Nego Instruments Set 1 (#s1-70) Page 1 of 112
Lumbas. Dadat
EN BANC G.R. No. L-1405 July 31, 1948
BENJAMIN ABUBAKAR vs. THE AUDITOR GENERAL
We are asked to overrule the decision of the Auditor General refusing to authorize
the payment of Treasury warrant No. A-2867376 for P1,000 which was issued in
favor of Placido S. Urbanes on December 10, 1941, but is now in the hands of
herein petitioner Benjamin Abubakar.
For his refusal the respondent gave two reasons: first, because the money
available for the redemption of treasury warrants issued before January 2, 1942,
is appropriated by Republic Act No. 80 (Item F-IV-8) and this warrant does not
come within the purview of said appropriation; and second, because on of the
requirements of his office had not been complied with, namely, that it must be
shown that the holders of warrants covering payment or replenishment of cash
advances for official expenditures (as this warrant is) received them in payment of
definite government obligations.
Finding the first reason to be sufficiently valid we shall not discuss, nor pass upon
the second.
There is no doubt as to the authenticity and date of the treasury warrant. There is
no question that it was regularly indorsed by the payee and is now in the custody
of the herein petitioner who is a private individual. On the other hand, it is
admitted that the warrant was originally made payable to Placido S. Urbanes in
his capacity as disbursing officer of the Food Administration for "additional cash
advance for Food Production Campaign in La Union" (Annex A). It is thus
apparent that this is a treasury warrant issued in favor of a public officer or
employee and held in possession by a private individual. Such being the case,
the Auditor General can hardly be blamed for not authorizing its redemption out of
an appropriation specifically for "treasury warrants issued ... in favor of and held
in possession by private individuals." (Republic Act No. 80, Item F-IV-8.) This
warrant was not issued in favor of aprivate individual. It was issued in favor of
a government employee.
The distinction is not without a difference. Outstanding treasury warrants issued
prior to January 2, 1942, amount to more than four million pesos. The
appropriation herein mentioned is only for P1,750,000. Obviously Congress
wished to provide for redemption of one class of warrants — those issued to
private individuals — as distinguished from those issued in favor of government
officials. Basis for the discrimination is not lacking. Probably the Government is
not so sure that those warrants to officials have all been properly used by the
latter during the Japanese occupation or maybe it wants to conduct further
inquiries as to the equities of the present holders thereof.
The petitioner argues that he is a holder in good faith and for value of a
negotiable instrument an dis entitled to the rights and privileges of a holder in due
course, free from defenses. But this treasury warrant is not within the scope of the
negotiable instruments law. For one thing, the document bearing on its face the
words "payable from the appropriation for food administration," is actually an
order for payment out of "a particular fund," and is not unconditional, and does
not fulfill one of the essential requirements of a negotiable instrument. (Section 3
last sentenced and section 1[b] of the Negotiable Instruments Law.) In the United
States, government warrants for the payment of money are not negotiable
instruments nor commercial proper1
Anyway the question here is not whether the Government should eventually pay
this warrant, or is ultimately responsible for it, but whether the Auditor General
erred in refusing to permit payment out of the particular appropriation in Item F-
IV-8 of Republic Act No. 80. We think that he did not. Petition dismissed, with
costs.
[ G.R. No. 185945, December 05, 2012 ]
FIDELIZA J. AGLIBOT VS. INGERSOL L. SANTIA
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[1] dated
March 18, 2008 of the Court of Appeals (CA) in CA-G.R. SP No. 100021, which
reversed the Decision[2] dated April 3, 2007 of the Regional Trial Court (RTC) of
Dagupan City, Branch 40, in Criminal Case Nos. 2006-0559-D to 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 areREVERSED AND SET ASIDE and a new one is entered
ordering private respondent Fideliza J. Aglibot to pay petitioner the total amount
of [P]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 petitioner's motion for
reconsideration.
Antecedent Facts
Private respondent-complainant Engr. Ingersol L. Santia (Santia) loaned the
amount of P2,500,000.00 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 Piñas, 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 [P]50,000.00, Philippine Currency, payable
to and in payment of an obligation with the complainant, although the said
accused knew full[y] 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 [t]hat
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 [P]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 [P]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, attorney's fees of[P]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 courta
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]
Santia's motion for reconsideration was denied in the RTC's Order dated June 12,
2007.[8] On petition for review to the CA docketed 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 RTC's 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 Aglibot's acquittal
by the MTCC in Criminal Case Nos. 47664 to 47674 was upon a reasonable
doubt[10] on whether the prosecution was able to satisfactorily establish that she
did receive a notice of dishonor, a requisite to hold her criminally liable under B.P.
