thing acquires the ownership thereof, and is bound to pay to the creditor
an equal amount of the same kind and quality.

Art. 1980. Fixed, savings, and current deposits of money in banks and
similar institutions shall be governed by the provisions concerning
simple loan.

Thus, we have ruled in a line of cases that a bank deposit is in the nature of a
simple loan or mutuum.[42] More succinctly, in Citibank, N.A. (Formerly First
National City Bank) v. Sabeniano, this Court ruled that a money market placement
is a simple loan or mutuum.[43] Further, we defined a money market in Cebu
International Finance Corporation v. Court of Appeals, as follows:
[A] money market is a market dealing in standardized short-term
credit instruments (involving large amounts) where lenders and borrowers do not
deal directly with each other but through a middle man or dealer in open market.
In a money market transaction, the investor is a lender who loans his money to a
borrower through a middleman or dealer.

In the case at bar, the money market transaction between the petitioner and
the private respondent is in the nature of a loan.[44]

Lim Sio Wan, as creditor of the bank for her money market placement, is
entitled to payment upon her request, or upon maturity of the placement, or until
the bank is released from its obligation as debtor. Until any such event, the
obligation of Allied to Lim Sio Wan remains unextinguished.

Art. 1231 of the Civil Code enumerates the instances when obligations are
considered extinguished, thus:

Art. 1231. Obligations are extinguished:

(1) By payment or performance;

(2) By the loss of the thing due;
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor and debtor;
(5) By compensation;
(6) By novation.

Other causes of extinguishment of obligations, such as annulment,

rescission, fulfillment of a resolutory condition, and prescription, are governed
elsewhere in this Code. (Emphasis supplied.)

From the factual findings of the trial and appellate courts that Lim Sio Wan
did not authorize the release of her money market placement to Santos and the
bank had been negligent in so doing, there is no question that the obligation of
Allied to pay Lim Sio Wan had not been extinguished. Art. 1240 of the Code states
that payment shall be made to the person in whose favor the obligation has been
constituted, or his successor in interest, or any person authorized to receive it. As
commented by Arturo Tolentino:
 Payment made by the debtor to a wrong party does not extinguish the
obligation as to the creditor, if there is no fault or negligence which can be
imputed to the latter. Even when the debtor acted in utmost good faith and by
mistake as to the person of his creditor, or through error induced by the fraud of a
third person, the payment to one who is not in fact his creditor, or authorized to
receive such payment, is void, except as provided in Article 1241. Such payment
does not prejudice the creditor, and accrual of interest is not suspended by
it.[45](Emphasis supplied.)

Since there was no effective payment of Lim Sio Wans money market placement,
the bank still has an obligation to pay her at six percent (6%) interest from March
16, 1984 until the payment thereof.

We cannot, however, say outright that Allied is solely liable to Lim Sio Wan.

Allied claims that Metrobank is the proximate cause of the loss of Lim Sio Wans
money. It points out that Metrobank guaranteed all prior indorsements inscribed on
the managers check, and without Metrobanks guarantee, the present controversy
would never have occurred. According to Allied:

Failure on the part of the collecting bank to ensure that the proceeds of
the check is paid to the proper party is, aside from being an efficient
intervening cause, also the last negligent act, x x x contributory to the
injury caused in the present case, which thereby leads to the conclusion
that it is the collecting bank, Metrobank that is the proximate cause of
the alleged loss of the plaintiff in the instant case.[46]

We are not persuaded.

Proximate cause 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.[47] Thus, there is an efficient
supervening event if the event breaks the sequence leading from the cause to the
ultimate result. To determine the proximate cause of a controversy, the question
that needs to be asked is: If the event did not happen, would the injury have
resulted? If the answer is NO, then the event is the proximate cause.
In the instant case, Allied avers that even if it had not issued the check payment,
the money represented by the check would still be lost because of Metrobanks
negligence in indorsing the check without verifying the genuineness of the
indorsement thereon.

Section 66 in relation to Sec. 65 of the Negotiable Instruments Law

provides:

Section 66. Liability of general indorser.Every indorser who indorses

without qualification, warrants to all subsequent holders in due course;

a) The matters and things mentioned in subdivisions (a),

(b) and (c) of the next preceding section; and

b) That the instrument is at the time of his indorsement valid

and subsisting;

And in addition, he engages that on due presentment, it shall be

accepted or paid, or both, as the case may be according to its tenor, and
that if it be dishonored, and the necessary proceedings on dishonor be
duly taken, he will pay the amount thereof to the holder, or to any
subsequent indorser who may be compelled to pay it.

Section 65. Warranty where negotiation by delivery, so

forth.Every person negotiating an instrument by delivery or by a
qualified indorsement, warrants:

a) That the instrument is genuine and in all respects what

it purports to be;
b) That he has a good title of it;
c) That all prior parties had capacity to contract;
d) That he has no knowledge of any fact which would impair
the validity of the instrument or render it valueless.

But when the negotiation is by delivery only, the warranty extends

in favor of no holder other than the immediate transferee.

The provisions of subdivision (c) of this section do not apply to

persons negotiating public or corporation securities, other than bills and
notes. (Emphasis supplied.)
The warranty that the instrument is genuine and in all respects what it purports to
be covers all the defects in the instrument affecting the validity thereof, including a
forged indorsement. Thus, the last indorser will be liable for the amount indicated
in the negotiable instrument even if a previous indorsement was forged. We held in
a line of cases that 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.[48]

However, this general rule is subject to exceptions. One such exception is when the
issuance of the check itself was attended with negligence. Thus, in the cases cited
above where the collecting bank is generally held liable, in two of the cases where
the checks were negligently issued, this Court held the institution issuing the check
just as liable as or more liable than the collecting bank.

In isolated cases where the checks were deposited in an account other than that of
the payees on the strength of forged indorsements, we held the collecting bank
solely liable for the whole amount of the checks involved for having indorsed the
same. In Republic Bank v. Ebrada,[49] the check was properly issued by the Bureau
of Treasury. While in Banco de Oro Savings and Mortgage Bank (Banco de
Oro) v. Equitable Banking Corporation,[50] Banco de Oro admittedly issued the
checks in the name of the correct payees.And in Traders Royal Bank v. Radio
Philippines Network, Inc.,[51] the checks were issued at the request of Radio
Philippines Network, Inc. from Traders Royal Bank.
However, in Bank of the Philippine Islands v. Court of Appeals, we said that the
drawee bank is liable for 60% of the amount on the face of the negotiable
instrument and the collecting bank is liable for 40%. We also noted the relative
negligence exhibited by two banks, to wit:
Both banks were negligent in the selection and supervision of their
employees resulting in the encashment of the forged checks by an impostor. Both
banks were not able to overcome the presumption of negligence in the selection
and supervision of their employees. It was the gross negligence of the employees
of both banks which resulted in the fraud and the subsequent loss. While it is true
that petitioner BPIs negligence may have been the proximate cause of the loss,
respondent CBCs negligence contributed equally to the success of the impostor in
encashing the proceeds of the forged checks. Under these circumstances, we
apply Article 2179 of the Civil Code to the effect that while respondent CBC may
recover its losses, such losses are subject to mitigation by the courts. (See Phoenix
Construction Inc. v. Intermediate Appellate Courts, 148 SCRA 353 [1987]).
 Considering the comparative negligence of the two (2) banks, we rule that
the demands of substantial justice are satisfied by allocating the loss of
P2,413,215.16 and the costs of the arbitration proceeding in the amount of
P7,250.00 and the cost of litigation on a 60-40 ratio.[52]

Similarly, we ruled in Associated Bank v. Court of Appeals that the issuing

institution and the collecting bank should equally share the liability for the loss of
amount represented by the checks concerned due to the negligence of both parties:

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 hospitals 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 payees indorsement.[53]

A reading of the facts of the two immediately preceding cases would reveal that
the reason why the bank or institution which issued the check was held partially
liable for the amount of the check was because of the negligence of these parties
which resulted in the issuance of the checks.
In the instant case, the trial court correctly found Allied negligent in issuing the
managers check and in transmitting it to Santos without even a written
authorization.[54] In fact, Allied did not even ask for the certificate evidencing the
money market placement or call up Lim Sio Wan at her residence or office to
confirm her instructions. Both actions could have prevented the whole fraudulent
transaction from unfolding. Allieds negligence must be considered as the
proximate cause of the resulting loss.

To reiterate, had Allied exercised the diligence due from a financial institution, the
check would not have been issued and no loss of funds would have resulted. In
fact, there would have been no issuance of indorsement had there been no check in
the first place.

The liability of Allied, however, is concurrent with that of Metrobank as the last
indorser of the check. When Metrobank indorsed the check in compliance with the
PCHC Rules and Regulations[55] without verifying the authenticity of Lim Sio
Wans indorsement and when it accepted the check despite the fact that it was
cross-checked payable to payees account only,[56] its negligent and cavalier
indorsement contributed to the easier release of Lim Sio Wans money and
perpetuation of the fraud. Given the relative participation of Allied and Metrobank
to the instant case, both banks cannot be adjudged as equally liable. Hence, the
60:40 ratio of the liabilities of Allied and Metrobank, as ruled by the CA, must be
upheld.

FCC, having no participation in the negotiation of the check and in the forgery of
Lim Sio Wans indorsement, can raise the real defense of forgery as against both
banks.[57]

As to Producers Bank, Allied Banks argument that Producers Bank must be

held liable as employer of Santos under Art. 2180 of the Civil Code is erroneous.
Art. 2180 pertains to the vicarious liability of an employer for quasi-delicts that an
employee has committed. Such provision of law does not apply to civil liability
arising from delict.

One also cannot apply the principle of subsidiary liability in Art. 103 of the
Revised Penal Code in the instant case. Such liability on the part of the employer
for the civil aspect of the criminal act of the employee is based on the conviction of
the employee for a crime. Here, there has been no conviction for any crime.

As to the claim that there was unjust enrichment on the part of Producers
Bank, the same is correct. Allied correctly claims in its petition that Producers
Bank should reimburse Allied for whatever judgment that may be rendered against
it pursuant to Art. 22 of the Civil Code, which provides: Every person who through
an act of performance by another, or any other means, acquires or comes into
possession of something at the expense of the latter without just cause or legal
ground, shall return the same to him.

The above provision of law was clarified in Reyes v. Lim, where we ruled
that [t]here is unjust enrichment when a person unjustly retains a benefit to the loss
of another, or when a person retains money or property of another against the
fundamental principles of justice, equity and good conscience.[58]

In Tamio v. Ticson, we further clarified the principle of unjust

enrichment, thus: Under Article 22 of the Civil Code, there is unjust enrichment
when (1) a person is unjustly benefited, and (2) such benefit is derived at the
expense of or with damages to another.[59]

In the instant case, Lim Sio Wans money market placement in Allied Bank
was pre-terminated and withdrawn without her consent. Moreover, the proceeds of
the placement were deposited in Producers Banks account in Metrobank without
any justification. In other words, there is no reason that the proceeds of Lim Sio
Wans placement should be deposited in FCCs account purportedly as payment for
FCCs money market placement and interest in Producers Bank. With such
payment, Producers Banks indebtedness to FCC was extinguished, thereby
benefitting the former. Clearly, Producers Bank was unjustly enriched at the
expense of Lim Sio Wan. Based on the facts and circumstances of the case,
Producers Bank should reimburse Allied and Metrobank for the amounts the two
latter banks are ordered to pay Lim Sio Wan.

It cannot be validly claimed that FCC, and not Producers Bank, should be
considered as having been unjustly enriched. It must be remembered that FCCs
money market placement with Producers Bank was already due and demandable;
thus, Producers Banks payment thereof was justified. FCC was entitled to such
payment. As earlier stated, the fact that the indorsement on the check was forged
cannot be raised against FCC which was not a part in any stage of the negotiation of
the check. FCC was not unjustly enriched.

From the facts of the instant case, we see that Santos could be the architect
of the entire controversy. Unfortunately, since summons had not been served
on Santos, the courts have not acquired jurisdiction over her.[60] We, therefore,
cannot ascribe to her liability in the instant case.

Clearly, Producers Bank must be held liable to Allied and Metrobank for the
amount of the check plus 12% interest per annum, moral damages, attorneys fees,
and costs of suit which Allied and Metrobank are adjudged to pay Lim Sio Wan
based on a proportion of 60:40.
 WHEREFORE, the petition is PARTLY GRANTED. The March 18, 1998
CA Decision in CA-G.R. CV No. 46290 and the November 15, 1993 RTC
Decision in Civil Case No. 6757 are AFFIRMED with MODIFICATION.

Thus, the CA Decision is AFFIRMED, the fallo of which is reproduced, as

follows:

WHEREFORE, premises considered, the decision appealed from is

MODIFIED. Judgment is rendered ordering and sentencing defendant-
appellant Allied Banking Corporation to pay sixty (60%) percent and
defendant-appellee Metropolitan Bank and Trust Company forty (40%)
of the amount of P1,158,648.49 plus 12% interest per annum from
March 16, 1984 until fully paid. The moral damages, attorneys fees and
costs of suit adjudged shall likewise be paid by defendant-appellant
Allied Banking Corporation and defendant-appellee Metropolitan Bank
and Trust Company in the same proportion of 60-40. Except as thus
modified, the decision appealed from is AFFIRMED.

SO ORDERED.

Additionally and by way of MODIFICATION, Producers Bank is hereby

ordered to pay Allied and Metrobank the aforementioned amounts. The liabilities
of the parties are concurrent and independent of each other.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 171998 October 20, 2010

ANAMER SALAZAR, Petitioner,
vs.
J.Y. BROTHERS MARKETING CORPORATION, Respondent.

DECISION

PERALTA, J.:

Before us is a petition for review seeking to annul and set aside the Decision1 dated September 29, 2005 and the Resolution2 dated
March 2, 2006 of the Court of Appeals (CA) in CA-G.R. CV No. 83104.

The facts, as found by the Court of Appeals, are not disputed, thus:

J.Y. Brothers Marketing (J.Y. Bros., for short) is a corporation engaged in the business of selling sugar, rice and other commodities.
On October 15, 1996, Anamer Salazar, a freelance sales agent, was approached by Isagani Calleja and Jess Kallos, if she knew a
supplier of rice. Answering in the positive, Salazar accompanied the two to J.Y. Bros. As a consequence, Salazar with Calleja and
Kallos procured from J. Y. Bros. 300 cavans of rice worth 214,000.00. As payment, Salazar negotiated and indorsed to J.Y. Bros.
Prudential Bank Check No. 067481 dated October 15, 1996 issued by Nena Jaucian Timario in the amount of 214,000.00 with the
assurance that the check is good as cash. On that assurance, J.Y. Bros. parted with 300 cavans of rice to Salazar. However, upon
presentment, the check was dishonored due to "closed account."

Informed of the dishonor of the check, Calleja, Kallos and Salazar delivered to J.Y. Bros. a replacement cross Solid Bank Check No.
PA365704 dated October 29, 1996 again issued by Nena Jaucian Timario in the amount of 214,000.00 but which, just the same,
bounced due to insufficient funds. When despite the demand letter dated February 27, 1997, Salazar failed to settle the amount due
J.Y. Bros., the latter charged Salazar and Timario with the crime of estafa before the Regional Trial Court of Legaspi City, docketed
as Criminal Case No. 7474.

After the prosecution rested its case and with prior leave of court, Salazar submitted a demurrer to evidence. On November 19,
2001, the court a quo rendered an Order, the dispositive portion of which reads:

WHEREFORE, premises considered, the accused Anamer D. Salazar is hereby ACQUITTED of the crime charged but is hereby
held liable for the value of the 300 bags of rice. Accused Anamer D. Salazar is therefore ordered to pay J.Y. Brothers Marketing
Corporation the sum of 214,000.00. Costs against the accused.

SO ORDERED.

Aggrieved, accused attempted a reconsideration on the civil aspect of the order and to allow her to present evidence thereon. The
motion was denied. Accused went up to the Supreme Court on a petition for review on certiorari under Rule 45 of the Rules of
Court. Docketed as G.R. 151931, in its Decision dated September 23, 2003, the High Court ruled:

IN LIGHT OF ALL THE FOREGOING, the Petition is GRANTED. The Orders dated November 19, 2001 and January 14, 2002 are
SET ASIDE and NULLIFIED. The Regional Trial Court of Legaspi City, Branch 5, is hereby DIRECTED to set Criminal Case No.
7474 for the continuation of trial for the reception of the evidence-in-chief of the petitioner on the civil aspect of the case and for the
rebuttal evidence of the private complainant and the sur-rebuttal evidence of the parties if they opt to adduce any.

SO ORDERED.3

The Regional Trial Court (RTC) of Legaspi City, Branch 5, then proceeded with the trial on the civil aspect of the criminal case.

On April 1, 2004, the RTC rendered its Decision,4 the dispositive portion of which reads:

WHEREFORE, Premises Considered, judgment is rendered DISMISSING as against Anamer D. Salazar the civil aspect of the
above-entitled case. No pronouncement as to costs.

Place into the files (archive) the record of the above-entitled case as against the other accused Nena Jaucian Timario. Let an alias
(bench) warrant of arrest without expiry dated issue for her apprehension, and fix the amount of the bail bond for her provisional
liberty at 59,000.00 pesos.

SO ORDERED.5
The RTC found that the Prudential Bank check drawn by Timario for the amount of 214,000.00 was payable to the order of
respondent, and such check was a negotiable order instrument; that petitioner was not the payee appearing in the check, but
respondent who had not endorsed the check, much less delivered it to petitioner. It then found that petitioners liability should be
limited to the allegation in the amended information that "she endorsed and negotiated said check," and since she had never been
the holder of the check, petitioner's signing of her name on the face of the dorsal side of the check did not produce the technical
effect of an indorsement arising from negotiation. The RTC ruled that after the Prudential Bank check was dishonored, it was
replaced by a Solid Bank check which, however, was also subsequently dishonored; that since the Solid Bank check was a crossed
check, which meant that such check was only for deposit in payees account, a condition that rendered such check non-negotiable,
the substitution of a non-negotiable Solid Bank check for a negotiable Prudential Bank check was an essential change which had
the effect of discharging from the obligation whoever may be the endorser of the negotiable check. The RTC concluded that the
absence of negotiability rendered nugatory the obligation arising from the technical act of indorsing a check and, thus, had the effect
of novation; and that the ultimate effect of such substitution was to extinguish the obligation arising from the issuance of the
Prudential Bank check.

Respondent filed an appeal with the CA on the sole assignment of error that:

IN BRIEF, THE LOWER COURT ERRED IN RULING THAT ACCUSED ANAMER SALAZAR BY INDORSING THE CHECK (A) DID
NOT BECOME A HOLDER OF THE CHECK, (B) DID NOT PRODUCE THE TECHNICAL EFFECT OF AN INDORSEMENT
ARISING FROM NEGOTIATION; AND (C) DID NOT INCUR CIVIL LIABILITY.6

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

IN VIEW OF ALL THE FOREGOING, the instant appeal is GRANTED, the challenged Decision is REVERSED and SET ASIDE, and
a new one entered ordering the appellee to pay the appellant the amount of 214,000.00, plus interest at the legal rate from the
written demand until full payment. Costs against the appellee. 7

In so ruling, the CA found that petitioner indorsed the Prudential Bank check, which was later replaced by a Solid Bank check issued
by Timario, also indorsed by petitioner as payment for the 300 cavans of rice bought from respondent. The CA, applying Sections
63,8 669 and 2910 of the Negotiable Instruments Law, found that petitioner was considered an indorser of the checks paid to
respondent and considered her as an accommodation indorser, who was liable on the instrument to a holder for value,
notwithstanding that such holder at the time of the taking of the instrument knew her only to be an accommodation party.

Respondent filed a motion for reconsideration, which the CA denied in a Resolution dated March 2, 2006.

Hence this petition, wherein petitioner raises the following assignment of errors:

1. THE COURT OF APPEALS ERRED IN IGNORING THE RAMIFICATIONS OF THE ISSUANCE OF THE SOLIDBANK
CHECK IN REPLACEMENT OF THE PRUDENTIAL BANK CHECK WHICH WOULD HAVE RESULTED TO THE
NOVATION OF THE OBLIGATION ARISING FROM THE ISSUANCE OF THE LATTER CHECK.

2. THE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE REGIONAL TRIAL COURT OF
LEGASPI CITY, BRANCH 5, DISMISSING AS AGAINST THE PETITIONER THE CIVIL ASPECT OF THE CRIMINAL
ACTION ON THE GROUND OF NOVATION OF OBLIGATION ARISING FROM THE ISSUANCE OF THE PRUDENTIAL
BANK CHECK.

3. THE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION TANTAMOUNT TO LACK OR EXCESS
OF JURISDICTION WHEN IT DENIED THE MOTION FOR RECONSIDERATION OF THE PETITIONER ON THE
GROUND THAT THE ISSUE RAISED THEREIN HAD ALREADY BEEN PASSED UPON AND CONSIDERED IN THE
DECISION SOUGHT TO BE RECONSIDERED WHEN IN TRUTH AND IN FACT SUCH ISSUE HAD NOT BEEN
RESOLVED AS YET.11

Petitioner contends that the issuance of the Solid Bank check and the acceptance thereof by the respondent, in replacement of the
dishonored Prudential Bank check, amounted to novation that discharged the latter check; that respondent's acceptance of the Solid
Bank check, notwithstanding its eventual dishonor by the drawee bank, had the effect of erasing whatever criminal responsibility,
under Article 315 of the Revised Penal Code, the drawer or indorser of the Prudential Bank check would have incurred in the
issuance thereof in the amount of 214,000.00; and that a check is a contract which is susceptible to a novation just like any other
contract.

Respondent filed its Comment, echoing the findings of the CA. Petitioner filed her Reply thereto.

We find no merit in this petition.

Section 119 of the Negotiable Instrument Law provides, thus:

SECTION 119. Instrument; how discharged. A negotiable instrument is discharged:

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

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

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

(d) By any other act which will discharge a simple contract for the payment of money;

(e) When the principal debtor becomes the holder of the instrument at or after maturity in his own right. (Emphasis ours)

And, under Article 1231 of the Civil Code, obligations are extinguished:

xxxx

(6) By novation.

Petitioner's claim that respondent's acceptance of the Solid Bank check which replaced the dishonored Prudential bank check
resulted to novation which discharged the latter check is unmeritorious.

In Foundation Specialists, Inc. v. Betonval Ready Concrete, Inc. and Stronghold Insurance Co., Inc.,12 we stated the concept of
novation, thus:

x x x Novation is done by the substitution or change of the obligation by a subsequent one which extinguishes the first, either by
changing the object or principal conditions, or by substituting the person of the debtor, or by subrogating a third person in the rights
of the creditor. Novation may:

[E]ither be extinctive or modificatory, much being dependent on the nature of the change and the intention of the parties. Extinctive
novation is never presumed; there must be an express intention to novate; in cases where it is implied, the acts of the parties must
clearly demonstrate their intent to dissolve the old obligation as the moving consideration for the emergence of the new one. Implied
novation necessitates that the incompatibility between the old and new obligation be total on every point such that the old obligation
is completely superceded by the new one. The test of incompatibility is whether they can stand together, each one having an
independent existence; if they cannot and are irreconcilable, the subsequent obligation would also extinguish the first.

An extinctive novation would thus have the twin effects of, first, extinguishing an existing obligation and, second, creating a new one
in its stead. This kind of novation presupposes a confluence of four essential requisites: (1) a previous valid obligation, (2) an
agreement of all parties concerned to a new contract, (3) the extinguishment of the old obligation, and (4) the birth of a valid new
obligation. Novation is merely modificatory where the change brought about by any subsequent agreement is merely incidental to
the main obligation (e.g., a change in interest rates or an extension of time to pay; in this instance, the new agreement will not have
the effect of extinguishing the first but would merely supplement it or supplant some but not all of its provisions.)

The obligation to pay a sum of money is not novated by an instrument that expressly recognizes the old, changes only the terms of
payment, adds other obligations not incompatible with the old ones or the new contract merely supplements the old one.13

In Nyco Sales Corporation v. BA Finance Corporation,14 we found untenable petitioner Nyco's claim that novation took place when
the dishonored BPI check it endorsed to BA Finance Corporation was subsequently replaced by a Security Bank check, 15 and said:

There are only two ways which indicate the presence of novation and thereby produce the effect of extinguishing an obligation by
another which substitutes the same. First, novation must be explicitly stated and declared in unequivocal terms as novation is never
presumed. Secondly, the old and the new obligations must be incompatible on every point. The test of incompatibility is whether or
1avv phi 1

not the two obligations can stand together, each one having its independent existence. If they cannot, they are incompatible and the
latter obligation novates the first. In the instant case, there was no express agreement that BA Finance's acceptance of the SBTC
check will discharge Nyco from liability. Neither is there incompatibility because both checks were given precisely to terminate a
single obligation arising from Nyco's sale of credit to BA Finance. As novation speaks of two distinct obligations, such is inapplicable
to this case.16
In this case, respondents acceptance of the Solid Bank check, which replaced the dishonored Prudential Bank check, did not result
to novation as there was no express agreement to establish that petitioner was already discharged from his liability to pay
respondent the amount of 214,000.00 as payment for the 300 bags of rice. As we said, novation is never presumed, there must be
an express intention to novate. In fact, when the Solid Bank check was delivered to respondent, the same was also indorsed by
petitioner which shows petitioners recognition of the existing obligation to respondent to pay 214,000.00 subject of the replaced
Prudential Bank check.

Moreover, respondents acceptance of the Solid Bank check did not result to any incompatibility, since the two checks Prudential
and Solid Bank checks were precisely for the purpose of paying the amount of 214,000.00, i.e., the credit obtained from the
purchase of the 300 bags of rice from respondent. Indeed, there was no substantial change in the object or principal condition of the
obligation of petitioner as the indorser of the check to pay the amount of 214,000.00. It would appear that respondent accepted the
Solid Bank check to give petitioner the chance to pay her obligation.

Petitioner also contends that the acceptance of the Solid Bank check, a non-negotiable check being a crossed check, which
replaced the dishonored Prudential Bank check, a negotiable check, is a new obligation in lieu of the old obligation arising from the
issuance of the Prudential Bank check, since there was an essential change in the circumstance of each check.

Such argument deserves scant consideration.

Among the different types of checks issued by a drawer is the crossed check.17 The Negotiable Instruments Law is silent with
respect to crossed checks,18 although the Code of Commerce makes reference to such instruments.19 We have taken judicial
cognizance of the practice that a check with two parallel lines in the upper left hand corner means that it could only be deposited
and could not be converted into cash.20 Thus, the effect of crossing a check relates to the mode of payment, meaning that the
drawer had intended the check for deposit only by the rightful person, i.e., the payee named therein.21 The change in the mode of
paying the obligation was not a change in any of the objects or principal condition of the contract for novation to take place.22

Considering that when the Solid Bank check, which replaced the Prudential Bank check, was presented for payment, the same was
again dishonored; thus, the obligation which was secured by the Prudential Bank check was not extinguished and the Prudential
Bank check was not discharged. Thus, we found no reversible error committed by the CA in holding petitioner liable as an
accommodation indorser for the payment of the dishonored Prudential Bank check.

WHEREFORE, the petition is DENIED. The Decision dated September 29, 2005 and the Resolution dated March 2, 2006, of the
Court of Appeals in CA-G.R. CV No. 83104, are AFFIRMED.

SO ORDERED.

DIOSDADO M. PERALTA
Associate Justice

Republic of the Philippines

Supreme Court
Manila

FIRST DIVISION

EQUITABLE BANKING G.R. No. 175350

CORPORATION,
Petitioner, Present:

LEONARDO-DE CASTRO,
Acting Chairperson,
 - versus - BERSAMIN,
DEL CASTILLO,
VILLARAMA, JR., and
PERLAS-BERNABE, JJ.
SPECIAL STEEL PRODUCTS,
INC. and AUGUSTO L. PARDO, Promulgated:
Respondents. June 13, 2012
x-----------------------------------------------------------------
--x

DECISION

DEL CASTILLO, J.:

A crossed check with the notation account payee only can only be deposited in the named
payees account. It is gross negligence for a bank to ignore this rule solely on the basis of a
third partys oral representations of having a good title thereto.

Before the Court is a Petition for Review on Certiorari of the October 13, 2006 Decision
of the Court of Appeals (CA) in CA-G.R. CV No. 62425. The dispositive portion of the
assailed Decision reads:

WHEREFORE, premises considered, the May 4, 1998 Decision of

the Regional Trial Court of Pasig City, Branch 168, in Civil Case No. 63561,
is hereby AFFIRMED.

SO ORDERED.[1]

Factual Antecedents

Respondent Special Steel Products, Inc. (SSPI) is a private domestic corporation selling
steel products. Its co-respondent Augusto L. Pardo (Pardo) is SSPIs President and
majority stockholder.[2]

International Copra Export Corporation (Interco) is its regular customer.[3]

Jose Isidoro[4] Uy, alias Jolly Uy (Uy), is an Interco employee, in charge of the
purchasing department, and the son-in-law of its majority stockholder.[5]
Petitioner Equitable Banking Corporation (Equitable or bank) is a private domestic
corporation engaged in banking[6] and is the depository bank of Interco and of Uy.

In 1991, SSPI sold welding electrodes to Interco, as evidenced by the following sales
invoices:

Sales Invoice No. 65042 dated February 14, 1991 for P325,976.34[7]
Sales Invoice No. 65842 dated April 11, 1991 for P345,412.80[8]
Sales Invoice No. 65843 dated April 11, 1991 for P313,845.84[9]

The due dates for these invoices were March 16, 1991 (for the first sales invoice) and
May 11, 1991 (for the others). The invoices provided that Interco would pay interest at
the rate of 36% per annum in case of delay.

In payment for the above welding electrodes, Interco issued three checks payable to the
order of SSPI on July 10, 1991,[10] July 16, 1991,[11] and July 29, 1991.[12] Each check was
crossed with the notation account payee only and was drawn against Equitable. The
records do not identify the signatory for these three checks, or explain how Uy, Intercos
purchasing officer, came into possession of these checks.

The records only disclose that Uy presented each crossed check to Equitable on the day
of its issuance and claimed that he had good title thereto.[13] He demanded the deposit of
the checks in his personal accounts in Equitable, Account No. 18841-2 and Account No.
03474-0.[14]

Equitable acceded to Uys demands on the assumption that Uy, as the son-in-law of
Intercos majority stockholder,[15] was acting pursuant to Intercos orders. The bank also
relied on Uys status as a valued client.[16] Thus, Equitable accepted the checks for deposit
in Uys personal accounts[17] and stamped ALL PRIOR ENDORSEMENT AND/OR
LACK OF ENDORSEMENT GUARANTEED on their dorsal portion.[18] Uy promptly
withdrew the proceeds of the checks.

In October 1991, SSPI reminded Interco of the unpaid welding electrodes, amounting
to P985,234.98.[19] It reiterated its demand on January 14, 1992.[20] SSPI explained its
immediate need for payment as it was experiencing some financial crisis of its
own. Interco replied that it had already issued three checks payable to SSPI and drawn
against Equitable. SSPI denied receipt of these checks.
On August 6, 1992, SSPI requested information from Equitable regarding the three
checks. The bank refused to give any information invoking the confidentiality of
deposits.[21]

The records do not disclose the circumstances surrounding Intercos and SSPIs eventual
discovery of Uys scheme. Nevertheless, it was determined that Uy, not SSPI, received
the proceeds of the three checks that were payable to SSPI. Thus, on June 30, 1993
(twenty-three months after the issuance of the three checks), Interco finally paid the value
of the three checks to SSPI, plus a portion of the accrued interests. Interco refused to pay
the entire accrued interest of P767,345.64 on the ground that it was not responsible for
the delay. Thus, SSPI was unable to collect P437,040.35 (at the contracted rate of 36%
per annum) in interest income.[22]

SSPI and its president, Pardo, filed a complaint for damages with application for a writ of
preliminary attachment against Uy and Equitable Bank. The complaint alleged that the
three crossed checks, all payable to the order of SSPI and with the notation account payee
only, could be deposited and encashed by SSPI only. However, due to Uys fraudulent
representations, and Equitables indispensable connivance or gross negligence, the
restrictive nature of the checks was ignored and the checks were deposited in Uys
account. Had the defendants not diverted the three checks in July 1991, the plaintiffs
could have used them in their business and earned money from them. Thus, the plaintiffs
prayed for an award of actual damages consisting of the unrealized interest income from
the proceeds of the checks for the two-year period that the defendants withheld the
proceeds from them (from July 1991 up to June 1993).[23]

In his personal capacity, Pardo claimed an award of P3 million as moral damages from
the defendants. He allegedly suffered hypertension, anxiety, and sleepless nights for fear
that the government would charge him for tax evasion or money laundering. He
maintained that defendants actions amounted to money laundering and that it unfairly
implicated his company in the scheme. As for his fear of tax evasion, Pardo explained
that the Bureau of Internal Revenue might notice a discrepancy between the financial
reports of Interco (which might have reported the checks as SSPIs income in 1991) and
those of SSPI (which reported the income only in 1993). Since Uy and Equitable were
responsible for Pardos worries, they should compensate him jointly and severally
therefor.[24]

SSPI and Pardo also prayed for exemplary damages and attorneys fees.[25]
In support of their application for preliminary attachment, the plaintiffs alleged that the
defendants are guilty of fraud in incurring the obligation upon which the action was
brought and that there is no sufficient security for the claim sought to be enforced in this
action.[26]

The trial court granted plaintiffs application.[27] It issued the writ of preliminary
attachment on September 20, 1993,[28] upon the filing of plaintiffs bond
for P500,000.00. The sheriff served and implemented the writ against the personal
properties of both defendants.[29]

Upon Equitables motion and filing of a counter-bond, however, the trial court eventually
discharged the attachment[30] against it.[31]

Equitable then argued for the dismissal of the complaint for lack of cause of action. It
maintained that interest income is due only when it is expressly stipulated in
writing. Since Equitable and SSPI did not enter into any contract, Equitable is not
liable for damages, in the form of unobtained interest income, to SSPI.[32] Moreover,
SSPIs acceptance of Intercos payment on the sales invoices is a waiver or extinction of
SSPIs cause of action based on the three checks.[33]

Equitable further argued that it is not liable to SSPI because it accepted the three crossed
checks in good faith.[34] Equitable averred that, due to Uys close relations with the drawer
of the checks, the bank had basis to assume that the drawer authorized Uy to
countermand the original order stated in the check (that it can only be deposited in the
named payees account). Since only Uy is responsible for the fraudulent conversion of the
checks, he should reimburse Equitable for any amounts that it may be made liable to
plaintiffs.[35]

The bank counter-claimed that SSPI is liable to it in damages for the wrongful and
malicious attachment of Equitables personal properties. The bank maintained that SSPI
knew that the allegation of fraud against the bank is a falsehood. Further, the bank is
financially capable to meet the plaintiffs claim should the latter receive a favorable
judgment. SSPI was aware that the preliminary attachment against the bank was
unnecessary, and intended only to humiliate or destroy the banks reputation.[36]

Meanwhile, Uy answered that the checks were negotiated to him; that he is a holder for
value of the checks and that he has a good title thereto.[37] He did not, however, explain
how he obtained the checks, from whom he obtained his title, and the value for which he
received them. During trial, Uy did not present any evidence but adopted Equitables
evidence as his own.
Ruling of the Regional Trial Court [38]

The RTC clarified that SSPIs cause of action against Uy and Equitable is for quasi-
delict. SSPI is not seeking to enforce payment on the undelivered checks from the
defendants, but to recover the damage that it sustained from the wrongful non-delivery of
the checks.[39]

The crossed checks belonged solely to the payee named therein, SSPI. Since SSPI did not
authorize anyone to receive payment in its behalf, Uy clearly had no title to the checks
and Equitable had no right to accept the said checks from Uy. Equitable was negligent in
permitting Uy to deposit the checks in his account without verifying Uys right to endorse
the crossed checks. The court reiterated that banks have the duty to scrutinize the checks
deposited with it, for a determination of their genuineness and regularity. The law holds
banks to a high standard because banks hold themselves out to the public as experts in the
field. Thus, the trial court found Equitables explanation regarding Uys close relations
with the drawer unacceptable.[40]

Uys conversion of the checks and Equitables negligence make them liable to compensate
SSPI for the actual damage it sustained. This damage consists of the income that SSPI
failed to realize during the delay.[41] The trial court then equated this unrealized income
with the interest income that SSPI failed to collect from Interco. Thus, it ordered Uy and
Equitable to pay, jointly and severally, the amount of P437,040.35 to SSPI as actual
damages.[42]

It also ordered the defendants to pay exemplary damages of P500,000.00, attorneys fees
amounting to P200,000.00, as well as costs of suit.[43]
The trial court likewise found merit in Pardos claim for moral damages. It found that
Pardo suffered anxiety, sleepless nights, and hypertension in fear that he would face
criminal prosecution.The trial court awarded Pardo the amount of P3 million in moral
damages.[44]

The dispositive portion of the trial courts Decision reads:

WHEREFORE, judgment is hereby rendered in favor of plaintiffs Special

Steel Products, Inc., and Augusto L. Pardo and against defendants Equitable
Banking Corporation [and] Jose Isidoro Uy, alias Jolly Uy, ordering
defendants to jointly and severally pay plaintiffs the following:

1. P437,040.35 as actual damages;

2. P3,000,000.00 as moral damages to Augusto L. Pardo;
 3. P500,000.00 as exemplary damages;
4. P200,000.00 as attorneys fees; and
5. Costs of suit.

Defendant EBCs counterclaim is hereby DISMISSED for lack of factual and

legal basis.

Likewise, the crossclaim filed by defendant EBC against defendant Jose

Isidoro Uy and the crossclaim filed by defendant Jose Isidoro Uy against
defendant EBC are hereby DISMISSED for lack of factual and legal basis.

SO ORDERED.

Pasig City, May 4, 1998.[45]

The trial court denied Equitables motion for reconsideration in its Order dated November
19, 1998.[46]

Only Equitable appealed to the CA,[47] reiterating its defenses below.

Appealed Ruling of the Court of Appeals[48]

The appellate court found no merit in Equitables appeal.