22, her acquittal did not operate to bar Santia's 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 accused's 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."[11] (Citation omitted)
The CA therefore ordered Aglibot to personally pay Santia P3,000,000.00 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 P3,000,000.00 due is fully paid, plus attorney's fees of P30,000.00
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."[12] The 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.[13] Thus, the creditor
may hold the guarantor liable only after judgment has been obtained against the
principal debtor and the latter is unable to pay, "for obviously the 'exhaustion of
the principal's property' the benefit of which the guarantor claims cannot even
begin to take place before judgment has been obtained."[14] This rule is contained
in Article 2062[15] of the Civil Code, which provides that the action brought by the
creditor must be filed against the principal debtor alone, except in some instances
mentioned in Article 2059[16] when the action may be brought against both the
Nego Instruments Set 1 (#s1-70) Page 2 of 112
Lumbas. Dadat
guarantor and the principal debtor. Thus did the CA reject the RTC's ruling that Aglibot was a mere guarantor of the
indebtedness of PLCC, and as such could not "be compelled to pay [Santia],
The Court must, however, reject Aglibot's claim as a mere guarantor of the unless the latter has exhausted all the property of PLCC, and has resorted to all
indebtedness of PLCC to Santia for want of proof, in view of Article 1403(2) of the the legal remedies against PLCC x x x."[22]
Civil Code, embodying the Statute of Frauds, which provides:
Aglibot is an accommodation party
and therefore liable to Santia
Art. 1403. The following contracts are unenforceable, unless they are ratified:
Section 185 of the Negotiable Instruments Law defines a check as "a bill of
x x x x 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
(2) Those that do not comply with the Statute of Frauds as set forth in this one person to another, signed by the person giving it, requiring the person to
number. In the following cases an agreement hereafter made shall be whom it is addressed to pay on demand or at a fixed or determinable future time
unenforceable by action, unless the same, or some note or memorandum thereof, a sum certain in money to order or to bearer."
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 The appellate court ruled that by issuing her own post-dated checks, Aglibot
secondary evidence of its contents: thereby bound herself personally and solidarily to pay Santia, and dismissed her
claim that she issued her said checks in her official capacity as PLCC's manager
merely to guarantee the investment of Santia. It noted that she could have issued
An agreement that by its terms is not to be performed within a year from the PLCC's checks, but instead she chose to issue her own checks, drawn against
a)
making thereof; her personal account with Metrobank. It concluded that Aglibot intended to
b) A special promise to answer for the debt, default, or miscarriage of another; personally assume the repayment of the loan, pointing out that in her Counter-
An agreement made in consideration of marriage, other than a mutual Affidavit, she even admitted that she was personally indebted to Santia, and only
c)
promise to marry; raised payment as her defense, a clear admission of her liability for the said loan.
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 The appellate court refused to give credence to Aglibot's claim that she had an
such goods and chattels, or the evidences, or some of them, or such things in understanding with Santia that the checks would not be presented to the bank for
action, or pay at the time some part of the purchase money; but when a sale payment, but were to be returned to her once she had made cash payments for
d)
is made by auction and entry is made by the auctioneer in his sales book, at their face values on maturity. It noted that Aglibot failed to present any proof that
the time of the sale, of the amount and kind of property sold, terms of sale, she had indeed paid cash on the above checks as she claimed. This is precisely
price, names of purchasers and person on whose account the sale is made, it why Santia decided to deposit the checks in order to obtain payment of his loan.
is a sufficient memorandum;
An agreement for the leasing of a longer period than one year, or for the sale The facts below present a clear situation where Aglibot, as the manager of PLCC,
e)
of real property or of an interest therein; agreed to accommodate its loan to Santia by issuing her own post-dated checks
f) A representation to the credit of a third person. (Italics ours) in payment thereof. She is what the Negotiable Instruments Law calls an
accommodation party.[23] Concerning the liability of an accommodation party,
Under the above provision, concerning a guaranty agreement, which is a promise Section 29 of the said law provides:
to answer for the debt or default of another,[17] the law clearly requires that it, or
some note or memorandum thereof, be in writing. Otherwise, it would be
unenforceable unless ratified,[18] although under Article 1358[19] of the Civil Code, Sec. 29. Liability of an accommodation party. An accommodation party is one
a contract of guaranty does not have to appear in a public document. [20] who has signed the instrument as maker, drawer, acceptor, or indorser, without
Contracts are generally obligatory in whatever form they may have been entered receiving value therefor, and for the purpose of lending his name to some other
into, provided all the essential requisites for their validity are present, and the person. Such a person is liable on the instrument to a holder for value
Statute of Frauds simply provides the method by which the contracts enumerated notwithstanding such holder at the time of taking the instrument knew him to be
in Article 1403(2) may be proved, but it does not declare them invalid just only an accommodation party.
because they are not reduced to writing. Thus, the form required under the
Statute is for convenience or evidentiary purposes only.[21] As elaborated in The Phil. Bank of Commerce v. Aruego:[24]
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 An accommodation party is one who has signed the instrument as maker, drawer,
stipulated therein. This is the obvious rationale why a contract of guarantee is indorser, without receiving value therefor and for the purpose of lending his name
unenforceable unless made in writing or evidenced by some writing. For as to some other person. Such person is liable on the instrument to a holder for
pointed out by Santia, Aglibot has not shown any proof, such as a contract, a value, notwithstanding such holder, at the time of the taking of the instrument
secretary's certificate or a board resolution, nor even a note or memorandum knew him to be only an accommodation party. In lending his name to the
thereof, whereby it was agreed that she would issue her personal checks in accommodated party, the accommodation party is in effect a surety for the latter.
behalf of the company to guarantee the payment of its debt to Santia. Certainly, He lends his name to enable the accommodated party to obtain credit or to raise
there is nothing shown in the Promissory Note signed by Aglibot herself remotely money. He receives no part of the consideration for the instrument but assumes
containing an agreement between her and PLCC resembling her guaranteeing its liability to the other parties thereto because he wants to accommodate another. x
debt to Santia. And neither is there a showing that PLCC thereafter ratified her x x.[25] (Citation omitted)
act of "guaranteeing" its indebtedness by issuing her own checks to Santia.
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.[26] It is not a valid defense that the 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]
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.[28] It would have been otherwise had it
been shown that Aglibot was a 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
onCertiorari is DENIED and the Decision dated March 18, 2008 of the Court of
Appeals in CA-G.R. SP No. 100021 is hereby AFFIRMED.SO ORDERED.
[G.R. No. 117660. December 18, 2000]
AGRO CONGLOMERATES, INC. and MARIO SORIANO,petitioners, vs. THE
HON. COURT OF APPEALS and REGENT SAVINGS and LOAN
BANK, INC., respondents.
DECISION
QUISUMBING, J.:
This is a petition for review challenging the decision[1] dated October 17,
1994 of the Court of Appeals in CA-G.R. No. 32933, which affirmed in toto the
judgment of the Manila Regional Trial Court, Branch 27, in consolidated Cases
Nos. 86-37374, 86-37388, 86-37543.
This petition springs from three complaints for sums of money filed by
respondent bank against herein petitioners. In the decision of the Court of
Appeals, petitioners were ordered to pay respondent bank, as follows:
Wherefore, judgment is hereby rendered in favor of plaintiff and against
defendants, as follows:
1) In Civil Case No. 86-37374, defendants [petitioners, herein] are
ordered jointly and severally, to pay to plaintiff the amount of
P78,212.29, together with interest and service charge
thereon, at the rates of 14% and 3% per annum, respectively,
computed from November 10, 1982, until fully paid, plus
stipulated penalty on unpaid principal at the rate of 6% per
annum, computed from November 10, 1982, plus 15% as
liquidated damage plus 10% of the total amount due, as
attorneys fees, plus costs;
2) In Civil Case No. 86-37388, defendant is ordered to pay plaintiff
the amount of P632,911.39, together with interest and service
charge thereon at the rate of 14% and 3% per annum,
respectively, computed from January 15, 1983, until fully paid,
plus stipulated penalty on unpaid principal at the rate of
6% per annum, computed from January 15, 1983, plus
liquidated damages equivalent to 15% of the total amount
due, plus attorneys fees equivalent to 10% of the total amount
due, plus costs; and
3) In Civil Case No. 86-37543, defendant is ordered to pay plaintiff,
on the first cause of action, the amount of P510,000.00,
together with interest and service charge thereon, at the rates
of 14% and 2% per annum, respectively, computed from
March 13, 1983, until fully paid, plus a penalty of 6% per
annum, based on the outstanding principal of the loan,
computed from March 13, 1983, until fully paid; and on the
second cause of action, the amount of P494,936.71, together
with interest and service charge thereon at the rates of 14%
and 2%, per annum, respectively, computed from March 30,
1983, until fully paid, plus a penalty charge of 6% per
annum, based on the unpaid principal, computed from March
30, 1983, until fully paid, plus (on both causes of action) an
amount equal to 15% of the total amounts due, as liquidated
damages, plus attorneys fees equal to 10% of the total
amounts due, plus costs.[2]
Based on the records, the following are the factual antecedents.
On July 17, 1982, petitioner Agro Conglomerates, Inc. as vendor, sold two
parcels of land to Wonderland Food Industries, Inc. In their Memorandum of
Agreement,[3] the parties covenanted that the purchase price of Five Million
(P5,000,000.00) Pesos would be settled by the vendee, under the following terms
and conditions: (1) One Million (P1,000,000.00) Pesos shall be paid in cash upon
the signing of the agreement; (2) Two Million (P2,000,000.00) Pesos worth of
common shares of stock of the Wonderland Food Industries, Inc.; and (3) The
balance of P2,000,000.00 shall be paid in four equal installments, the first
installment falling due, 180 days after the signing of the agreement and every six
months thereafter, with an interest rate of 18% per annum, to be advanced by the
vendee upon the signing of the agreement.