It affirmed the trial courts ruling that SSPI had a cause of action for quasi-delict against
Equitable.[49] The CA noted that the three checks presented by Uy to Equitable were
crossed checks, and strictly made payable to SSPI only. This means that the checks could
only be deposited in the account of the named payee.[50] Thus, the CA found that
Equitable had the responsibility of ensuring that the crossed checks are deposited in
SSPIs account only. Equitable violated this duty when it allowed the deposit of the
crossed checks in Uys account.[51]
The CA found factual and legal basis to affirm the trial courts award of moral damages in
favor of Pardo.[52]

It likewise affirmed the award of exemplary damages and attorneys fees in favor of
SSPI.[53]

Issues

1. Whether SSPI has a cause of action against Equitable for quasi-delict;

2. Whether SSPI can recover, as actual damages, the stipulated 36% per annum interest
from Equitable;

3. Whether speculative fears and imagined scenarios, which cause sleepless nights, may
be the basis for the award of moral damages; and

4. Whether the attachment of Equitables personal properties was wrongful.

Our Ruling

SSPIs cause of action

This case involves a complaint for damages based on quasi-delict. SSPI asserts that it did
not receive prompt payment from Interco in July 1991 because of Uys wilful and illegal
conversion of the checks payable to SSPI, and of Equitables gross negligence, which
facilitated Uys actions. The combined actions of the defendants deprived SSPI of interest
income on the said moneys from July 1991 until June 1993. Thus, SSPI claims damages
in the form of interest income for the said period from the parties who wilfully or
negligently withheld its money from it.

Equitable argues that SSPI cannot assert a right against the bank based on the undelivered
checks.[54] It cites provisions from the Negotiable Instruments Law and the case
of Development Bank of Rizal v. Sima Wei[55] to argue that a payee, who did not receive
the check, cannot require the drawee bank to pay it the sum stated on the checks.

Equitables argument is misplaced and beside the point. SSPIs cause of action is not based
on the three checks. SSPI does not ask Equitable or Uy to deliver to it the proceeds of the
checks as the rightful payee. SSPI does not assert a right based on the undelivered checks
or for breach of contract. Instead, it asserts a cause of action based on quasi-delict. A
quasi-delict is an act or omission, there being fault or negligence, which causes damage
to another. Quasi-delicts exist even without a contractual relation between the
parties. The courts below correctly ruled that SSPI has a cause of action for quasi-delict
against Equitable.

The checks that Interco issued in favor of SSPI were all crossed, made payable to SSPIs
order, and contained the notation account payee only. This creates a reasonable
expectation that the payee alone would receive the proceeds of the checks and that
diversion of the checks would be averted. This expectation arises from the accepted
banking practice that crossed checks are intended for deposit in the named payees
account only and no other.[56] At the very least, the nature of crossed checks should place
a bank on notice that it should exercise more caution or expend more than a cursory
inquiry, to ascertain whether the payee on the check has authorized the holder to deposit
the same in a different account. It is well to remember that [t]he banking system has
become an indispensable institution in the modern world and plays a vital role in the
economic life of every civilized society. Whether as mere passive entities for the safe-
keeping and saving of money or as active instruments of business and commerce, banks
have attained an [sic] ubiquitous presence among the people, who have come to regard
them with respect and even gratitude and, above all, trust and confidence. In this
connection, it is important that banks should guard against injury attributable to
negligence or bad faith on its part. As repeatedly emphasized, since the banking business
is impressed with public interest, the trust and confidence of the public in it is of
paramount importance. Consequently, the highest degree of diligence is expected, and
high standards of integrity and performance are required of it.[57]

Equitable did not observe the required degree of diligence expected of a banking
institution under the existing factual circumstances.

The fact that a person, other than the named payee of the crossed check, was presenting it
for deposit should have put the bank on guard. It should have verified if the payee (SSPI)
authorized the holder (Uy) to present the same in its behalf, or indorsed it to
him. Considering however, that the named payee does not have an account with
Equitable (hence, the latter has no specimen signature of SSPI by which to judge the
genuineness of its indorsement to Uy), the bank knowingly assumed the risk of relying
solely on Uys word that he had a good title to the three checks.Such misplaced reliance
on empty words is tantamount to gross negligence, which is the absence of or failure to
exercise even slight care or diligence, or the entire absence of care, evincing a thoughtless
disregard of consequences without exerting any effort to avoid them.[58]

Equitable contends that its knowledge that Uy is the son-in-law of the majority
stockholder of the drawer, Interco, made it safe to assume that the drawer authorized Uy
to countermand the order appearing on the check. In other words, Equitable theorizes that
Interco reconsidered its original order and decided to give the proceeds of the checks to
Uy.[59] That the bank arrived at this conclusion without anything on the face of the checks
to support it is demonstrative of its lack of caution. It is troubling that Equitable
proceeded with the transaction based only on its knowledge that Uy had close relations
with Interco. The bank did not even make inquiries with the drawer, Interco (whom the
bank considered a valued client), to verify Uys representation.The banking system is
placed in peril when bankers act out of blind faith and empty promises, without requiring
proof of the assertions and without making the appropriate inquiries. Had it only
exercised due diligence, Equitable could have saved both Interco and the named payee,
SSPI, from the trouble that the banks mislaid trust wrought for them.
Equitables pretension that there is nothing under the circumstances that rendered Uys title
to the checks questionable is outrageous. These are crossed checks, whose manner of
discharge, in banking practice, is restrictive and specific. Uys name does not appear
anywhere on the crossed checks. Equitable, not knowing the named payee on the check,
had no way of verifying for itself the alleged genuineness of the indorsement to Uy. The
checks bear nothing on their face that supports the belief that the drawer gave the checks
to Uy. Uys relationship to Intercos majority stockholder will not justify disregarding what
is clearly ordered on the checks.

Actual damages

For its role in the conversion of the checks, which deprived SSPI of the use
thereof, Equitable is solidarily liable with Uy to compensate SSPI for the damages it
suffered.

Among the compensable damages are actual damages, which encompass the value of the
loss sustained by the plaintiff, and the profits that the plaintiff failed to obtain.[60] Interest
payments, which SSPI claims, fall under the second category of actual damages.

SSPI computed its claim for interest payments based on the interest rate stipulated in its
contract with Interco. It explained that the stipulated interest rate is the actual interest
income it had failed to obtain from Interco due to the defendants tortious conduct.
The Court finds the application of the stipulated interest rate erroneous.

SSPI did not recover interest payments at the stipulated rate from Interco because it
agreed that the delay was not Intercos fault, but that of the defendants. If that is the case,
then Interco is not in delay (at least not after issuance of the checks) and the stipulated
interest payments in their contract did not become operational. If Interco is not liable to
pay for the 36% per annum interest rate, then SSPI did not lose that income. SSPI cannot
lose something that it was not entitled to in the first place. Thus, SSPIs claim that it was
entitled to interest income at the rate stipulated in its contract with Interco, as a measure
of its actual damage, is fallacious.

More importantly, the provisions of a contract generally take effect only among the
parties, their assigns and heirs.[61] SSPI cannot invoke the contractual stipulation on
interest payments against Equitable because it is neither a party to the contract, nor an
assignee or an heir to the contracting parties.
Nevertheless, it is clear that defendants actions deprived SSPI of the present use of its
money for a period of two years. SSPI is therefore entitled to obtain from the tortfeasors
the profits that it failed to obtain from July 1991 to June 1993. SSPI should recover
interest at the legal rate of 6% per annum,[62] this being an award for damages based on
quasi-delict and not for a loan or forbearance of money.

Moral damages
Both the trial and appellate courts awarded Pardo P3 million in moral damages. Pardo
claimed that he was frightened, anguished, and seriously anxious that the government
would prosecute him for money laundering and tax evasion because of defendants
actions.[63] In other words, he was worried about the repercussions that defendants actions
would have on him.

Equitable argues that Pardos fears are all imagined and should not be compensated. The
bank points out that none of Pardos fears panned out.[64]
Moral damages are recoverable only when they are the proximate result of the defendants
wrongful act or omission.[65] Both the trial and appellate courts found that Pardo indeed
suffered as a result of the diversion of the three checks. It does not matter that the things
he was worried and anxious about did not eventually materialize. It is rare for a person,
who is beset with mounting problems, to sift through his emotions and distinguish which
fears or anxieties he should or should not bother with. So long as the injured partys moral
sufferings are the result of the defendants actions, he may recover moral damages.

The Court, however, finds the award of P3 million excessive. Moral damages are given
not to punish the defendant but only to give the plaintiff the means to assuage his
sufferings with diversions and recreation.[66] We find that the award of P50,000.00[67] as
moral damages is reasonable under the circumstances.

Equitable to recover amounts from Uy

Equitable then insists on the allowance of their cross-claim against Uy. The bank argues
that it was Uy who was enriched by the entire scheme and should reimburse Equitable for
whatever amounts the Court might order it to pay in damages to SSPI.[68]

Equitable is correct. There is unjust enrichment when (1) a person is unjustly benefited,
and (2) such benefit is derived at the expense of or with damages to another.[69] In the
instant case, the fraudulent scheme concocted by Uy allowed him to improperly receive
the proceeds of the three crossed checks and enjoy the profits from these proceeds during
the entire time that it was withheld from SSPI. Equitable, through its gross negligence
and mislaid trust on Uy, became an unwitting instrument in Uys scheme. Equitables fault
renders it solidarily liable with Uy, insofar as respondents are concerned. Nevertheless, as
between Equitable and Uy, Equitable should be allowed to recover from Uy whatever
amounts Equitable may be made to pay under the judgment. It is clear that Equitable did
not profit in Uys scheme. Disallowing Equitables cross-claim against Uy is tantamount to
allowing Uy to unjustly enrich himself at the expense of Equitable. For this reason, the
Court allows Equitables cross-claim against Uy.

Preliminary attachment

Equitable next assails as error the trial courts dismissal of its counter-claim for wrongful
preliminary attachment. It maintains that, contrary to SSPIs allegation in its application
for the writ, there is no showing whatsoever that Equitable was guilty of fraud in
allowing Uy to deposit the checks. Thus, the trial court should not have issued the writ of
preliminary attachment in favor of SSPI. The wrongful attachment compelled Equitable
to incur expenses for a counter-bond, amounting to P30,204.26, and caused it to sustain
damage, amounting to P5 million, to its goodwill and business credit.[70]

SSPI submitted the following affidavit in support of its application for a writ of
preliminary attachment:

I, Augusto L. Pardo, of legal age, under oath hereby depose and declare:

1. I am one of the plaintiffs in the above-entitled case; the other plaintiff

is our family corporation, Special Steel Products, Inc., of which I am the
president and majority stockholder; I caused the preparation of the foregoing
Complaint, the allegations of which I have read, and which I hereby affirm to
be true and correct out of my own personal knowledge;

2. The corporation and I have a sufficient cause of action against

defendants Isidoro Uy alias Jolly Uy and Equitable Banking Corporation, who
are guilty of fraud in incurring the obligation upon which this action is
brought, as particularly alleged in the Complaint, which allegations I hereby
adopt and reproduce herein;

3. There is no sufficient security for our claim in this action and that the
amount due us is as much as the sum for which the order is granted above all
legal counterclaims;

4. We are ready and able to put up a bond executed to the defendants in

an amount to be fixed by the Court[,] conditioned on the payment of all
costs[,] which may be adjudged to defendants[,] and all damages[,] which they
 may sustain by reason of the attachment of the court, should [the court] finally
adjudge that we are not entitled thereto.[71]

The complaint (to which the supporting affidavit refers) cites the following factual
circumstances to justify SSPIs application:

6. x x x Yet, notwithstanding the fact that SPECIAL STEEL did not

open an account with EQUITABLE BANK as already alleged, thru its
connivance with defendant UY in his fraudulent scheme to defraud SPECIAL
STEEL, or at least thru its gross negligence EQUITABLE BANK consented
to or allowed the opening of Account No. 18841-2 at its head office and
Account No. 03474-0 at its Ermita Branch in the name of SPECIAL STEEL
without the latters knowledge, let alone authority or consent, but obviously on
the bases of spurious or falsified documents submitted by UY or under his
authority, which documents EQUITABLE BANK did not bother to verify or
check their authenticity with SPECIAL STEEL.[72]

xxxx

9. On August 6, 1992, plaintiffs, thru counsel, wrote EQUITABLE

BANK about the fraudulent transactions involving the aforesaid checks, which
could not have been perpetrated without its indispensable participation and
cooperation, or gross negligence, and therein solicited its cooperation in
securing information as to the anomalous and irregular opening of the false
accounts maintained in SPECIAL STEELs name, but EQUITABLE BANK
malevolently shirking from its responsibility to prevent the further perpetration
of fraud, conveniently, albeit unjustifiably, invoked the confidentiality of the
deposits and refused to give any information, and accordingly denied
SPECIAL STEELs valid request, thereby knowingly shielding the identity of
the ma[le]factors involved [in] the unlawful and fraudulent transactions.[73]

The above affidavit and the allegations of the complaint are bereft of specific and definite
allegations of fraud against Equitable that would justify the attachment of its
properties. In fact, SSPI admits its uncertainty whether Equitables participation in the
transactions involved fraud or was a result of its negligence. Despite such uncertainty
with respect to Equitables participation, SSPI applied for and obtained a preliminary
attachment of Equitables properties on the ground of fraud. We believe that such
preliminary attachment was wrongful. [A] writ of preliminary attachment is too harsh a
provisional remedy to be issued based on mere abstractions of fraud. Rather, the rules
require that for the writ to issue, there must be a recitation of clear and concrete factual
circumstances manifesting that the debtor practiced fraud upon the creditor at the time of
the execution of their agreement in that said debtor had a preconceived plan or intention
not to pay the creditor.[74] No proof was adduced tending to show that Equitable had a
preconceived plan not to pay SSPI or had knowingly participated in Uys scheme.

That the plaintiffs eventually obtained a judgment in their favor does not detract
from the wrongfulness of the preliminary attachment. While the evidence warrants [a]
judgment in favor of [the] applicant, the proofs may nevertheless also establish that said
applicants proffered ground for attachment was inexistent or specious, and hence, the writ
should not have issued at all x x x.[75]

For such wrongful preliminary attachment, plaintiffs may be held liable for
damages. However, Equitable is entitled only to such damages as its evidence would
allow,[76] for the wrongfulness of an attachment does not automatically warrant the award
of damages. The debtor still has the burden of proving the nature and extent of the injury
that it suffered by reason of the wrongful attachment.[77]

The Court has gone over the records and found that Equitable has duly proved its claim
for, and is entitled to recover, actual damages. In order to lift the wrongful attachment of
Equitables properties, the bank was compelled to pay the total amount of P30,204.26 in
premiums for a counter-bond.[78] However, Equitable failed to prove that it sustained
damage to its goodwill and business credit in consequence of the alleged wrongful
attachment. There was no proof of Equitables contention that respondents actions caused
it public embarrassment and a bank run.

WHEREFORE, premises considered, the Petition is PARTIALLY GRANTED. The

assailed October 13, 2006 Decision of the Court of Appeals in CA-G.R. CV No. 62425
is MODIFIED by:

1. REDUCING the award of actual damages to respondents to the rate of 6% per

annum of the value of the three checks from July 1991 to June 1993 or a period of
twenty-three months;

2. REDUCING the award of moral damages in favor of Augusto L. Pardo

from P3,000,000.00 to P 50,000.00; and

3. REVERSING the dismissal of Equitable Banking Corporations cross-claim

against Jose Isidoro Uy, alias Jolly Uy. Jolly Uy is
hereby ORDERED to REIMBURSE Equitable Banking Corporation the amounts that
the latter will pay to respondents.

Additionally, the Court hereby REVERSES the dismissal of Equitable Banking

Corporations counterclaim for damages against Special Steel Products, Inc. This
Court ORDERS Special Steel Products, Inc. to PAY Equitable Banking
Corporation actual damages in the total amount of P30,204.36, for the wrongful
preliminary attachment of its properties.

The rest of the assailed Decision is AFFIRMED.

SO ORDERED.

MARIANO C. DEL CASTILLO

Associate Justice

Republic of the Philippines

Supreme Court
Manila

SECOND DIVISION

PHILIPPINE COMMERCIAL G.R. No. 158143

INTERNATIONAL BANK,
Petitioner, Present:

VELASCO, JR.,* J.,

BRION,**
- versus - Acting Chairperson,
PEREZ,
SERENO, and
REYES, JJ.
ANTONIO B. BALMACEDA and ROLANDO
N. RAMOS, Promulgated:
Respondents.
September 21, 2011

x------------------------------------------------------------------------------------x

DECISION

BRION, J.:

Before us is a petition for review on certiorari,[1] filed by the Philippine

Commercial International Bank[2] (Bank or PCIB), to reverse and set aside the
decision[3] dated April 29, 2003 of the Court of Appeals (CA) in CA-G.R. CV No.
69955. The CA overturned the September 22, 2000 decision of the Regional Trial
Court (RTC) of Makati City, Branch 148, in Civil Case No. 93-3181, which held
respondent Rolando Ramos liable to PCIB for the amount of P895,000.00.

FACTUAL ANTECEDENTS
On September 10, 1993, PCIB filed an action for recovery of sum of money
with damages before the RTC against Antonio Balmaceda, the Branch Manager of
its Sta. Cruz, Manila branch. In its complaint, PCIB alleged that between 1991 and
1993, Balmaceda, by taking advantage of his position as branch manager,
fraudulently obtained and encashed 31 Managers checks in the total amount of
Ten Million Seven Hundred Eighty Two Thousand One Hundred Fifty Pesos
(P10,782,150.00).

On February 28, 1994, PCIB moved to be allowed to file an amended complaint to

implead Rolando Ramos as one of the recipients of a portion of the proceeds from
Balmacedas alleged fraud. PCIB also increased the number of fraudulently
obtained and encashed Managers checks to 34, in the total amount of Eleven
Million Nine Hundred Thirty Seven Thousand One Hundred Fifty Pesos
(P11,937,150.00). The RTC granted this motion.
Since Balmaceda did not file an Answer, he was declared in default. On the other
hand, Ramos filed an Answer denying any knowledge of Balmacedas scheme.
According to Ramos, he is a reputable businessman engaged in the business of
buying and selling fighting cocks, and Balmaceda was one of his clients. Ramos
admitted receiving money from Balmaceda as payment for the fighting cocks that
he sold to Balmaceda, but maintained that he had no knowledge of the source of
Balmacedas money.

THE RTC DECISION

On September 22, 2000, the RTC issued a decision in favor of PCIB, with the
following dispositive portion:

WHEREFORE, premises considered, judgment is hereby rendered

in favor of the plaintiff and against the defendants as follows:

1. Ordering defendant Antonio Balmaceda to pay the amount

of P11,042,150.00 with interest thereon at the legal rate from [the]
date of his misappropriation of the said amount until full restitution
shall have been made[.]

2. Ordering defendant Rolando Ramos to pay the amount

of P895,000.00 with interest at the legal rate from the date of
misappropriation of the said amount until full restitution shall have
been made[.]

3. Ordering the defendants to pay plaintiff moral damages in the

sum of P500,000.00 and attorneys fees in the amount of ten (10%)
percent of the total misappropriated amounts sought to be recovered.

4. Plus costs of suit.

SO ORDERED.[4]
 From the evidence presented, the RTC found that Balmaceda, by taking
undue advantage of his position and authority as branch manager of the Sta. Cruz,
Manila branch of PCIB, successfully obtained and misappropriated the banks
funds by falsifying several commercial documents. He accomplished this by
claiming that he had been instructed by one of the Banks corporate clients to
purchase Managers checks on its behalf, with the value of the checks to be
debited from the clients corporate bank account. First, he would instruct the Bank
staff to prepare the application forms for the purchase of Managers checks,
payable to several persons. Then, he would forge the signature of the clients
authorized representative on these forms and sign the forms as PCIBs approving
officer. Finally, he would have an authorized officer of PCIB issue the Managers
checks. Balmaceda would subsequently ask his subordinates to release the
Managers checks to him, claiming that the client had requested that he deliver
the checks.[5] After receiving the Managers checks, he encashed them by forging
the signatures of the payees on the checks.

In ruling that Ramos acted in collusion with Balmaceda, the RTC noted that
although the Managers checks payable to Ramos were crossed checks, Balmaceda
was still able to encash the checks.[6] After Balmaceda encashed three of these
Managers checks, he deposited most of the money into Ramos account.[7] The
RTC concluded that from the P11,937,150.00 that Balmaceda misappropriated
from PCIB, P895,000.00 actually went to Ramos. Since the RTC disbelieved Ramos
allegation that the sum of money deposited into his Savings Account (PCIB, Pasig
branch) were proceeds from the sale of fighting cocks, it held Ramos liable to pay
PCIB the amount of P895,000.00.

THE COURT OF APPEALS DECISION

On appeal, the CA dismissed the complaint against Ramos, holding that no

sufficient evidence existed to prove that Ramos colluded with Balmaceda in the
latters fraudulent manipulations.[8]

According to the CA, the mere fact that Balmaceda made Ramos the payee in
some of the Managers checks does not suffice to prove that Ramos was complicit
in Balmacedas fraudulent scheme. It observed that other persons were also
named as payees in the checks that Balmaceda acquired and encashed, and PCIB
only chose to go after Ramos. With PCIBs failure to prove Ramos actual
participation in Balmacedas fraud, no legal and factual basis exists to hold him
liable.

The CA also found that PCIB acted illegally in freezing and

debiting P251,910.96 from Ramos bank account. The CA thus decreed:

WHEREFORE, the appeal is granted. The Decision of the trial court

rendered on September 22, 2000[,] insofar as appellant Ramos is
concerned, is SET ASIDE, and the complaint below against him is
DISMISSED.

Appellee is hereby ordered to release the amount of P251,910.96 to

appellant Ramos plus interest at [the] legal rate computed from
September 30, 1993 until appellee shall have fully complied therewith.

Appellee is likewise ordered to pay appellant Ramos the following:

a) P50,000.00 as moral damages

b) P50,000.00 as exemplary damages, and
c) P20,000.00 as attorneys fees.

No costs.

SO ORDERED.[9]

THE PETITION

In the present petition, PCIB avers that:

I
THE APPELLATE COURT ERRED IN HOLDING THAT THERE IS NO
EVIDENCE TO HOLD THAT RESPONDENT RAMOS ACTED IN COMPLICITY
WITH RESPONDENT BALMACEDA

II
 THE APPELLATE COURT ERRED IN ORDERING THE PETITIONER TO
RELEASE THE AMOUNT OF P251,910.96 TO RESPONDENT RAMOS AND
TO PAY THE LATTER MORAL AND EXEMPLARY DAMAGES AND
ATTORNEYS FEES[10]

PCIB contends that the circumstantial evidence shows that Ramos had
knowledge of, and acted in complicity with Balmaceda in, the perpetuation of the
fraud. Ramos explanation that he is a businessman and that he received the
Managers checks as payment for the fighting cocks he sold to Balmaceda is
unconvincing, given the large sum of money involved. While Ramos presented
evidence that he is a reputable businessman, this evidence does not explain why
the Managers checks were made payable to him in the first place.

PCIB maintains that it had the right to freeze and debit the amount
of P251,910.96 from Ramos bank account, even without his consent, since legal
compensation had taken place between them by operation of law. PCIB debited
Ramos bank account, believing in good faith that Ramos was not entitled to the
proceeds of the Managers checks and was actually privy to the fraud perpetrated
by Balmaceda. PCIB cannot thus be held liable for moral and exemplary damages.

OUR RULING

We partly grant the petition.

At the outset, we observe that the petition raises mainly questions of fact
whose resolution requires the re-examination of the evidence on record. As a
general rule, petitions for review on certiorari only involve questions of law.[11] By
way of exception, however, we can delve into evidence and the factual
circumstance of the case when the findings of fact in the tribunals below (in this
case between those of the CA and of the RTC) are conflicting. When the exception
applies, we are given latitude to review the evidence on record to decide the case
with finality.[12]

Ramos participation in Balmacedas scheme

not proven
From the testimonial and documentary evidence presented, we find it beyond
question that Balmaceda, by taking advantage of his position as branch manager
of PCIBs Sta. Cruz, Manila branch, was able to apply for and obtain Managers
checks drawn against the bank account of one of PCIBs clients. The unsettled
question is whether Ramos, who received a portion of the money that Balmaceda
took from PCIB, should also be held liable for the return of this money to the
Bank.

PCIB insists that it presented sufficient evidence to establish that Ramos

colluded with Balmaceda in the scheme to fraudulently secure Managers checks
and to misappropriate their proceeds. Since Ramos defense anchored on mere
denial of any participation in Balmacedas wrongdoing is an intrinsically weak
defense, it was error for the CA to exonerate Ramos from any liability.

In civil cases, the party carrying the burden of proof must establish his case
by a preponderance of evidence, or evidence which, to the court, is more worthy of
belief than the evidence offered in opposition.[13] This Court, in Encinas v.
National Bookstore, Inc.,[14] defined preponderance of evidence in the following
manner:

"Preponderance of evidence" is the weight, credit, and value of the

aggregate evidence on either side and is usually considered to be
synonymous with the term "greater weight of the evidence" or "greater
weight of the credible evidence." Preponderance of evidence is a phrase
which, in the last analysis, means probability of the truth. It is evidence
which is more convincing to the court as worthy of belief than that
which is offered in opposition thereto.

The party, whether the plaintiff or the defendant, who asserts the affirmative
of an issue has the onus to prove his assertion in order to obtain a favorable
judgment, subject to the overriding rule that the burden to prove his cause of action
never leaves the plaintiff. For the defendant, an affirmative defense is one that is
not merely a denial of an essential ingredient in the plaintiff's cause of action, but
one which, if established, will constitute an "avoidance" of the claim.[15]

Thus, PCIB, as plaintiff, had to prove, by preponderance of evidence, its

positive assertion that Ramos conspired with Balmaceda in perpetrating the
latters scheme to defraud the Bank. In PCIBs estimation, it successfully
accomplished this through the submission of the following evidence:

[1] Exhibits A, D, PPPP, QQQQ, and RRRR and their submarkings, the
application forms for MCs, show that [these MCs were applied
for in favor of Ramos;]

[2] Exhibits K, N, SSSS, TTTT, and UUUU and their submarkings prove
that the MCs were issued in favor of x x x Ramos[; and]

[3] [T]estimonies of the witness for [PCIB].[16]

We cannot accept these submitted pieces of evidence as sufficient to

satisfy the burden of proof that PCIB carries as plaintiff.

On its face, all that PCIBs evidence proves is that Balmaceda used Ramos
name as a payee when he filled up the application forms for the Managers checks.
But, as the CA correctly observed, the mere fact that Balmaceda made Ramos the
payee on some of the Managers checks is not enough basis to conclude that
Ramos was complicit in Balmacedas fraud; a number of other people were made
payees on the other Managers checks yet PCIB never alleged them to be liable,
nor did the Bank adduce any other evidence pointing to Ramos participation that
would justify his separate treatment from the others. Also, while Ramos is
Balmacedas brother-in-law, their relationship is not sufficient, by itself, to render
Ramos liable, absent concrete proof of his actual participation in the fraudulent
scheme.

Moreover, the evidence on record clearly shows that Balmaceda acted on his
own when he applied for the Managers checks against the bank account of one of
PCIBs clients, as well as when he encashed the fraudulently acquired Managers
checks.

Mrs. Elizabeth Costes, the Area Manager of PCIB at the time of the relevant
events, testified that Balmaceda committed all the acts necessary to obtain the
unauthorized Managers checks from filling up the application form by forging the
signature of the clients representative, to forging the signatures of the payees in
order to encash the checks. As Mrs. Costes stated in her testimony:
 Q: I am going into [these] particular instances where you said that
Mr. Balmaceda [has] been making unauthorized withdrawals from
particular account of a client or a client of yours at Sta. Cruz branch.
Would you tell us how he effected his unauthorized withdrawals?
A: He prevailed upon the domestic remittance clerk to prepare the
application of a Managers check which [has] been debited to a clients
account. This particular Managers check will be payable to a certain
individual thru his account as the instruction of the client.

Q: What was your findings in so far as the particular alleged

instruction of a client is concerned?
A: We found out that he forged the signature of the client.

Q: On that particular application?

A: Yes sir.

Q: Showing to you several applications for Managers Check

previously attached as Annexes A, B, C, D and E[] of the complaint.
Could you please tell us where is that particular alleged signature of a
client applying for the Managers check which you claimed to have been
forged by Mr. Balmaceda?
A: Here sir.

xxxx

Q: After the accomplishment of this application form as you

stated Mrs. witness, do you know what happened to the application
form?
A: Before that application form is processed it goes to several
stages. Here for example this was signed supposed to be by the client
and his signature representing that, he certified the signature based on
their records to be authentic.

Q: When you said he to whom are you referring to?

A: Mr. Balmaceda. And at the same time he approved the
transaction.

xxxx
 Q: Do you know if the corresponding checks applied for in the
application forms were issued?
A: Yes sir.

Q: Could you please show us where these checks are now, the one
applied for in Exhibit A which is in the amount of P150,000.00, where is
the corresponding check?

A: Rolando Ramos dated December 26, 1991 and one of the

signatories with higher authority, this is Mr. Balmacedas signature.

Q: In other words he is likewise approving signatory to the

Managers check?
A: Yes sir. This is an authority that the check [has] been
encashed.

Q: In other words this check issued to Rolando Ramos dated

December 26, 1991 is a cross check but nonetheless he allowed to
encash by granting it.

Could you please show us?

ATTY. PACES: Witness pointing to an initial of the defendant

Antonio Balmaceda, the notation cross check.

A: And this is his signature.

xxxx

Q: How about the check corresponding to Exhibit E-2 which is an

application for P125,000.00 for a certain Rolando Ramos. Do you have
the check?
A: Yes sir.

ATTY. PACES: Witness producing a check dated December 19,

1991 the amount of P125,000.00 payable to certain Rolando Ramos.

Q: Can you tell us whether the same modus operandi was

ad[o]pted by Mr. Balmaceda in so far as he is concerned?
 A: Yes sir he is also the right signer and he authorized the
cancellation of the cross check.[17] (emphasis ours)

xxxx

Q: These particular checks [Mrs.] witness in your findings, do you

know if Mr. Balmaceda [has] again any participation in these checks?
A: He is also the right signer and approved officer and he was
authorized to debit on file.

xxxx

Q: And do you know if these particular checks marked as Exhibit

G-2 to triple FFF were subsequently encashed?
A: Yes sir.

Q: Were you able to find out who encashed?

A: Mr. Balmaceda himself and besides he approved the

encashment because of the signature that he allowed the encashment
of the check.

xxxx

Q: Do you know if this particular person having in fact withdraw

of received the proceeds of [these] particular checks, the payee?
A: No sir.

Q: It was all Mr. Balmaceda dealing with you?

A: Yes sir.

Q: In other words it would be possible that Mr. Balmaceda

himself gotten the proceeds of the checks by forging the payees
signature?
A: Yes sir.[18] (emphases ours)

Mrs. Nilda Laforteza, the Commercial Account Officer of PCIBs Sta. Cruz,
Manila branch at the time the events of this case occurred, confirmed Mrs. Costes
testimony by stating that it was Balmaceda who forged Ramos signature on the
Managers checks where Ramos was the payee, so as to encash the amounts
indicated on the checks.[19] Mrs. Laforteza also testified that Ramos never went to
the PCIB, Sta. Cruz, Manila branch to encash the checks since Balmaceda was the
one who deposited the checks into Ramos bank account. As revealed during
Mrs. Lafortezas cross-examination:

Q: Mrs. Laforteza, these checks that were applied for by Mr.

Balmaceda, did you ever see my client go to the bank to encash these
checks?
A: No it is Balmaceda who is depositing in his behalf.

Q: Did my client ever call up the bank concerning this amount?

A: Yes he is not going to call PCIBank Sta. Cruz branch because
his account is maintained at Pasig.

Q: So Mr. Balmaceda was the one who just remitted or

transmitted the amount that you claimed [was sent] to the account of
my client?
A: Yes.[20] (emphases ours)

Even Mrs. Rodelia Nario, presented by PCIB as its rebuttal witness to prove
that Ramos encashed a Managers check for P480,000.00, could only testify that
the money was deposited into Ramos PCIB bank account. She could not attest
that Ramos himself presented the Managers check for deposit in his bank
account.[21] These testimonies clearly dispute PCIBs theory that Ramos was
instrumental in the encashment of the Managers checks.

We also find no reason to doubt Ramos claim that Balmaceda deposited

these large sums of money into his bank account as payment for the fighting
cocks that Balmaceda purchased from him. Ramos presented two witnesses
Vicente Cosculluela and Crispin Gadapan who testified that Ramos previously
engaged in the business of buying and selling fighting cocks, and that Balmaceda
was one of Ramos biggest clients.

Quoting from the RTC decision, PCIB stresses that Ramos own witness and
business partner, Cosculluela, testified that the biggest net profit he and Ramos
earned from a single transaction with Balmaceda amounted to no more
than P100,000.00, for the sale of approximately 45 fighting cocks. [22] In PCIBs
view, this testimony directly contradicts Ramos assertion that he received
approximately P400,000.00 from his biggest transaction with Balmaceda. To PCIB,
the testimony also renders questionable Ramos assertion that Balmaceda
deposited large amounts of money into his bank account as payment for the
fighting cocks.

On this point, we find that PCIB misunderstood Cosculluelas testimony. A

review of the testimony shows that Cosculluela specifically referred to the net
profit that they earned from the sale of the fighting cocks;[23] PCIB apparently did
not take into account the capital, transportation and other expenses that are
components of these transactions. Obviously, in sales transactions, the buyer has
to pay not only for the value of the thing sold, but also for the shipping costs and
other incidental costs that accompany the acquisition of the thing sold. Thus,
while the biggest net profit that Ramos and Cosculluela earned in a single
transaction amounted to no more than P100,000.00,[24] the inclusion of the actual
acquisition costs of the fighting cocks, the transportation expenses (i.e., airplane
tickets from Bacolod or Zamboanga to Manila) and other attendant expenses
could account for the P400,000.00 that Balmaceda deposited into Ramos bank
account.

Given that PCIB failed to establish Ramos participation in Balmacedas

scheme, it was not even necessary for Ramos to provide an explanation for the
money he received from Balmaceda. Even if the evidence adduced by the plaintiff
appears stronger than that presented by the defendant, a judgment cannot be
entered in the plaintiffs favor if his evidence still does not suffice to sustain his
cause of action;[25] to reiterate, a preponderance of evidence as defined must be
established to achieve this result.

PCIB itself at fault as employer

In considering this case, one point that cannot be disregarded is the

significant role that PCIB played which contributed to the perpetration of the
fraud. We cannot ignore that Balmaceda managed to carry out his fraudulent
scheme primarily because other PCIB employees failed to carry out their assigned
tasks flaws imputable to PCIB itself as the employer.

Ms. Analiza Vega, an accounting clerk, teller and domestic remittance clerk
working at the PCIB, Sta. Cruz, Manila branch at the time of the incident, testified
that Balmaceda broke the Banks protocol when he ordered the Banks employees
to fill up the application forms for the Managers checks, to be debited from the
bank account of one of the banks clients, without providing the necessary
Authority to Debit from the client.[26] PCIB also admitted that these Managers
checks were subsequently released to Balmaceda, and not to the clients
representative, based solely on Balmacedas word that the client had tasked him
to deliver these checks.[27]

Despite Balmacedas gross violations of bank procedures mainly in the

processing of the applications for Managers checks and in the releasing of the
Managers checks Balmacedas co-employees not only turned a blind eye to his
actions, but actually complied with his instructions. In this way, PCIBs own
employees were unwitting accomplicesin Balmacedas fraud.

Another telling indicator of PCIBs negligence is the fact that it allowed

Balmaceda to encash the Managers checks that were plainly crossed checks. A
crossed check is one where two parallel lines are drawn across its face or across
its corner.[28] Based on jurisprudence, the crossing of a check has the following
effects: (a) the check may not be encashed but only deposited in the bank; (b)
the check may be negotiated only once to the one who has an account with the
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 and he must inquire if he
received the check pursuant to this purpose; otherwise, he is not a holder in due
course.[29] In other words, the crossing of a check is a warning that the check
should be deposited only in the account of the payee. When a check is crossed, it
is the duty of the collecting bank to ascertain that the check is only deposited to
the payees account.[30] In complete disregard of this duty, PCIBs systems allowed
Balmaceda to encash 26 Managers checks which were all crossed checks, or
checks payable to the payees account only.

The General Banking Law of 2000[31] requires of banks the highest

standards of integrity and performance. The banking business is impressed with
public interest. Of paramount importance is the trust and confidence of the public
in general in the banking industry. Consequently, the diligence required of banks
is more than that of a Roman pater familias or a good father of a family.[32] The
highest degree of diligence is expected.[33]

While we appreciate that Balmaceda took advantage of his authority and

position as the branch manager to commit these acts, this circumstance cannot be
used to excuse the manner the Bank through its employees handled its clients bank
accounts and thereby ignored established bank procedures at the branch managers
mere order. This lapse is made all the more glaring by Balmacedas repetition of
his modus operandi 33 more times in a period of over one year by the Banks own
estimation. With this kind of record, blame must be imputed on the Bank itself and
its systems, not solely on the weakness or lapses of individual employees.

Principle of unjust enrichment not

applicable

PCIB maintains that even if Ramos did not collude with Balmaceda, it still
has the right to recover the amounts unjustly received by Ramos pursuant to the
principle of unjust enrichment. This principle is embodied in Article 22 of the Civil
Code which provides:

Article 22. Every person who through an act of performance by another,

or any other means, acquires or comes into possession of something at
the expense of the latter without just or legal ground, shall return the
same to him.

To have a cause of action based on unjust enrichment, we explained

in University of the Philippines v. Philab Industries, Inc.[34] that:

Unjust enrichment claims do not lie simply because one party benefits
from the efforts or obligations of others, but instead it must be shown
that a party was unjustly enriched in the sense that the term unjustly
could mean illegally or unlawfully.

Moreover, to substantiate a claim for unjust enrichment, the claimant

must unequivocally prove that another party knowingly received
something of value to which he was not entitledand that the state of
 affairs are such that it would be unjust for the person to keep the
benefit. Unjust enrichment is a term used to depict result or effect of
failure to make remuneration of or for property or benefits received
under circumstances that give rise to legal or equitable obligation to
account for them; to be entitled to remuneration, one must confer
benefit by mistake, fraud, coercion, or request. Unjust enrichment is
not itself a theory of reconvey. Rather, it is a prerequisite for the
enforcement of the doctrine of restitution.[35] (emphasis ours)

Ramos cannot be held liable to PCIB on account of unjust enrichment simply

because he received payments out of money secured by fraud from PCIB. To hold
Ramos accountable, it is necessary to prove that he received the money from
Balmaceda, knowing that he (Ramos) was not entitled to it. PCIB must also prove
that Ramos, at the time that he received the money from Balmaceda, knew that the
money was acquired through fraud. Knowledge of the fraud is the link between
Ramos and PCIB that would obligate Ramos to return the money based on the
principle of unjust enrichment.

However, as the evidence on record indicates, Ramos accepted the deposits

that Balmaceda made directly into his bank account, believing that these deposits
were payments for the fighting cocks that Balmaceda had purchased. Significantly,
PCIB has not presented any evidence proving that Ramos participated in, or that he
even knew of, the fraudulent sources of Balmacedas funds.

PCIB illegally froze and debited Ramos

assets

We also find that PCIB acted illegally in freezing and debiting Ramos bank
account. In BPI Family Bank v. Franco,[36] we cautioned against the unilateral
freezing of bank accounts by banks, noting that:

More importantly, [BPI Family Bank] does not have a unilateral

right to freeze the accounts of Franco based on its mere suspicion that
the funds therein were proceeds of the multi-million peso scam Franco
was allegedly involved in. To grant [BPI Family Bank], or any bank for
that matter, the right to take whatever action it pleases on deposits
which it supposes are derived from shady transactions, would open the
floodgates of public distrust in the banking industry.[37]
 We see no legal merit in PCIBs claim that legal compensation took place
between it and Ramos, thereby warranting the automatic deduction from Ramos
bank account. For legal compensation to take place, two persons, in their own
right, must first be creditors and debtors of each other.[38] While PCIB, as the
depositary bank, is Ramos debtor in the amount of his deposits, Ramos is not
PCIBs debtor under the evidence the PCIB adduced. PCIB thus had no basis, in fact
or in law, to automatically debit from Ramos bank account.

On the award of damages

Although PCIBs act of freezing and debiting Ramos account is unlawful, we

cannot hold PCIB liable for moral and exemplary damages. Since a contractual
relationship existed between Ramos and PCIB as the depositor and the depositary
bank, respectively, the award of moral damages depends on the applicability of
Article 2220 of the Civil Code, which provides:

Article 2220. Willful injury to property may be a legal ground for

awarding moral damages if the court should find that, under the
circumstances, such damages are justly due. The same rule applies to
breaches of contract where the defendant acted fraudulently or in bad
faith. [emphasis ours]

Bad faith does not simply connote bad judgment or negligence; it imports a
dishonest purpose or some moral obliquity and conscious commission of a wrong;
it partakes of the nature of fraud.[39]

As the facts of this case bear out, PCIB did not act out of malice or bad faith
when it froze Ramos bank account and subsequently debited the amount
of P251,910.96 therefrom. While PCIB may have acted hastily and without regard
to its primary duty to treat the accounts of its depositors with meticulous care
and utmost fidelity,[40] we find that its actions were propelled more by the need to
protect itself, and not out of malevolence or ill will. One may err, but error alone
is not a ground for granting moral damages.[41]
We also disallow the award of exemplary damages. Article 2234 of the Civil Code
requires a party to first prove that he is entitled to moral, temperate or
compensatory damages before he can be awarded exemplary damages. Since no
reason exists to award moral damages, so too can there be no reason to award
exemplary damages.
We deem it just and equitable, however, to uphold the award of attorneys fees in
Ramos favor. Taking into consideration the time and efforts involved that went
into this case, we increase the award of attorneys fees from P20,000.00
to P75,000.00.

WHEREFORE, the petition is PARTIALLY GRANTED. We AFFIRM the decision

of the Court of Appeals dated April 29, 2003 in CA-G.R. CV No. 69955 with
the MODIFICATION that the award of moral and exemplary damages in favor of
Rolando N. Ramos is DELETED, while the award of attorneys fees
is INCREASED to P75,000.00. Costs against the Philippine Commercial
International Bank.

SO ORDERED.

ARTURO D. BRION
Associate Justice

SECOND DIVISION

ROBERT DINO, G.R. No. 170912

Petitioner,
Present:

CARPIO, J., Chairperson,

- versus - BRION,
DEL CASTILLO,
ABAD, and
MARIA LUISA JUDAL-LOOT, PEREZ, JJ.
joined by her husband
VICENTE LOOT, Promulgated:
Respondents. April 19, 2010
x-----------------------------------------------------------------------------------------x

DECISION

CARPIO, J.:

The Case

This is a petition for review[1] of the 16 August 2005 Decision[2] and 30 November
2005 Resolution[3] of the Court of Appeals in CA-G.R. CV No. 57994. The Court of
Appeals affirmed the decision of the Regional Trial Court, 7th Judicial Region,
Branch 56, Mandaue City (trial court), with the deletion of the award of interest,
moral damages, attorneys fees and litigation expenses. The trial court ruled that
respondents Maria Luisa Judal-Loot and Vicente Loot are holders in due course of
Metrobank Check No. C-MA 142119406 CA and ordered petitioner Robert Dino as
drawer, together with co-defendant Fe Lobitana as indorser, to solidarily pay
respondents the face value of the check, among others.

The Facts

Sometime in December 1992, a syndicate, one of whose members posed as an

owner of several parcels of land situated in Canjulao, Lapu-lapu City, approached
petitioner and induced him to lend the group P3,000,000.00 to be secured by a
real estate mortgage on the properties. A member of the group, particularly a
woman pretending to be a certain Vivencia Ompok Consing, even offered to
execute a Deed of Absolute Sale covering the properties, instead of the usual
mortgage contract.[4] Enticed and convinced by the syndicates offer, petitioner
issued three Metrobank checks totaling P3,000,000.00, one of which is Check No.
C-MA-142119406-CA postdated 13 February 1993 in the amount of P1,000,000.00
payable to Vivencia Ompok Consing and/or Fe Lobitana.[5]

Upon scrutinizing the documents involving the properties, petitioner discovered

that the documents covered rights over government properties. Realizing he had
been deceived,petitioner advised Metrobank to stop payment of his
checks. However, only the payment of Check No. C-MA- 142119406-CA was
ordered stopped. The other two checks were already encashed by the payees.

Meanwhile, Lobitana negotiated and indorsed Check No. C-MA- 142119406-CA to

respondents in exchange for cash in the sum of P948,000.00, which respondents
borrowed from Metrobank and charged against their credit line. Before
respondents accepted the check, they first inquired from the drawee bank,
Metrobank, Cebu-Mabolo Branch which is also their depositary bank, if the
subject check was sufficiently funded, to which Metrobank answered in the
positive. However, when respondents deposited the check with Metrobank,
Cebu-Mabolo Branch, the same was dishonored by the drawee bank for reason
PAYMENT STOPPED.

Respondents filed a collection suit[6] against petitioner and Lobitana before the
trial court. In their Complaint, respondents alleged, among other things, that they
are holders in due course and for value of Metrobank Check No. C-MA-
142119406-CA and that they had no prior information concerning the transaction
between defendants.

In his Answer, petitioner denied respondents allegations that on the face of the
subject check, no condition or limitation was imposed and that respondents are
holders in due course and for value of the check. For her part, Lobitana denied
the allegations in the complaint and basically claimed that the transaction leading
to the issuance of the subject check is a sale of a parcel of land by Vivencia Ompok
Consing to petitioner and that she was made a payee of the check only to
facilitate its discounting.
The trial court ruled in favor of respondents and declared them due course
holders of the subject check, since there was no privity between respondents and
defendants. The dispositive portion of the 14 March 1996 Decision of the trial
court reads:

In summation, this Court rules for the Plaintiff and against the
Defendants and hereby orders:

1.) defendants to pay to Plaintiff, and severally, the amount

of P1,000,000.00 representing the face value of subject
Metrobank check;
2.) to pay to Plaintiff herein, jointly and severally, the sum
of P101,748.00 for accrued and paid interest;
3.) to pay to Plaintiff, jointly and severally, moral damages in
the amount of P100,000.00;

4.) to pay to Plaintiff, jointly and severally, the sum

of P200,000.00 for attorneys fees; and
5.) to pay to Plaintiff, jointly and severally, litigation expenses
in the sum of P10,000.00 and costs of the suit.
SO ORDERED.[7]

Only petitioner filed an appeal. Lobitana did not appeal the trial courts judgment.
The Ruling of the Court of Appeals

The Court of Appeals affirmed the trial courts finding that respondents are
holders in due course of Metrobank Check No. C-MA- 142119406-CA. The Court
of Appeals pointed out that petitioners own admission that respondents were
never parties to the transaction among petitioner, Lobitana, Concordio Toring,
Cecilia Villacarlos, and Consing, proved respondents lack of knowledge of any
infirmity in the instrument or defect in the title of the person negotiating
it. Moreover, respondents verified from Metrobank whether the check was
sufficiently funded before they accepted it. Therefore, respondents must be
excluded from the ambit of petitioners stop payment order.
The Court of Appeals modified the trial courts decision by deleting the award of
interest, moral damages, attorneys fees and litigation expenses. The Court of
Appeals opined that petitioner was only exercising (although incorrectly), what he
perceived to be his right to stop the payment of the check which he
rediscounted. The Court of Appeals ruled that petitioner acted in good faith in
ordering the stoppage of payment of the subject check and thus, he must not be
made liable for those amounts.

In its 16 August 2005 Decision, the Court of Appeals affirmed the trial courts
decision with modifications, thus:
WHEREFORE, premises considered, finding no reversible error in the
decision of the lower court, WE hereby DISMISS the appeal and AFFIRM
the decision of the court a quo with modifications that the award of
interest, moral damages, attorneys fees and litigation expenses be
deleted.

No pronouncement as to costs.

SO ORDERED.[8]

In its 30 November 2005 Resolution, the Court of Appeals denied petitioners

motion for reconsideration.

In denying the petitioners motion for reconsideration, the Court of Appeals noted
that petitioner raised the defense that the check is a crossed check for the first
time on appeal (particularly in the motion for reconsideration). The Court of
Appeals rejected such defense considering that to entertain the same would be
offensive to the basic rules of fair play, justice, and due process.

Hence, this petition.

The Issues

Petitioner raises the following issues:

 I. THE COURT OF APPEALS ERRED IN HOLDING THAT THE
RESPONDENTS WERE HOLDERS IN DUE COURSE. THE FACT THAT
METROBANK CHECK NO. 142119406 IS A CROSSED CHECK CONSTITUTES
SUFFICIENT WARNING TO THE RESPONDENTS TO EXERCISE
EXTRAORDINARY DILIGENCE TO DETERMINE THE TITLE OF THE
INDORSER.

II. THE COURT OF APPEALS ERRED IN DENYING PETITIONERS

MOTION FOR RECONSIDERATION UPON THE GROUND THAT THE
ARGUMENTS RELIED UPON HAVE ONLY BEEN RAISED FOR THE FIRST
TIME. EQUITY DEMANDS THAT THE COURT OF APPEALS SHOULD HAVE
MADE AN EXCEPTION TO PREVENT THE COMMISSION OF MANIFEST
WRONG AND INJUSTICE UPON THE PETITIONER.[9]

The Ruling of this Court

The petition is meritorious.

Respondents point out that petitioner raised the defense that Metrobank Check
No. C-MA-142119406-CA is a crossed check for the first time in his motion for
reconsideration before the Court of Appeals. Respondents insist that issues not
raised during the trial cannot be raised for the first time on appeal as it would be
offensive to the elementary rules of fair play, justice and due process.
Respondents further assert that a change of theory on appeal is improper.

In his Answer, petitioner specifically denied, among others, (1) Paragraph 4 of the
Complaint, concerning the allegation that on the face of the subject check, no
condition or limitation was imposed, and (2) Paragraph 8 of the Complaint,
regarding the allegation that respondents were holders in due course and for
value of the subject check. In his Special Affirmative Defenses, petitioner claimed
that for want or lack of the prestation, he could validly stop the payment of his
check, and that by rediscounting petitioners check, respondents took the risk of
what might happen on the check. Essentially, petitioner maintained that
respondents are not holders in due course of the subject check, and as such,
respondents could not recover any liability on the check from petitioner.
Indeed, petitioner did not expressly state in his Answer or raise during the trial
that Metrobank Check No. C-MA-142119406-CA is a crossed check. It must be
stressed, however, that petitioner consistently argues that respondents are not
holders in due course of the subject check, which is one of the possible effects of
crossing a check. The act of crossing a check serves as a warning to the holder
that the check has been issued for a definite purpose so that the holder thereof
must inquire if he has received the check pursuant to that purpose; otherwise, he
is not a holder in due course.[10] Contrary to respondents view, petitioner never
changed his theory, that respondents are not holders in due course of the subject
check, as would violate fundamental rules of justice, fair play, and due
process. Besides, the subject check was presented and admitted as evidence
during the trial and respondents did not and in fact cannot deny that it is a
crossed check.

In any event, the Court is clothed with ample authority to entertain issues or
matters not raised in the lower courts in the interest of substantial
justice.[11] In Casa Filipina Realty v. Office of the President,[12] the Court held:

[T]he trend in modern-day procedure is to accord the courts broad

discretionary power such that the appellate court may consider matters
bearing on the issues submitted for resolution which the parties failed
to raise or which the lower court ignored. Since rules of procedure are
mere tools designed to facilitate the attainment of justice, their strict
and rigid application which would result in technicalities that tend to
frustrate rather than promote substantial justice, must always be
avoided. Technicality should not be allowed to stand in the way of
equitably and completely resolving the rights and obligations of the
parties.[13]

Having disposed of the procedural issue, the Court shall now proceed to the
merits of the case. The main issue is whether respondents are holders in due
course of Metrobank Check No. C-MA 142119406 CA as to entitle them to collect
the face value of the check from its drawer or petitioner herein.

Section 52 of the Negotiable Instruments Law defines a holder in due course,

thus:

A holder in due course is a holder who has taken the instrument under
the following conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue,
and without notice that it has been previously dishonored,
if such was the fact;

(c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him, he had no
notice of any infirmity in the instrument or defect in the
title of the person negotiating it.

In the case of a crossed check, as in this case, the following principles must
additionally be considered: A crossed check (a) may not be encashed but only
deposited in the bank; (b) may be negotiated only once to one who has an
account with a bank; and (c) warns the holder that it has been issued for a
definite purpose so that the holder thereof must inquire if he has received the
check pursuant to that purpose; otherwise, he is not a holder in due course.[14]

Based on the foregoing, respondents had the duty to ascertain the indorsers, in
this case Lobitanas, title to the check or the nature of her possession. This
respondents failed to do. Respondents verification from Metrobank on the
funding of the check does not amount to determination of Lobitanas title to the
check. Failing in this respect, respondents are guilty of gross negligence
amounting to legal absence of good faith,[15] contrary to Section 52(c) of the
Negotiable Instruments Law. Hence, respondents are not deemed holders in due
course of the subject check.[16]

State Investment House v. Intermediate Appellate Court[17] squarely applies to this

case. There, New Sikatuna Wood Industries, Inc. sold at a discount to State
Investment House three post-dated crossed checks, issued by Anita Pea Chua
naming as payee New Sikatuna Wood Industries, Inc. The Court found State
Investment House not a holder in due course of the checks. The Court also
expounded on the effect of crossing a check, thus:
Under usual practice, crossing a check is done by placing two parallel
lines diagonally on the left top portion of the check. The crossing may
be special wherein between the two parallel lines is written the name of
a bank or a business institution, in which case the drawee should pay
only with the intervention of that bank or company, or crossing may be
general wherein between two parallel diagonal lines are written the
words and Co. or none at all as in the case at bar, in which case the
drawee should not encash the same but merely accept the same for
deposit.

The effect therefore of crossing a check relates to the mode of its

presentment for payment. Under Section 72 of the Negotiable
Instruments Law, presentment for payment to be sufficient must be
made (a) by the holder, or by some person authorized to receive
payment on his behalf x x x As to who the holder or authorized person
will be depends on the instructions stated on the face of the check.

The three subject checks in the case at bar had been crossed generally
and issued payable to New Sikatuna Wood Industries, Inc. which could
only mean that the drawer had intended the same for deposit only by the
rightful person, i.e., the payee named therein. Apparently, it was not the
payee who presented the same for payment and therefore, there was no
proper presentment, and the liability did not attach to the drawer.

Thus, in the absence of due presentment, the drawer did not become
liable. Consequently, no right of recourse is available to petitioner
against the drawer of the subject checks, private respondent wife,
considering that petitioner is not the proper party authorized to make
presentment of the checks in question.

In this case, there is no question that the payees of the check, Lobitana or
Consing, were not the ones who presented the check for payment. Lobitana
negotiated and indorsed the check to respondents in exchange for P948,000.00. It
was respondents who presented the subject check for payment; however, the
check was dishonored for reason PAYMENT STOPPED. In other words, it was not
the payee who presented the check for payment; and thus, there was no proper
presentment. As a result, liability did not attach to the drawer. Accordingly, no
right of recourse is available to respondents against the drawer of the check,
petitioner herein, since respondents are not the proper party authorized to make
presentment of the subject check.

However, the fact that respondents are not holders in due course does not
automatically mean that they cannot recover on the check.[18] The Negotiable
Instruments Law does not provide that a holder who is not a holder in due course
may not in any case recover on the instrument. The only disadvantage of a holder
who is not in due course is that the negotiable instrument is subject to defenses
as if it were non-negotiable.[19] Among such defenses is the absence or failure of
consideration,[20] which petitioner sufficiently established in this case. Petitioner
issued the subject check supposedly for a loan in favor of Consings group, who
turned out to be a syndicate defrauding gullible individuals.Since there is in fact
no valid loan to speak of, there is no consideration for the issuance of the check.
Consequently, petitioner cannot be obliged to pay the face value of the check.
Respondents can collect from the immediate indorser,[21] in this case
Lobitana. Significantly, Lobitana did not appeal the trial courts decision, finding
her solidarily liable to pay, among others, the face value of the subject
check. Therefore, the trial courts judgment has long become final and executory
as to Lobitana.

WHEREFORE, we GRANT the petition. We SET ASIDE the 16 August 2005 Decision
and 30 November 2005 Resolution of the Court of Appeals in CA-G.R. CV No.
57994.

SO ORDERED.

ANTONIO T. CARPIO
Associate Justice
 SECOND DIVISION

G.R. No. 121413 January 29, 2001

PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly INSULAR BANK OF ASIA AND AMERICA),petitioner,
vs.
COURT OF APPEALS and FORD PHILIPPINES, INC. and CITIBANK, N.A., respondents.

G.R. No. 121479 January 29, 2001

FORD PHILIPPINES, INC., petitioner-plaintiff,

vs.
COURT OF APPEALS and CITIBANK, N.A. and PHILIPPINE COMMERCIAL INTERNATIONAL BANK, respondents.

G.R. No. 128604 January 29, 2001

FORD PHILIPPINES, INC., petitioner,

vs.
CITIBANK, N.A., PHILIPPINE COMMERCIAL INTERNATIONAL BANK and COURT OF APPEALS, respondents.

QUISUMBING, J.:

These consolidated petitions involve several fraudulently negotiated checks.

The original actions a quo were instituted by Ford Philippines to recover from the drawee bank, CITIBANK, N.A. (Citibank) and
collecting bank, Philippine Commercial International Bank (PCIBank) [formerly Insular Bank of Asia and America], the value of
several checks payable to the Commissioner of Internal Revenue, which were embezzled allegedly by an organized syndicate. 1wphi1.nt

G.R. Nos. 121413 and 121479 are twin petitions for review of the March 27, 1995 Decision1 of the Court of Appeals in CA-G.R. CV
No. 25017, entitled "Ford Philippines, Inc. vs. Citibank, N.A. and Insular Bank of Asia and America (now Philipppine Commercial
International Bank), and the August 8, 1995 Resolution,2 ordering the collecting bank, Philippine Commercial International Bank, to
pay the amount of Citibank Check No. SN-04867.

In G.R. No. 128604, petitioner Ford Philippines assails the October 15, 1996 Decision3 of the Court of Appeals and its March 5,
1997 Resolution4 in CA-G.R. No. 28430 entitled "Ford Philippines, Inc. vs. Citibank, N.A. and Philippine Commercial International
Bank," affirming in toto the judgment of the trial court holding the defendant drawee bank, Citibank, N.A., solely liable to pay the
amount of P12,163,298.10 as damages for the misapplied proceeds of the plaintiff's Citibanl Check Numbers SN-10597 and 16508.

I. G.R. Nos. 121413 and 121479

The stipulated facts submitted by the parties as accepted by the Court of Appeals are as follows:

"On October 19, 1977, the plaintiff Ford drew and issued its Citibank Check No. SN-04867 in the amount of
P4,746,114.41, in favor of the Commissioner of Internal Revenue as payment of plaintiff;s percentage or manufacturer's
sales taxes for the third quarter of 1977.
 The aforesaid check was deposited with the degendant IBAA (now PCIBank) and was subsequently cleared at the Central
Bank. Upon presentment with the defendant Citibank, the proceeds of the check was paid to IBAA as collecting or
depository bank.

The proceeds of the same Citibank check of the plaintiff was never paid to or received by the payee thereof, the
Commissioner of Internal Revenue.

As a consequence, upon demand of the Bureau and/or Commissioner of Internal Revenue, the plaintiff was compelled to
make a second payment to the Bureau of Internal Revenue of its percentage/manufacturers' sales taxes for the third
quarter of 1977 and that said second payment of plaintiff in the amount of P4,746,114.41 was duly received by the Bureau
of Internal Revenue.

It is further admitted by defendant Citibank that during the time of the transactions in question, plaintiff had been
maintaining a checking account with defendant Citibank; that Citibank Check No. SN-04867 which was drawn and issued
by the plaintiff in favor of the Commissioner of Internal Revenue was a crossed check in that, on its face were two parallel
lines and written in between said lines was the phrase "Payee's Account Only"; and that defendant Citibank paid the full
face value of the check in the amount of P4,746,114.41 to the defendant IBAA.

It has been duly established that for the payment of plaintiff's percentage tax for the last quarter of 1977, the Bureau of
Internal Revenue issued Revenue Tax Receipt No. 18747002, dated October 20, 1977, designating therein in Muntinlupa,
Metro Manila, as the authorized agent bank of Metrobanl, Alabang branch to receive the tax payment of the plaintiff.

On December 19, 1977, plaintiff's Citibank Check No. SN-04867, together with the Revenue Tax Receipt No. 18747002,
was deposited with defendant IBAA, through its Ermita Branch. The latter accepted the check and sent it to the Central
Clearing House for clearing on the samd day, with the indorsement at the back "all prior indorsements and/or lack of
indorsements guaranteed." Thereafter, defendant IBAA presented the check for payment to defendant Citibank on same
date, December 19, 1977, and the latter paid the face value of the check in the amount of P4,746,114.41. Consequently,
the amount of P4,746,114.41 was debited in plaintiff's account with the defendant Citibank and the check was returned to
the plaintiff.

Upon verification, plaintiff discovered that its Citibank Check No. SN-04867 in the amount of P4,746,114.41 was not paid
to the Commissioner of Internal Revenue. Hence, in separate letters dated October 26, 1979, addressed to the
defendants, the plaintiff notified the latter that in case it will be re-assessed by the BIR for the payment of the taxes
covered by the said checks, then plaintiff shall hold the defendants liable for reimbursement of the face value of the same.
Both defendants denied liability and refused to pay.

In a letter dated February 28, 1980 by the Acting Commissioner of Internal Revenue addressed to the plaintiff - supposed
to be Exhibit "D", the latter was officially informed, among others, that its check in the amount of P4, 746,114.41 was not
paid to the government or its authorized agent and instead encashed by unauthorized persons, hence, plaintiff has to pay
the said amount within fifteen days from receipt of the letter. Upon advice of the plaintiff's lawyers, plaintiff on March 11,
1982, paid to the Bureau of Internal Revenue, the amount of P4,746,114.41, representing payment of plaintiff's
percentage tax for the third quarter of 1977.

As a consequence of defendant's refusal to reimburse plaintiff of the payment it had made for the second time to the BIR
of its percentage taxes, plaintiff filed on January 20, 1983 its original complaint before this Court.

On December 24, 1985, defendant IBAA was merged with the Philippine Commercial International Bank (PCI Bank) with
the latter as the surviving entity.

Defendant Citibank maintains that; the payment it made of plaintiff's Citibank Check No. SN-04867 in the amount of
P4,746,114.41 "was in due course"; it merely relied on the clearing stamp of the depository/collecting bank, the defendant
IBAA that "all prior indorsements and/or lack of indorsements guaranteed"; and the proximate cause of plaintiff's injury is
the gross negligence of defendant IBAA in indorsing the plaintiff's Citibank check in question.

It is admitted that on December 19, 1977 when the proceeds of plaintiff's Citibank Check No. SN-048867 was paid to
defendant IBAA as collecting bank, plaintiff was maintaining a checking account with defendant Citibank."5

Although it was not among the stipulated facts, an investigation by the National Bureau of Investigation (NBI) revealed that Citibank
Check No. SN-04867 was recalled by Godofredo Rivera, the General Ledger Accountant of Ford. He purportedly needed to hold
back the check because there was an error in the computation of the tax due to the Bureau of Internal Revenue (BIR). With Rivera's
instruction, PCIBank replaced the check with two of its own Manager's Checks (MCs). Alleged members of a syndicate later
deposited the two MCs with the Pacific Banking Corporation.
Ford, with leave of court, filed a third-party complaint before the trial court impleading Pacific Banking Corporation (PBC) and
Godofredo Rivera, as third party defendants. But the court dismissed the complaint against PBC for lack of cause of action. The
course likewise dismissed the third-party complaint against Godofredo Rivera because he could not be served with summons as the
NBI declared him as a "fugitive from justice".

On June 15, 1989, the trial court rendered its decision, as follows:

"Premises considered, judgment is hereby rendered as follows:

"1. Ordering the defendants Citibank and IBAA (now PCI Bank), jointly and severally, to pay the plaintiff the
amount of P4,746,114.41 representing the face value of plaintiff's Citibank Check No. SN-04867, with interest
thereon at the legal rate starting January 20, 1983, the date when the original complaint was filed until the
amount is fully paid, plus costs;

"2. On defendant Citibank's cross-claim: ordering the cross-defendant IBAA (now PCI Bank) to reimburse
defendant Citibank for whatever amount the latter has paid or may pay to the plaintiff in accordance with next
preceding paragraph;

"3. The counterclaims asserted by the defendants against the plaintiff, as well as that asserted by the cross-
defendant against the cross-claimant are dismissed, for lack of merits; and

"4. With costs against the defendants.

SO ORDERED."6

Not satisfied with the said decision, both defendants, Citibank and PCIBank, elevated their respective petitions for review on
certiorari to the Courts of Appeals. On March 27, 1995, the appellate court issued its judgment as follows:

"WHEREFORE, in view of the foregoing, the court AFFIRMS the appealed decision with modifications.

The court hereby renderes judgment:

1. Dismissing the complaint in Civil Case No. 49287 insofar as defendant Citibank N.A. is concerned;

2. Ordering the defendant IBAA now PCI Bank to pay the plaintiff the amount of P4,746,114.41 representing
the face value of plaintiff's Citibank Check No. SN-04867, with interest thereon at the legal rate starting January
20, 1983, the date when the original complaint was filed until the amount is fully paid;

3. Dismissing the counterclaims asserted by the defendants against the plaintiff as well as that asserted by the
cross-defendant against the cross-claimant, for lack of merits.

Costs against the defendant IBAA (now PCI Bank).

IT IS SO ORDERED."7

PCI Bank moved to reconsider the above-quoted decision of the Court of Appeals, while Ford filed a "Motion for Partial
Reconsideration." Both motions were denied for lack of merit.

Separately, PCIBank and Ford filed before this Court, petitions for review by certiorari under Rule 45.

In G.R. No. 121413, PCIBank seeks the reversal of the decision and resolution of the Twelfth Division of the Court of Appeals
contending that it merely acted on the instruction of Ford and such casue of action had already prescribed.

PCIBank sets forth the following issues for consideration:

I. Did the respondent court err when, after finding that the petitioner acted on the check drawn by respondent Ford on the
said respondent's instructions, it nevertheless found the petitioner liable to the said respondent for the full amount of the
said check.
 II. Did the respondent court err when it did not find prescription in favor of the petitioner. 8

In a counter move, Ford filed its petition docketed as G.R. No. 121479, questioning the same decision and resolution of the Court of
Appeals, and praying for the reinstatement in toto of the decision of the trial court which found both PCIBank and Citibank jointly and
severally liable for the loss.

In G.R. No. 121479, appellant Ford presents the following propositions for consideration:

I. Respondent Citibank is liable to petitioner Ford considering that:

1. As drawee bank, respondent Citibank owes to petitioner Ford, as the drawer of the subject check and a
depositor of respondent Citibank, an absolute and contractual duty to pay the proceeds of the subject check
only to the payee thereof, the Commissioner of Internal Revenue.

2. Respondent Citibank failed to observe its duty as banker with respect to the subject check, which was
crossed and payable to "Payee's Account Only."

3. Respondent Citibank raises an issue for the first time on appeal; thus the same should not be considered by
the Honorable Court.

4. As correctly held by the trial court, there is no evidence of gross negligence on the part of petitioner Ford.9

II. PCI Bank is liable to petitioner Ford considering that:

1. There were no instructions from petitioner Ford to deliver the proceeds of the subject check to a person other
than the payee named therein, the Commissioner of the Bureau of Internal Revenue; thus, PCIBank's only
obligation is to deliver the proceeds to the Commissioner of the Bureau of Internal Revenue. 10

2. PCIBank which affixed its indorsement on the subject check ("All prior indorsement and/or lack of
indorsement guaranteed"), is liable as collecting bank.11

3. PCIBank is barred from raising issues of fact in the instant proceedings. 12

4. Petitioner Ford's cause of action had not prescribed. 13

II. G.R. No. 128604

The same sysndicate apparently embezzled the proceeds of checks intended, this time, to settle Ford's percentage taxes
appertaining to the second quarter of 1978 and the first quarter of 1979.

The facts as narrated by the Court of Appeals are as follows:

Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the amount of P5,851,706.37 representing the percentage tax due for
the second quarter of 1978 payable to the Commissioner of Internal Revenue. A BIR Revenue Tax Receipt No. 28645385 was
issued for the said purpose.

On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in the amount of P6,311,591.73, representing the payment of
percentage tax for the first quarter of 1979 and payable to the Commissioner of Internal Revenue. Again a BIR Revenue Tax
Receipt No. A-1697160 was issued for the said purpose.

Both checks were "crossed checks" and contain two diagonal lines on its upper corner between, which were written the words
"payable to the payee's account only."

The checks never reached the payee, CIR. Thus, in a letter dated February 28, 1980, the BIR, Region 4-B, demanded for the said
tax payments the corresponding periods above-mentioned.

As far as the BIR is concernced, the said two BIR Revenue Tax Receipts were considered "fake and spurious". This anomaly was
confirmed by the NBI upon the initiative of the BIR. The findings forced Ford to pay the BIR a new, while an action was filed against
Citibank and PCIBank for the recovery of the amount of Citibank Check Numbers SN-10597 and 16508.
The Regional Trial Court of Makati, Branch 57, which tried the case, made its findings on the modus operandi of the syndicate, as
follows:

"A certain Mr. Godofredo Rivera was employed by the plaintiff FORD as its General Ledger Accountant. As such, he
prepared the plaintiff's check marked Ex. 'A' [Citibank Check No. Sn-10597] for payment to the BIR. Instead, however, fo
delivering the same of the payee, he passed on the check to a co-conspirator named Remberto Castro who was a pro-
manager of the San Andres Branch of PCIB.* In connivance with one Winston Dulay, Castro himself subsequently opened
a Checking Account in the name of a fictitious person denominated as 'Reynaldo reyes' in the Meralco Branch of PCIBank
where Dulay works as Assistant Manager.

After an initial deposit of P100.00 to validate the account, Castro deposited a worthless Bank of America Check in exactly
the same amount as the first FORD check (Exh. "A", P5,851,706.37) while this worthless check was coursed through
PCIB's main office enroute to the Central Bank for clearing, replaced this worthless check with FORD's Exhibit 'A' and
accordingly tampered the accompanying documents to cover the replacement. As a result, Exhibit 'A' was cleared by
defendant CITIBANK, and the fictitious deposit account of 'Reynaldo Reyes' was credited at the PCIB Meralco Branch
with the total amount of the FORD check Exhibit 'A'. The same method was again utilized by the syndicate in profiting
from Exh. 'B' [Citibank Check No. SN-16508] which was subsequently pilfered by Alexis Marindo, Rivera's Assistant at
FORD.

From this 'Reynaldo Reyes' account, Castro drew various checks distributing the sahres of the other participating
conspirators namely (1) CRISANTO BERNABE, the mastermind who formulated the method for the embezzlement; (2)
RODOLFO R. DE LEON a customs broker who negotiated the initial contact between Bernabe, FORD's Godofredo Rivera
and PCIB's Remberto Castro; (3) JUAN VASTILLO who assisted de Leon in the initial arrangements; (4) GODOFREDO
RIVERA, FORD's accountant who passed on the first check (Exhibit "A") to Castro; (5) REMERTO CASTRO, PCIB's pro-
manager at San Andres who performed the switching of checks in the clearing process and opened the fictitious Reynaldo
Reyes account at the PCIB Meralco Branch; (6) WINSTON DULAY, PCIB's Assistant Manager at its Meralco Branch, who
assisted Castro in switching the checks in the clearing process and facilitated the opening of the fictitious Reynaldo
Reyes' bank account; (7) ALEXIS MARINDO, Rivera's Assistant at FORD, who gave the second check (Exh. "B") to
Castro; (8) ELEUTERIO JIMENEZ, BIR Collection Agent who provided the fake and spurious revenue tax receipts to
make it appear that the BIR had received FORD's tax payments.

Several other persons and entities were utilized by the syndicate as conduits in the disbursements of the proceeds of the
two checks, but like the aforementioned participants in the conspiracy, have not been impleaded in the present case. The
manner by which the said funds were distributed among them are traceable from the record of checks drawn against the
original "Reynaldo Reyes" account and indubitably identify the parties who illegally benefited therefrom and readily
indicate in what amounts they did so."14

On December 9, 1988, Regional Trial Court of Makati, Branch 57, held drawee-bank, Citibank, liable for the value of the two checks
while adsolving PCIBank from any liability, disposing as follows:

"WHEREFORE, judgment is hereby rendered sentencing defendant CITIBANK to reimburse plaintiff FORD the total
amount of P12,163,298.10 prayed for in its complaint, with 6% interest thereon from date of first written demand until full
payment, plus P300,000.00 attorney's fees and expenses litigation, and to pay the defendant, PCIB (on its counterclaim to
crossclaim) the sum of P300,000.00 as attorney's fees and costs of litigation, and pay the costs.

SO ORDERED."15

Both Ford and Citibank appealed to the Court of Appeals which affirmed, in toto, the decision of the trial court. Hence, this petition.

Petitioner Ford prays that judgment be rendered setting aside the portion of the Court of Appeals decision and its resolution dated
March 5, 1997, with respect to the dismissal of the complaint against PCIBank and holding Citibank solely responsible for the
proceeds of Citibank Check Numbers SN-10597 and 16508 for P5,851,706.73 and P6,311,591.73 respectively.

Ford avers that the Court of Appeals erred in dismissing the complaint against defendant PCIBank considering that:

I. Defendant PCIBank was clearly negligent when it failed to exercise the diligence required to be exercised by it as a
banking insitution.

II. Defendant PCIBank clearly failed to observe the diligence required in the selection and supervision of its officers and
employees.

III. Defendant PCIBank was, due to its negligence, clearly liable for the loss or damage resulting to the plaintiff Ford as a
consequence of the substitution of the check consistent with Section 5 of Central Bank Circular No. 580 series of 1977.
 IV. Assuming arguedo that defedant PCIBank did not accept, endorse or negotiate in due course the subject checks, it is
liable, under Article 2154 of the Civil Code, to return the money which it admits having received, and which was credited
to it its Central bank account.16

The main issue presented for our consideration by these petitions could be simplified as follows: Has petitioner Ford the right to
recover from the collecting bank (PCIBank) and the drawee bank (Citibank) the value of the checks intended as payment to the
Commissioner of Internal Revenue? Or has Ford's cause of action already prescribed?

Note that in these cases, the checks were drawn against the drawee bank, but the title of the person negotiating the same was
allegedly defective because the instrument was obtained by fraud and unlawful means, and the proceeds of the checks were not
remitted to the payee. It was established that instead of paying the checks to the CIR, for the settlement of the approprite quarterly
percentage taxes of Ford, the checks were diverted and encashed for the eventual distribution among the mmbers of the syndicate.
As to the unlawful negotiation of the check the applicable law is Section 55 of the Negotiable Instruments Law (NIL), which provides:

"When title defective -- The title of a person who negotiates an instrument is defective within the meaning of this Act when
he obtained the instrument, or any signature thereto, by fraud, duress, or fore and fear, or other unlawful means, or for an
illegal consideration, or when he negotiates it in breach of faith or under such circumstances as amount to a fraud."

Pursuant to this provision, it is vital to show that the negotiation is made by the perpetator in breach of faith amounting to fraud. The
person negotiating the checks must have gone beyond the authority given by his principal. If the principal could prove that there was
no negligence in the performance of his duties, he may set up the personal defense to escape liability and recover from other parties
who. Though their own negligence, alowed the commission of the crime.

In this case, we note that the direct perpetrators of the offense, namely the embezzlers belonging to a syndicate, are now fugitives
from justice. They have, even if temporarily, escaped liability for the embezzlement of millions of pesos. We are thus left only with
the task of determining who of the present parties before us must bear the burden of loss of these millions. It all boils down to
thequestion of liability based on the degree of negligence among the parties concerned.

Foremost, we must resolve whether the injured party, Ford, is guilty of the "imputed contributory negligence" that would defeat its
claim for reimbursement, bearing ing mind that its employees, Godofredo Rivera and Alexis Marindo, were among the members of
the syndicate.

Citibank points out that Ford allowed its very own employee, Godofredo Rivera, to negotiate the checks to his co-conspirators,
instead of delivering them to the designated authorized collecting bank (Metrobank-Alabang) of the payee, CIR. Citibank bewails the
fact that Ford was remiss in the supervision and control of its own employees, inasmuch as it only discovered the syndicate's
activities through the information given by the payee of the checks after an unreasonable period of time.