On July 19, 1982, the vendor, the vendee, and the respondent bank
Regent Savings & Loan Bank (formerly Summa Savings & Loan Association),
executed an Addendum[4]to the previous Memorandum of Agreement. The new
arrangement pertained to the revision of settlement of the initial payments of
P1,000,000.00 and prepaid interest of P360,000.00 (18% of P2,000,000.00) as
follows:
Whereas, the parties have agreed to qualify the stipulated terms for the payment
of the said ONE MILLION THREE HUNDRED SIXTY THOUSAND
(P1,360,000.00) PESOS.
WHEREFORE, in consideration of the mutual covenant and agreement of the
parties, they do further covenant and agree as follows:
1. That the VENDEE instead of paying the amount of ONE
MILLION THREE HUNDRED SIXTY THOUSAND
(P1,360,000.00) PESOS in cash, hereby authorizes the
VENDOR to obtain a loan from Summa Savings and Loan
Association with office address at Valenzuela, Metro Manila,
being represented herein by its President, Mr. Jaime Cario
and referred to hereafter as Financier; in the amount of ONE
MILLION THREE HUNDRED SIXTY
THOUSAND (P1,360,000.00)PESOS, plus interest thereon at
such rate as the VENDEE and the Financier may agree,
which amount shall cover the ONE MILLION (P1,000,000.00)
PESOS cashwhich was agreed to be paid upon signing of the
Memorandum of Agreement, plus 18% interest on the
balance of two million pesos stipulated upon in Item No. 1(c)
of the said agreement; provided however, that said loan shall
be made for and in the name of the VENDOR.
2. The VENDEE also agrees that the full amount of ONE MILLION
THREE HUNDRED SIXTY THOUSAND (P1,360,000.00)
PESOS be paid directly to the VENDOR; however, the
VENDEE hereby undertakes to pay the full amount of the said
loan to the Financier on such terms and conditions agreed
upon by the Financier and the VENDOR, it being understood
Nego Instruments Set 1 (#s1-70) Page 3 of 112
Lumbas. Dadat
that while the loan will be secured from and in the name of
the VENDOR, the VENDEE will be the one liable to pay the
entire proceeds thereof including interest and other charges.[5]
This addendum was not notarized.
Consequently, petitioner Mario Soriano signed as maker several
promissory notes,[6] payable to the respondent bank. Thereafter, the bank
released the proceeds of the loan to petitioners. However, petitioners failed to
meet their obligations as they fell due. During that time, the bank was
experiencing financial turmoil and was under the supervision of the Central
Bank. Central Bank examiner and liquidator Cordula de Jesus, endorsed the
subject promissory notes to the banks counsel for collection. The bank gave
petitioners opportunity to settle their account by extending payment due
dates.Mario Soriano manifested his intention to re-structure the loan, yet did not
show up nor submit his formal written request.
Respondent bank filed three separate complaints before the Regional
Trial Court of Manila for Collection of Sums of money. The corresponding case
histories are illustrated in the table below:
Date of Loan Amount Payment Due Payment
Date Extension Dates
Civil Case 86-
37374 P78,212.29 Nov. 10, 1982 Feb. 8, 1983
August 12, 1982 May 9, 1983
Aug. 7, 1983
Civil Case 86-
37388 P632,911.39 Jan. 15, 1983 May 16, 1983
July 19, 1982 Aug. 14, 1983
Civil Case 86-
37543 P510,000.00 March 13, 1983 June 11, 1983
September 14, Sept. 9, 1983
1982
P494,936.71 March 30, 1983 June 28, 1983
Sept. 26, 1983
October 1, 1982
In their answer, petitioners interposed the defense of novation and insisted there
was a valid substitution of debtor. They alleged that the addendum specifically
states that although the promissory notes were in their names, Wonderland shall
be responsible for the payment thereof.
The trial court held that petitioners are liable, to wit:
The evidences, however, disclose that Wonderland did not comply with its
obligation under said Addendum (Exh. S) as the agreement to turn over the
farmland to it, did not materialize (57 tsn, May 29, 1990), and there was, actually
no sale of the land (58 tsn, ibid). Hence, Wonderland is not answerable. And
since the loans obtained under the four promissory notes (Exhs. A, C, G, and E)
have not been paid, despite opportunities given by plaintiff to defendants to make
payments, it stands to reason that defendants are liable to pay their obligations
thereunder to plaintiff. In fact, defendants failed to file a third-party complaint
against Wonderland, which shows the weakness of its stand that Wonderland is
answerable to make said payments.[7]
Petitioners appealed to the Court of Appeals. The trial courts decision was
affirmed by the appellate court.