PCIBank also blames Ford of negligence when it allegedly authorized Godofredo Rivera to divert the proceeds of Citibank Check
No. SN-04867, instead of using it to pay the BIR. As to the subsequent run-around of unds of Citibank Check Nos. SN-10597 and
16508, PCIBank claims that the proximate cause of the damge to Ford lies in its own officers and employees who carried out the
fradulent schemes and the transactions. These circumstances were not checked by other officers of the company including its
comptroller or internal auditor. PCIBank contends that the inaction of Ford despite the enormity of the amount involved was a sheer
negligence and stated that, as between two innocent persons, one of whom must suffer the consequences of a breach of trust, the
one who made it possible, by his act of negligence, must bear the loss.

For its part, Ford denies any negligence in the performance of its duties. It avers that there was no evidence presented before the
trial court showing lack of diligence on the part of Ford. And, citing the case of Gempesaw vs. Court of Appeals,17 Ford argues that
even if there was a finding therein that the drawer was negligent, the drawee bank was still ordered to pay damages.

Furthermore, Ford contends the Godofredo rivera was not authorized to make any representation in its behalf, specifically, to divert
the proceeds of the checks. It adds that Citibank raised the issue of imputed negligence against Ford for the first time on appeal.
Thus, it should not be considered by this Court.

On this point, jurisprudence regarding the imputed negligence of employer in a master-servant relationship is instructive. Since a
master may be held for his servant's wrongful act, the law imputes to the master the act of the servant, and if that act is negligent or
wrongful and proximately results in injury to a third person, the negligence or wrongful conduct is the negligence or wrongful conduct
of the master, for which he is liable.18 The general rule is that if the master is injured by the negligence of a third person and by the
concuring contributory negligence of his own servant or agent, the latter's negligence is imputed to his superior and will defeat the
superior's action against the third person, asuming, of course that the contributory negligence was the proximate cause of the
injury of which complaint is made.19

Accordingly, we need to determine whether or not the action of Godofredo Rivera, Ford's General Ledger Accountant, and/or Alexis
Marindo, his assistant, was the proximate cause of the loss or damage. AS defined, proximate cause is that which, in the natural
and continuous sequence, unbroken by any efficient, intervening cause produces the injury and without the result would not have
occurred.20

It appears that although the employees of Ford initiated the transactions attributable to an organized syndicate, in our view, their
actions were not the proximate cause of encashing the checks payable to the CIR. The degree of Ford's negligence, if any, could
not be characterized as the proximate cause of the injury to the parties.

The Board of Directors of Ford, we note, did not confirm the request of Godofredo Rivera to recall Citibank Check No. SN-04867.
Rivera's instruction to replace the said check with PCIBank's Manager's Check was not in theordinary course of business which
could have prompted PCIBank to validate the same.

As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it was established that these checks were made payable to the
CIR. Both were crossed checks. These checks were apparently turned around by Ford's emploees, who were acting on their own
personal capacity.

Given these circumstances, the mere fact that the forgery was committed by a drawer-payor's confidential employee or agent, who
by virtue of his position had unusual facilities for perpertrating the fraud and imposing the forged paper upon the bank, does
notentitle the bank toshift the loss to the drawer-payor, in the absence of some circumstance raising estoppel against the
drawer.21 This rule likewise applies to the checks fraudulently negotiated or diverted by the confidential employees who hold them in
their possession.

With respect to the negligence of PCIBank in the payment of the three checks involved, separately, the trial courts found variations
between the negotiation of Citibank Check No. SN-04867 and the misapplication of total proceeds of Checks SN-10597 and 16508.
Therefore, we have to scrutinize, separately, PCIBank's share of negligence when the syndicate achieved its ultimate agenda of
stealing the proceeds of these checks.

G.R. Nos. 121413 and 121479

Citibank Check No. SN-04867 was deposited at PCIBank through its Ermita Branch. It was coursed through the ordinary banking
transaction, sent to Central Clearing with the indorsement at the back "all prior indorsements and/or lack of indorsements
guaranteed," and was presented to Citibank for payment. Thereafter PCIBank, instead of remitting the proceeds to the CIR,
prepared two of its Manager's checks and enabled the syndicate to encash the same.

On record, PCIBank failed to verify the authority of Mr. Rivera to negotiate the checks. The neglect of PCIBank employees to verify
whether his letter requesting for the replacement of the Citibank Check No. SN-04867 was duly authorized, showed lack of care and
prudence required in the circumstances.

Furthermore, it was admitted that PCIBank is authorized to collect the payment of taxpayers in behalf of the BIR. As an agent of
BIR, PCIBank is duty bound to consult its principal regarding the unwarranted instructions given by the payor or its agent. As aptly
stated by the trial court, to wit:

"xxx. Since the questioned crossed check was deposited with IBAA [now PCIBank], which claimed to be a
depository/collecting bank of BIR, it has the responsibility to make sure that the check in question is deposited in Payee's
account only.

xxx xxx xxx

As agent of the BIR (the payee of the check), defendant IBAA should receive instructions only from its principal BIR and
not from any other person especially so when that person is not known to the defendant. It is very imprudent on the part of
the defendant IBAA to just rely on the alleged telephone call of the one Godofredo Rivera and in his signature considering
that the plaintiff is not a client of the defendant IBAA."

It is a well-settled rule that the relationship between the payee or holder of commercial paper and the bank to which it is sent for
collection is, in the absence of an argreement to the contrary, that of principal and agent. 22 A bank which receives such paper for
collection is the agent of the payee or holder.23

Even considering arguendo, that the diversion of the amount of a check payable to the collecting bank in behalf of the designated
payee may be allowed, still such diversion must be properly authorized by the payor. Otherwise stated, the diversion can be justified
only by proof of authority from the drawer, or that the drawer has clothed his agent with apparent authority to receive the proceeds
of such check.
Citibank further argues that PCI Bank's clearing stamp appearing at the back of the questioned checks stating that ALL PRIOR
INDORSEMENTS AND/OR LACK OF INDORSEMENTS GURANTEED should render PCIBank liable because it made it pass
through the clearing house and therefore Citibank had no other option but to pay it. Thus, Citibank had no other option but to pay it.
Thus, Citibank assets that the proximate cause of Ford's injury is the gross negligence of PCIBank. Since the questione dcrossed
check was deposited with PCIBank, which claimed to be a depository/collecting bank of the BIR, it had the responsibility to make
sure that the check in questions is deposited in Payee's account only.

Indeed, the crossing of the check with the phrase "Payee's Account Only," is a warning that the check should be deposited only in
the account of the CIR. Thus, it is the duty of the collecting bank PCIBank to ascertain that the check be deposited in payee's
account only. Therefore, it is the collecting bank (PCIBank) which is bound to scruninize the check and to know its depositors before
it could make the clearing indorsement "all prior indorsements and/or lack of indorsement guaranteed".

In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corporation, 24 we ruled:

"Anent petitioner's liability on said instruments, this court is in full accord with the ruling of the PCHC's Board of Directors
that:

'In presenting the checks for clearing and for payment, the defendant made an express guarantee on the validity of "all
prior endorsements." Thus, stamped at the back of the checks are the defedant's clear warranty: ALL PRIOR
ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS GUARANTEED. Without such warranty, plaintiff would not
have paid on the checks.'

No amount of legal jargon can reverse the clear meaning of defendant's warranty. As the warranty has proven to be false
and inaccurate, the defendant is liable for any damage arising out of the falsity of its representation." 25

Lastly, banking business requires that the one who first cashes and negotiates the check must take some percautions to learn
whether or not it is genuine. And if the one cashing the check through indifference or othe circumstance assists the forger in
committing the fraud, he should not be permitted to retain the proceeds of the check from the drawee whose sole fault was that it did
not discover the forgery or the defect in the title of the person negotiating the instrument before paying the check. For this reason, a
bank which cashes a check drawn upon another bank, without requiring proof as to the identity of persons presenting it, or making
inquiries with regard to them, cannot hold the proceeds against the drawee when the proceeds of the checks were afterwards
diverted to the hands of a third party. In such cases the drawee bank has a right to believe that the cashing bank (or the collecting
bank) had, by the usual proper investigation, satisfied itself of the authenticity of the negotiation of the checks. Thus, one who
encashed a check which had been forged or diverted and in turn received payment thereon from the drawee, is guilty of negligence
which proximately contributed to the success of the fraud practiced on the drawee bank. The latter may recover from the holder the
money paid on the check.26

Having established that the collecting bank's negligence is the proximate cause of the loss, we conclude that PCIBank is liable in
the amount corresponding to the proceeds of Citibank Check No. SN-04867.

G.R. No. 128604

The trial court and the Court of Appeals found that PCIBank had no official act in the ordinary course of business that would attribute
to it the case of the embezzlement of Citibank Check Numbers SN-10597 and 16508, because PCIBank did not actually receive nor
hold the two Ford checks at all. The trial court held, thus:

"Neither is there any proof that defendant PCIBank contributed any official or conscious participation in the process of the
embezzlement. This Court is convinced that the switching operation (involving the checks while in transit for "clearing")
were the clandestine or hidden actuations performed by the members of the syndicate in their own personl, covert and
private capacity and done without the knowledge of the defendant PCIBank" 27

In this case, there was no evidence presented confirming the conscious particiapation of PCIBank in the embezzlement. As a
general rule, however, a banking corporation is liable for the wrongful or tortuous acts and declarations of its officers or agents
within the course and scope of their employment.28 A bank will be held liable for the negligence of its officers or agents when acting
within the course and scope of their employment. It may be liable for the tortuous acts of its officers even as regards that species of
tort of which malice is an essential element. In this case, we find a situation where the PCIBank appears also to be the victim of the
scheme hatched by a syndicate in which its own management employees had particiapted.

The pro-manager of San Andres Branch of PCIBank, Remberto Castro, received Citibank Check Numbers SN-10597 and 16508.
He passed the checks to a co-conspirator, an Assistant Manager of PCIBank's Meralco Branch, who helped Castro open a
Checking account of a fictitious person named "Reynaldo Reyes." Castro deposited a worthless Bank of America Check in exactly
the same amount of Ford checks. The syndicate tampered with the checks and succeeded in replacing the worthless checks and
the eventual encashment of Citibank Check Nos. SN 10597 and 16508. The PCIBank Ptro-manager, Castro, and his co-conspirator
Assistant Manager apparently performed their activities using facilities in their official capacity or authority but for their personal and
private gain or benefit.

A bank holding out its officers and agents as worthy of confidence will not be permitted to profit by the frauds these officers or
agents were enabled to perpetrate in the apparent course of their employment; nor will t be permitted to shirk its responsibility for
such frauds, even though no benefit may accrue to the bank therefrom. For the general rule is that a bank is liable for the fraudulent
acts or representations of an officer or agent acting within the course and apparent scope of his employment or authority. 29 And if an
officer or employee of a bank, in his official capacity, receives money to satisfy an evidence of indebetedness lodged with his bank
for collection, the bank is liable for his misappropriation of such sum. 30

Moreover, as correctly pointed out by Ford, Section 531 of Central Bank Circular No. 580, Series of 1977 provides that any theft
affecting items in transit for clearing, shall be for the account of sending bank, which in this case is PCIBank.

But in this case, responsibility for negligence does not lie on PCIBank's shoulders alone.

The evidence on record shows that Citibank as drawee bank was likewise negligent in the performance of its duties. Citibank failed
to establish that its payment of Ford's checjs were made in due course and legally in order. In its defense, Citibank claims the
genuineness and due execution of said checks, considering that Citibank (1) has no knowledge of any informity in the issuance of
the checks in question (2) coupled by the fact that said checks were sufficiently funded and (3) the endorsement of the Payee or
lack thereof was guaranteed by PCI Bank (formerly IBAA), thus, it has the obligation to honor and pay the same.

For its part, Ford contends that Citibank as the drawee bank owes to Ford an absolute and contractual duty to pay the proceeds of
the subject check only to the payee thereof, the CIR. Citing Section 6232 of the Negotiable Instruments Law, Ford argues that by
accepting the instrument, the acceptro which is Citibank engages that it will pay according to the tenor of its acceptance, and that it
will pay only to the payee, (the CIR), considering the fact that here the check was crossed with annotation "Payees Account Only."

As ruled by the Court of Appeals, Citibank must likewise answer for the damages incurred by Ford on Citibank Checks Numbers SN
10597 and 16508, because of the contractual relationship existing between the two. Citibank, as the drawee bank breached its
contractual obligation with Ford and such degree of culpability contributed to the damage caused to the latter. On this score, we
agree with the respondent court's ruling.

Citibank should have scrutinized Citibank Check Numbers SN 10597 and 16508 before paying the amount of the proceeds thereof
to the collecting bank of the BIR. One thing is clear from the record: the clearing stamps at the back of Citibank Check Nos. SN
10597 and 16508 do not bear any initials. Citibank failed to notice and verify the absence of the clearing stamps. Had this been duly
examined, the switching of the worthless checks to Citibank Check Nos. 10597 and 16508 would have been discovered in time. For
this reason, Citibank had indeed failed to perform what was incumbent upon it, which is to ensure that the amount of the checks
should be paid only to its designated payee. The fact that the drawee bank did not discover the irregularity seasonably, in our view,
consitutes negligence in carrying out the bank's duty to its depositors. The point is that as a business affected with public interest
and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care,
always having in mind the fiduciary nature of their relationship.33

Thus, invoking the doctrine of comparative negligence, we are of the view that both PCIBank and Citibank failed in their respective
obligations and both were negligent in the selection and supervision of their employees resulting in the encashment of Citibank
Check Nos. SN 10597 AND 16508. Thus, we are constrained to hold them equally liable for the loss of the proceeds of said checks
issued by Ford in favor of the CIR.

Time and again, we have stressed that banking business is so impressed with public interest where the trust and confidence of the
public in general is of paramount umportance such that the appropriate standard of diligence must be very high, if not the highest,
degree of diligence.34 A bank's liability as obligor is not merely vicarious but primary, wherein the defense of exercise of due
diligence in the selection and supervision of its employees is of no moment. 35

Banks handle daily transactions involving millions of pesos.36 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. 37 Banks are
expected to exercise the highest degree of diligence in the selection and supervision of their employees. 38

On the issue of prescription, PCIBank claims that the action of Ford had prescribed because of its inability to seek judicial relief
seasonably, considering that the alleged negligent act took place prior to December 19, 1977 but the relief was sought only in 1983,
or seven years thereafter.

The statute of limitations begins to run when the bank gives the depositor notice of the payment, which is ordinarily when the check
is returned to the alleged drawer as a voucher with a statement of his account, 39 and an action upon a check is ordinarily governed
by the statutory period applicable to instruments in writing.40
Our laws on the matter provide that the action upon a written contract must be brought within ten year from the time the right of
action accrues.41 hence, the reckoning time for the prescriptive period begins when the instrument was issued and the
corresponding check was returned by the bank to its depositor (normally a month thereafter). Applying the same rule, the cause of
action for the recovery of the proceeds of Citibank Check No. SN 04867 would normally be a month after December 19, 1977, when
Citibank paid the face value of the check in the amount of P4,746,114.41. Since the original complaint for the cause of action was
filed on January 20, 1984, barely six years had lapsed. Thus, we conclude that Ford's cause of action to recover the amount of
Citibank Check No. SN 04867 was seasonably filed within the period provided by law.

Finally, we also find thet Ford is not completely blameless in its failure to detect the fraud. Failure on the part of the depositor to
examine its passbook, statements of account, and cancelled checks and to give notice within a reasonable time (or as required by
statute) of any discrepancy which it may in the exercise of due care and diligence find therein, serves to mitigate the banks' liability
by reducing the award of interest from twelve percent (12%) to six percent (6%) per annum. As provided in Article 1172 of the Civil
Code of the Philippines, respondibility arising from negligence in the performance of every kind of obligation is also demandable, but
such liability may be regulated by the courts, according to the circumstances. In quasi-delicts, the contributory negligence of the
plaintiff shall reduce the damages that he may recover.42

WHEREFORE, the assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 25017 are AFFIRMED. PCIBank,
know formerly as Insular Bank of Asia and America, id declared solely responsible for the loss of the proceeds of Citibank Check No
SN 04867 in the amount P4,746,114.41, which shall be paid together with six percent (6%) interest thereon to Ford Philippines Inc.
from the date when the original complaint was filed until said amount is fully paid.

However, the Decision and Resolution of the Court of Appeals in CA-G.R. No. 28430 are MODIFIED as follows: PCIBank and
Citibank are adjudged liable for and must share the loss, (concerning the proceeds of Citibank Check Numbers SN 10597 and
16508 totalling P12,163,298.10) on a fifty-fifty ratio, and each bank is ORDERED to pay Ford Philippines Inc. P6,081,649.05, with
six percent (6%) interest thereon, from the date the complaint was filed until full payment of said amount.1wphi1.nt

Costs against Philippine Commercial International Bank and Citibank N.A.

SO ORDERED.

Bellosillo, Mendoza, Buena, De Leon, Jr., JJ, concur.

FIRST DIVISION

[G.R. No. 112392. February 29, 2000]

BANK OF THE PHILIPPINE ISLANDS, petitioner, vs. COURT OF

APPEALS and BENJAMIN C. NAPIZA, respondents.

DECISION

YNARES-SANTIAGO, J.:

This is a petition for review on certiorari of the Decision of the Court of [1]

Appeals in CA-G.R. CV No. 37392 affirming in toto that of the Regional Trial
Court of Makati, Branch 139, which dismissed the complaint filed by
[2]

petitioner Bank of the Philippine Islands against private respondent Benjamin

C. Napiza for sum of money. Sdaad
On September 3, 1987, private respondent deposited in Foreign Currency
Deposit Unit (FCDU) Savings Account No. 028-187 which he maintained in
[3]

petitioner banks Buendia Avenue Extension Branch, Continental Bank

Managers Check No. 00014757 dated August 17, 1984, payable to "cash" in
[4]

the amount of Two Thousand Five Hundred Dollars ($2,500.00) and duly
endorsed by private respondent on its dorsal side. It appears that the check
[5]

belonged to a certain Henry Chan who went to the office of private respondent
and requested him to deposit the check in his dollar account by way of
accommodation and for the purpose of clearing the same. Private respondent
acceded, and agreed to deliver to Chan a signed blank withdrawal slip, with
the understanding that as soon as the check is cleared, both of them would go
to the bank to withdraw the amount of the check upon private respondents
presentation to the bank of his passbook.

Using the blank withdrawal slip given by private respondent to Chan, on

October 23, 1984, one Ruben Gayon, Jr. was able to withdraw the amount of
$2,541.67 from FCDU Savings Account No. 028-187. Notably, the withdrawal
slip shows that the amount was payable to Ramon A. de Guzman and Agnes
C. de Guzman and was duly initialed by the branch assistant manager,
Teresita Lindo. [6]

On November 20, 1984, petitioner received communication from the Wells

Fargo Bank International of New York that the said check deposited by private
respondent was a counterfeit check because it was "not of the type or style of
[7]

checks issued by Continental Bank International." Consequently, Mr. Ariel

[8]

Reyes, the manager of petitioners Buendia Avenue Extension Branch,

instructed one of its employees, Benjamin D. Napiza IV, who is private
respondents son, to inform his father that the check bounced. Reyes himself
[9]

sent a telegram to private respondent regarding the dishonor of the check. In

turn, private respondents son wrote to Reyes stating that the check had been
assigned "for encashment" to Ramon A. de Guzman and/or Agnes C. de
Guzman after it shall have been cleared upon instruction of Chan. He also
said that upon learning of the dishonor of the check, his father immediately
tried to contact Chan but the latter was out of town. [10]

Private respondents son undertook to return the amount of $2,500.00 to

petitioner bank. On December 18, 1984, Reyes reminded private respondent
of his sons promise and warned that should he fail to return that amount within
seven (7) days, the matter would be referred to the banks lawyers for
appropriate action to protect the banks interest. This was followed by a letter
[11]

of the banks lawyer dated April 8, 1985 demanding the return of the
$2,500.00.[12]
In reply, private respondent wrote petitioners counsel on April 20,
1985 stating that he deposited the check "for clearing purposes" only to
[13]

accommodate Chan. He added:

"Further, please take notice that said check was deposited on

September 3, 1984 and withdrawn on October 23, 1984, or a total
period of fifty (50) days had elapsed at the time of withdrawal.
Also, it may not be amiss to mention here that I merely signed an
authority to withdraw said deposit subject to its clearing, the
reason why the transaction is not reflected in the passbook of the
account. Besides, I did not receive its proceeds as may be
gleaned from the withdrawal slip under the captioned signature of
recipient.

If at all, my obligation on the transaction is moral in nature, which

(sic) I have been and is (sic) still exerting utmost and maximum
efforts to collect from Mr. Henry Chan who is directly liable under
the circumstances. Scsdaad

xxx......xxx......xxx."

On August 12, 1986, petitioner filed a complaint against private respondent,

praying for the return of the amount of $2,500.00 or the prevailing peso
equivalent plus legal interest from date of demand to date of full payment, a
sum equivalent to 20% of the total amount due as attorney's fees, and
litigation and/or costs of suit.

Private respondent filed his answer, admitting that he indeed signed a "blank"
withdrawal slip with the understanding that the amount deposited would be
withdrawn only after the check in question has been cleared. He likewise
alleged that he instructed the party to whom he issued the signed blank
withdrawal slip to return it to him after the bank drafts clearance so that he
could lend that party his passbook for the purpose of withdrawing the amount
of $2,500.00. However, without his knowledge, said party was able to
withdraw the amount of $2,541.67 from his dollar savings account through
collusion with one of petitioners employees. Private respondent added that he
had "given the Plaintiff fifty one (51) days with which to clear the bank draft in
question." Petitioner should have disallowed the withdrawal because his
passbook was not presented. He claimed that petitioner had no one to blame
except itself "for being grossly negligent;" in fact, it had allegedly admitted
having paid the amount in the check "by mistake" x x x "if not altogether due
to collusion and/or bad faith on the part of (its) employees." Charging
petitioner with "apparent ignorance of routine bank procedures," by way of
counterclaim, private respondent prayed for moral damages of P100,000.00,
exemplary damages of P50,000.00 and attorneys fees of 30% of whatever
amount that would be awarded to him plus an honorarium of P500.00 per
appearance in court.

Private respondent also filed a motion for admission of a third party complaint
against Chan. He alleged that "thru strategem and/or manipulation," Chan
was able to withdraw the amount of $2,500.00 even without private
respondents passbook. Thus, private respondent prayed that third party
defendant Chan be made to refund to him the amount withdrawn and to pay
attorneys fees of P5,000.00 plus P300.00 honorarium per appearance.

Petitioner filed a comment on the motion for leave of court to admit the third
party complaint, wherein it asserted that per paragraph 2 of the Rules and
Regulations governing BPI savings accounts, private respondent alone was
liable "for the value of the credit given on account of the draft or check
deposited." It contended that private respondent was estopped from
disclaiming liability because he himself authorized the withdrawal of the
amount by signing the withdrawal slip. Petitioner prayed for the denial of the
said motion so as not to unduly delay the disposition of the main case
asserting that private respondents claim could be ventilated in another case.

Private respondent replied that for the parties to obtain complete relief and to
avoid multiplicity of suits, the motion to admit third party complaint should be
granted. Meanwhile, the trial court issued orders on August 25, 1987 and
October 28, 1987 directing private respondent to actively participate in
locating Chan. After private respondent failed to comply, the trial court, on
May 18, 1988, dismissed the third party complaint without prejudice.

On November 4, 1991, a decision was rendered dismissing the complaint.

The lower court held that petitioner could not hold private respondent liable
based on the checks face value alone. To so hold him liable "would
render inutile the requirement of clearance from the drawee bank before the
value of a particular foreign check or draft can be credited to the account of a
depositor making such deposit." The lower court further held that "it was
incumbent upon the petitioner to credit the value of the check in question to
the account of the private respondent only upon receipt of the notice of final
payment and should not have authorized the withdrawal from the latters
account of the value or proceeds of the check." Having admitted that it
committed a "mistake" in not waiting for the clearance of the check before
authorizing the withdrawal of its value or proceeds, petitioner should suffer the
resultant loss. Supremax

On appeal, the Court of Appeals affirmed the lower courts decision. The
appellate court held that petitioner committed "clear gross negligence" in
allowing Ruben Gayon, Jr. to withdraw the money without presenting private
respondents passbook and, before the check was cleared and in crediting the
amount indicated therein in private respondents account. It stressed that the
mere deposit of a check in private respondents account did not mean that the
check was already private respondents property. The check still had to be
cleared and its proceeds can only be withdrawn upon presentation of a
passbook in accordance with the banks rules and regulations. Furthermore,
petitioners contention that private respondent warranted the checks
genuineness by endorsing it is untenable for it would render useless the
clearance requirement. Likewise, the requirement of presentation of a
passbook to ascertain the propriety of the accounting reflected would be a
meaningless exercise. After all, these requirements are designed to protect
the bank from deception or fraud.

The Court of Appeals cited the case of Roman Catholic Bishop of Malolos,
Inc. v. IAC, where this Court stated that a personal check is not legal tender
[14]

or money, and held that the check deposited in this case must be cleared
before its value could be properly transferred to private respondent's account.

Without filing a motion for the reconsideration of the Court of Appeals

Decision, petitioner filed this petition for review on certiorari, raising the
following issues:

1.......WHETHER OR NOT RESPONDENT NAPIZA IS LIABLE

UNDER HIS WARRANTIES AS A GENERAL INDORSER.

2.......WHETHER OR NOT A CONTRACT OF AGENCY WAS

CREATED BETWEEN RESPONDENT NAPIZA AND RUBEN
GAYON.

3.......WHETHER OR NOT PETITIONER WAS GROSSLY

NEGLIGENT IN ALLOWING THE WITHDRAWAL.

Petitioner claims that private respondent, having affixed his signature at the
dorsal side of the check, should be liable for the amount stated therein in
accordance with the following provision of the Negotiable Instruments Law
(Act No. 2031):
 "SEC. 66. Liability of general indorser. Every indorser who
indorses without qualification, warrants to all subsequent holders
in due course

(a)......The matters and things mentioned in subdivisions (a), (b),

and (c) of the next preceding section; and

(b)......That the instrument is at the time of his indorsement, valid

and subsisting.

And, in addition, he engages that on due presentment, it shall be

accepted or paid, or both, as the case may be, according to its
tenor, and that if it be dishonored, and the necessary proceedings
on dishonor be duly taken, he will pay the amount thereof to the
holder, or to any subsequent indorser who may be compelled to
pay it."

Section 65, on the other hand, provides for the following warranties of a
person negotiating an instrument by delivery or by qualified indorsement: (a)
that the instrument is genuine and in all respects what it purports to be; (b)
that he has a good title to it, and (c) that all prior parties had capacity to
contract. In People v. Maniego, this Court described the liabilities of an
[15] [16]

indorser as follows: Juris

"Appellants contention that as mere indorser, she may not be

liable on account of the dishonor of the checks indorsed by her, is
likewise untenable. Under the law, the holder or last indorsee of a
negotiable instrument has the right to enforce payment of the
instrument for the full amount thereof against all parties liable
thereon. Among the parties liable thereon is an indorser of the
instrument, i.e., a person placing his signature upon an instrument
otherwise than as a maker, drawer or acceptor * * unless he
clearly indicated by appropriate words his intention to be bound in
some other capacity. Such an indorser who indorses without
qualification, inter alia engages that on due presentment, * * (the
instrument) shall be accepted or paid, or both, as the case may
be, according to its tenor, and that if it be dishonored, and the
necessary proceedings on dishonor be duly taken, he will pay the
amount thereof to the holder, or any subsequent indorser who
may be compelled to pay it. Maniego may also be deemed an
accommodation party in the light of the facts, i.e., a person who
has signed the instrument as maker, drawer, acceptor, or
 indorser, without receiving value therefor, and for the purpose of
lending his name to some other person. As such, she is under the
law liable on the instrument to a holder for value, notwithstanding
such holder at the time of taking the instrument knew * * (her) to
be only an accommodation party, although she has the right, after
paying the holder, to obtain reimbursement from the party
accommodated, since the relation between them is in effect that
of principal and surety, the accommodation party being the
surety."

It is thus clear that ordinarily private respondent may be held liable as an

indorser of the check or even as an accommodation party. However, to hold
[17]

private respondent liable for the amount of the check he deposited by the
strict application of the law and without considering the attending
circumstances in the case would result in an injustice and in the erosion of the
public trust in the banking system. The interest of justice thus demands
looking into the events that led to the encashment of the check.

Petitioner asserts that by signing the withdrawal slip, private respondent

"presented the opportunity for the withdrawal of the amount in question."
Petitioner relied "on the genuine signature on the withdrawal slip, the
personality of private respondents son and the lapse of more than fifty (50)
days from date of deposit of the Continental Bank draft, without the same
being returned yet." We hold, however, that the propriety of the withdrawal
[18]

should be gauged by compliance with the rules thereon that both petitioner
bank and its depositors are duty-bound to observe.

In the passbook that petitioner issued to private respondent, the following

rules on withdrawal of deposits appear:

"4.......Withdrawals must be made by the depositor personally but

in some exceptional circumstances, the Bank may allow
withdrawal by another upon the depositors written authority duly
authenticated; and neither a deposit nor a withdrawal will be
permitted except upon the presentation of the depositors savings
passbook, in which the amount deposited withdrawn shall be
entered only by the Bank.

5.......Withdrawals may be made by draft, mail or telegraphic

transfer in currency of the account at the request of the depositor
in writing on the withdrawal slip or by authenticated cable. Such
request must indicate the name of the payee/s, amount and the
 place where the funds are to be paid. Any stamp, transmission
and other charges related to such withdrawals shall be for the
account of the depositor and shall be paid by him/her upon
demand. Withdrawals may also be made in the form of travellers
checks and in pesos. Withdrawals in the form of notes/bills are
allowed subject however, to their (availability).

6.......Deposits shall not be subject to withdrawal by check, and

may be withdrawn only in the manner above provided, upon
presentation of the depositors savings passbook and with the
withdrawal form supplied by the Bank at the counter." Scjuris
[19]

Under these rules, to be able to withdraw from the savings account deposit
under the Philippine foreign currency deposit system, two requisites must be
presented to petitioner bank by the person withdrawing an amount: (a) a duly
filled-up withdrawal slip, and (b) the depositors passbook. Private respondent
admits that he signed a blank withdrawal slip ostensibly in violation of Rule
No. 6 requiring that the request for withdrawal must name the payee, the
amount to be withdrawn and the place where such withdrawal should be
made. That the withdrawal slip was in fact a blank one with only private
respondents two signatures affixed on the proper spaces is buttressed by
petitioners allegation in the instant petition that had private respondent
indicated therein the person authorized to receive the money, then Ruben
Gayon, Jr. could not have withdrawn any amount. Petitioner contends that
"(i)n failing to do so (i.e., naming his authorized agent), he practically
authorized any possessor thereof to write any amount and to collect the
same." [20]

Such contention would have been valid if not for the fact that the withdrawal
slip itself indicates a special instruction that the amount is payable to "Ramon
A. de Guzman &/or Agnes C. de Guzman." Such being the case, petitioners
personnel should have been duly warned that Gayon, who was also employed
in petitioners Buendia Ave. Extension branch, was not the proper payee of
[21]

the proceeds of the check. Otherwise, either Ramon or Agnes de Guzman

should have issued another authority to Gayon for such withdrawal. Of
course, at the dorsal side of the withdrawal slip is an "authority to withdraw"
naming Gayon the person who can withdraw the amount indicated in the
check. Private respondent does not deny having signed such authority.
However, considering petitioners clear admission that the withdrawal slip was
a blank one except for private respondents signature, the unavoidable
conclusion is that the typewritten name of "Ruben C. Gayon, Jr." was
intercalated and thereafter it was signed by Gayon or whoever was allowed by
petitioner to withdraw the amount. Under these facts, there could not have
been a principal-agent relationship between private respondent and Gayon so
as to render the former liable for the amount withdrawn.

Moreover, the withdrawal slip contains a boxed warning that states: "This
receipt must be signed and presented with the corresponding foreign currency
savings passbook by the depositor in person. For withdrawals thru a
representative, depositor should accomplish the authority at the back." The
requirement of presentation of the passbook when withdrawing an amount
cannot be given mere lip service even though the person making the
withdrawal is authorized by the depositor to do so. This is clear from Rule No.
6 set out by petitioner so that, for the protection of the banks interest and as a
reminder to the depositor, the withdrawal shall be entered in the depositors
passbook. The fact that private respondents passbook was not presented
during the withdrawal is evidenced by the entries therein showing that the last
transaction that he made with the bank was on September 3, 1984, the date
he deposited the controversial check in the amount of $2,500.00. [22]

In allowing the withdrawal, petitioner likewise overlooked another rule that is

printed in the passbook. Thus:

"2.......All deposits will be received as current funds and will be

repaid in the same manner; provided, however, that deposits
of drafts, checks, money orders, etc. will be accepted as subject
to collection only and credited to the account only upon receipt of
the notice of final payment. Collection charges by the Banks
foreign correspondent in effecting such collection shall be for the
account of the depositor. If the account has sufficient balance, the
collection shall be debited by the Bank against the account. If, for
any reason, the proceeds of the deposited checks, drafts, money
orders, etc., cannot be collected or if the Bank is required to return
such proceeds, the provisional entry therefor made by the Bank in
the savings passbook and its records shall be deemed
automatically cancelled regardless of the time that has elapsed,
and whether or not the defective items can be returned to the
depositor; and the Bank is hereby authorized to execute
immediately the necessary corrections, amendments or changes
in its record, as well as on the savings passbook at the first
opportunity to reflect such cancellation." (Italics and underlining
supplied.) Jurissc
As correctly held by the Court of Appeals, in depositing the check in his name,
private respondent did not become the outright owner of the amount stated
therein. Under the above rule, by depositing the check with petitioner, private
respondent was, in a way, merely designating petitioner as the collecting
bank. This is in consonance with the rule that a negotiable instrument, such as
a check, whether a managers check or ordinary check, is not legal
tender. As such, after receiving the deposit, under its own rules, petitioner
[23]

shall credit the amount in private respondents account or infuse value thereon
only after the drawee bank shall have paid the amount of the check or the
check has been cleared for deposit. Again, this is in accordance with ordinary
banking practices and with this Courts pronouncement 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." The rule finds more meaning in this case where the
[24]

check involved is drawn on a foreign bank and therefore collection is more

difficult than when the drawee bank is a local one even though the check in
question is a managers check. Misjuris
[25]

In Banco Atlantico v. Auditor General, Banco Atlantico, a commercial bank in

[26]

Madrid, Spain, paid the amounts represented in three (3) checks to Virginia
Boncan, the finance officer of the Philippine Embassy in Madrid. The bank did
so without previously clearing the checks with the drawee bank, the Philippine
National Bank in New York, on account of the "special treatment" that Boncan
received from the personnel of Banco Atlanticos foreign department. The
Court held that the encashment of the checks without prior clearance is
"contrary to normal or ordinary banking practice specially so where the
drawee bank is a foreign bank and the amounts involved were large."
Accordingly, the Court approved the Auditor Generals denial of Banco
Atlanticos claim for payment of the value of the checks that was withdrawn by
Boncan.

Said ruling brings to light the fact that the banking business is affected with
public interest. By the nature of its functions, a bank is under obligation to
treat the accounts of its depositors "with meticulous care, always having in
mind the fiduciary nature of their relationship." As such, in dealing with its
[27]

depositors, a bank should exercise its functions not only with the diligence of a
good father of a family but it should do so with the highest degree of care.[28]

In the case at bar, petitioner, in allowing the withdrawal of private respondents

deposit, failed to exercise the diligence of a good father of a family. In total
disregard of its own rules, petitioners personnel negligently handled private
respondents account to petitioners detriment. As this Court once said on this
matter:

"Negligence is the omission to do something which a reasonable

man, guided by those considerations which ordinarily regulate the
conduct of human affairs, would do, or the doing of something
which a prudent and reasonable man would do. The seventy-eight
(78)-year-old, yet still relevant, case of Picart v. Smith, provides
the test by which to determine the existence of negligence in a
particular case which may be stated as follows: Did the defendant
in doing the alleged negligent act use that reasonable care and
caution which an ordinarily prudent person would have used in the
same situation? If not, then he is guilty of negligence. The law
here in effect adopts the standard supposed to be supplied by the
imaginary conduct of the discreet pater-familias of the Roman law.
The existence of negligence in a given case is not determined by
reference to the personal judgment of the actor in the situation
before him. The law considers what would be reckless,
blameworthy, or negligent in the man of ordinary intelligence and
prudence and determines liability by that." [29]

Petitioner violated its own rules by allowing the withdrawal of an amount that
is definitely over and above the aggregate amount of private respondents
dollar deposits that had yet to be cleared. The banks ledger on private
respondents account shows that before he deposited $2,500.00, private
respondent had a balance of only $750.00. Upon private respondents
[30]

deposit of $2,500.00 on September 3, 1984, that amount was credited in his

ledger as a deposit resulting in the corresponding total balance of
$3,250.00. On September 10, 1984, the amount of $600.00 and the
[31]

additional charges of $10.00 were indicated therein as withdrawn thereby

leaving a balance of $2,640.00. On September 30, 1984, an interest of $11.59
was reflected in the ledger and on October 23, 1984, the amount of $2,541.67
was entered as withdrawn with a balance of $109.92. On November 19,
[32]

1984 the word "hold" was written beside the balance of $109.92. That must
[33]

have been the time when Reyes, petitioners branch manager, was informed
unofficially of the fact that the check deposited was a counterfeit, but
petitioners Buendia Ave. Extension Branch received a copy of the
communication thereon from Wells Fargo Bank International in New York the
following day, November 20, 1984. According to Reyes, Wells Fargo Bank
[34]
International handled the clearing of checks drawn against U.S. banks that
were deposited with petitioner. Jjlex
[35]

From these facts on record, it is at once apparent that petitioners personnel

allowed the withdrawal of an amount bigger than the original deposit of
$750.00 and the value of the check deposited in the amount of $2,500.00
although they had not yet received notice from the clearing bank in the United
States on whether or not the check was funded. Reyes contention that after
the lapse of the 35-day period the amount of a deposited check could be
withdrawn even in the absence of a clearance thereon, otherwise it could take
a long time before a depositor could make a withdrawal, is untenable. Said
[36]

practice amounts to a disregard of the clearance requirement of the banking

system.

While it is true that private respondents having signed a blank withdrawal slip
set in motion the events that resulted in the withdrawal and encashment of the
counterfeit check, the negligence of petitioners personnel was the proximate
cause of the loss that petitioner sustained. Proximate cause, which is
determined by a mixed consideration of logic, common sense, policy and
precedent, 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." The proximate cause of the
[37]

withdrawal and eventual loss of the amount of $2,500.00 on petitioners part

was its personnels negligence in allowing such withdrawal in disregard of its
own rules and the clearing requirement in the banking system. In so doing,
petitioner assumed the risk of incurring a loss on account of a forged or
counterfeit foreign check and hence, it should suffer the resulting damage.

WHEREFORE, the petition for review on certiorari is DENIED. The Decision

of the Court of Appeals in CA-G.R. CV No. 37392 is AFFIRMED.

SO ORDERED. Newmiso

Davide, Jr., C.J., (Chairman), Puno, Kapunan, and Pardo, JJ., concur.
 SECOND DIVISION

G.R. No. 125059 March 17, 2000

FRANCISCO T. SYCIP, JR., petitioner,

vs.
COURT OF APPEALS and PEOPLE OF THE PHILIPPINES, respondents.

QUISUMBING, J.:

For review on certiorari is the decision of the Court of Appeals, dated February 29, 1996, in CA-G.R. CR No. 15993, which affirmed
the judgment of the Regional Trial Court of Quezon City, Branch 95, in Criminal Cases Nos. Q-91-25910 to 15, finding petitioner
guilty beyond reasonable doubt of violating B.P. Blg. 22, the Bouncing Checks Law.

The facts in this case, as culled from the records, are as follows:

On August 24, 1989, Francisco T. Sycip agreed to buy, on installment, from Francel Realty Corporation (FRC), a townhouse unit in
the latter's project at Bacoor, Cavite.

Upon execution of the contract to sell, Sycip, as required, issued to FRC, forty-eight (48) postdated checks, each in the amount of
P9,304.00, covering 48 monthly installments.

After moving in his unit, Sycip complained to FRC regarding defects in the unit and incomplete features of the townhouse project.
FRC ignored the complaint. Dissatisfied, Sycip served on FRC two (2) notarial notices to the effect that he was suspending his
installment payments on the unit pending compliance with the project plans and specifications, as approved by the Housing and
Land Use Regulatory Board (HLURB). Sycip and 12 out of 14 unit buyers then filed a complaint with the HLURB. The complaint was
dismissed as to the defects, but FRC was ordered by the HLURB to finish all incomplete features of its townhouse project. Sycip
appealed the dismissal of the complaint as to the alleged defects.

Notwithstanding the notarial notices, FRC continued to present for encashment Sycip's postdated checks in its possession. Sycip
sent "stop payment orders" to the bank. When FRC continued to present the other postdated checks to the bank as the due date
fell, the bank advised Sycip to close his checking account to avoid paying bank charges every time he made a "stop payment" order
on the forthcoming checks. Due to the closure of petitioner's checking account, the drawee bank dishonored six postdated checks.
FRC filed a complaint against petitioner for violations of B.P. Blg. 22 involving said dishonored checks.

On November 8, 1991, the Quezon City Prosecutor's Office filed with the RTC of Quezon City six Informations docketed as Criminal
Cases No. Q-91-25910 to Q-91-25915, charging petitioner for violation of B.P. Blg. 22.

The accusative portion of the Information in Criminal Case No. Q-91-25910 reads:

That on or about the 30th day of October 1990 in Quezon City, Philippines and within the jurisdiction of this Honorable
Court, the said accused, did then and there, willfully, unlawfully and feloniously make, draw and issue in favor of Francel
Realty Corporation a check 813514 drawn against Citibank, a duly established domestic banking institution in the amount
of P9,304.00 Philippine Currency dated/postdated October 30, 1990 in payment of an obligation, knowing fully well at the
time of issue that she/he did not have any funds in the drawee bank of (sic) the payment of such check; that upon
presentation of said check to said bank for payment, the same was dishonored for the reason that the drawer thereof,
accused Francisco T. Sycip, Jr. did not have any funds therein, and despite notice of dishonor thereof, accused failed and
refused and still fails and refused (sic) to redeem or make good said check, to the damage and prejudice of the said
Francel Realty Corporation in the amount aforementioned and in such other amount as may be awarded under the
provisions of the Civil Code.

CONTRARY TO LAW. 1
Criminal Cases No. Q-91-25911 to Q-91-25915, with Informations similarly worded as in Criminal Case No. Q-91-25910, except for
the dates, and check numbers were consolidated and jointly tried.
2

When arraigned, petitioner pleaded "Not Guilty" to each of the charges. Trial then proceeded.

The prosecution's case, as summarized by the trial court and adopted by the appellate court, is as follows:

The prosecution evidence established that on or about August 24, 1989, at the office of the private complainant Francel
Realty Corporation (a private domestic corporation engaged in the real estate business) at 822 Quezon Avenue, QC,
accused Francisco Sycip, Jr. drew, issued, and delivered to private complainant Francel Realty Corporation (FRC
hereinafter) six checks (among a number of other checks), each for P9,304.00 and drawn pay to the order of FRC and
against Francisco's account no. 845515 with Citibank, to wit: Check No. 813514 dated October 30, 1990 (Exh. C), Check
No. 813515 dated November 30, 1990 (Exh. D), Check No. 813518 dated February 28, 1991 (Exh. E), Check No. 813516
dated December 30, 1990 (Exh. F), Check No. 813517 dated January 30, 1991 (Exh. G) and Check No. 813519 dated
March 30, 1991 (Exh. H), as and in partial payment of the unpaid balance of the purchase price of the house and lot
subject of the written contract executed and entered into by and between FRC as seller and Francisco as buyer on said
date of August 24, 1989 (Exh. B, also Exh. 1). The total stipulated purchase price for the house and lot was P451,700.00,
of which Francisco paid FRC in the sum of P135,000.00 as down payment, with Francisco agreeing and committing
himself to pay the balance of P316,000.00 in 48 equal monthly installments of P9,304.00 (which sum already includes
interest on successive monthly balance) effective September 30, 1989 and on the 30th day of each month thereafter until
the stipulated purchase price is paid in full. The said six Citibank checks, Exhs. C thru H, as earlier indicated were drawn,
issued, and delivered by Francisco in favor of FRC as and in partial payment of the said 48 equal monthly installments
under their said contract (Exh. B, also Exh. 1). Sometime in September 1989, the Building Official's certificate of
occupancy for the subject house a residential townhouse was issued (Exh. N) and Francisco took possession and
started in the use and occupancy of the subject house and lot. 1wphi1.nt

When the subject six checks, Exhs. C thru H, were presented to the Citibank for payment on their respective due dates,
they were all returned to FRC dishonored and unpaid for the reason: account closed as indicated in the drawee bank's
stamped notations on the face and back of each check; in fact, as indicated in the corresponding record of Francisco's
account no. 815515 with Citibank, said account already had a zero balance as early as September 14, 1990 (Exh. 1-5).
Notwithstanding the fact that FRC, first thru its executive vice president and project manager and thereafter thru its
counsel, had notified Francisco, orally and in writing, of the checks' dishonor and demanded from him the payment of the
amount thereof, still Francisco did not pay or make good any of the checks (Exhs. I thru K). . . 3

The case for the defense, as summarized also by the trial court and adopted by the Court of Appeals, is as follows:

The defense evidence in sum is to the effect that after taking possession and starting in the use and occupancy of the
subject townhouse unit, Francisco became aware of its various construction defects; that he called the attention of FRC,
thru its project manager, requesting that appropriate measures be forthwith instituted, but despite his several requests,
FRC did not acknowledge, much less attend to them; that Francisco thus mailed to FRC a verified letter dated June 6,
1990 (Exh. 2) in sum giving notice that effective June 1990, he will cease and desist "from paying my monthly
amortization of NINE THOUSAND THREE HUNDRED FOUR (P9,304.00) PESOS towards the settlement of my
obligation concerning my purchase of Unit No. 14 of FRC Townhomes referred to above, unless and until your Office
satisfactorily complete(s) the construction, renovation and/or repair of my townhouses (sic) unit referred to above" and
that should FRC "persist in ignoring my aforesaid requests, I shall, after five (5) days from your receipt of this Verified
Notice, forthwith petition the [HLURB] for Declaratory Relief and Consignation to grant me provisional relief from my
obligation to pay my monthly amortization to your good Office and allow me to deposit said amortizations with [HLURB]
pending your completion of FRC Townhomes Unit in question"; that Francisco thru counsel wrote FRC, its president, and
its counsel notices/letters in sum to the effect that Francisco and all other complainants in the [HLURB] case against FRC
shall cease and desist from paying their monthly amortizations unless and until FRC satisfactorily completes the
construction of their units in accordance with the plans and specifications thereof as approved by the [HLURB] and as
warranted by the FRC in their contracts and that the dishonor of the subject checks was a natural consequence of such
suspension of payments, and also advising FRC not to encash or deposit all other postdated checks issued by Francisco
and the other complainants and still in FRC's possession (Exhs. 3 thru 5); that Francisco and the other complainants filed
the [HLURB] case against FRC and later on a decision was handed down therein and the same is pending appeal with
the Board (Exhs. 6, 7, & 12 thru 17, also Exh. 8); that as of the time of presentation of the subject checks for payment by
the drawee bank, Francisco had at least P150,000.00 cash or credit with Citibank (Exhs. 10 & 11) and, that Francisco
closed his account no. 845515 with Citibank conformably with the bank's customer service officer's advice to close his
said account instead of making a stop-payment order for each of his more than 30 post-dated checks still in FRC's
possession at the time, so as to avoid the P600.00-penalty imposed by the bank for every check subject of a stop-
payment order. 4

On March 11, 1994, the trial court found petitioner guilty of violating Section 1 of B.P. Blg. 22 in each of the six cases, disposing as
follows:
 WHEREFORE, in each of Crim. Cases Nos. Q-91-25910, Q-91-25911, Q-91-25912, Q-91-25913, Q-91-25914 and Q-91-
25915, the Court finds accused Francisco T. Sycip, Jr. guilty beyond reasonable doubt of a violation of Sec. 1 of Batas
Pambansa Blg. 22 and, accordingly, he is hereby sentenced in and for each case to suffer imprisonment of thirty (30)
days and pay the costs. Further, the accused is hereby ordered to pay the offended party, Francel Realty Corporation, as
and for actual damages, the total sum of fifty-five thousand eight hundred twenty four pesos (P55,824.00) with interest
thereon at the legal rate from date of commencement of these actions, that is, November 8, 1991, until full payment
thereof.

SO ORDERED.

Dissatisfied, Sycip appealed the decision to the Court of Appeals. His appeal was docketed as CA-G.R. CR No. 15993. But on
February 29, 1996, the appellate court ruled:

On the basis of the submission of the People, We find and so hold that appellant has no basis to rely on the provision of
PD 957 to justify the non-payment of his obligation, the closure of his checking account and the notices sent by him to
private complainant that he will stop paying his monthly amortizations. 6

Petitioner filed a motion for reconsideration on March 18, 1996, but it was denied per Resolution dated April 22, 1996.

Hence, the instant petition anchored on the following assignment of errors:

THE APPELLATE COURT ERRED IN AFFIRMING THE DECISION OF THE LOWER COURT FINDING THAT THE
ACCUSED-APPELLANT DID NOT HAVE ANY JUSTIFIABLE CAUSE TO STOP OR OTHERWISE PREVENT THE
PAYMENT OF THE SUBJECT CHECKS BY THE DRAWEE BANK.

II

THE LOWER COURT ERRED IN FINDING THAT THE ACCUSED-APPELLANT MUST BE DEEMED TO HAVE WAIVED
HIS RIGHT TO COMPLAIN AGAINST THE DEVELOPMENT OF THE TOWNHOUSE UNIT AND THE TOWNHOUSE
PROJECT.

III

THE APPELLATE COURT ERRED IN AFFIRMING THE DECISION OF THE LOWER COURT THAT THE ACCUSED-
APPELLANT DID NOT HAVE SUFFICIENT FUNDS WITH THE DRAWEE BANK TO COVER THE SUBJECT CHECKS
UPON PRESENTMENT FOR PAYMENT THEREOF.

IV

THE APPELLATE COURT ERRED IN AFFIRMING THE DECISION OF THE LOWER COURT CONVICTING THE
ACCUSED-APPELLANT AND AWARDING DAMAGES IN FAVOR OF PRIVATE COMPLAINANT. 7

The principal issue before us is whether or not the Court of Appeals erred in affirming the conviction of petitioner for violation of the
Bouncing Checks Law.

Petitioner argues that the court a quo erred when it affirmed his conviction for violation of B.P. Blg. 22, considering that he had
cause to stop payment of the checks issued to respondent. Petitioner insists that under P.D. No. 957, the buyer of a townhouse unit
has the right to suspend his amortization payments, should the subdivision or condominium developer fail to develop or complete
the project in accordance with duly-approved plans and specifications. Given the findings of the HLURB that certain aspects of
private complainant's townhouse project were incomplete and undeveloped, the exercise of his right to suspend payments should
not render him liable under B.P. Blg. 22.

The Solicitor General argues that since what petitioner was charged with were violations of B.P. Blg. 22, the intent and
circumstances surrounding the issuance of a worthless check are immaterial. The gravamen of the offense charged is the act itself
8

of making and issuing a worthless check or one that is dishonored upon its presentment for payment. Mere issuing of a bad check
is malum prohibitum, pernicious and inimical to public welfare. In his view, P.D. No. 957 does not provide petitioner a sufficient
defense against the charges against him.

Under the provisions of the Bouncing Checks Law (B.P. No. 22), an offense is committed when the following elements are present:
9
 (1) the making, drawing and issuance of any check to apply for 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) the 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. 10

In this case, we find that although the first element of the offense exists, the other elements have not been established beyond
reasonable doubt.

To begin with, the second element involves knowledge on the part of the issuer at the time of the check's issuance that he did not
have enough funds or credit in the bank for payment thereof upon its presentment. B.P. No. 22 creates a presumption juris
tantum that the second element prima facie exists when the first and third elements of the offense are present. But such evidence
11

may be rebutted. If not rebutted or contradicted, it will suffice to sustain a judgment in favor of the issue, which it supports. As
12

pointed out by the Solicitor General, such knowledge of the insufficiency of petitioner's funds "is legally presumed from the dishonor
of his checks for insufficiency of funds." But such presumption cannot hold if there is evidence to the contrary. In this case, we find
13

that the other party has presented evidence to contradict said presumption. Hence, the prosecution is duty bound to prove every
element of the offense charged, and not merely rely on a rebuttable presumption.

Admittedly, what are involved here are postdated checks. Postdating simply means that on the date indicated on its face, the check
would be properly funded, not that the checks should be deemed as issued only then. The checks in this case were issued at the
14

time of the signing of the Contract to Sell in August 1989. But we find from the records no showing that the time said checks were
issued, petitioner had knowledge that his deposit or credit in the bank would be insufficient to cover them when presented for
encashment. On the contrary, there is testimony by petitioner that at the time of presentation of the checks, he had P150,000,00
15

cash or credit with Citibank.

As the evidence for the defense showed, the closure of petitioner's Account No. 845515 with Citibank was not for insufficiency of
funds. It was made upon the advice of the drawee bank, to avoid payment of hefty bank charges each time petitioner issued a "stop
payment" order to prevent encashment of postdated checks in private respondent's possession. Said evidence contradicts
16

the prima facie presumption of knowledge of insufficiency of funds. But it establishes petitioner's state of mind at the time said
checks were issued on August 24, 1989. Petitioner definitely had no knowledge that his funds or credit would be insufficient when
the checks would be presented for encashment. He could not have foreseen that he would be advised by his own bank in the future,
to close his account to avoid paying the hefty banks charges that came with each "stop payment" order issued to prevent private
respondent from encashing the 30 or so checks in its possession. What the prosecution has established is the closure of petitioner's
checking account. But this does not suffice to prove the second element of the offense under B.P. Blg. 22, which explicitly requires
"evidence of knowledge of insufficient funds" by the accused at the time the check or checks are presented for encashment.

To rely on the presumption created by B.P. No. 22 as the prosecution did in this case, would be to misconstrue the import of
requirements for conviction under the law. It must be stressed that every element of the offense must be proved beyond reasonable
doubt, never presumed. Furthermore, penal statutes are strictly construed against the State and liberally in favor of the accused.
Under the Bouncing Checks Law, the punishable act must come clearly within both the spirit and letter of the statute. 17

While B.P. Blg. 22 was enacted to safeguard the interest of the banking system, it is difficult to see how conviction of the accused
18

in this case will protect the sanctity of the financial system. Moreover, protection must also be afforded the interest of townhouse
buyers under P.D. No. 957. A statute must be construed in relation to other laws so as to carry out the legitimate ends and
19

purposes intended by the legislature. Courts will not strictly follow the letter of one statute when it leads away from the true intent of
20

legislature and when ends are inconsistent with the general purpose of the act. More so, when it will mean the contravention of
21

another valid statute. Both laws have to be reconciled and given due effect.

Note that we have upheld a buyer's reliance on Section 23 of P.D. 957 to suspend payments until such time as the owner or
developer had fulfilled its obligations to the buyer. This exercise of a statutory right to suspend installment payments, is to our
22

mind, a valid defense against the purported violations of B.P. Blg. 22 that petitioner is charged with.

Given the findings of the HLURB as to incomplete features in the construction of petitioner's and other units of the subject
condominium bought on installment from FRC, we are of the view that petitioner had a valid cause to order his bank to stop
payment. To say the least, the third element of "subsequent dishonor of the check. . . without valid cause" appears to us not
established by the prosecution. As already stated, the prosecution tried to establish the crime on a prima facie presumption in B.P.
Blg. 22. Here that presumption is unavailing, in the presence of a valid cause to stop payment, thereby negating the third element of
the crime.1wphi 1

Offenses punished by a special law, like the Bouncing Checks Law, are not subject to the Revised Penal Code, but the Code is
supplementary to such a law. We find nothing in the text of B.P. Blg. 22, which would prevent the Revised Penal Code from
23
supplementing it. Following Article 11 (5) of the Revised Penal Code, petitioner's exercise of a right of the buyer under Article 23 of
24

P.D. No. 957 is a valid defense to the charges against him.

WHEREFORE, the instant petition is GRANTED. Petitioner Francisco T. Sycip, Jr., is ACQUITTED of the charges against him under
Batas Pambansa Blg. 22, for lack of sufficient evidence to prove the offenses charged beyond reasonable doubt. No
pronouncement as to costs.

SO ORDERED.

Bellosillo, Mendoza, Buena and De Leon, Jr., JJ., concur.

SECOND DIVISION

[G.R. No. 150618. July 24, 2003]

EVANGELINE CABRERA, petitioner, vs. PEOPLE OF

THE PHILIPPINES and LUIS GO, respondents.

DECISION
CALLEJO, SR., J.:

This is a petition for review of the Decision dated January 25, 2001, and [1]

the October 9, 2001 Resolution of the Court of Appeals in CA-G.R. CR No.

17715 affirming the Decision dated January 17, 1993 of the Regional Trial
[2]

Court (RTC) of Davao City, Branch 17, which found the petitioner Evangeline
Cabrera guilty beyond reasonable doubt of three counts of violation of Batas
Pambansa Bilang 22 (B.P. Blg. 22), otherwise known as the Bouncing Checks
Law.
On August 2, 1993, three Informations were filed charging Evangeline
Cabrera with violation of B.P. Blg. 22, the accusatory portion of which
respectively reads as follows:

That sometime in April 1992 in the City of Davao, Philippines, and within the
jurisdiction of this Honorable Court, the above-named accused, knowing fully well
that she had no sufficient funds in the drawee bank, willfully, unlawfully and
feloniously issued and/or made out a Prudential Bank Check No. 665332 in the
amount of P50,907.70 postdated July 11, 1992 in favor of Luis Go, in payment of an
obligation; but when said check was presented to the drawee bank for encashment, the
same was dishonored for the reason 'Account Closed' and despite notice of dishonor
and demands made upon said accused to make good the check, the same refused and
failed to make payment, to the damage and prejudice of the herein complainant in the
aforesaid amount of P50,907.70.

Contrary to law. [3]

---

That sometime in April 1992 in the City of Davao, Philippines, and within the
jurisdiction of this Honorable Court, the above-named accused, knowing fully well
that she had no sufficient funds in the drawee bank, willfully, unlawfully and
feloniously issued and/or made out a Prudential Bank Check No. 658049 in the
amount of P72,311.75 postdated June 12, 1992 in favor of Luis Go, in payment of an
obligation; but when said check was presented to the drawee bank for encashment, the
same was dishonored for the reason 'Account Closed' and despite notice of dishonor
and demands made upon said accused to make good the check, the same refused and
failed to make payment, to the damage and prejudice of the herein complainant in the
aforesaid amount of P72, 311.75.

Contrary to law. [4]

---

That sometime in April 1992 in the City of Davao, Philippines, and within the
jurisdiction of this Honorable Court, the above-named accused, knowing fully well
that she had no sufficient funds in the drawee bank, willfully, unlawfully and
feloniously issued and/or made out a Prudential Bank Check No. 658034 in the
amount of P67,956.00 postdated May 2, 1992 in favor of Luis Go, in payment of an
obligation; but when said check was presented to the drawee bank for encashment, the
same was dishonored for the reason 'Account Closed' and despite notice of dishonor
and demands made upon said accused to make good the check, the same refused and
failed to make payment, to the damage and prejudice of the herein complainant in the
aforesaid amount of P67,956.00.

Contrary to law. [5]

The accused, now the petitioner in this case, was duly arraigned, assisted
by counsel de oficio and entered a plea of not guilty to all the charges. Joint
trial thereafter ensued.
 The Case for the Prosecution

Luis Go was the sole proprietor of the Davao Mindanao Pioneer Hardware
& Company (DMPH Co.), located at No. 63 Ramon Magsaysay Boulevard,
Davao City. One of his customers was Boni Co, a travelling salesman. The
two had agreed that Go would sell lumber materials and merchandise to Co
on a thirty to forty-day credit basis. Go, however, required Co to issue
postdated checks in payment for his purchases. Since Co had no checking
account with any bank, he offered to pay for his purchases with postdated
checks drawn and issued by the petitioner. Co assured Go that he and the
petitioner had a business arrangement. Go made inquiries at the bank and
was told that the petitioner handled her checks well. Since Go also believed
that Co was a good businessman, he finally agreed to accept the postdated
checks issued by the petitioner. Go and Co also agreed that on the due date
of the checks, Co would either pay the amount thereof in cash by way of
replacement for the same, or Go would negotiate, or deposit the checks in his
account and/or the account of DMPH Co.
Co purchased merchandise from Go and delivered postdated checks
drawn against the petitioners checking account with the Davao City Branch of
Prudential Bank, bearing the following particulars:

Check Number Amount Date

658034 P67,956.00 May 02, 1992

658049 P72,311.75 June 12, 1992
665332 P50,907.70 July 12, 1992

When Co failed to pay for his purchases, Go deposited the three

postdated checks in his account with the Far East Bank & Trust Company
(FEBTC) on August 3, 1992. As of July 31, 1999, the petitioner had P700.00
in her account. When the checks were deposited, the petitioners account with
the bank had a balance of only P100.04. The bank had closed the petitioners
account on August 4, 1992 after applying the said amount to the payment of
bank charges. The drawee bank thus dishonored the petitioners postdated
checks, and duly stamped Account Closed on the front and dorsal portions of
each check. The drawee bank returned the checks to the FEBTC with the
corresponding check return slips. Nevertheless, Go continued selling
merchandise to Co, who likewise continued to draw and issue postdated
checks; this time drawn against his personal account. Go accepted Cos
personal checks, hoping that he would eventually be paid. Cos personal
checks were all dishonored by the drawee bank.
 Go notified the petitioner that her three checks were dishonored by the
drawee bank. She saw Go in his office and confirmed that she and Co had a
business arrangement. She asked Go to give Co more time to redeem the
postdated checks with cash. Go agreed. However, Co again failed to redeem
the checks. The petitioner likewise failed to pay the amounts of the checks
despite Gos repeated demands.

The Petitioners Evidence

Boni Co testified that he was engaged in the business of buying and

selling merchandise from DMPH Co. Go had agreed that Co would pay for his
purchases on a thirty to forty-day credit basis to be guaranteed by postdated
checks. Since Co had no checking account, Go agreed to accept blank
checks drawn against the petitioners checking account with the Prudential
Bank. Go also agreed to the arrangement that Co would pay for his purchases
after the merchandise was sold and the latter had collected from his
customers. Co had paid Go the amount of P120,000.00 for his purchases, but
Go did not issue any receipt therefor because of mutual trust and
confidence. Go, however, failed to return the three postdated checks issued
by the petitioner.
The petitioner admitted that she was the drawer of the three postdated
checks, but averred that she did not receive any valuable consideration when
she issued the same. She merely affixed her signature on the said checks
without filling up the names of the payees, the amounts and the corresponding
dates therefor. She and Co had agreed that the checks would not be
encashed or deposited, but would merely serve as guarantee for the payment
of the stocks purchased by Co. Evidently, the petitioner acted in good faith
when she issued the checks and delivered them to Co, and as such should
not be held guilty of violating B.P. Blg. 22.
The petitioner also admitted that she spoke to Go but denied having
received any notice of dishonor, or any demand letter from the latter or from
the DMPH Co., informing her of the dishonor of the checks and demanding
payment of the amounts thereof. She only learned that the checks were
dishonored when she received a subpoena pertaining to the same. [6]

On January 17, 1993, the trial court rendered a decision finding the
petitioner guilty beyond reasonable doubt of three counts of violation of B.P.
Blg. 22, the dispositive portion of which reads:
WHEREFORE, finding the evidence of the prosecution more than sufficient, to prove
beyond reasonable doubt, the guilt of accused, Evangeline Cabrera, for Violation of
Batas Pambansa Blg. 22, pursuant to Section 1 of BP Blg. 22, accused
EVANGELINE CABRERA, is sentenced to pay a FINE of P50,907.70, in favor of
the government under Crim. Case 30,806-93; under Crim. Case 30,807-93 a FINE
of P72,311.75; and under Crim. Case 30,808-93, to pay a FINE of P67,956.00 in favor
of the government, with costs.

Moreover, pursuant to Art. 100 in relation to Art. 104 of the Revised Penal Code,
governing civil indemnity, accused is furthermore ordered, to pay the amount of:

In Criminal Case 30,806-93, the amount of P50,907.70;

In Criminal Case 30,807-93, the amount of P72,311.75; and

In Criminal Case 30,808-93, the amount of P67.956.00, in favor of Luis Go, with
subsidiary imprisonment in case of insolvency, in accordance with the provisions of
Art. 39, of the Revised Penal Code, as amended by Republic Act No. 5455, approved
on April 21, 1969.[7]

The trial court ruled that the evidence on record showed that the petitioner
voluntarily issued the checks in question. Notwithstanding her claim that the
said checks were issued merely to accommodate Co and to guarantee the
latters obligations, she is guilty of violation of B.P. Blg. 22 which prohibits and
penalizes the mere issuance of a bouncing check. The trial court did not rule
on the petitioners claim that she did not receive any notice of dishonor from
the drawee bank or from the private complainant, or any letter of demand
notifying her of such dishonor and demanding payment of the amounts of the
checks.
Aggrieved, the petitioner interposed an appeal before the Court of Appeals
(CA). Therein, she asserted that:

THE TRIAL COURT ERRED IN HOLDING THAT THERE WAS A VALID

ISSUANCE OF THE CHECKS IN QUESTION;

THE TRIAL COURT ERRED IN NOT CONSIDERING THE EVIDENCE THAT

THE CHECKS IN QUESTION WERE NOT ISSUED FOR A VALID
CONSIDERATION IN SO FAR AS THE ACCUSED IS CONCERNED;

THE TRIAL COURT ERRED IN NOT CONSIDERING THAT THE

PROSECUTION HAD NOT ESTABLISHED THE ELEMENT OF FRAUD OR
DECEIT;
THE TRIAL COURT ERRED IN HOLDING THE ACCUSED LIABLE TO PAY A
FINE EQUIVALENT TO THE AMOUNT OF THE CHECKS IN QUESTION; AND

THE TRIAL COURT ERRED IN HOLDING THE ACCUSED LIABLE TO PAY

THE COMPLAINANT THE TOTAL SUM OF P191,175.45 NOTWITHSTANDING
THE EVIDENCE THAT SHE DID NOT RECEIVE ANY MERCHANDISE. [8]

The petitioner argued in her brief that the prosecution failed to prove that
she received any notice of dishonor of the subject checks:

In fact under the law, a drawer of a check is entitled to a notice of dishonor and only if
said drawer fails to make good the same within five (5) banking days from receipt of
said notice that bad faith or fraud is prima facie presumed to exist.

In the case at bar, no such notice of dishonor was afforded the accused. Hence, for
lack of bad faith or fraudulent intent, the accused may not be convicted of the offense
charged.

Moreover, the accused may not be said to have knowledge[d] that she has no funds in
the bank at the time of issuance because when subject checks were borrowed from
her, the obligation of Boni Co and its maturity was not yet fixed. [9]

On January 25, 2001, the CA rendered a decision affirming the decision of

the trial court.

WHEREFORE, in the light of the foregoing consideration, the assailed decision is

hereby AFFIRMED in toto. Without pronouncement as to costs. [10]

The CA ruled that the petitioner voluntarily and validly issued the blank
checks. Thus, the presumption is that the checks were issued for valuable
consideration, notwithstanding the claim that they were issued merely as a
form of deposit or guaranty.
The CA stressed that the failure of the prosecution to prove that the
petitioner was motivated by fraud or deceit in issuing the said checks was of
no moment since fraud is not an element of violation of B.P. Blg. 22. The CA
emphasized that the act of issuing a worthless check is malum prohibitum;
hence, fraud is not an essential element of the crime. However, the CA failed
to resolve the petitioners plea of acquittal for failure of the prosecution to
prove that she received any notices of dishonor of the subject checks from the
private respondent or from the drawee bank.
 Dissatisfied, the petitioner filed a motion for reconsideration of the
decision, but the CA resolved on October 9, 2001 to deny the same. [11]

In the petition at bar, the petitioner ascribes several errors to the CA.
However, this Court believes that the threshold issue to be resolved is
whether or not the petitioner is liable for violation of B.P. Blg. 22, on her plea
that:

In fact under the law, a drawer of a check is entitled to a notice of dishonor and only if
said drawer fails to make good the same within five (5) banking days from receipt of
said notice that bad faith or fraud is prima facie presumed to exist.

In the case at bar, no such notice of dishonor was afforded the accused. Hence, for
lack of bad faith or fraudulent intent, the accused may not be convicted of the offense
charged.

Moreover, the accused may not be said to have knowledge that she has no funds in the
bank at the time of issuance because when subject checks were borrowed from her,
the obligation of Boni Co and its maturity was not fixed.

Under the foregoing facts and circumstances, it is unjust for the accused to be fined
the total sum of P191,175.45 as a penalty for alleged violation of Batas Pambansa
Blg. 22.[12]

The petition is impressed with merit.

Section 1 of B.P. Blg. No. 22 provides that:

SECTION 1. Checks without sufficient funds.Any person who makes or draws and
issues any check to apply on account or for value, knowing 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, which 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, shall be punished by imprisonment of not less than thirty days but not
more than one (1) year or by a fine of not less than but not more than double the
amount of the check which fine shall in no case exceed Two Hundred Thousand
pesos, or both such fine and imprisonment at the discretion of the court.

The same penalty shall be imposed upon any person who having sufficient funds in or
credit with the drawee bank when he makes or draws and issues a check, shall fail to
keep sufficient funds or to maintain a credit to cover the full amount of the check if
presented within a period of ninety (90) days from the date appearing thereon, for
which reason it is dishonored by the drawee bank.

Where the check is drawn by a corporation, company or entity, the person or persons
who actually signed the check in behalf of such drawer shall be liable under this Act.

The law enumerates the elements of the offense penalized under B.P. Blg.
22 as follows: (1) the drawing, making and issuance of any check to apply to
account or for value; (b) 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. The barefaced fact that
the petitioner was the signatory to the checks that were subsequently
dishonored merely gave rise to a prima facie presumption that she knew of
the insufficiency of funds; it did not render her automatically liable for violating
B.P. Blg. 22. The prosecution is burdened to prove all the elements of the
crime beyond reasonable doubt. [13]

To prove the first and third elements of the crime, Section 3 of the law
provides that the introduction in evidence of the unpaid or dishonored check,
having the drawees refusal to pay stamped or written thereon, or attached
thereto, with the reason therefor as aforesaid shall be prima facie evidence of
the making or issuing of the said checks and the due presentment to the
drawee for payment and the dishonor thereof, and that the same was properly
dishonored for the reason written, stamped or attached thereto by the drawee
on such dishonored checks. It is difficult for the prosecution to prove the
[14]

second element because knowledge involves a state of mind. Hence, [15]

Section 2 of the law provides that:

SEC. 2. Evidence of knowledge of insufficient funds.The making, drawing and

issuance of a check payment of which is refused by the drawee because of insufficient
funds in or credit with such bank, when presented within ninety (90) days from the
date of the check, shall be prima facie evidence of knowledge of such insufficiency of
funds or credit unless such maker or drawer pays the holder thereof the amount due
thereon, or makes arrangements for payment in full by the drawee of such
check within five (5) banking days after receiving notice that such check has not been
paid by the drawee.[16]

In order to create the prima facie presumption, that the issuer knew of the
insufficiency of funds, it must be shown that he or she received a notice of
dishonor and within five banking days thereafter, failed to satisfy the amount
of the check or shall arrange for its payment. The prosecution is burdened to
[17]

prove the acts that gave rise to the prima facie presumption. On the other
hand, the drawer has the right to adduce evidence to rebut the same. It is
important to stress that this presumption is not conclusive, or one that
forecloses or precludes the presentation of evidence to the contrary. Thus, [18]

the drawer of the check can still overturn the prima facie presumption by
proving that the holder thereof was paid the amount due thereon, or that
arrangements were made for payment in full by the drawee of the check within
five banking days after receipt of notice that such check has not been paid by
the drawee bank.
In Lao vs. Court of Appeals, this Court ruled that the full payment of the
[19]

amount of the check within five banking days from receipt of notice of
dishonor is a complete defense. Hence, the absence of a notice of dishonor
necessarily deprives the drawer of the check the opportunity to
preclude criminal prosecution:

It has been observed that the State, under this statute, actually offers the violator a
compromise by allowing him to perform some act which operates to preempt the
criminal action, and if he opts to perform it the action is abated. This was also
compared to certain laws allowing illegal possessors of firearms a certain period of
time to surrender the illegally possessed firearms to the Government, without
incurring any criminal liability. In this light, the full payment of the amount appearing
in the check within five banking days from notice of dishonor is a complete defense.
The absence of a notice of dishonor necessarily deprives an accused an opportunity to
preclude a criminal prosecution. Accordingly, procedural due process clearly enjoins
that a notice of dishonor be actually served on petitioner. Petitioner has a right to
demandand the basic postulates of fairness requirethat the notice of dishonor be
actually sent to and received by her to afford her the opportunity to avert prosecution
under B.P. Blg. 22. [20]

In Domagsang vs. Court of Appeals, this Court held that a mere oral
[21]

notice or demand to pay is insufficient compliance with the requirements of

the law:

Petitioner counters that the lack of a written notice of dishonor is fatal. The Court
agrees.

While, indeed, Section 2 of B.P. Blg. 22 does not state that the notice of dishonor be
in writing, taken in conjunction, however, with Section 3 of the law, i.e., that where
there are no sufficient funds in or credit with such drawee bank, `such fact shall
always be explicitly stated in the notice of dishonor or refusal, a mere oral notice or
demand to pay would appear to be insufficient for conviction under the law. The
Court is convinced that both the spirit and letter of the Bouncing Checks Law would
require for the act to be punished thereunder not only that the accused issued a check
that is dishonored, but that likewise the accused has actually been notified in writing
of the fact of dishonor. The consistent rule is that penal statutes have to be construed
strictly against the State and liberally in favor of the accused.

Evidently, the appellate court did not give weight and credence to the assertion that a
demand letter was sent by a counsel of the complainant because of the failure of the
prosecution to formally offer it in evidence. Courts are bound to consider as part of
the evidence only those which are formally offered for judges must base their findings
strictly on the evidence submitted by the parties at the trial. Without the written notice
of dishonor, there can be no basis, considering what has heretofore been said, for
establishing the presence of actual knowledge of insufficiency of funds. [22]

It is not enough for the prosecution to prove that a notice of dishonor was
sent to the drawee of the check. It must also show that the drawer of the
check received the said notice because the fact of service provided for in the
law is reckoned from receipt of such notice of dishonor by the drawee of the
check.