Hence, this recourse, wherein petitioners raise the sole issue of:
WHETHER THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE
ADDENDUM, SIGNED BY THE PETITIONERS, RESPONDENT BANK AND
WONDERLAND INC., CONSTITUTES A NOVATION OF THE CONTRACT BY
SUBSTITUTION OF DEBTOR, WHICH EXEMPTS THE PETITIONERS FROM
ANY LIABILITY OVER THE PROMISSORY NOTES.
Revealed by the facts on record, the conflict among the parties started
from a contract of sale of a farmland between petitioners and Wonderland Food
Industries, Inc. As found by the trial court, no such sale materialized.

A contract of sale is a reciprocal transaction. The obligation or promise of
each party is the cause or consideration for the obligation or promise by the
other. The vendee is obliged to pay the price, while the vendor must deliver actual
possession of the land. In the instant case the original plan was that the initial
payments would be paid in cash. Subsequently, the parties (with the participation
of respondent bank) executed an addendum providing instead, that the
petitioners would secure a loan in the name of Agro Conglomerates Inc. for the
total amount of the initial payments, while the settlement of said loan would be
assumed by Wonderland. Thereafter, petitioner Soriano signed several
promissory notes and received the proceeds in behalf of petitioner-company.
By this time, we note a subsidiary contract of suretyship had taken effect
since petitioners signed the promissory notes as maker and accommodation party
for the benefit of Wonderland. Petitioners became liable as accommodation
party. An accommodation party is a person who has signed the instrument as
maker, acceptor, or indorser, without receiving value therefor, and for the purpose
of lending his name to some other person and is liable on the instrument to a
holder for value, notwithstanding such holder at the time of taking the instrument
knew (the signatory) to be an accommodation party.[8] He has the right, after
paying the holder, to obtain reimbursement from the party accommodated, since
the relation between them has in effect become one of principal and surety, the
accommodation party being the surety.[9] Suretyship is defined as the relation
which exists where one person has undertaken an obligation and another person
is also under the obligation or other duty to the obligee, who is entitled to but one
performance, and as between the two who are bound, one rather than the other
should perform.[10]The suretys liability to the creditor or promisee of the principal
is said to be direct, primary and absolute; in other words, he is directly and
equally bound with the principal.[11] And the creditor may proceed against any one
of the solidary debtors.[12]
We do not give credence to petitioners assertion that, as provided by the
addendum, their obligation to pay the promissory notes was novated by
substitution of a new debtor, Wonderland. Contrary to petitioners contention, the
attendant facts herein do not make a case of novation.
Novation is the extinguishment of an obligation by the substitution or
change of the obligation by a subsequent one which extinguishes or modifies the
first, either by changing the object or principal conditions, or by substituting
another in place of the debtor, or by subrogating a third person in the rights of the
creditor.[13] In order that a novation can take place, the concurrence of the
following requisites[14] are indispensable:
1) There must be a previous valid obligation;
2) There must be an agreement of the parties concerned to a new
contract;
3) There must be the extinguishment of the old contract; and
4) There must be the validity of the new contract.
In the instant case, the first requisite for a valid novation is lacking. There
was no novation by substitution of debtor because there was no prior obligation
which was substituted by a new contract. It will be noted that the promissory
notes, which bound the petitioners to pay, were executed after the addendum.The
addendum modified the contract of sale, not the stipulations in the promissory
notes which pertain to the surety contract. At this instance, Wonderland
apparently assured the payment of future debts to be incurred by the
petitioners. Consequently, only a contract of surety arose. It was wrong for
petitioners to presume a novation had taken place. The well-settled rule is that
novation is never presumed,[15] it must be clearly and unequivocally shown.[16]
As it turned out, the contract of surety between Wonderland and the
petitioners was extinguished by the rescission of the contract of sale of the
farmland. With the rescission, there was confusion or merger in the persons of
the principal obligor and the surety, namely the petitioners herein. The addendum
which was dependent thereon likewise lost its efficacy.
It is true that the basic and fundamental rule in the interpretation of
contract is that, if the terms thereof are clear and leave no doubt as to the
intention of the contracting parties, the literal meaning shall control. However, in
order to judge the intention of the parties, their contemporaneous and subsequent
acts should be considered.[17]
The contract of sale between Wonderland and petitioners did not
materialize. But it was admitted that petitioners received the proceeds of the
promissory notes obtained from respondent bank.
Sec. 22 of the Civil Code provides:
Every person who through an act of performance by another, or any other means,
acquires or comes into possession of something at the expense of the latter
without just or legal ground, shall return the same to him.