As adverted to earlier, it is necessary in cases for violation of Batas Pambansa Blg. 22,
that the prosecution prove that the issuer had received a notice of dishonor. It is a
general rule that when service of notice is an issue, the person alleging that the notice
was served must prove the fact of service. (58 Am. Jur. 2d, Notice 45). The burden of
proving notice rests upon the party asserting its existence. Now, ordinarily,
preponderance of evidence is sufficient to prove notice. In criminal cases, however,
the quantum of proof required is proof beyond reasonable doubt. Hence, for Batas
Pambansa Blg. 22 cases, there should be clear proof of notice. Moreover, it is a
general rule that, when service of a notice is sought to be made by mail, it should
appear that the conditions on which the validity of such service depends had
existence, otherwise the evidence is insufficient to establish the fact of service (C.J.S.,
Notice, 18). In the instant case, the prosecution did not present proof that the demand
letter was sent through registered mail, relying as it did only on the registry return
receipt. In civil cases, service made through registered mail is proved by the registry
receipt issued by the mailing office and an affidavit of the person mailing of facts
showing compliance with Section 7 of Rule 13 (See Section 13, Rule 13, 1997 Rules
of Civil Procedure). If, in addition to the registry receipt, it is required in civil cases
that an affidavit of mailing as proof of service be presented, then with more reason
should we hold in criminal cases that a registry receipt alone is insufficient as proof of
mailing. In the instant case, the prosecution failed to present the testimony, or at least
the affidavit, of the person mailing that, indeed, the demand letter was sent. [23]

In this case, the prosecution failed to adduce in evidence any notice of

dishonor of the three postdated checks or any letter of demand sent to and
received by the petitioner. The bare testimony of Luis Go that he sent letters
of demand to the petitioner notifying her of the dishonor of her checks is
utterly insufficient.
For failure of the prosecution to show that notices of dishonor of the three
postdated checks were served on the petitioner, or at the very least, that she
was sent a demand letter notifying her of the said dishonor, the prima
facie presumption under Section 2 of B.P. Blg. 22 that she knew of the
insufficiency of funds cannot arise. Thus, there can be no basis for
establishing the presence of actual knowledge of insufficiency of funds.
In light of such failure, we find and so declare that the prosecution failed to
prove beyond reasonable doubt all the elements of violation of B.P. Blg.
22. Hence, the need to reverse and set aside the decisions of both the Court
of Appeals and the trial court convicting the petitioner of the crime of violation
of B.P. Blg. 22.
However, we uphold the decision of the CA affirming the trial courts
decision ordering the petitioner to pay to the private respondent the total face
value of the checks in the amount of P209,175.45. We stress that a check is
an evidence of debt against the drawer, and although may not be intended to
be presented, has the same effect as an ordinary check, and if passed upon
to a third person, will be valid in his hands like any other check. Hence, the
[24]

petitioner is obliged to pay to the private respondent Luis Go the said amount
of P209,175.45 with 12% legal interest per annum, from the filing of the
information until the finality of this decision, the sum of which, inclusive of
interest, shall be subject thereafter to 12% per annum interest until the
amount due is fully paid, conformably to our ruling that when an obligation is
breached, and it consists in the payment of a sum of money, i.e. a loan or
forbearance of money, the interest due should be that which may have been
stipulated in writing. In the absence of such stipulation, the rate shall be 12%
per annum computed from default, i.e. judicial or extrajudicial demand. In [25]

this case, the rate of interest was not stipulated in writing by the petitioner, the
private respondent and Boni Co. Thus, the applicable interest rate is 12% per
annum.
WHEREFORE, the assailed January 25, 2001 Decision and October 9,
2001 Resolution of the Court of Appeals in C.A-G.R. CR No. 17715 affirming
the January 17, 1993 Decision of the Regional Trial Court of Davao City,
Branch 17, in Criminal Cases Nos. 30,806-93, 30,807-93 and 30,808-93
convicting the petitioner of violation of B.P. Blg. 22 are hereby REVERSED
and SET ASIDE. Petitioner Evangeline Cabrera is ACQUITTED of violations
of B.P. Blg. 22 on the ground that her guilt for the said crimes has not been
proved beyond reasonable doubt.The petitioner is hereby directed to pay to
the private respondent the total amount of P209,175.45 at 12% interest per
annum from the filing of the Informations until the finality of this Decision, the
sum of which, inclusive of the interest, shall be subject thereafter to 12% per
annum interest until the amount due is fully paid. Costs de oficio.
SO ORDERED.
Bellosillo, (Chairman), Austria-Martinez, and Tinga, JJ., concur.
Quisumbing, J., on official leave.

SECOND DIVISION

G.R. No. 156294 November 29, 2006

MELVA THERESA ALVIAR GONZALES, Petitioner,

vs.
RIZAL COMMERCIAL BANKING CORPORATION, Respondent.

DECISION

GARCIA, J.:

An action for a sum of money originating from the Regional Trial Court (RTC) of Makati City, Branch 61, thereat docketed as Civil
Case No. 88-1502, was decided in favor of therein plaintiff, now respondent Rizal Commercial Banking Corporation (RCBC). On
appeal to the Court of Appeals (CA) in CA-G.R. CV No. 48596, that court, in a decision1 dated August 30, 2002, affirmed the RTC
minus the award of attorneys fees. Upon the instance of herein petitioner Melva Theresa Alviar Gonzales, the case is now before
this Court via this petition for review on certiorari, based on the following undisputed facts as unanimously found by the RTC and the
CA, which the latter summarized as follows:
Gonzales was an employee of Rizal Commercial Banking Corporation (or RCBC) as New Accounts Clerk in the Retail Banking
Department at its Head Office.

A foreign check in the amount of $7,500 was drawn by Dr. Don Zapanta of the Ade Medical Group with address at 569 Western
Avenue, Los Angeles, California, against the drawee bank Wilshire Center Bank, N.A., of Los Angeles, California, U.S.A., and
payable to Gonzales mother, defendant Eva Alviar (or Alviar). Alviar then endorsed this check. Since RCBC gives special
accommodations to its employees to receive the checks value without awaiting the clearing period, Gonzales presented the foreign
check to Olivia Gomez, the RCBCs Head of Retail Banking. After examining this, Olivia Gomez requested Gonzales to endorse it
which she did. Olivia Gomez then acquiesced to the early encashment of the check and signed the check but indicated thereon her
authority of "up to 17,500.00 only". Afterwards, Olivia Gomez directed Gonzales to present the check to RCBC employee Carlos
Ramos and procure his signature. After inspecting the check, Carlos Ramos also signed it with an "ok" annotation. After getting the
said signatures Gonzales presented the check to Rolando Zornosa, Supervisor of the Remittance section of the Foreign Department
of the RCBC Head Office, who after scrutinizing the entries and signatures therein authorized its encashment. Gonzales then
received its peso equivalent of 155,270.85.

RCBC then tried to collect the amount of the check with the drawee bank by the latter through its correspondent bank, the First
Interstate Bank of California, on two occasions dishonored the check because of "END. IRREG" or irregular indorsement. Insisting,
RCBC again sent the check to the drawee bank, but this time the check was returned due to "account closed". Unable to collect,
RCBC demanded from Gonzales the payment of the peso equivalent of the check that she received. Gonzales settled the matter by
agreeing that payment be made thru salary deduction. This temporary arrangement for salary deductions was communicated by
Gonzales to RCBC through a letter dated November 27, 1987 xxx

xxx xxx xxx

The deductions was implemented starting October 1987. On March 7, 1988 RCBC sent a demand letter to Alviar for the payment of
her obligation but this fell on deaf ears as RCBC did not receive any response from Alviar. Taking further action to collect, RCBC
then conveyed the matter to its counsel and on June 16, 1988, a letter was sent to Gonzales reminding her of her liability as an
indorser of the subject check and that for her to avoid litigation she has to fulfill her commitment to settle her obligation as assured in
her said letter. On July 1988 Gonzales resigned from RCBC. What had been deducted from her salary was only 12,822.20
covering ten months.

It was against the foregoing factual backdrop that RCBC filed a complaint for a sum of money against Eva Alviar, Melva Theresa
Alviar-Gonzales and the latters husband Gino Gonzales. The spouses Gonzales filed an Answer with Counterclaim praying for the
dismissal of the complaint as well as payment of 10,822.20 as actual damages, 20,000.00 as moral damages, 20,000.00 as
exemplary damages, and 20,000.00 as attorneys fees and litigation expenses. Defendant Eva Alviar, on the other hand, was
declared in default for having filed her Answer out of time.

After trial, the RTC, in its three-page decision,2 held two of the three defendants liable as follows:

WHEREFORE, premises above considered and plaintiff having established its case against the defendants as above stated,
judgment is hereby rendered for plaintiff and as against defendant EVA. P. ALVIAR as principal debtor and defendants MELVA
THERESA ALVIAR GONZLAES as guarantor as follows:

1. To pay plaintiff the amount of 142,648.65 (155,270.85 less the amount of 12,622.20, as salary deduction of
[Gonzales]), representing the outstanding obligation of the defendants with interest of 12% per annum starting February
1987 until fully paid;

2. To pay the amount of 40,000.00 as and for attorneys fees; and to

3. Pay the costs of this suit.

SO ORDERED.

On appeal, the CA, except for the award of attorneys fees, affirmed the RTC judgment.

Hence, this recourse by the petitioner on her submission that the CA erred

XXX IN FINDING [PETITIONER], AN ACCOMMODATION PARTY TO A CHECK SUBSEQUENTLY ENDORSED

PARTIALLY, LIABLE TO RCBC AS GUARANTOR;
 XXX IN FINDING THAT THE SIGNATURE OF GOMEZ, AN RCBC EMPLOYEE, DOES NOT CONSTITUTE AS AN
ENDORSEMENT BUT ONLY AN INTER-BANK APPROVAL OF SIGNATURE NECESSARY FOR THE ENCASHMENT
OF THE CHECK;

XXX IN NOT FINDING RCBC LIABLE ON THE COUNTERCLAIMS OF [THE PETITIONER].

The recourse is impressed with merit.

The dollar-check3 in question in the amount of $7,500.00 drawn by Don Zapanta of Ade Medical Group (U.S.A.) against a Los
Angeles, California bank, Wilshire Center Bank N.A., was dishonored because of "End. Irregular," i.e., an irregular endorsement.
While the foreign drawee bank did not specifically state which among the four signatures found on the dorsal portion of the check
made the check irregularly endorsed, it is absolutely undeniable that only the signature of Olivia Gomez, an RCBC employee, was a
qualified endorsement because of the phrase "up to 17,500.00 only." There can be no other acceptable explanation for the
dishonor of the foreign check than this signature of Olivia Gomez with the phrase "up to 17,500.00 only" accompanying it. This
Court definitely agrees with the petitioner that the foreign drawee bank would not have dishonored the check had it not been for this
signature of Gomez with the same phrase written by her.

The foreign drawee bank, Wilshire Center Bank N.A., refused to pay the bearer of this dollar-check drawn by Don Zapanta because
of the defect introduced by RCBC, through its employee, Olivia Gomez. It is, therefore, a useless piece of paper if returned in that
state to its original payee, Eva Alviar.

There is no doubt in the mind of the Court that a subsequent party which caused the defect in the instrument cannot have any
recourse against any of the prior endorsers in good faith. Eva Alviars and the petitioners liability to subsequent holders of the
foreign check is governed by the Negotiable Instruments Law as follows:

Sec. 66. Liability of general indorser. - Every indorser who indorses without qualification, warrants to all subsequent holders in due
course;

(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding section; and

(b) That the instrument is, at the time of his indorsement, valid and subsisting;

And, in addition, he engages that, on due presentment, it shall be accepted or paid, or both, as the case may be, according to its
tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the
holder, or to any subsequent indorser who may be compelled to pay it.

The matters and things mentioned in subdivisions (a), (b) and (c) of Section 65 are the following:

(a) That the instrument is genuine and in all respects what it purports to be;

(b) That he has a good title to it;

(c) That all prior parties had capacity to contract;

Under Section 66, the warranties for which Alviar and Gonzales are liable as general endorsers in favor of subsequent endorsers
extend only to the state of the instrument at the time of their endorsements, specifically, that the instrument is genuine and in all
respects what it purports to be; that they have good title thereto; that all prior parties had capacity to contract; and that the
instrument, at the time of their endorsements, is valid and subsisting. This provision, however, cannot be used by the party which
introduced a defect on the instrument, such as respondent RCBC in this case, which qualifiedly endorsed the same, to hold prior
endorsers liable on the instrument because it results in the absurd situation whereby a subsequent party may render an instrument
useless and inutile and let innocent parties bear the loss while he himself gets away scot-free. It cannot be over-stressed that had it
not been for the qualified endorsement ("up to 17,500.00 only") of Olivia Gomez, who is the employee of RCBC, there would have
been no reason for the dishonor of the check, and full payment by drawee bank therefor would have taken place as a matter of
course.

Section 66 of the Negotiable Instruments Law which further states that the general endorser additionally engages that, on due
presentment, the instrument shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be
dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any
subsequent endorser who may be compelled to pay it, must be read in the light of the rule in equity requiring that those who come to
court should come with clean hands. The holder or subsequent endorser who tries to claim under the instrument which had been
dishonored for "irregular endorsement" must not be the irregular endorser himself who gave cause for the dishonor. Otherwise, a
clear injustice results when any subsequent party to the instrument may simply make the instrument defective and later claim from
prior endorsers who have no knowledge or participation in causing or introducing said defect to the instrument, which thereby
caused its dishonor.

Courts in this jurisdiction are not only courts of law but also of equity, and therefore cannot unqualifiedly apply a provision of law so
as to cause clear injustice which the framers of the law could not have intended to so deliberately cause. In Carceller v. Court of
Appeals,4 this Court had occasion to stress:

Courts of law, being also courts of equity, may not countenance such grossly unfair results without doing violence to its solemn
obligation to administer fair and equal justice for all.

RCBC, which caused the dishonor of the check upon presentment to the drawee bank, through the qualified endorsement of its
employee, Olivia Gomez, cannot hold prior endorsers, Alviar and Gonzales in this case, liable on the instrument.

Moreover, it is a well-established principle in law that as between two parties, he who, by his acts, caused the loss shall bear the
same.5 RCBC, in this instance, should therefore bear the loss.

Relative to the petitioners counterclaim against RCBC for the amount of 12,822.20 which it admittedly deducted from petitioners
salary, the Court must order the return thereof to the petitioner, with legal interest of 12% per annum, notwithstanding the
petitioners apparent acquiescence to such an arrangement. It must be noted that petitioner is not any ordinary client or depositor
with whom RCBC had this isolated transaction. Petitioner was a rank-and-file employee of RCBC, being a new accounts clerk
thereat. It is easy to understand how a vulnerable Gonzales, who is financially dependent upon RCBC, would rather bite the bullet,
so to speak, and expectedly opt for salary deduction rather than lose her job and her entire salary altogether. In this sense, we
cannot take petitioners apparent acquiescence to the salary deduction as being an entirely free and voluntary act on her part.
Additionally, under the obtaining facts and circumstances surrounding the present complaint for collection of sum of money by
RCBC against its employee, which may be deemed tantamount to harassment, and the fact that RCBC itself was the one, acting
through its employee, Olivia Gomez, which gave reason for the dishonor of the dollar-check in question, RCBC may likewise be held
liable for moral and exemplary damages and attorneys fees by way of damages, in the amount of 20,000.00 for each.

WHEREFORE, the assailed CA Decision dated August 30, 2002 is REVERSED and SET ASIDE and the Complaint in this case
DISMISSED for lack of merit. Petitioners counterclaim is GRANTED, ordering the respondent RCBC to reimburse petitioner the
amount 12,822.20, with legal interest computed from the time of salary deduction up to actual payment, and to pay petitioner the
total amount of 60,000.00 as moral and exemplary damages, and attorneys fees.

Costs against the respondent.

SO ORDERED.

CANCIO C. GARCIA
Associate Justice

THIRD DIVISION

MARIA TUAZON, ALEJANDRO G.R. No. 156262

P. TUAZON, MELECIO P.
TUAZON, Spouses ANASTACIO and Present:
MARY T. BUENAVENTURA,
Petitioners, Panganiban, J.,
Chairman,
Sandoval-Gutierrez,
Corona,
- versus - Carpio Morales, and
Garcia, JJ
Promulgated:
HEIRS OF BARTOLOME RAMOS,
Respondents. July 14, 2005
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --- -- -- -- -- x

DECISION

PANGANIBAN, J.:

S
tripped of nonessentials, the present case involves the collection
of a sum of money. Specifically, this case arose from the failure
of petitioners to pay respondents predecessor-in-interest. This
fact was shown by the non-encashment of checks issued by a
third person, but indorsed by herein Petitioner Maria Tuazon in favor of
the said predecessor. Under these circumstances, to enable respondents
to collect on the indebtedness, the check drawer need not be impleaded
in the Complaint. Thus, the suit is directed, not against the drawer, but
against the debtor who indorsed the checks in payment of the
obligation.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of Court,

challenging the July 31, 2002 Decision[2] of the Court of Appeals (CA) in
CA-GR CV No. 46535. The decretal portion of the assailed Decision reads:
 WHEREFORE, the appeal is DISMISSED and the appealed
decision is AFFIRMED.

On the other hand, the affirmed Decision[3] of Branch 34 of the Regional

Trial Court (RTC) of Gapan, Nueva Ecija, disposed as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs
and against the defendants, ordering the defendants spouses
Leonilo Tuazon and Maria Tuazon to pay the plaintiffs, as follows:

1. The sum of P1,750,050.00, with interests from the

filing of the second amended complaint;

2. The sum of P50,000.00, as attorneys fees;

3. The sum of P20,000.00, as moral damages

4. And to pay the costs of suit.

x x x x x x x x x[4]

The Facts

The facts are narrated by the CA as follows:

[Respondents] alleged that between the period of May 2, 1988
and June 5, 1988, spouses Leonilo and Maria Tuazon purchased a
total of 8,326 cavans of rice from [the deceased Bartolome] Ramos
[predecessor-in-interest of respondents]. That of this [quantity,] x x x
only 4,437 cavans [have been paid for so far], leaving unpaid 3,889
cavans valued at P1,211,919.00. In payment therefor, the spouses
Tuazon issued x x x [several] Traders Royal Bank checks.

xxxxxxxxx

[B]ut when these [checks] were encashed, all of the checks bounced
due to insufficiency of funds. [Respondents] advanced that before
issuing said checks[,] spouses Tuazon already knew that they had
no available fund to support the checks, and they failed to provide
for the payment of these despite repeated demands made on them.

[Respondents] averred that because spouses Tuazon anticipated

that they would be sued, they conspired with the other [defendants]
to defraud them as creditors by executing x x x fictitious sales of
their properties. They executed x x x simulated sale[s] [of three lots]
in favor of the x x x spouses Buenaventura x x x[,] as well as their
residential lot and the house thereon[,] all located at Nueva Ecija,
and another simulated deed of sale dated July 12, 1988 of a Stake
Toyota registered with the Land Transportation Office of
Cabanatuan City on September 7, 1988. [Co-petitioner] Melecio
Tuazon, a son of spouses Tuazon, registered a fictitious Deed of
Sale on July 19, 1988 x x x over a residential lot located at Nueva
Ecija. Another simulated sale of a Toyota Willys was executed on
January 25, 1988 in favor of their other son, [co-petitioner] Alejandro
Tuazon x x x. As a result of the said sales, the titles of these
properties issued in the names of spouses Tuazon were cancelled
and new ones were issued in favor of the [co-]defendants spouses
Buenaventura, Alejandro Tuazon and Melecio Tuazon. Resultantly,
by the said ante-dated and simulated sales and the corresponding
transfers there was no more property left registered in the names of
spouses Tuazon answerable to creditors, to the damage and
prejudice of [respondents].

For their part, defendants denied having purchased x x x

rice from [Bartolome] Ramos. They alleged that it was Magdalena
Ramos, wife of said deceased, who owned and traded the
merchandise and Maria Tuazon was merely her agent. They argued
that it was Evangeline Santos who was the buyer of the rice and
issued the checks to Maria Tuazon as payments therefor. In good
faith[,] the checks were received [by petitioner] from Evangeline
Santos and turned over to Ramos without knowing that these were
not funded. And it is for this reason that [petitioners] have been
insisting on the inclusion of Evangeline Santos as an indispensable
party, and her non-inclusion was a fatal error. Refuting that the sale
of several properties were fictitious or simulated, spouses Tuazon
contended that these were sold because they were then meeting
financial difficulties but the disposals were made for value and in
good faith and done before the filing of the instant suit. To dispute
the contention of plaintiffs that they were the buyers of the rice, they
argued that there was no sales invoice, official receipts or like
 evidence to prove this. They assert that they were merely agents
and should not be held answerable.[5]

The corresponding civil and criminal cases were filed by respondents

against Spouses Tuazon. Those cases were later consolidated and amended
to include Spouses Anastacio and Mary Buenaventura, with Alejandro
Tuazon and Melecio Tuazon as additional defendants. Having passed away
before the pretrial, Bartolome Ramos was substituted by his heirs, herein
respondents.

Contending that Evangeline Santos was an indispensable party in the case,

petitioners moved to file a third-party complaint against her. Allegedly, she
was primarily liable to respondents, because she was the one who had
purchased the merchandise from their predecessor, as evidenced by the
fact that the checks had been drawn in her name. The RTC, however,
denied petitioners Motion.

Since the trial court acquitted petitioners in all three of the consolidated
criminal cases, they appealed only its decision finding them civilly liable to
respondents.

Ruling of the Court of Appeals

Sustaining the RTC, the CA held that petitioners had failed to prove the
existence of an agency between respondents and Spouses Tuazon. The
appellate court disbelieved petitioners contention that Evangeline Santos
should have been impleaded as an indispensable party. Inasmuch as all the
checks had been indorsed by Maria Tuazon, who thereby became liable to
subsequent holders for the amounts stated in those checks, there was no
need to implead Santos.

Hence, this Petition.[6]

Issues

Petitioners raise the following issues for our consideration:

1. Whether or not the Honorable Court of Appeals erred in ruling that

petitioners are not agents of the respondents.

2. Whether or not the Honorable Court of Appeals erred in

rendering judgment against the petitioners despite x x x
the failure of the respondents to include in their action Evangeline
Santos, an indispensable party to the suit.[7]

The Courts Ruling

The Petition is unmeritorious.

First Issue:
Agency

Well-entrenched is the rule that the Supreme Courts role in a petition

under Rule 45 is limited to reviewing errors of law allegedly committed by
the Court of Appeals. Factual findings of the trial court, especially when
affirmed by the CA, are conclusive on the parties and this
Court.[8] Petitioners have not given us sufficient reasons to deviate from
this rule.
 In a contract of agency, one binds oneself to render some service or
to do something in representation or on behalf of another, with the latters
consent or authority.[9] The following are the elements of agency: (1) the
parties consent, express or implied, to establish the relationship; (2)
the object, which is the execution of a juridical act in relation to a third
person; (3) the representation, by which the one who acts as an agent does so,
not for oneself, but as a representative; (4) the limitation that the agent acts
within the scope of his or her authority.[10] As the basis of agency is
representation, there must be, on the part of the principal, an actual
intention to appoint, an intention naturally inferable from the principals
words or actions. In the same manner, there must be an intention on the
part of the agent to accept the appointment and act upon it. Absent such
mutual intent, there is generally no agency.[11]

This Court finds no reversible error in the findings of the courts a

quo that petitioners were the rice buyers themselves; they were not mere
agents of respondents in their rice dealership. The question of whether a
contract is one of sale or of agency depends on the intention of the
parties.[12]

The declarations of agents alone are generally insufficient to establish

the fact or extent of their authority.[13] The law makes no presumption of
agency; proving its existence, nature and extent is incumbent upon the
person alleging it.[14] In the present case, petitioners raise the fact of agency
as an affirmative defense, yet fail to prove its existence.

The Court notes that petitioners, on their own behalf, sued

Evangeline Santos for collection of the amounts represented by the
bounced checks, in a separate civil case that they sought to be consolidated
with the current one. If, as they claim, they were mere agents of
respondents, petitioners should have brought the suit against Santos for
and on behalf of their alleged principal, in accordance with Section 2 of
Rule 3 of the Rules on Civil Procedure.[15] Their filing a suit against her in
their own names negates their claim that they acted as mere agents in selling
the rice obtained from Bartolome Ramos.

Second Issue:
Indispensable Party

Petitioners argue that the lower courts erred in not allowing Evangeline
Santos to be impleaded as an indispensable party. They insist that
respondents Complaint against them is based on the bouncing checks she
issued; hence, they point to her as the person primarily liable for the
obligation.

We hold that respondents cause of action is clearly founded on petitioners

failure to pay the purchase price of the rice. The trial court held that
Petitioner Maria Tuazon had indorsed the questioned checks in favor of
respondents, in accordance with Sections 31 and 63 of the Negotiable
Instruments Law.[16] That Santos was the drawer of the checks is thus
immaterial to the respondents cause of action.

As indorser, Petitioner Maria Tuazon warranted that upon due

presentment, the checks were to be accepted or paid, or both, according to
their tenor; and that in case they were dishonored, she would pay the
corresponding amount.[17] After an instrument is dishonored by
nonpayment, indorsers cease to be merely secondarily liable; they become
principal debtors whose liability becomes identical to that of the original
obligor. The holder of a negotiable instrument need not even proceed
against the maker before suing the indorser.[18] Clearly, Evangeline Santos --
as the drawer of the checks -- is not an indispensable party in an action
against Maria Tuazon, the indorser of the checks.

Indispensable parties are defined as parties in interest without whom no

final determination can be had.[19] The instant case was originally one for
the collection of the purchase price of the rice bought by Maria Tuazon
from respondents predecessor. In this case, it is clear that there is no
privity of contract between respondents and Santos. Hence, a final
determination of the rights and interest of the parties may be made without
any need to implead her.

WHEREFORE, the Petition is DENIED and the assailed

Decision AFFIRMED. Costs against petitioners.

SO ORDERED.

ARTEMIO V. PANGANIBAN
Associate Justice
Chairman, Third Division

Republic of the Philippines

SUPREME COURT
Manila
 SECOND DIVISION

SPS. PEDRO AND FLORENCIA G.R. No. 158262

VIOLAGO,
Petitioners, Present:

QUISUMBING, J., Chairperson,

YNARES-SANTIAGO,
- versus - CARPIO MORALES,
TINGA, and
VELASCO, JR., JJ.

BA FINANCE CORPORATION Promulgated:

and AVELINO VIOLAGO,
Respondents. July 21, 2008
x-----------------------------------------------------------------------------------------x

DECISION
VELASCO, JR., J.:

This is a Petition for Review on Certiorari of the August 20, 2002

Decision[1] and May 15, 2003 Resolution[2] 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

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]

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. 2002-SP. 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.
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-Party-Defendant-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 Code[14] should 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.

(Sgd.) (Sgd.)
PEDRO F. VIOLAGO FLORENCIA R. VIOLAGO

763 Constancia St., Sampaloc, Manila same

(Address) (Address)

(Sgd.) (Sgd.)
Marivic Avaria Jesus Tuazon
(WITNESS) (WITNESS)

PAY TO THE ORDER OF BA FINANCE CORPORATION

WITHOUT RECOURSE
VIOLAGO MOTOR SALES CORPORATION
By: (Sgd.)
AVELINO A. VIOLAGO, Pres. [15]

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]

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.
 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 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;
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
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 non-inclusion 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 and AFFIRMED. Costs against Avelino
Violago.

SO ORDERED.
PRESBITERO J. VELASCO, JR.
 Republic of the Philippines
Supreme Court
Manila
THIRD DIVISION

MARLOU L. VELASQUEZ, G.R. No. 157309

Petitioner,
Present:
AUSTRIA-MARTINEZ,* J.,
Acting Chairperson,
**
TINGA,
- versus - CHICO-NAZARIO,
NACHURA, and
REYES, JJ.
Promulgated:
SOLIDBANK CORPORATION,
Respondent. March 28, 2008
x--------------------------------------------------x

DECISION

REYES, R.T., J.:

PARTIES may not impugn the effectivity of a contract, after much benefit has
been gained to the prejudice of another. They are bound by the obligations they
expressly set out to do.

Before Us is a petition for review on certiorari of the Decision[1] of the

Court of Appeals (CA) which affirmed with modification that of the Regional Trial
Court (RTC) in Cebu City,[2] holding petitioner Marlou Velasquez liable under his
letter of undertaking to respondent Solidbank Corporation.

The Facts
Petitioner is engaged in the export business operating under the name Wilderness
Trading. Respondent is a domestic banking corporation organized under Philippine
laws.

The case arose out of a business transaction for the sale of dried sea cucumber for
export to South Korea between Wilderness Trading, as seller, and Goldwell
Trading of Pusan, South Korea, as buyer. To facilitate payment of the products,
Goldwell Trading opened a letter of credit in favor of Wilderness Trading in the
amount of US$87,500.00[3] with the Bank of Seoul, Pusan, Korea.

On November 12, 1992, petitioner applied for credit accommodation with

respondent bank for pre-shipment financing. The credit accommodation was
granted. Petitioner was successful in his first two export transactions both drawn
on the letter of credit. The third export shipment, however, yielded a different
result.

On February 22, 1993, petitioner submitted to respondent the necessary

documents for his third shipment. Wanting to be paid the value of the shipment in
advance, petitioner negotiated for a documentary sight draft to be drawn on the
letter of credit, chargeable to the account of Bank of Seoul. The sight draft
represented the value of the shipment in the amount of US$59,640.00.[4]

As a condition for the issuance of the sight draft, petitioner executed a letter
of undertaking in favor of respondent. Under the terms of the letter of
undertaking, petitioner promised that the draft will be accepted and paid by Bank
of Seoul according to its tenor. Petitioner also held himself liable if the sight draft
was not accepted. The letter of undertaking provided:

SOLIDBANK CORPORATION Feb. 22, 1993

32 Borromeo Street
Cebu City

Gentlemen: Re: PURCHASE OF ONE DOC. SIGHT DRAFT DRAWN

UNDER LC#M2073210NS00040 FOR US$59,640.00
UNDER OUR CEBP93/102.

In consideration of your negotiating the above described draft(s), we

hereby warrant that the above referred to draft(s) and accompanying
documents are genuine and accurately represent the facts stated therein
and that the draft(s) will be accepted and paid in accordance with
 its/their tenor. We further undertake and agree, jointly and severally, to
hold you free and harmless from and to defend all actions, claims and
demands whatsoever, and to pay on demand all damages, actual or
compensatory, including attorneys fees, in case of suit, at least equal to
__% of the amount due, which you may suffer arising by reason of or on
account of your negotiating the above draft(s) because of the following
discrepancies or reasons or any other discrepancy or reason whatever:

1) B/L MARKED SAID TO CONTAIN & SHIPPERS

LOAD, STOWAGE & COUNT.
2) LATE SHIPMENT.
3) QUANTITY SHIPPED @ US$14.00 OVERDRAWN
BY 0.06 TON.
4) NO INSPECTION CERTIFICATE PRESENTED.

We hereby undertake to pay on demand the full amount of the draft(s) or

any unpaid balance of the draft(s), with interest at the prevailing rate of
today from the date of negotiation, plus all charges and expenses
whatsoever incurred in connection therewith. You shall neither be
obligated to contest or dispute any refusal to accept or to pay the whole
or any part of the above draft(s) nor to proceed in anyway against the
drawee thereof, the issuing bank, or against any indorser thereof before
making a demand on us for the payment of the whole or any unpaid
balance of the draft(s).[5] (Emphasis added)

By virtue of the letter of undertaking, respondent advanced the value of the

shipment which, at the current rate of exchange at that time was P1,495,115.16,
less bank charges, to petitioner. Respondent then sent all the documents pertinent
to the export transaction to the Bank of Seoul.

Respondent failed to collect on the sight draft as it was dishonored by non-

acceptance by the Bank of Seoul. The reasons given for the dishonor were late
shipment, forged inspection certificate, and absence of countersignature of the
negotiating bank on the inspection certificate.[6] Goldwell Trading likewise issued
a stop payment order on the sight draft because most of the bags of dried sea
cucumber exported by petitioner contained soil.

Due to the dishonor of the sight draft and the stop payment order, respondent
demanded restitution of the sum advanced.[7] Petitioner failed to heed the demand.
 On June 3, 1993, respondent filed a complaint for recovery of sum of
money[8] with the RTC in Cebu City. In his answer, petitioner alleged that his
liability under the sight draft was extinguished when respondent failed to protest its
non-acceptance, as required under the Negotiable Instruments Law (NIL). He also
alleged that the letter of undertaking is not binding because it is a superfluous
document, and that he did not violate any of the provisions of the letter of credit.[9]

RTC and CA Dispositions

On September 25, 1996, the RTC rendered judgment[10] in favor of respondent with
the following fallo:

IN VIEW OF THE FOREGOING, judgment is hereby rendered ordering

the defendant:

(1) to pay the plaintiff the principal sum of P1,495, 115.16

plus interest at 20% per annum counted from February
22, 1993 up to the time the entire amount shall have
been fully paid;

(2) to pay attorneys fees equivalent to 10% of the total

amount due the plaintiff; and

(3) to pay the costs.

SO ORDERED.[11]

The RTC ratiocinated:

This court is not convinced with the defendants argument that

because of plaintiffs failure to protest the dishonor of the sight draft, his
liability is extinguished because his liability remains under the letter of
undertaking which he signed and without which plaintiff would not have
advanced or credited to him the amount.
 Section 152 of the Negotiable Instruments Law under which
defendant claims extinguishment of his liability to plaintiff is not a bar to
the filing of other appropriate remedies which the aggrieved party may
pursue to vindicate his rights and in this instant case, plaintiff wants his
right vindicated by virtue of the letter of undertaking which defendant
signed. By the letter of undertaking, defendant bound himself to pay on
demand all damages including attorneys fees which plaintiff may suffer
arising by reason of or on account of negotiating the above draftbecause
of the following discrepancies or any other discrepancy or reasons
whatsoever and further to pay on demand full amount of any unpaid
balance with interest at the prevailing rate. He should be bound to the
fulfillment of what he expressly obligated himself to do and perform in
the letter of undertaking without which, plaintiff would not have
advance (sic) and credited to him the amount in the draft. He should not
enrich himself at the expense of plaintiff.[12] (Emphasis added)

Disagreeing, petitioner elevated the matter to the CA.

On June 27, 2002, the CA affirmed with modification the RTC decision,
disposing as follows:

WHEREFORE, premises considered, the assailed Decision is

hereby AFFIRMED with MODIFICATION. Defendant-appellant
Marlou L. Velasquez is hereby ordered to pay plaintiff-appellee
Solidbank Corporation, the following: (1) the principal amount of One
Million Four Hundred Ninety-Five Thousand One Hundred Fifteen and
Sixteen Centavos (P1,495,115.16) plus interest at twelve percent (12%)
per annum from February 22, 1993 until fully paid, (2) attorneys fees
equivalent to five percent (5%) of the total amount due, and (3) costs of
the suit.

SO ORDERED.[13]

In ruling against petitioner, the CA opined:

The fact that said draft was dishonored and not paid by the Bank of
Seoul-Korea, (sic) it is incumbent upon defendant-appellant Velasquez
to comply with his obligation under the Letter of Undertaking. He cannot
be allowed to impugn the contract of undertaking he entered into by
saying that it was a superfluous document, and therefore, not binding on
him. The contract of undertaking is the law between them, and must be
 enforced accordingly. This is in accord with Article 1159 of the New
Civil Code, which provides that obligations arising from contracts have
the force of law between the contracting parties and should be complied
with in good faith. And parties to a contract are bound to the fulfillment
of what has expressly been stipulated therein, regardless of the fact that
it turn (sic) out to be financially disadvantageous.[14]

xxxx

The fact that Defendant-appellant benefited from the advance payment

made by Plaintiff appellee, (sic) it is incumbent upon him to return what
he received because the purpose of the advance payment was not
attained and/or realized, as the sight draft was not paid
accordingly, otherwise, it will result to unjust enrichment on the part of
Defendant-appellant at the expense of Plaintiff-appellee, in violation of
Articles 19 and 22 of the New Civil Code. The doctrine of unjust
enrichment and restitution simply means that the exercise of a right ends
when the right disappears, and it disappears when it is abused, especially
to the prejudice of others.[15] (Emphasis added)

Petitioner moved for reconsideration[16] but his motion was denied.[17] Hence, the
present recourse.

Issues

Petitioner raises twin issues for Our consideration, to wit:

THE COURT OF APPEALS HAS DECIDED A QUESTION OF

SUBSTANCE, NOT HERETOFORE DETERMINED BY THIS
HONORABLE COURT, OR HAS DECIDED IT IN A WAY
PROBABLY NOT IN ACCORD WITH LAW OR WITH THE
APPLICABLE DECISIONS OF THIS HONORABLE COURT, IN
THAT:

I.
THE COURT OF APPEALS RULED THAT PETITIONER IS
LIABLE ON THE ACCESSORY CONTRACT, THE LETTER
OF UNDERTAKING, DESPITE
THE FACT THATPETITIONER WAS ALREADY RELEASED
FROM LIABILITY UNDER THE SIGHT DRAFT, THE
PRINCIPAL CONTRACT, UNDER THE PROVISIONS OF
 THE NEGOTIABLE INSTRUMENTS LAW AND THE CIVIL
CODE.

II.
THE COURT OF APPEALS HELD PETITIONER LIABLE
UNDER THE ACCESSORY CONTRACT, THE LETTER OF
UNDERTAKING, DESPITE THE FACT THAT THERE
WAS NO PROOF WHATSOEVER THAT PETITIONER
VIOLATED EITHER THE PRINCIPAL CONTRACT, THE
SIGHT DRAFT, OR EVEN THE LETTER OF
[18]
UNDERTAKING. (Underscoring supplied)

The main issue is whether or not petitioner should be held liable to respondent
under the sight draft or the letter of undertaking. There is no dispute that petitioner
duly signed and executed these documents. It is likewise admitted that the sight
draft was dishonored by non acceptance by the Bank of Seoul.

Our Ruling

The petition is without merit.

Petitioner is not liable under the sight draft

but he is liable under his letter of
undertaking; liability under the letter of
undertaking was not extinguished by non-
protest of the dishonor of the sight draft.

Petitioner argues that he cannot be held liable under either the sight draft or
the letter of undertaking. He claims that the failure of respondent to protest the
dishonor of the sight draft under Section 152 of the NIL discharged him from
liability under the negotiable instrument. It is also contended that his liability under
the letter of undertaking is that of a mere guarantor; that the letter of undertaking is
only an accessory contract to the sight draft. Since he was discharged from liability
under the sight draft, he cannot be held liable under the letter of undertaking.

For its part, respondent counters that petitioners liability springs from the
letter of undertaking, independently of the sight draft. It would not have advanced
the amount without the letter of undertaking. According to respondent, the letter of
undertaking is an independent agreement and not merely an accessory contract. To
permit petitioner to escape liability under the letter of undertaking would result in
unjust enrichment.

Petitioners liability under the letter of undertaking is independent from his

liability under the sight draft. He may be held liable under either the sight draft or
the letter of undertaking or both.

Admittedly, petitioner was discharged from liability under the sight draft
when respondent failed to protest it for non-acceptance by the Bank of Seoul. A
sight draft made payable outside the Philippines is a foreign bill of
exchange.[19] When a foreign bill is dishonored by non-acceptance or non-payment,
protest is necessary to hold the drawer and indorsers liable. Verily, respondents
failure to protest the non-acceptance of the sight draft resulted in the discharge of
petitioner from liability under the instrument.