Petitioners had no legal or just ground to retain the proceeds of the loan at
the expense of private respondent. Neither could petitioners excuse themselves
and hold Wonderland still liable to pay the loan upon the rescission of their sales
contract. If petitioners sustained damages as a result of the rescission, they
should have impleaded Wonderland and asked damages. The non-inclusion of a
necessary party does not prevent the court from proceeding in the action, and the
judgment rendered therein shall be without prejudice to the rights of such
necessary party.[18] But respondent appellate court did not err in holding that
petitioners are duty-bound under the law to pay the claims of respondent bank
from whom they had obtained the loan proceeds.
WHEREFORE, the petition is DENIED for lack of merit. The assailed
decision of the Court of Appeals dated October 17, 1994 is AFFIRMED. Costs
against petitioners.SO ORDERED.
EN BANCG.R. No. L-2516 September 25, 1950
ANG TEK LIAN, petitioner, vs.THE COURT OF APPEALS, respondent.
BENGZON, J.:
For having issued a rubber check, Ang Tek Lian was convicted of estafa in the
Court of First Instance of Manila. The Court of Appeals affirmed the verdict.
It appears that, knowing he had no funds therefor, Ang Tek Lian drew on
Saturday, November 16, 1946, the check Exhibits A upon the China Banking
Corporation for the sum of P4,000, payable to the order of "cash". He delivered it
to Lee Hua Hong in exchange for money which the latter handed in act. On
November 18, 1946, the next business day, the check was presented by Lee Hua
Hong to the drawee bank for payment, but it was dishonored for insufficiency of
funds, the balance of the deposit of Ang Tek Lian on both dates being P335 only.
The Court of Appeals believed the version of Lee Huan Hong who testified that
"on November 16, 1946, appellant went to his (complainant's) office, at 1217
Herran, Paco, Manila, and asked him to exchange Exhibit A — which he
(appellant) then brought with him — with cash alleging that he needed badly the
sum of P4,000 represented by the check, but could not withdraw it from the bank,
it being then already closed; that in view of this request and relying upon
appellant's assurance that he had sufficient funds in the blank to meet Exhibit A,
and because they used to borrow money from each other, even before the war,
and appellant owns a hotel and restaurant known as the North Bay Hotel, said
complainant delivered to him, on the same date, the sum of P4,000 in cash; that
despite repeated efforts to notify him that the check had been dishonored by the
bank, appellant could not be located any-where, until he was summoned in the
City Fiscal's Office in view of the complaint for estafa filed in connection therewith;
and that appellant has not paid as yet the amount of the check, or any part
thereof."
Inasmuch as the findings of fact of the Court of Appeals are final, the only
question of law for decision is whether under the facts found, estafa had been
accomplished.
Article 315, paragraph (d), subsection 2 of the Revised Penal Code, punishes
swindling committed "By post dating a check, or issuing such check in payment of
an obligation the offender knowing that at the time he had no funds in the bank, or
the funds deposited by him in the bank were not sufficient to cover the amount of
the check, and without informing the payee of such circumstances".
We believe that under this provision of law Ang Tek Lian was properly held liable.
In this connection, it must be stated that, as explained in People vs.
Nego Instruments Set 1 (#s1-70) Page 4 of 112
Lumbas. Dadat
Fernandez (59 Phil., 615), estafa is committed by issuing either a postdated
check or an ordinary check to accomplish the deceit.
It is argued, however, that as the check had been made payable to "cash" and
had not been endorsed by Ang Tek Lian, the defendant is not guilty of the offense
charged. Based on the proposition that "by uniform practice of all banks in the
Philippines a check so drawn is invariably dishonored," the following line of
reasoning is advanced in support of the argument:
. . . When, therefore, he (the offended party ) accepted the check
(Exhibit A) from the appellant, he did so with full knowledge that it
would be dishonored upon presentment. In that sense, the appellant
could not be said to have acted fraudulently because the
complainant, in so accepting the check as it was drawn, must be
considered, by every rational consideration, to have done so fully
aware of the risk he was running thereby." (Brief for the appellant, p.
11.)
We are not aware of the uniformity of such practice. Instances have undoubtedly
occurred wherein the Bank required the indorsement of the drawer before
honoring a check payable to "cash." But cases there are too, where no such
requirement had been made . It depends upon the circumstances of each
transaction.
Under the Negotiable Instruments Law (sec. 9 [d], a check drawn payable to the
order of "cash" is a check payable to bearer, and the bank may pay it to the
person presenting it for payment without the drawer's indorsement.
A check payable to the order of cash is a bearer instrument.