Section 152 of the NIL is explicit:

Section 152. In what cases protest necessary. Where a foreign bill

appearing on its face to be such is dishonored by non-acceptance, it
must be duly protested for non-acceptance, and where such a bill which
has not been previously dishonored by non-acceptance, is dishonored by
non-payment, it must be duly protested for non-payment. If it is not so
protested, the drawer and indorsers are discharged. Where a bill does
not appear on its face to be a foreign bill, protest thereof in case of
dishonor is unnecessary. (Emphasis added)

Petitioner, however, can still be made liable under the letter of

undertaking. It bears stressing that it is a separate contract from the sight draft. The
liability of petitioner under the letter of undertaking is direct and primary. It is
independent from his liability under the sight draft. Liability subsists on it even if
the sight draft was dishonored for non-acceptance or non-payment.

Respondent agreed to purchase the draft and credit petitioner its value upon
the undertaking that he will reimburse the amount in case the sight draft is
dishonored. The bank would certainly not have agreed to grant petitioner an
advance export payment were it not for the letter of undertaking. The consideration
for the letter of undertaking was petitioners promise to pay respondent the value of
the sight draft if it was dishonored for any reason by the Bank of Seoul.
 We cannot accept petitioners thesis that he is only a mere guarantor under
the letter of credit. Petitioner cannot be both the primary debtor and the guarantor
of his own debt. This is inconsistent with the very purpose of a guarantee which is
for the creditor to proceed against a third person if the debtor defaults in his
obligation. Certainly, to accept such an argument would make a mockery of
commercial transactions.

Petitioner bound himself liable to respondent under the letter of undertaking

if the sight draft is not accepted. He also warranted that the sight draft is genuine;
will be paid by the issuing bank in accordance with its tenor; and that he will be
held liable for the full amount of the draft upon demand, without necessity of
proceeding against the drawee bank.[20] Petitioner breached his undertaking when
the Bank of Seoul dishonored the sight draft and Goldwell Trading ordered a stop
payment order on it for discrepancies in the export documents.

Petitioner is liable without need for

respondent to establish collateral facts such
as violations of the letter of credit.

It is also argued that petitioner cannot be held liable under the letter of
undertaking because respondent failed to prove that he violated any of the
provisions in the letter of credit or that sixty (60) of the seventy-one (71) bags
shipped to Goldwell Trading contained soil instead of dried sea cucumber.

We cannot agree. Respondent need not prove that petitioner violated the
provisions of the letter of credit in order to be held liable under the letter of
undertaking. Parties are bound to fulfill what has been expressly stipulated in the
contract.[21] Petitioners liability under the letter of undertaking is clear. He is liable
to respondent if the sight draft is not accepted by the Bank of Seoul. Mere non-
acceptance of the sight draft is sufficient for liability to attach. Here, the sight draft
was dishonored for non-acceptance. The non-acceptance of the sight draft triggered
petitioners liability under the letter of undertaking.

Records also show that the Bank of Seoul found discrepancies in the
documents submitted by petitioner. Goldwell Trading issued a stop payment order
because the products shipped were defective. It found that most of the bags
shipped contained soil instead of dried sea cucumber. If petitioner disputes the
finding of Goldwell Trading, he can file a case against said company but he cannot
dispute his liability under either the sight draft or the letter of undertaking.
 As We see it, this is a straightforward case of collection of sum of money on
the basis of a letter of undertaking. Respondent advanced the export payment to
petitioner on the understanding that the draft will be honored and paid. The draft
was dishonored. Justice and equity dictate that petitioner be held liable to
respondent bank.

WHEREFORE, the petition is DENIED for lack of merit. The Decision of

the Court of Appeals dated June 27, 2002 is hereby AFFIRMED.

SO ORDERED.

FIRST DIVISION

[G.R. No. 109491. February 28, 2001]

ATRIUM MANAGEMENT CORPORATION, petitioner, vs. COURT OF

APPEALS, E.T. HENRY AND CO., LOURDES VICTORIA M. DE
LEON, RAFAEL DE LEON, JR., AND HI-CEMENT
CORPORATION, respondents.

[G.R. No. 121794. February 28, 2001]

LOURDES M. DE LEON, petitioner, vs. COURT OF APPEALS, ATRIUM

MANAGEMENT CORPORATION, AND HI-CEMENT
CORPORATION, respondents.

DECISION
PARDO, J.:
 What is before the Court are separate appeals from the decision of the Court of
Appeals,[1] ruling that Hi-Cement Corporation is not liable for four checks amounting to P2
million issued to E.T. Henry and Co. and discounted to Atrium Management Corporation.
On January 3, 1983, Atrium Management Corporation filed with the Regional Trial Court,
Manila an action for collection of the proceeds of four postdated checks in the total amount of P2
million. Hi-Cement Corporation through its corporate signatories, petitioner Lourdes M. de
Leon,[2] treasurer, and the late Antonio de las Alas, Chairman, issued checks in favor of E.T.
Henry and Co. Inc., as payee. E.T. Henry and Co., Inc., in turn, endorsed the four checks to
petitioner Atrium Management Corporation for valuable consideration. Upon presentment for
payment, the drawee bank dishonored all four checks for the common reason payment
stopped. Atrium, thus, instituted this action after its demand for payment of the value of the
checks was denied.[3]
After due proceedings, on July 20, 1989, the trial court rendered a decision ordering Lourdes
M. de Leon, her husband Rafael de Leon, E.T. Henry and Co., Inc. and Hi-Cement Corporation
to pay petitioner Atrium, jointly and severally, the amount of P2 million corresponding to the
value of the four checks, plus interest and attorneys fees.[4]
On appeal to the Court of Appeals, on March 17, 1993, the Court of Appeals promulgated its
decision modifying the decision of the trial court, absolving Hi-Cement Corporation from
liability and dismissing the complaint as against it. The appellate court ruled that: (1) Lourdes M.
de Leon was not authorized to issue the subject checks in favor of E.T. Henry, Inc.; (2) The
issuance of the subject checks by Lourdes M. de Leon and the late Antonio de las Alas
constituted ultra vires acts; and (3) The subject checks were not issued for valuable
consideration.[5]
At the trial, Atrium presented as its witness Carlos C. Syquia who testified that in February
1981, Enrique Tan of E.T. Henry approached Atrium for financial assistance, offering to
discount four RCBC checks in the total amount of P2 million, issued by Hi-Cement in favor of
E.T. Henry. Atrium agreed to discount the checks, provided it be allowed to confirm with Hi-
Cement the fact that the checks represented payment for petroleum products which E.T. Henry
delivered to Hi-Cement. Carlos C. Syquia identified two letters, dated February 6, 1981 and
February 9, 1981 issued by Hi-Cement through Lourdes M. de Leon, as treasurer, confirming the
issuance of the four checks in favor of E.T. Henry in payment for petroleum products.[6]
Respondent Hi-Cement presented as witness Ms. Erlinda Yap who testified that she was
once a secretary to the treasurer of Hi-Cement, Lourdes M. de Leon, and as such she was
familiar with the four RCBC checks as the postdated checks issued by Hi-Cement to E.T. Henry
upon instructions of Ms. de Leon. She testified that E.T. Henry offered to give Hi-Cement a loan
which the subject checks would secure as collateral.[7]
On July 20, 1989, the Regional Trial Court, Manila, Branch 09 rendered a decision, the
dispositive portion of which reads:

WHEREFORE, in view of the foregoing considerations, and plaintiff having proved

its cause of action by preponderance of evidence, judgment is hereby rendered
ordering all the defendants except defendant Antonio de las Alas to pay plaintiff
jointly and severally the amount of TWO MILLION (P2,000,000.00) PESOS with the
legal rate of interest from the filling of the complaint until fully paid, plus the sum of
TWENTY THOUSAND (P20,000.00) PESOS as and for attorneys fees and the cost
of suit.

All other claims are, for lack of merit dismissed.

SO ORDERED.[8]

In due time, both Lourdes M. de Leon and Hi-Cement appealed to the Court of Appeals.[9]
Lourdes M. de Leon submitted that the trial court erred in ruling that she was solidarilly
liable with Hi-Cement for the amount of the check. Also, that the trial court erred in ruling that
Atrium was an ordinary holder, not a holder in due course of the rediscounted checks.[10]
Hi-Cement on its part submitted that the trial court erred in ruling that even if Hi-Cement
did not authorize the issuance of the checks, it could still be held liable for the checks. And
assuming that the checks were issued with its authorization, the same was without any
consideration, which is a defense against a holder in due course and that the liability shall be
borne alone by E.T. Henry.[11]
On March 17, 1993, the Court of Appeals promulgated its decision modifying the ruling of
the trial court, the dispositive portion of which reads:

Judgement is hereby rendered:

(1) dismissing the plaintiffs complaint as against defendants Hi-Cement Corporation and
Antonio De las Alas;
(2) ordering the defendants E.T. Henry and Co., Inc. and Lourdes M. de Leon, jointly and
severally to pay the plaintiff the sum of TWO MILLION PESOS (P2,000,000.00) with
interest at the legal rate from the filling of the complaint until fully paid, plus P20,000.00 for
attorneys fees.
(3) Ordering the plaintiff and defendants E.T. Henry and Co., Inc. and Lourdes M. de Leon,
jointly and severally to pay defendant Hi-Cement Corporation, the sum of P20,000.00 as and
for attorneys fees.

With cost in this instance against the appellee Atrium Management

Corporation and appellant Lourdes Victoria M. de Leon.

So ordered.[12]

Hence, the recourse to this Court.[13]

The issues raised are the following:
In G. R. No. 109491 (Atrium, petitioner):
1. Whether the issuance of the questioned checks was an ultra vires act;
 2. Whether Atrium was not a holder in due course and for value; and
3. Whether the Court of Appeals erred in dismissing the case against Hi-Cement and ordering it
to pay P20,000.00 as attorneys fees.[14]
In G. R. No. 121794 (de Leon, petitioner):
1. Whether the Court of Appeals erred in holding petitioner personally liable for the Hi-Cement
checks issued to E.T. Henry;
2. Whether the Court of Appeals erred in ruling that Atrium is a holder in due course;
3. Whether the Court of Appeals erred in ruling that petitioner Lourdes M. de Leon as signatory
of the checks was personally liable for the value of the checks, which were declared to be
issued without consideration;
4. Whether the Court of Appeals erred in ordering petitioner to pay Hi-Cement attorneys fees
and costs.[15]
We affirm the decision of the Court of Appeals.
We first resolve the issue of whether the issuance of the checks was an ultra vires act. The
record reveals that Hi-Cement Corporation issued the four (4) checks to extend financial
assistance to E.T. Henry, not as payment of the balance of the P30 million pesos cost of hydro oil
delivered by E.T. Henry to Hi-Cement. Why else would petitioner de Leon ask for counterpart
checks from E.T. Henry if the checks were in payment for hydro oil delivered by E.T. Henry to
Hi-Cement?
Hi-Cement, however, maintains that the checks were not issued for consideration and that
Lourdes and E.T. Henry engaged in a kiting operation to raise funds for E.T. Henry, who
admittedly was in need of financial assistance. The Court finds that there was no sufficient
evidence to show that such is the case. Lourdes M. de Leon is the treasurer of the corporation
and is authorized to sign checks for the corporation. At the time of the issuance of the checks,
there were sufficient funds in the bank to cover payment of the amount of P2 million pesos.
It is, however, our view that there is basis to rule that the act of issuing the checks was well
within the ambit of a valid corporate act, for it was for securing a loan to finance the activities of
the corporation, hence, not an ultra vires act.
An ultra vires act is one committed outside the object for which a corporation is created as
defined by the law of its organization and therefore beyond the power conferred upon it by
law[16] The term ultra vires is distinguished from an illegal act for the former is merely voidable
which may be enforced by performance, ratification, or estoppel, while the latter is void and
cannot be validated.[17]
The next question to determine is whether Lourdes M. de Leon and Antonio de las Alas
were personally liable for the checks issued as corporate officers and authorized signatories of
the check.
"Personal liability of a corporate director, trustee or officer along (although not necessarily)
with the corporation may so validly attach, as a rule, only when:
 1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross
negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the
corporation, its stockholders or other persons;
2. He consents to the issuance of watered down stocks or who, having knowledge thereof, does
not forthwith file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by a specific provision of law, to personally answer for his corporate action.[18]
In the case at bar, Lourdes M. de Leon and Antonio de las Alas as treasurer and Chairman of
Hi-Cement were authorized to issue the checks. However, Ms. de Leon was negligent when she
signed the confirmation letter requested by Mr. Yap of Atrium and Mr. Henry of E.T. Henry for
the rediscounting of the crossed checks issued in favor of E.T. Henry. She was aware that the
checks were strictly endorsed for deposit only to the payees account and not to be further
negotiated. What is more, the confirmation letter contained a clause that was not true, that is, that
the checks issued to E.T. Henry were in payment of Hydro oil bought by Hi-Cement from E.T.
Henry. Her negligence resulted in damage to the corporation. Hence, Ms. de Leon may be held
personally liable therefor.
The next issue is whether or not petitioner Atrium was a holder of the checks in due
course. The Negotiable Instruments Law, Section 52 defines a holder in due course, thus:

A holder in due course is a holder who has taken the instrument under the following
conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice that it 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.
In the instant case, the checks were crossed checks and specifically indorsed for deposit to
payees account only. From the beginning, Atrium was aware of the fact that the checks were all
for deposit only to payees account, meaning E.T. Henry. Clearly, then, Atrium could not be
considered a holder in due course.
However, it does not follow as a legal proposition that simply because petitioner Atrium was
not a holder in due course for having taken the instruments in question with notice that the same
was for deposit only to the account of payee E.T. Henry that it was altogether precluded from
recovering on the instrument. The Negotiable Instruments Law does not provide that a holder not
in due course can not recover on the instrument.[19]
The disadvantage of Atrium in not being a holder in due course is that the negotiable
instrument is subject to defenses as if it were non-negotiable.[20] One such defense is absence or
failure of consideration.[21] We need not rule on the other issues raised, as they merely follow as a
consequence of the foregoing resolutions.
 WHEREFORE, the petitions are hereby DENIED. The decision and resolution of the Court
of Appeals in CA-G. R. CV No. 26686, are hereby AFFIRMED in toto.
No costs.
SO ORDERED.
Davide, Jr., C.J. (Chairman), Puno, Kapunan, and Ynares-Santiago, JJ., concur.

FIRST DIVISION

BANK OF THE PHILIPPINE ISLANDS, G.R. No. 157833

Petitioner,

Present:

PUNO, C.J., Chairperson,

-versus- SANDOVAL-GUTIERREZ,
CORONA,
AZCUNA, and
GARCIA, JJ.

GREGORIO C. ROXAS, Promulgated:

Respondent.
October 15, 2007
x-----------------------------------------------------------------------------------------x

DECISION

SANDOVAL-GUTIERREZ, J.:
 For our resolution is the instant Petition for Review on Certiorari assailing
the Decision[1] of the Court of Appeals (Fourth Division) dated February 13, 2003
in CA-G.R. CV No. 67980.

The facts of the case, as found by the trial court and affirmed by the Court
of Appeals, are:

Gregorio C. Roxas, respondent, is a trader. Sometime in March 1993, he

delivered stocks of vegetable oil to spouses Rodrigo and Marissa Cawili. As
payment therefor, spouses Cawili issued a personal check in the amount
of P348,805.50. However, when respondent tried to encash the check, it was
dishonored by the drawee bank. Spouses Cawili then assured him that they would
replace the bounced check with a cashiers check from the Bank of the Philippine
Islands (BPI), petitioner.

On March 31, 1993, respondent and Rodrigo Cawili went

to petitioners branch at Shaw Boulevard, Mandaluyong City where Elma
Capistrano, the branch manager, personally attended to them. Upon Elmas
instructions, Lita Sagun, the bank teller, prepared BPI Cashiers Check No. 14428 in
the amount of P348,805.50, drawn against the account of Marissa Cawili, payable
to respondent. Rodrigo then handed the check to respondent in the presence of
Elma.

The following day, April 1, 1993, respondent returned to petitioners branch

at Shaw Boulevard to encash the cashiers check but it was dishonored. Elma
informed him that Marissas account was closed on that date.

Despite respondents insistence, the bank officers refused to encash the

check and tried to retrieve it from respondent. He then called his lawyer who
advised him to deposit the check in his (respondents) account at Citytrust, Ortigas
Avenue. However, the check was dishonored on the ground Account Closed.
 On September 23, 1993, respondent filed with the Regional Trial Court,
Branch 263, Pasig City a complaint for sum of money against petitioner, docketed
as Civil Case No. 63663. Respondent prayed that petitioner be ordered to pay the
amount of the check, damages and cost of the suit.

In its answer, petitioner specifically denied the allegations in the complaint,

claiming that it issued the check by mistake in good faith; that its dishonor was
due to lack of consideration; and that respondents remedy was to sue Rodrigo
Cawili who purchased the check. As a counterclaim, petitioner prayed that
respondent be ordered to pay attorneys fees and expenses of litigation.

Petitioner filed a third-party complaint against spouses Cawili. They were

later declared in default for their failure to file their answer.

After trial, the RTC rendered a Decision, the dispositive portion of which
reads:

WHEREFORE, in view of the foregoing premises, this Court hereby

renders judgment in favor of herein plaintiff and orders the defendant,
Bank of the Philippine Islands, to pay Gerardo C. Roxas:

1) The sum of P348,805.50, the face value of the cashiers check,

with legal interest thereon computed from April 1, 1993 until
the amount is fully paid;

2) The sum of P50,000.00 for moral damages;

3) The sum of P50,000.00 as exemplary damages to serve as an

example for the public good;

4) The sum of P25,000.00 for and as attorneys fees; and the

5) Costs of suit.

As to the third-party complaint, third-party defendants Spouses

Rodrigo and Marissa Cawili are hereby ordered to indemnify defendant
 Bank of the Philippine Islands such amount(s) adjudged and actually
paid by it to herein plaintiff Gregorio C. Roxas, including the costs of
suit.

SO ORDERED.

On appeal, the Court of Appeals, in its Decision, affirmed the trial courts
judgment.

Hence, this petition.

Petitioner ascribes to the Court of Appeals the following errors: (1) in

finding that respondent is a holder in due course; and (2) in holding that it
(petitioner) is liable to respondent for the amount of the cashiers check.

Section 52 of the Negotiable Instruments Law provides:

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:

(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 person
negotiating it.

As a general rule, under the above provision, every holder is

presumed prima facie to be a holder in due course. One who claims otherwise has
the onus probandi to prove that one or more of the conditions required to
constitute a holder in due course are lacking. In this case, petitioner contends that
the element of value is not present, therefore, respondent could not be a holder
in due course.

Petitioners contention lacks merit. Section 25 of the same law states:

SEC. 25. Value, what constitutes. Value is any consideration sufficient

to support a simple contract. An antecedent or pre-existing debt
constitutes value; and is deemed as such whether the instrument is
payable on demand or at a future time.

In Walker Rubber Corp. v. Nederlandsch Indische & Handelsbank, N.V. and South
Sea Surety & Insurance Co., Inc.,[2] this Court ruled that value in general terms may
be some right, interest, profit or benefit to the party who makes the contract or
some forbearance, detriment, loan, responsibility, etc. on the other side. Here,
there is no dispute that respondent received Rodrigo Cawilis cashiers check as
payment for the formers vegetable oil. The fact that it was Rodrigo who
purchased the cashiers check from petitioner will not affect respondents status as
a holder for value since the check was delivered to him as payment for the
vegetable oil he sold to spouses Cawili. Verily, the Court of Appeals did not err in
concluding that respondent is a holder in due course of the cashiers check.

Furthermore, it bears emphasis that the disputed check is a cashiers

check. In International Corporate Bank v. Spouses Gueco,[3] this Court held that a
cashiers check is really the banks own check and may be treated as a promissory
note with the bank as the maker. The check becomes the primary obligation of
the bank which issues it and constitutes a written promise to pay upon
demand. In New Pacific Timber & Supply Co. Inc. v. Seeris,[4] this Court took
judicial notice of the well-known and accepted practice in the business sector that
a cashiers check is deemed as cash. This is because the mere issuance of a
cashiers check is considered acceptance thereof.

In view of the above pronouncements, petitioner bank became liable to

respondent from the moment it issued the cashiers check. Having been accepted
by respondent, subject to no condition whatsoever, petitioner should have paid
the same upon presentment by the former.

WHEREFORE, the petition is DENIED. The assailed Decision of the Court of

Appeals (Fourth Division) in CA-G.R. CV No. 67980 is AFFIRMED. Costs against
petitioner.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

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. Delivery of an
3

instrument means transfer of possession, actual or constructive, from one person to another. Without the initial delivery of the
4
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

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. None of
6

these exceptions were alleged by respondent Sima Wei.

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

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

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

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

SO ORDERED.

Narvasa, C.J., Padilla, Regalado and Nocon, JJ., concur.

Republic of the Philippines

Supreme Court
Manila

FIRST DIVISION
UNION BANK OF THE PHILIPPINES, G.R. Nos. 173090-91
Petitioner,
Present:

CORONA, C.J.,
Chairperson,
- versus - LEONARDO-DE CASTRO,
BERSAMIN,
DEL CASTILLO, and
VILLARAMA, JR., JJ.

SPOUSES RODOLFO T. TIU AND

VICTORIA N. TIU, Promulgated:
Respondents.
September 7, 2011
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

LEONARDO-DE CASTRO, J.:

This is a Petition for Review on Certiorari seeking to reverse the Joint

Decision[1] of the Court of Appeals dated February 21, 2006 in CA-G.R. CV No.
00190 and CA-G.R. SP No. 00253, as well as the Resolution[2] dated June 1,
2006 denying the Motion for Reconsideration.

The factual and procedural antecedents of this case are as follows:

On November 21, 1995, petitioner Union Bank of the Philippines (Union

Bank) and respondent spouses Rodolfo T. Tiu and Victoria N. Tiu (the spouses Tiu)
entered into a Credit Line Agreement (CLA) whereby Union Bank agreed to make
available to the spouses Tiu credit facilities in such amounts as may be
approved.[3] From September 22, 1997 to March 26, 1998, the spouses Tiu took
out various loans pursuant to this CLA in the total amount of three million six
hundred thirty-two thousand dollars (US$3,632,000.00), as evidenced by
promissory notes:

PN No. Amount in US$ Date Granted

87/98/111 72,000.00 02/16/98
87/98/108 84,000.00 02/13/98
87/98/152 320,000.00 03/02/98
87/98/075 150,000.00 01/30/98
87/98/211 32,000.00 03/26/98
87/98/071 110,000.00 01/29/98
87/98/107 135,000.00 02/13//98
87/98/100 75,000.00 02/12/98
87/98/197 195,000.00 03/19/98
87/97/761 60,000.00 09/26/97
87/97/768 30,000.00 09/29/97
87/97/767 180,000.00 09/29/97
87/97/970 110,000.00 12/29/97
87/97/747 50,000.00 09/22/97
87/96/944 605,000.00 12/19/97
87/98/191 470,000.00 03/16/98
87/98/198 505,000.00 03/19/98
87/98/090 449,000.00 02/09/98
US$3,632,000.00[4]

On June 23, 1998, Union Bank advised the spouses Tiu through a
[5]
letter that, in view of the existing currency risks, the loans shall be
redenominated to their equivalent Philippine peso amount on July 15,
1998. On July 3, 1998, the spouses Tiu wrote to Union Bank authorizing the latter
to redenominate the loans at the rate of US$1=P41.40[6]with interest of 19% for
one year.[7]
 On December 21, 1999, Union Bank and the spouses Tiu entered into a
Restructuring Agreement.[8] The Restructuring Agreement contains a clause
wherein the spouses Tiu confirmed their debt and waived any action on account
thereof. To quote said clause:

1. Confirmation of Debt The BORROWER hereby confirms and

accepts that as of December 8, 1999, its outstanding principal
indebtedness to the BANK under the Agreement and the Notes
amount to ONE HUNDRED FIFTY[-]FIVE MILLION THREE
HUNDRED SIXTY[-]FOUR THOUSAND EIGHT HUNDRED
PESOS (PHP 155,364,800.00) exclusive of interests, service and
penalty charges (the Indebtedness) and further confirms the
correctness, legality, collectability and enforceability of the
Indebtedness. The BORROWER unconditionally waives any
action, demand or claim that they may otherwise have to dispute
the amount of the Indebtedness as of the date specified in this
Section, or the collectability and enforceability thereof. It is the
understanding of the parties that the BORROWERs
acknowledgment, affirmation, and waiver herein are material
considerations for the BANKs agreeing to restructure the
Indebtedness which would have already become due and
payable as of the above date under the terms of the Agreement
and the Notes.[9]

The restructured amount (P155,364,800.00) is the sum of the following

figures: (1) P150,364,800.00, which is the value of the US$3,632,000.00 loan as
redenominated under the above-mentioned exchange rate of US$1=P41.40; and
(2) P5,000,000.00, an additional loan given to the spouses Tiu to update their
interest payments.[10]

Under the same Restructuring Agreement, the parties declared that the
loan obligation to be restructured (after deducting the dacion price of properties
ceded by the Tiu spouses and adding: [1] the taxes, registration fees and other
expenses advanced by Union Bank in registering the Deeds of Dation in Payment;
and [2] other fees and charges incurred by the Indebtedness) is one hundred four
million six hundred sixty-eight thousand seven hundred forty-one pesos
(P104,668,741.00) (total restructured amount).[11] The Deeds of Dation in
Payment referred to are the following:

1. Dation of the Labangon properties Deed executed by Juanita Tiu, the

mother of respondent Rodolfo Tiu, involving ten parcels of land with
improvements located in Labangon, Cebu City and with a total land area
of 3,344 square meters, for the amount of P25,130,000.00. The Deed
states that these properties shall be leased to the Tiu spouses at a
monthly rate of P98,000.00 for a period of two years.[12]

2. Dation of the Mandaue property Deed executed by the spouses Tiu

involving one parcel of land with improvements located in A.S. Fortuna
St., Mandaue City, covered by TCT No. T-31604 and with a land area of
2,960 square meters, for the amount of P36,080,000.00. The Deed
states that said property shall be leased to the Tiu spouses at a monthly
rate of P150,000.00 for a period of two years.[13]

As likewise provided in the Restructuring Agreement, the spouses Tiu

executed a Real Estate Mortgage in favor of Union Bank over their residential
property inclusive of lot and improvements located at P. Burgos St., Mandaue
City, covered by TCT No. T-11951 with an area of 3,096 square meters.[14]

The spouses Tiu undertook to pay the total restructured amount

(P104,668,741.00) via three loan facilities (payment schemes).

The spouses Tiu claim to have made the following payments:

(1) P15,000,000.00 on August 3, 1999; and (2) another P13,197,546.79 as of May
8, 2001. Adding the amounts paid under the Deeds of Dation in Payment, the
spouses Tiu postulate that their payments added up to P89,407,546.79.[15]

Asserting that the spouses Tiu failed to comply with the payment schemes
set up in the Restructuring Agreement, Union Bank initiated extrajudicial
foreclosure proceedings on the residential property of the spouses Tiu, covered
by TCT No. T-11951. The property was to be sold at public auction on July 18,
2002.
 The spouses Tiu, together with Juanita T. Tiu, Rosalinda T. King, Rufino T.
Tiu, Rosalie T. Young and Rosenda T. Tiu, filed with the Regional Trial Court (RTC)
of Mandaue City a Complaint seeking to have the Extrajudicial Foreclosure
declared null and void. The case was docketed as Civil Case No. MAN-
4363.[16] Named as defendants were Union Bank and Sheriff IV Veronico C. Ouano
(Sheriff Oano) of Branch 55, RTC, Mandaue City. Complainants therein prayed for
the following: (1) that the spouses Tiu be declared to have fully paid their
obligation to Union Bank; (2) that defendants be permanently enjoined from
proceeding with the auction sale; (3) that Union Bank be ordered to return to the
spouses Tiu their properties as listed in the Complaint; (4) that Union Bank be
ordered to pay the plaintiffs the sum of P10,000,000.00 as moral
damages, P2,000,000.00 as exemplary damages, P3,000,000.00 as attorneys fees
and P500,000.00 as expenses of litigation; and (5) a writ of preliminary injunction
or temporary restraining order be issued enjoining the public auction sale to be
held on July 18, 2002.[17]

The spouses Tiu claim that from the beginning the loans were in pesos, not
in dollars. Their office clerk, Lilia Gutierrez, testified that the spouses Tiu merely
received the peso equivalent of their US$3,632,000.00 loan at the rate of
US$1=P26.00. The spouses Tiu further claim that they were merely forced to sign
the Restructuring Agreement and take up an additional loan of P5,000,000.00, the
proceeds of which they never saw because this amount was immediately applied
by Union Bank to interest payments.[18]

The spouses Tiu allege that the foreclosure sale of the mortgaged
properties was invalid, as the loans have already been fully paid. They also allege
that they are not the owners of the improvements constructed on the lot because
the real owners thereof are their co-petitioners, Juanita T. Tiu, Rosalinda T. King,
Rufino T. Tiu, Rosalie T. Young and Rosenda T. Tiu.[19]

The spouses Tiu further claim that prior to the signing of the Restructuring
Agreement, they entered into a Memorandum of Agreement with Union Bank
whereby the former deposited with the latter several certificates of shares of
stock of various companies and four certificates of title of various parcels of land
located in Cebu. The spouses Tiu claim that these properties have not been
subjected to any lien in favor of Union Bank, yet the latter continues to hold on to
these properties and has not returned the same to the former.[20]
 On the other hand, Union Bank claims that the Restructuring Agreement
was voluntarily and validly entered into by both parties. Presenting as evidence
the Warranties embodied in the Real Estate Mortgage, Union Bank contends that
the foreclosure of the mortgage on the residential property of the spouses Tiu
was valid and that the improvements thereon were absolutely owned by
them. Union Bank denies receiving certificates of shares of stock of various
companies or the four certificates of title of various parcels of land from the
spouses Tiu. However, Union Bank also alleges that even if said certificates were
in its possession it is authorized under the Restructuring Agreement to retain any
and all properties of the debtor as security for the loan.[21]

The RTC issued a Temporary Restraining Order[22] and, eventually, a Writ of

Preliminary Injunction[23] preventing the sale of the residential property of the
spouses Tiu.[24]

On December 16, 2004, the RTC rendered its Decision[25] in Civil Case No.
MAN-4363 in favor of Union Bank. The dispositive portion of the Decision read:

WHEREFORE, premises considered, judgment is hereby rendered

dismissing the Complaint and lifting and setting aside the Writ of
Preliminary Injunction. No pronouncement as to damages, attorneys
fees and costs of suit.[26]

In upholding the validity of the Restructuring Agreement, the RTC held that
the spouses Tiu failed to present any evidence to prove either fraud or
intimidation or any other act vitiating their consent to the same. The exact
obligation of the spouses Tiu to Union Bank is therefore P104,668,741.00, as
agreed upon by the parties in the Restructuring Agreement. As regards the
contention of the spouses Tiu that they have fully paid their indebtedness, the
RTC noted that they could not present any detailed accounting as to the total
amount they have paid after the execution of the Restructuring Agreement.[27]

On January 4, 2005, Union Bank filed a Motion for Partial

Reconsideration,[28] protesting the finding in the body of the December 16, 2004
Decision that the residential house on Lot No. 639 is not owned by the spouses
Tiu and therefore should be excluded from the real properties covered by the real
estate mortgage. On January 6, 2005, the spouses Tiu filed their own Motion for
Partial Reconsideration and/or New Trial.[29] They alleged that the trial court failed
to rule on their fourth cause of action wherein they mentioned that they turned
over the following titles to Union Bank: TCT Nos. 30271, 116287 and 116288 and
OCT No. 0-3538. They also prayed for a partial new trial and for a declaration that
they have fully paid their obligation to Union Bank.[30]

On January 11, 2005, the spouses Tiu received from Sheriff Oano a Second
Notice of Extra-judicial Foreclosure Sale of Lot No. 639 to be held on February 3,
2005. To prevent the same, the Tiu spouses filed with the Court of Appeals a
Petition for Prohibition and Injunction with Application for TRO/Writ of
Preliminary Injunction.[31] The petition was docketed as CA-G.R. SP No. 00253. The
Court of Appeals issued a Temporary Restraining Order on January 27, 2005.[32]

On January 19, 2005, the RTC issued an Order denying Union Banks Motion
for Partial Reconsideration and the Tiu spouses Motion for Partial
Reconsideration and/or New Trial.[33]

Both the spouses Tiu and Union Bank appealed the case to the Court of
Appeals.[34] The two appeals were given a single docket number, CA-G.R. CEB-CV
No. 00190.Acting on a motion filed by the spouses Tiu, the Court of Appeals
consolidated CA-G.R. SP No. 00253 with CA-G.R. CEB-CV No. 00190.[35]

On April 19, 2005, the Court of Appeals issued a Resolution finding that
there was no need for the issuance of a Writ of Preliminary Injunction as the
judgment of the lower court has been stayed by the perfection of the appeal
therefrom.[36]

On May 9, 2005, Sheriff Oano proceeded to conduct the extrajudicial

sale. Union Bank submitted the lone bid of P18,576,000.00.[37] On June 14, 2005,
Union Bank filed a motion with the Court of Appeals praying that Sheriff Oano be
ordered to issue a definite and regular Certificate of Sale.[38] On July 21, 2005, the
Court of Appeals issued a Resolution denying the Motion and suspending the
auction sale at whatever stage, pending resolution of the appeal and conditioned
upon the filing of a bond in the amount of P18,000,000.00 by the Tiu
spouses.[39] The Tiu spouses failed to file said bond.[40]
 On February 21, 2006, the Court of Appeals rendered the assailed Joint
Decision in CA-G.R. CV No. 00190 and CA-G.R. SP No. 00253. The Court of Appeals
dismissed the Petition for Prohibition, CA-G.R. SP No. 00253, on the ground that
the proper venue for the same is with the RTC.[41]

On the other hand, the Court of Appeals ruled in favor of the spouses Tiu in
CA-G.R. CV No. 00190. The Court of Appeals held that the loan transactions were
in pesos, since there was supposedly no stipulation the loans will be paid in dollars
and since no dollars ever exchanged hands. Considering that the loans were in
pesos from the beginning, the Court of Appeals reasoned that there is no need to
convert the same. By making it appear that the loans were originally in dollars,
Union Bank overstepped its rights as creditor, and made unwarranted
interpretations of the original loan agreement. According to the Court of Appeals,
the Restructuring Agreement, which purportedly attempts to create a novation of
the original loan, was not clearly authorized by the debtors and was not
supported by any cause or consideration. Since the Restructuring Agreement is
void, the original loan of P94,432,000.00 (representing the amount received by
the spouses Tiu of US$3,632,000.00 using the US$1=P26.00 exchange rate) should
subsist. The Court of Appeals likewise invalidated (1) the P5,000,000.00 charge for
interest in the Restructuring Agreement, for having been unilaterally imposed by
Union Bank; and (2) the lease of the properties conveyed in dacion en pago, for
being against public policy. [42]
In sum, the Court of Appeals found Union Bank liable to the spouses Tiu in
the amount of P927,546.79. For convenient reference, we quote relevant portion
of the Court of Appeals Decision here:

To summarize the obligation of the Tiu spouses, they owe Union

Bank P94,432,000.00. The Tiu spouses had already paid Union Bank the
amount of P89,407,546.79. On the other hand, Union Bank must return
to the Tiu spouses the illegally collected rentals in the amount
of P5,952,000.00. Given these findings, the obligation of the Tiu spouses
has already been fully paid. In fact, it is the Union Bank that must return
to the Tiu spouses the amount of NINE HUNDRED TWENTY[-]SEVEN
THOUSAND FIVE HUNDRED FORTY[-]SIX PESOS AND SEVENTY[-]NINE
CENTAVOS (P927,546.79).[43]
 With regard to the ownership of the improvements on the subject
mortgaged property, the Court of Appeals ruled that it belonged to respondent
Rodolfo Tius father, Jose Tiu, since 1981. According to the Court of Appeals, Union
Bank should not have relied on warranties made by debtors that they are the
owners of the property. The appellate court went on to permanently enjoin Union
Bank from foreclosing the mortgage not only of the property covered by TCT No.
T-11951, but also any other mortgage over any other property of the spouses
Tiu.[44]

The Court of Appeals likewise found Union Bank liable to return the
certificates of stocks and titles to real properties of the spouses Tiu in its
possession. The appellate court held that Union Bank made judicial admissions of
such possession in its Reply to Plaintiffs Request for Admission.[45] In the event
that Union Bank can no longer return these certificates and titles, it was
mandated to shoulder the cost for their replacement.[46]

Finally, the Court of Appeals took judicial notice that before or during the
financial crisis, banks actively convinced debtors to make dollar loans in the guise
of benevolence, saddling borrowers with loans that ballooned twice or thrice their
original loans. The Court of Appeals, noting the cavalier way with which banks
exploited and manipulated the situation,[47] held Union Bank liable to the spouses
Tiu for P100,000.00 in moral damages, P100,000.00 in exemplary damages,
and P50,000.00 in attorneys fees.[48]

The Court of Appeals disposed of the case as follows:

WHEREFORE, in view of the foregoing premises, judgment is

hereby rendered by us permanently enjoining Union Bank from
foreclosing the mortgage of the residential property of the Tiu spouses
which is covered by Transfer Certificate of Title No. 11951 and from
pursuing other foreclosure of mortgages over any other properties of
the Tiu spouses for the above-litigated debt that has already been fully
paid. If a foreclosure sale has already been made over such properties,
this Court orders the cancellation of such foreclosure sale and the
Certificate of Sale thereof if any has been issued. This Court orders
Union Bank to return to the Tiu spouses the amount of NINE
HUNDRED TWENTY[-]SEVEN THOUSAND FIVE HUNDRED FORTY[-]SIX
PESOS AND SEVENTY[-]NINE CENTAVOS (P927,546.79) representing
 illegally collected rentals. This Court also orders Union Bank to return to
the Tiu spouses all the certificates of shares of stocks and titles to real
properties of the Tiu spouses that were deposited to it or, in lieu
thereof, to pay the cost for the replacement and issuance of new
certificates and new titles over the said properties. This Court finally
orders Union Bank to pay the Tiu spouses ONE HUNDRED THOUSAND
PESOS (P100,000.00) in moral damages, ONE HUNDRED THOUSAND
PESOS (P100,000.00) in exemplary damages, FIFTY THOUSAND PESOS
(P50,000.00) in attorneys fees and cost, both in the lower court and in
this Court.[49]

On June 1, 2006, the Court of Appeals rendered the assailed Resolution

denying Union Banks Motion for Reconsideration.