Bacal vs. National City Bank of New York (1933), 146 Misc., 732;
262 N. Y. S., 839; Cleary vs. De Beck Plate Glass Co. (1907), 54
Misc., 537; 104 N. Y. S., 831; Massachusetts Bonding & Insurance
Co. vs. Pittsburgh Pipe & Supply Co. (Tex. Civ. App., 1939), 135 S.
W. (2d), 818. See also H. Cook & Son vs. Moody (1916), 17 Ga.
App., 465; 87 S. E., 713.
Where a check is made payable to the order of "cash", the word cash
"does not purport to be the name of any person", and hence the
instrument is payable to bearer. The drawee bank need not obtain
any indorsement of the check, but may pay it to the person
presenting it without any indorsement. . . . (Zollmann, Banks and
Banking, Permanent Edition, Vol. 6, p. 494.)
Of course, if the bank is not sure of the bearer's identity or financial solvency, it
has the right to demand identification and /or assurance against possible
complications, — for instance, (a) forgery of drawer's signature, (b) loss of the
check by the rightful owner, (c) raising of the amount payable, etc. The bank may
therefore require, for its protection, that the indorsement of the drawer — or of
some other person known to it — be obtained. But where the Bank is satisfied of
the identity and /or the economic standing of the bearer who tenders the check for
collection, it will pay the instrument without further question; and it would incur no
liability to the drawer in thus acting.
A check payable to bearer is authority for payment to holder. Where
a check is in the ordinary form, and is payable to bearer, so that no
indorsement is required, a bank, to which it is presented for payment,
need not have the holder identified, and is not negligent in falling to
do so. . . . (Michie on Banks and Banking, Permanent Edition, Vol. 5,
p. 343.)
. . . Consequently, a drawee bank to which a bearer check is
presented for payment need not necessarily have the holder
identified and ordinarily may not be charged with negligence in failing
to do so. See Opinions 6C:2 and 6C:3 If the bank has no reasonable
cause for suspecting any irregularity, it will be protected in paying a
bearer check, "no matter what facts unknown to it may have occurred
prior to the presentment." 1 Morse, Banks and Banking, sec. 393.
Although a bank is entitled to pay the amount of a bearer check
without further inquiry, it is entirely reasonable for the bank to insist

that holder give satisfactory proof of his identity. . . . (Paton's Digest,
Vol. I, p. 1089.)
Anyway, it is significant, and conclusive, that the form of the check Exhibit A was
totally unconnected with its dishonor. The Court of Appeals declared that it was
returned unsatisfied because the drawer had insufficient funds— not because the
drawer's indorsement was lacking.
Wherefore, there being no question as to the correctness of the penalty imposed
on the appellant, the writ ofcertiorari is denied and the decision of the Court of
Appeals is hereby affirmed, with costs..
SECOND DIVISION G.R. No. 107382/G.R. No. 107612 January 31,
1996
ASSOCIATED BANK, petitioner, vs. HON. COURT OF APPEALS, PROVINCE
OF TARLAC and PHILIPPINE NATIONAL BANK, respondents.
xxxxxxxxxxxxxxxxxxxxx
G.R. No. 107612 January 31, 1996
PHILIPPINE NATIONAL BANK, petitioner, vs.HONORABLE COURT OF
APPEALS, PROVINCE OF TARLAC, and ASSOCIATED BANK, respondents.
DECISION
ROMERO, J.:
Where thirty checks bearing forged endorsements are paid, who bears the loss,
the drawer, the drawee bank or the collecting bank?
This is the main issue in these consolidated petitions for review assailing the
decision of the Court of Appeals in "Province of Tarlac v. Philippine National Bank
v. Associated Bank v. Fausto Pangilinan, et. al." (CA-G.R. No. CV No. 17962). 1
The facts of the case are as follows:
The Province of Tarlac maintains a current account with the Philippine National
Bank (PNB) Tarlac Branch where the provincial funds are deposited. Checks
issued by the Province are signed by the Provincial Treasurer and countersigned
by the Provincial Auditor or the Secretary of the Sangguniang Bayan.
A portion of the funds of the province is allocated to the Concepcion Emergency
Hospital. 2 The allotment checks for said government hospital are drawn to the
order of "Concepcion Emergency Hospital, Concepcion, Tarlac" or "The Chief,
Concepcion Emergency Hospital, Concepcion, Tarlac." The checks are released
by the Office of the Provincial Treasurer and received for the hospital by its
administrative officer and cashier.
In January 1981, the books of account of the Provincial Treasurer were post-
audited by the Provincial Auditor. It was then discovered that the hospital did not
receive several allotment checks drawn by the Province.
On February 19, 1981, the Provincial Treasurer requested the manager of the
PNB to return all of its cleared checks which were issued from 1977 to 1980 in
order to verify the regularity of their encashment. After the checks were
examined, the Provincial Treasurer learned that 30 checks amounting to
P203,300.00 were encashed by one Fausto Pangilinan, with the Associated Bank
acting as collecting bank.