Hence, this Petition for Review on Certiorari, wherein Union Bank submits
the following issues for the consideration of this Court:

1. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE

AND REVERSIBLE ERROR WHEN IT CONCLUDED THAT THERE WERE
NO DOLLAR LOANS OBTAINED BY [THE] TIU SPOUSES FROM UNION
BANK DESPITE [THE] CLEAR ADMISSION OF INDEBTEDNESS BY THE
BORROWER-MORTGAGOR TIU SPOUSES.

2. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE

AND REVERSIBLE ERROR WHEN IT NULLIFIED THE RESTRUCTURING
AGREEMENT BETWEEN TIU SPOUSES AND UNION BANK FOR LACK
OF CAUSE OR CONSIDERATION DESPITE THE ADMISSION OF THE
BORROWER-MORTGAGOR TIU SPOUSES OF THE DUE AND
VOLUNTARY EXECUTION OF SAID RESTRUCTURING AGREEMENT.

3. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE

AND REVERSIBLE ERROR WHEN IT PERMANENTLY ENJOINED UNION
BANK FROM FORECLOSING THE MORTGAGE ON THE RESIDENTIAL
PROPERTY OF THE TIU SPOUSES DESPITE THE ADMISSION OF NON-
PAYMENT OF THEIR OUTSTANDING LOAN TO THE BANK BY THE
BORROWER-MORTGAGOR TIU SPOUSES;
 4. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE
AND REVERSIBLE ERROR WHEN IT FIXED THE AMOUNT OF THE
OBLIGATION OF RESPONDENT SPOUSES CONTRARY TO THE
PROVISIONS OF THE PROMISSORY NOTES, RESTRUCTURING
AGREEMENT AND [THE] VOLUNTARY ADMISSIONS BY BORROWER-
MORTGAGOR TIU SPOUSES;

5. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE

AND REVERSIBLE ERROR WHEN IT RULED ON THE ALLEGED RENTALS
PAID BY RESPONDENT SPOUSES WITHOUT ANY FACTUAL BASIS;

6. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE

AND REVERSIBLE ERROR WHEN IT HELD WITHOUT ANY FACTUAL
BASIS THAT THE LOAN OBLIGATION OF TIU SPOUSES HAS BEEN
FULLY PAID;

7. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE

AND REVERSIBLE ERROR WHEN IT HELD WITHOUT ANY FACTUAL
BASIS THAT THE HOUSE INCLUDED IN THE REAL ESTATE MORTGAGE
DID NOT BELONG TO THE TIU SPOUSES.

8. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE

AND REVERSIBLE ERROR IN ORDERING UNION BANK TO RETURN THE
CERTIFICATES OF SHARES OF STOCK AND TITLES TO REAL
PROPERTIES OF TIU SPOUSES ALLEGEDLY IN THE POSSESSION OF
UNION BANK.

9. WHETHER OR NOT THE COURT OF APPEALS VIOLATED THE

DOCTRINES AND PRINCIPLES ON APPELLATE JURISDICTION.

10. WHETHER OR NOT THE COURT OF APPEALS COMMITTED GRAVE

AND REVERSIBLE ERROR IN AWARDING DAMAGES AGAINST UNION
BANK.[50]

Validity of the Restructuring Agreement

As previously discussed, the Court of Appeals declared that the

Restructuring Agreement is void on account of its being a failed novation of the
original loan agreements.The Court of Appeals explained that since there was no
stipulation that the loans will be paid in dollars, and since no dollars ever
exchanged hands, the original loan transactions were in pesos.[51] Proceeding from
this premise, the Court of Appeals held that the Restructuring Agreement, which
was meant to convert the loans into pesos, was unwarranted.Thus, the Court of
Appeals reasoned that:

Be that as it may, however, since the loans of the Tiu spouses

from Union Bank were peso loans from the very beginning, there is no
need for conversion thereof. A Restructuring Agreement should merely
confirm the loans, not add thereto. By making it appear in the
Restructuring Agreement that the loans were originally dollar loans,
Union Bank overstepped its rights as a creditor and made unwarranted
interpretations of the original loan agreement. This Court is not bound
by such interpretations made by Union Bank. When one party makes an
interpretation of a contract, he makes it at his own risk, subject to a
subsequent challenge by the other party and a modification by the
courts. In this case, that party making the interpretation is not just any
party, but a well entrenched and highly respected bank. The matter that
was being interpreted was also a financial matter that is within the
profound expertise of the bank. A normal person who does not possess
the same financial proficiency or acumen as that of a bank will most
likely defer to the latters esteemed opinion, representations and
interpretations. It has been often stated in our jurisprudence that banks
have a fiduciary duty to their depositors. According to the case of Bank
of the Philippine Islands vs. IAC (G.R. No. 69162, February 21, 1992), as a
business affected with public interest and because of the nature of its
functions, the bank is under obligation to treat the accounts of its
depositors with meticulous care, always having in mind the fiduciary
nature of their relationship. Such fiduciary relationship should also
extend to the banks borrowers who, more often than not, are also
depositors of the bank. Banks are in the business of lending while most
borrowers hardly know the basics of such business. When transacting
with a bank, most borrowers concede to the expertise of the bank and
consider their procedures, pronouncements and representations as
unassailable, whether such be true or not. Therefore, when there is a
doubtful banking transaction, this Court will tip the scales in favor of
the borrower.
 Given the above ruling, the Restructuring Agreement, therefore,
between the Tiu spouses and Union Bank does not operate to
supersede all previous loan documents, as claimed by Union Bank. But
the said Restructuring Agreement, as it was crafted by Union Bank, does
not merely confirm the original loan of the Tiu spouses but attempts to
create a novation of the said original loan that is not clearly authorized
by the debtors and that is not supported by any cause or
consideration. According to Article 1292 of the New Civil Code, in order
that an obligation may by extinguished by another which substitutes
the same, it is imperative that it be so declared in unequivocal terms, or
that the old and the new obligations be on every point incompatible
with each other. Such is not the case in this instance. No valid novation
of the original obligation took place. Even granting arguendo that there
was a novation, the sudden change in the original amount of the loan to
the new amount declared in the Restructuring Agreement is not
supported by any cause or consideration. Under Article 1352 of the Civil
Code, contracts without cause, or with unlawful cause, produce no
effect whatever. A contract whose cause did not exist at the time of the
transaction is void. Accordingly, Article 1297 of the New Civil Code
mandates that, if the new obligation is void, the original one shall
subsist, unless the parties intended that the former relation should be
extinguished at any event. Since the Restructuring Agreement is void
and since there was no intention to extinguish the original loan, the
original loan shall subsist.[52]

Union Bank does not dispute that the spouses Tiu received the loaned
amount of US$3,632,000.00 in Philippine pesos, not dollars, at the prevailing
exchange rate of US$1=P26.[53] However, Union Bank claims that this does not
change the true nature of the loan as a foreign currency loan,[54] and proceeded to
illustrate in its Memorandum that the spouses Tiu obtained favorable interest
rates by opting to borrow in dollars (but receiving the equivalent peso amount) as
opposed to borrowing in pesos.[55]

We agree with Union Bank on this point. Although indeed, the spouses Tiu
received peso equivalents of the borrowed amounts, the loan documents
presented as evidence, i.e., the promissory notes,[56] expressed the amount of the
loans in US dollars and not in any other currency. This clearly indicates that the
spouses Tiu were bound to pay Union Bank in dollars, the amount stipulated in
said loan documents. Thus, before the Restructuring Agreement, the spouses Tiu
were bound to pay Union Bank the amount of US$3,632,000.00 plus the interest
stipulated in the promissory notes, without converting the same to pesos. The
spouses Tiu, who are in the construction business and appear to be dealing
primarily in Philippine currency, should therefore purchase the necessary amount
of dollars to pay Union Bank, who could have justly refused payment in any
currency other than that which was stipulated in the promissory notes.

We disagree with the finding of the Court of Appeals that the testimony of
Lila Gutierrez, which merely attests to the fact that the spouses Tiu received the
peso equivalent of their dollar loan, proves the intention of the parties that such
loans should be paid in pesos. If such had been the intention of the parties, the
promissory notes could have easily indicated the same.

Such stipulation of payment in dollars is not prohibited by any prevailing

law or jurisprudence at the time the loans were taken. In this regard, Article 1249
of the Civil Code provides:

Art. 1249. The payment of debts in money shall be made in the

currency stipulated, and if it is not possible to deliver such currency,
then in the currency which is legal tender in the Philippines.

Although the Civil Code took effect on August 30, 1950, jurisprudence had
upheld[57] the continued effectivity of Republic Act No. 529, which took effect
earlier on June 16, 1950. Pursuant to Section 1[58] of Republic Act No. 529, any
agreement to pay an obligation in a currency other than the Philippine currency is
void; the most that could be demanded is to pay said obligation in Philippine
currency to be measured in the prevailing rate of exchange at the time the
obligation was incurred.[59] On June 19, 1964, Republic Act No. 4100 took effect,
modifying Republic Act No. 529 by providing for several exceptions to the nullity
of agreements to pay in foreign currency.[60]

On April 13, 1993, Central Bank Circular No. 1389[61] was issued, lifting
foreign exchange restrictions and liberalizing trade in foreign currency. In cases of
foreign borrowings and foreign currency loans, however, prior Bangko Sentral
approval was required. On July 5, 1996, Republic Act No. 8183 took
effect,[62] expressly repealing Republic Act No. 529 in Section 2[63] thereof. The
same statute also explicitly provided that parties may agree that the obligation or
transaction shall be settled in a currency other than Philippine currency at the
time of payment.[64]

Although the Credit Line Agreement between the spouses Tiu and Union
Bank was entered into on November 21, 1995,[65] when the agreement to pay in
foreign currency was still considered void under Republic Act No. 529, the actual
loans,[66] as shown in the promissory notes, were taken out from September 22,
1997 to March 26, 1998, during which time Republic Act No. 8183 was already in
effect. In United Coconut Planters Bank v. Beluso,[67] we held that:

[O]pening a credit line does not create a credit transaction of loan

or mutuum, since the former is merely a preparatory contract to the
contract of loan or mutuum. Under such credit line, the bank is merely
obliged, for the considerations specified therefor, to lend to the other
party amounts not exceeding the limit provided. The credit transaction
thus occurred not when the credit line was opened, but rather when
the credit line was availed of. x x x.[68]

Having established that Union Bank and the spouses Tiu validly entered into
dollar loans, the conclusion of the Court of Appeals that there were no dollar
loans to novate into peso loans must necessarily fail.

Similarly, the Court of Appeals pronouncement that the novation was not
supported by any cause or consideration is likewise incorrect. This conclusion
suggests that when the parties signed the Restructuring Agreement, Union Bank
got something out of nothing or that the spouses Tiu received no benefit from the
restructuring of their existing loan and was merely taken advantage of by the
bank. It is important to note at this point that in the determination of the nullity of
a contract based on the lack of consideration, the debtor has the burden to prove
the same. Article 1354 of the Civil Code provides that [a]though the cause is not
stated in the contract, it is presumed that it exists and is lawful, unless the debtor
proves the contrary.

In the case at bar, the Restructuring Agreement was signed at the height of
the financial crisis when the Philippine peso was rapidly depreciating. Since the
spouses Tiu were bound to pay their debt in dollars, the cost of purchasing the
required currency was likewise swiftly increasing. If the parties did not enter into
the Restructuring Agreement in December 1999 and the peso continued to
deteriorate, the ability of the spouses Tiu to pay and the ability of Union Bank to
collect would both have immensely suffered. As shown by the evidence presented
by Union Bank, the peso indeed continued to deteriorate, climbing to
US$1=P50.01 on December 2000.[69] Hence, in order to ensure the stability of the
loan agreement, Union Bank and the spouses Tiu agreed in the Restructuring
Agreement to peg the principal loan at P150,364,800.00 and the unpaid interest
at P5,000,000.00.

Before this Court, the spouses Tiu belatedly argue that their consent to the
Restructuring Agreement was vitiated by fraud and mistake, alleging that (1) the
Restructuring Agreement did not take into consideration their substantial
payment in the amount of P40,447,185.60 before its execution; and (2) the dollar
loans had already been redenominated in 1997 at the rate of US$1=P26.34.[70]

We have painstakingly perused over the records of this case, but failed to
find any documentary evidence of the alleged payment of P40,447,185.60 before
the execution of the Restructuring Agreement. In paragraph 16 of their Amended
Complaint, the spouses Tiu alleged payment of P40,447,185.60 for
interests before the conversion of the dollar loan.[71] This was specifically denied
by Union Bank in paragraph 5 of its Answer with Counterclaim.[72] Respondent
Rodolfo Tiu testified that they made 50 million plus in cash payment plus other
monthly interest payments,[73] and identified a computation of payments dated
July 17, 2002 signed by himself.[74] Such computation, however, was never
formally offered in evidence and was in any event, wholly self-serving.

As regards the alleged redenomination of the same dollar loans in 1997 at

the rate of US$1=P26.34, the spouses Tiu merely relied on the following direct
testimony of Herbert Hojas, one of the witnesses of Union Bank:

Q: Could you please describe what kind of loan was the loan of the
spouses Rodolfo Tiu, the plaintiffs in this case?

A: It was originally an FCDU, meaning a dollar loan.

Q: What happened to this FCDU loan or dollar loan?

 A: The dollar loan was re-denominated in view of the very unstable
exchange of the dollar and the peso at that time,

Q: Could you still remember what year this account was re-
denominated from dollar to peso?

A: I think it was on the year 1997.

Q: Could [you] still remember what was then the prevailing exchange
rate between the dollar and the peso at that year 1997?

A: Yes. I have here the list of the dollar exchange rate from January
1987 (sic). It was P26.34 per dollar.[75]

Neither party presented any documentary evidence of the alleged

redenomination in 1997. Respondent Rodolfo Tiu did not even mention it in his
testimony. Furthermore, Hojas was obviously uncertain in his statement that said
redenomination was made in 1997.

As pointed out by the trial court, the Restructuring Agreement, being

notarized, is a public document enjoying a prima facie presumption of
authenticity and due execution.Clear and convincing evidence must be presented
to overcome such legal presumption.[76] The spouses Tiu, who attested before the
notary public that the Restructuring Agreement is their own free and voluntary
act and deed,[77] failed to present sufficient evidence to prove otherwise. It is
difficult to believe that the spouses Tiu, veteran businessmen who operate a
multi-million peso company, would sign a very important document without fully
understanding its contents and consequences.

This Court therefore rules that the Restructuring Agreement is valid and, as
such, a valid and binding novation of loans of the spouses Tiu entered into from
September 22, 1997 to March 26, 1998 which had a total amount of
US$3,632,000.00.

Validity of the Foreclosure of Mortgage

 The spouses Tiu challenge the validity of the foreclosure of the mortgage on
two grounds, claiming that: (1) the debt had already been fully paid; and (2) they
are not the owners of the improvements on the mortgaged property.

(1) Allegation of full payment of the mortgage debt

In the preceding discussion, we have ruled that the Restructuring

Agreement is a valid and binding novation of loans of the spouses Tiu entered into
from September 22, 1997 to March 26, 1998 in the total amount of
US$3,632,000.00. Thus, in order that the spouses Tiu can be held to have fully
paid their loan obligation, they should present evidence showing their payment of
the total restructured amount under the Restructuring Agreement which
was P104,668,741.00. As we have discussed above, however, while respondent
Rodolfo Tiu appeared to have identified during his testimony a computation dated
July 17, 2002 of the alleged payments made to Union Bank,[78] the same was not
formally offered in evidence. Applying Section 34, Rule 132[79] of the Rules of
Court, such computation cannot be considered by this Court. We have held that a
formal offer is necessary because judges are mandated to rest their findings of
facts and their judgment only and strictly upon the evidence offered by the parties
at the trial. It has several functions: (1) to enable the trial judge to know the
purpose or purposes for which the proponent is presenting the evidence; (2) to
allow opposing parties to examine the evidence and object to its admissibility; and
(3) to facilitate review by the appellate court, which will not be required to review
documents not previously scrutinized by the trial court.[80]Moreover, even if such
computation were admitted in evidence, the same is self-serving and cannot be
given probative weight. In the case at bar, the records do not contain even a single
receipt evidencing payment to Union Bank.

The Court of Appeals, however, held that several payments made by the
spouses Tiu had been admitted by Union Bank. Indeed, Section 11, Rule 8 of the
Rules of Court provides that an allegation not specifically denied is deemed
admitted. In such a case, no further evidence would be required to prove the
antecedent facts. We should therefore examine which of the payments specified
by the spouses Tiu in their Amended Complaint[81] were not specifically denied by
Union Bank.
 The allegations of payment are made in paragraphs 16 to 21 of the
Amended Complaint:

16. Before conversion of the dollar loan into a peso loan[,] the
spouses Tiu had already paid the defendant bank the amount of
P40,447,185.60 for interests;

17. On August 3, 1999 and August 12, 1999, plaintiffs made

payments in the amount of P15,000,000.00;

18. In order to lessen the obligation of plaintiffs, the mother of

plaintiff Rodolfo T. Tiu, plaintiff Juanita T. Tiu, executed a deed of
dacion in payment in favor of defendant involving her 10 parcels of land
located in Labangon, Cebu City for the amount of P25,130,000.00. Copy
of the deed was attached to the original complaint as Annex C;

19. For the same purpose, plaintiffs spouses Tiu also executed a
deed of dacion in payment of their property located at A.S. Fortuna St.,
Mandaue City for the amount of P36,080,000.00.Copy of the deed was
attached to the original complaint as Annex D;

20. The total amount of the two dacions in payment made by the
plaintiffs was P61,210,000.00;

21. Plaintiffs spouses Tiu also made other payment of the

amount of P13,197,546.79 as of May 8, 2001;[82]

In paragraphs 4 and 5 of their Answer with Counterclaim,[83] Union Bank

specifically denied the allegation in paragraph 9 of the Complaint, but admitted
the allegations in paragraphs 17, 18, 19, 20 and 21 thereof. Paragraphs 18, 19 and
20 allege the two deeds of dacion. However, these instruments were already
incorporated in the computation of the outstanding debt (i.e., subtracted from the
confirmed debt of P155,364,800.00), as can be gleaned from the following
provisions in the Restructuring Agreement:

a.) The loan obligation to the BANK to be restructured herein after

deducting from the Indebtedness of the BORROWER the dacion
 price of the properties subject of the Deeds of Dacion and adding
to the Indebtedness all the taxes, registration fees and other
expenses advanced by the bank in registering the Deeds of
Dacion, and also adding to the Indebtedness the interest, and
other fees and charges incurred by the Indebtedness, amounts to
ONE HUNDRED FOUR MILLION SIX HUNDRED SIXTY-EIGHT
THOUSAND SEVEN HUNDRED FORTY-ONE PESOS
(PHP104,668,741.00) (the TOTAL RESTRUCTURED AMOUNT).[84]

As regards the allegations of cash payments in paragraphs 17 and 21 of the

Amended Complaint, the date of the alleged payment is critical as to whether they
were included in the Restructuring Agreement. The payment of P15,000,000.00
alleged in paragraph 17 of the Amended Complaint was supposedly made on
August 3 and 12, 1999. This payment was before the date of execution of the
Restructuring Agreement on December 21, 1999, and is therefore already
factored into the restructured obligation of the spouses.[85] On the other hand, the
payment of P13,197,546.79 alleged in paragraph 21 of the Amended Complaint
was dated May, 8, 2001. Said payment cannot be deemed included in the
computation of the spouses Tius debt in the Restructuring Agreement, which was
assented to more than a year earlier. This amount (P13,197,546.79) is even
absent[86] in the computation of Union Bank of the outstanding debt, in contrast
with the P15,000,000.00 payment which is included[87] therein. Union Bank did not
explain this discrepancy and merely relied on the spouses Tius failure to formally
offer supporting evidence. Since this payment of P13,197,546.79 on May 8, 2001
was admitted by Union Bank in their Answer with Counterclaim, there was no
need on the part of the spouses Tiu to present evidence on the
same. Nonetheless, if we subtract this figure from the total restructured amount
(P104,668,741.00) in the Restructuring Agreement, the result is that the spouses
Tiu still owe Union Bank P91,471,194.21.

(2) Allegation of third party ownership of the improvements on the

mortgaged lot

The Court of Appeals, taking into consideration its earlier ruling that the
loan was already fully paid, permanently enjoined Union Bank from foreclosing
the mortgage on the property covered by Transfer Certificate of Title No. 11951
(Lot No. 639) and from pursuing other foreclosure of mortgages over any other
properties of the spouses Tiu. The Court of Appeals ruled:
 The prayer, therefore, of the Tiu spouses to enjoin the
foreclosure of the real estate mortgage over their residential property
has merit. The loan has already been fully paid. It should also be noted
that the house constructed on the residential property of the Tiu
spouses is not registered in the name of the Tiu spouses, but in the
name of Jose Tiu (Records, pp. 127-132), the father of appellant and
petitioner Rodolfo Tiu, since 1981. It had been alleged by the Tiu
spouses that Jose Tiu died on December 18, 1983, and, that
consequently upon his death, Juanita T. Tiu, Rosalinda T. King, Rufino T.
Tiu, Rosalie T. Young and Rosenda T. Tiu became owners of the house
(Records, p. 116). This allegation has not been substantially denied by
Union Bank. All that the Union Bank presented to refute this allegation
are a Transfer Certificate of Title and a couple of Tax Declarations which
do not indicate that a residential house is titled in the name of the Tiu
spouses. In fact, in one of the Tax Declarations, the market value of the
improvements is worth only P3,630.00. Certainly, Union Bank should
have been aware that this Tax Declaration did not cover the residential
house. Union Bank should also not rely on warranties made by debtors
that they are the owners of the property. They should investigate such
representations. The courts have made consistent rulings that a bank,
being in the business of lending, is obligated to verify the true
ownership of the properties mortgaged to them. Consequently, this
Court permanently enjoins Union Bank from foreclosing the mortgage
of the residential property of the Tiu spouses which is covered by
Transfer Certificate of Title No. 11951 and from pursuing other
foreclosure of mortgages over any other properties of the Tiu
spouses. If a foreclosure sale has already been made over such
properties, this Court orders the cancellation of such foreclosure sale
and the Certificate of Sale thereof if any has been issued, and the return
of the title to the Tiu spouses.[88]

We disagree. Contrary to the ruling of the Court of Appeals, the burden to

prove the spouses Tius allegation that they do not own the improvements on Lot
No. 639, despite having such improvements included in the mortgage is on the
spouses Tiu themselves. The fundamental rule is that he who alleges must
prove.[89] The allegations of the spouses Tiu on this matter, which are found in
paragraphs 35 to 39[90] of their Amended Complaint, were specifically denied in
paragraph 9 of Union Banks Answer with Counterclaim.[91]

Upon careful examination of the evidence, we find that the spouses Tiu
failed to prove that the improvements on Lot No. 639 were owned by third
persons. In fact, the evidence presented by the spouses Tiu merely attempt to
prove that the improvements on Lot No. 639 were declared for taxes in the name
of respondent Rodolfo Tius father, Jose Tiu, who allegedly died on December 18,
1983. There was no effort to show how their co-plaintiffs in the original complaint,
namely Juanita T. Tiu, Rosalinda T. King, Rufino T. Tiu, Rosalie T. Young and
Rosenda T. Tiu, became co-owners of the house. The spouses Tiu did not present
evidence as to (1) who the heirs of Jose Tiu are; (2) if Juanita T. Tiu, Rosalinda T.
King, Rufino T. Tiu, Rosalie T. Young and Rosenda T. Tiu are indeed included as
heirs; and (3) why petitioner Rodolfo Tiu is not included as an heir despite being
the son of Jose Tiu. No birth certificate of the alleged heirs, will of the deceased,
or any other piece of evidence showing judicial or extrajudicial settlement of the
estate of Jose Tiu was presented.

In light of the foregoing, this Court therefore sets aside the ruling of the
Court of Appeals permanently enjoining Union Bank from foreclosing the
mortgage on Lot No. 639, including the improvements thereon.

Validity of Alleged Rental Payments on

the Properties Conveyed to the Bank via Dacion
en Pago

The Court of Appeals found the lease contracts over the properties
conveyed to Union Bank via dacion en pago to be void for being against public
policy. The appellate court held that since the General Banking Law of
2000[92] mandates banks to immediately dispose of real estate properties that are
not necessary for its own use in the conduct of its business, banks should not
enter into two-year contracts of lease over properties paid to them
through dacion.[93] The Court of Appeals thus ordered Union Bank to return the
rentals it collected. To determine the amount of rentals paid by the spouses Tiu to
Union Bank, the Court of Appeals simply multiplied the monthly rental stipulated
in the Restructuring Agreement by the stipulated period of the lease agreement:
 For the Labangon property, the Tiu spouses paid rentals in the
amount of P98,000.00 per month for two years, or a total amount
of P2,352,000.00. For the A.S. Fortuna property, the Tiu spouses paid
rentals in the amount of P150,000.00 per month for two years, or a
total amount of P3,600,000.00. The total amount in rentals paid by the
Tiu spouses to Union Bank is FIVE MILLION NINE HUNDRED FIFTY- TWO
THOUSAND PESOS (P5,952,000.00). This Court finds that the return of
this amount to the Tiu spouses is called for since it will better serve
public policy. These properties that were given by the Tiu spouses to
Union Bank as payment should not be used by the latter to extract
more money from the former. This situation is analogous to having a
debtor pay interest for a debt already paid. Instead of leasing the
properties, Union Bank should have instructed the Tiu spouses to
vacate the said properties so that it could dispose of them.[94]

The Court of Appeals committed a serious error in this regard. As pointed

out by petitioner Union Bank, the spouses Tiu did not present any proof of the
alleged rental payments. Not a single receipt was formally offered in
evidence. The mere stipulation in a contract of the monthly rent to be paid by the
lessee is certainly not evidence that the same has been paid. Since the spouses Tiu
failed to prove their payment to Union Bank of the amount of P5,952,000.00, we
are constrained to reverse the ruling of the Court of Appeals ordering its return.

Even assuming arguendo that the spouses Tiu had duly proven that it had
paid rent to Union Bank, we nevertheless disagree with the finding of the Court of
Appeals that it is against public policy for banks to enter into two-year contracts of
lease of properties ceded to them through dacion en pago. The provisions of law
cited by the Court of Appeals, namely Sections 51 and 52 of the General Banking
Law of 2000, merely provide:

SECTION 51. Ceiling on Investments in Certain Assets. Any bank may

acquire real estate as shall be necessary for its own use in the conduct of its
business: Provided, however, That the total investment in such real estate and
improvements thereof, including bank equipment, shall not exceed fifty percent
(50%) of combined capital accounts: Provided, further, That the equity
investment of a bank in another corporation engaged primarily in real estate shall
be considered as part of the bank's total investment in real estate, unless otherwise
provided by the Monetary Board.
 SECTION 52. Acquisition of Real Estate by Way of Satisfaction of Claims.
Notwithstanding the limitations of the preceding Section, a bank may acquire,
hold or convey real property under the following circumstances:

52.1. Such as shall be mortgaged to it in good faith by way of security for

debts;

52.2. Such as shall be conveyed to it in satisfaction of debts previously

contracted in the course of its dealings; or

52.3. Such as it shall purchase at sales under judgments, decrees,

mortgages, or trust deeds held by it and such as it shall purchase to secure debts
due it.

Any real property acquired or held under the circumstances enumerated in

the above paragraph shall be disposed of by the bank within a period of five (5)
years or as may be prescribed by the Monetary Board: Provided, however, That
the bank may, after said period, continue to hold the property for its own use,
subject to the limitations of the preceding Section.

Section 52.2 contemplates a dacion en pago. Thus, Section 52 undeniably

gives banks five years to dispose of properties conveyed to them in satisfaction of
debts previously contracted in the course of its dealings, unless another period is
prescribed by the Monetary Board. Furthermore, there appears to be no legal
impediment for a bank to lease the real properties it has received in satisfaction of
debts, within the five-year period that such bank is allowed to hold the acquired
realty.

We do not dispute the interpretation of the Court of Appeals that the

purpose of the law is to prevent the concentration of land holdings in a few hands,
and that banks should not be allowed to hold on to the properties contemplated
in Section 52 beyond the five-year period unless such bank has exerted its best
efforts to dispose of the property in good faith but failed. However, inquiries as to
whether the banks exerted best efforts to dispose of the property can only be
done if said banks fail to dispose of the same within the period provided. Such
inquiry is furthermore irrelevant to the issues in the case at bar.

Order to Return Certificates Allegedly in Union

Banks Possession
 In the Amended Complaint, the spouses Tiu alleged[95] that they delivered
several certificates and titles to Union Bank pursuant to a Memorandum of
Agreement. These certificates and titles were not subjected to any lien in favor of
Union Bank, but the latter allegedly continued to hold on to said properties.

The RTC failed to rule on this issue. The Court of Appeals, tackling this issue
for the first time, ruled in favor of the Tiu spouses and ordered the return of these
certificates and titles. The appellate court added that if Union Bank can no longer
return these certificates or titles, it should shoulder the cost for their
replacement.[96]

Union Bank, asserting that the Memorandum of Agreement did not, in fact,
push through, denies having received the subject certificates and titles. Union
Bank added that even assuming arguendo that it is in possession of said
documents, the Restructuring Agreement itself allows such possession.[97]

The evidence on hand lends credibility to the allegation of Union Bank that
the Memorandum of Agreement did not push through. The copy of the
Memorandum of Agreement attached by the spouses Tiu themselves to their
original complaint did not bear the signature of any representative from Union
Bank and was not notarized.[98]

We, however, agree with the finding of the Court of Appeals that despite
the failure of the Memorandum of Agreement to push through, the certificates
and titles mentioned therein do appear to be in the possession of Union Bank. As
held by the Court of Appeals:

Lastly, this Court will order, as it hereby orders, Union Bank to

return to the Tiu spouses all the certificates of shares of stocks and
titles to real properties of the Tiu spouses in its possession. Union Bank
cannot deny possession of these items since it had made judicial
admissions of such possession in their document entitled Reply to
Plaintiffs request for Admission (records, pp. 216-217). While in that
document, Union Bank only admitted to the possession of four real
estate titles, this Court is convinced that all the certificates and titles
mentioned in the unconsummated Memorandum of Agreement
(Records, pp. 211-213) were given by the Tiu spouses to Union Bank for
appraisal. This finding is further bolstered by the admission of the Union
 Bank that it kept the titles for safekeeping after it rejected the
Memorandum of Agreement. Since Union Bank rejected these
certificates and titles of property, it should return the said items to the
Tiu spouses. If Union Bank can no longer return these certificates and
titles or if it has misplaced them, it shall shoulder the cost for the
replacement and issuance of new certificates and new titles over the
said properties.[99]

As regards Union Banks argument that it has the right to retain said
documents pursuant to the Restructuring Agreement, it is referring to paragraph
11(b), which provides that:

11. Effects of Default When the BORROWER is in default, such

default shall have the following effects, alternative, concurrent and
cumulative with each other:

xxxx

(b) The BANK shall be entitled to all the remedies provided for
and further shall have the right to effect or apply against the partial
or full payment of any and all obligations of the BORROWER under
this Restructuring Agreement any and all moneys or other
properties of the BORROWER which, for any reason, are or may
hereafter come into the possession of the Bank or the Banks
agent. All such moneys or properties shall be deemed in the BANKs
possession as soon as put in transit to the BANK by mail or carrier.[100]

In the first place, notwithstanding the foregoing provision, there is no clear

intention on the part of the spouses Tiu to deliver the certificates over certain
shares of stock and real properties as security for their debt. From the terms of
the Memorandum of Agreement, these certificates were surrendered to Union
Bank in order that the said properties described therein be given their
corresponding loan values required for the restructuring of the spouses Tius
outstanding obligations. However, in the event the parties fail to agree on the
valuation of the subject properties, Union Bank agrees to release the same.[101] As
Union Bank itself vehemently alleges, the Memorandum of Agreement was not
consummated. Moreover, despite the fact that the Bank was aware, or in
possession, of these certificates,[102] at the time of execution of the Restructuring
Agreement, only the mortgage over the real property covered by TCT No. T-11951
was expressly mentioned as a security in the Restructuring Agreement. In fact, in
its Reply to Request for Admission,[103] Union Bank admitted that (1) the titles to
the real properties were submitted to it for appraisal but were subsequently
rejected, and (2) no real estate mortgages were executed over the said properties.
There being no agreement that these properties shall secure respondents
obligation, Union Bank has no right to retain said certificates.

Assuming arguendo that paragraph 11(b) of the Restructuring Agreement

indeed allows the retention of the certificates (submitted to the Bank ostensibly
for safekeeping and appraisal) as security for spouses Tius debt, Union Banks
position still cannot be upheld. Insofar as said provision permits Union Bank to
apply properties of the spouses Tiu in its possession to the full or partial payment
of the latters obligations, the same appears to impliedly allow Union Bank to
appropriate these properties for such purpose.However, said provision cannot be
validly applied to the subject certificates and titles without violating the
prohibition against pactum commissorium contained in Article 2088 of the Civil
Code, to the effect that [t]he creditor cannot appropriate the things given by way
of pledge or mortgage, or dispose of them[;] [a]ny stipulation to the contrary is
null and void. Applicable by analogy to the present case is our ruling in Nakpil v.
Intermediate Appellate Court,[104] wherein property held in trust was ceded to the
trustee upon failure of the beneficiary to answer for the amounts owed to the
former, to wit:

For, there was to be automatic appropriation of the property by Valdes

in the event of failure of petitioner to pay the value of the advances.
Thus, contrary to respondent's manifestations, all the elements of
a pactum commissorium were present: there was a creditor-debtor
relationship between the parties; the property was used as security for
the loan; and, there was automatic appropriation by respondent of
Pulong Maulap in case of default of petitioner.[105] (Emphases supplied.)

This Court therefore affirms the order of the Court of Appeals for Union
Bank to return to the spouses Tiu all the certificates of shares of stock and titles to
real properties that were submitted to it or, in lieu thereof, to pay the cost for the
replacement and issuance of new certificates and new titles over the said
properties.

Validity of the Award of Damages

The Court of Appeals awarded damages in favor of the spouses Tiu based
on its taking judicial notice of the alleged exploitation by many banks of the Asian
financial crisis, as well as the foreclosure of the mortgage of the home of the
spouses Tiu despite the alleged full payment by the latter. As regards the alleged
manipulation of the financial crisis, the Court of Appeals held:

As a final note, this Court observes the irregularity in the

circumstances [surrounding] dollar loans granted by banks right before
or during the Asian financial crisis. It is of common knowledge that
many banks, around that time, actively pursued and convinced debtors
to make dollar loans or to convert their peso loans to dollar loans
allegedly because of the lower interest rate of dollar loans. This is a
highly suspect behavior on the part of the banks because it is irrational
for the banks to voluntarily and actively proffer a conversion that would
give them substantially less income. In the guise of benevolence, many
banks were able to convince borrowers to make dollar loans or to
convert their peso loans to dollar loans. Soon thereafter, the Asian
financial crisis hit, and many borrowers were saddled with loans that
ballooned to twice or thrice the amount of their original loans. This
court takes judicial notice of these events or matters which are of public
knowledge. It is inconceivable that the banks were unaware of the
looming Asian financial crisis. Being in the forefront of the financial
world and having access to financial data that were not available to the
average borrower, the banks were in such a position that they had a
higher vantage point with respect to the financial landscape over their
average clients. The cavalier way with which banks exploited and
manipulated the situation is almost too palpable that they openly and
unabashedly struck heavy blows on the Philippine economy, industries
and businesses. The banks have a fiduciary duty to their clients and to
the Filipino people to be transparent in their dealings and to make sure
that the latters interest are not prejudiced by the formers
interest. Article 1339 of the New Civil Code provides that the failure to
disclose facts, when there is a duty to reveal them, as when the parties
 are bound by confidential relations, constitutes fraud. Undoubtedly, the
banks and their clients are bound by confidential relations. The almost
perfect timing of the banks in convincing their clients to shift to dollar
loans just when the Asian financial crisis struck indicates that the banks
not only failed to disclose facts to their clients of the looming crisis, but
also suggests of the insidious design to take advantage of these
undisclosed facts.[106]

We have already held that the foreclosure of the mortgage was warranted
under the circumstances. As regards the alleged exploitation by many banks of the
Asian financial crisis, this Court rules that the generalization made by the
appellate court is unfounded and cannot be the subject of judicial notice. It is
axiomatic that good faith is always presumed unless convincing evidence to the
contrary is adduced. It is incumbent upon the party alleging bad faith to
sufficiently prove such allegation. Absent enough proof thereof, the presumption
of good faith prevails.[107] The alleged insidious design of many banks to betray
their clients during the Asian financial crisis is certainly not of public
knowledge. The deletion of the award of moral and exemplary damages in favor
of the spouses Tiu is therefore in order.

WHEREFORE, the Petition is PARTIALLY GRANTED. The Joint Decision of the

Court of Appeals in CA-G.R. CV No. 00190 and CA-G.R. SP No. 00253 dated
February 21, 2006 is hereby AFFIRMED insofar as it ordered petitioner Union Bank
of the Philippines to return to the respondent spouses Rodolfo T. Tiu and Victoria
N. Tiu all the certificates of shares of stock and titles to real properties that were
submitted to it or, in lieu thereof, to pay the cost for the replacement and
issuance of new certificates and new titles over the said properties. The foregoing
Joint Decision is hereby SET ASIDE: (1) insofar as it permanently enjoined Union
Bank of the Philippines from foreclosing the mortgage of the residential property
of respondent spouses Rodolfo T. Tiu and Victoria N. Tiu which is covered by
Transfer Certificate of Title No. 11951; (2) insofar as it ordered Union Bank of the
Philippines to return to the respondent spouses Rodolfo T. Tiu and Victoria N. Tiu
the amount of P927,546.79 representing illegally collected rentals; and (3) insofar
as it ordered Union Bank of the Philippines to pay the respondent spouses Rodolfo
T. Tiu and Victoria N. Tiu P100,000.00 in moral damages, P100,000.00 in
exemplary damages, P50,000.00 in attorneys fees and cost, both in the lower
court and in this Court.
No further pronouncement as to costs.

SO ORDERED.