It turned out that Fausto Pangilinan, who was the administrative officer and
cashier of payee hospital until his retirement on February 28, 1978, collected the
questioned checks from the office of the Provincial Treasurer. He claimed to be
assisting or helping the hospital follow up the release of the checks and had
official receipts. 3Pangilinan sought to encash the first check 4 with Associated
Bank. However, the manager of Associated Bank refused and suggested that
Pangilinan deposit the check in his personal savings account with the same bank.
Pangilinan was able to withdraw the money when the check was cleared and paid
by the drawee bank, PNB.
After forging the signature of Dr. Adena Canlas who was chief of the payee
hospital, Pangilinan followed the same procedure for the second check, in the
amount of P5,000.00 and dated April 20, 1978, 5 as well as for twenty-eight other
checks of various amounts and on various dates. The last check negotiated by
Pangilinan was for f8,000.00 and dated February 10, 1981. 6 All the checks bore
the stamp of Associated Bank which reads "All prior endorsements guaranteed
ASSOCIATED BANK."
Jesus David, the manager of Associated Bank testified that Pangilinan made it
appear that the checks were paid to him for certain projects with the hospital. 7 He
did not find as irregular the fact that the checks were not payable to Pangilinan
but to the Concepcion Emergency Hospital. While he admitted that his wife and
Pangilinan's wife are first cousins, the manager denied having given Pangilinan
preferential treatment on this account. 8
On February 26, 1981, the Provincial Treasurer wrote the manager of the PNB
seeking the restoration of the various amounts debited from the current account
of the Province. 9
In turn, the PNB manager demanded reimbursement from the Associated Bank
on May 15, 1981. 10
As both banks resisted payment, the Province of Tarlac brought suit against PNB
which, in turn, impleaded Associated Bank as third-party defendant. The latter
then filed a fourth-party complaint against Adena Canlas and Fausto
Pangilinan. 11
After trial on the merits, the lower court rendered its decision on March 21, 1988,
disposing as follows:
WHEREFORE, in view of the foregoing, judgment is hereby
rendered:
1. On the basic complaint, in favor of plaintiff Province of Tarlac and
against defendant Philippine National Bank (PNB), ordering the latter
to pay to the former, the sum of Two Hundred Three Thousand Three
Hundred (P203,300.00) Pesos with legal interest thereon from March
20, 1981 until fully paid;
2. On the third-party complaint, in favor of defendant/third-party
plaintiff Philippine National Bank (PNB) and against third-party
defendant/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 court's decision in toto on September 30, 1992.
Hence these consolidated petitions which seek a reversal of respondent appellate
court's decision.
PNB assigned two errors. First, the bank contends that respondent court erred in
exempting the Province of Tarlac from liability when, in fact, the latter was
negligent because it delivered and released the questioned checks to Fausto
Pangilinan who was then already retired as the hospital's cashier and
administrative officer. PNB also maintains its innocence and alleges that as
between two innocent persons, the one whose act was the cause of the loss, in
this case the Province of Tarlac, bears the loss.
Next, PNB asserts that it was error for the court to order it to pay the province and
then seek reimbursement from Associated Bank. According to petitioner bank,
respondent appellate Court should have directed Associated Bank to pay the
adjudged liability directly to the Province of Tarlac to avoid circuity. 14
Associated Bank, on the other hand, argues that the order of liability should be
totally reversed, with the drawee bank (PNB) solely and ultimately bearing the
loss.
Respondent court allegedly erred in applying Section 23 of the Philippine Clearing
House Rules instead of Central Bank Circular No. 580, which, being an
administrative regulation issued pursuant to law, has the force and effect of
law. 15 The PCHC Rules are merely contractual stipulations among and between
member-banks. As such, they cannot prevail over the aforesaid CB Circular.
Nego Instruments Set 1 (#s1-70) Page 5 of 112
Lumbas. Dadat
It likewise contends that PNB, the drawee bank, is estopped from asserting the
defense of guarantee of prior indorsements against Associated Bank, the
collecting bank. In stamping the guarantee (for all prior indorsements), it merely
followed a mandatory requirement for clearing and had no choice but to place the
stamp of guarantee; otherwise, there would be no clearing. The bank will be in a
"no-win" situation and will always bear the loss as against the drawee bank. 16
Associated Bank also claims that since PNB already cleared and paid the value
of the forged checks in question, it is now estopped from asserting the defense
that Associated Bank guaranteed prior indorsements. The drawee bank allegedly
has the primary duty to verify the genuineness of payee's indorsement before
paying the check. 17
While both banks are innocent of the forgery, Associated Bank claims that PNB
was at fault and should solely bear the loss because it cleared and paid the
forged checks.
xxx xxx xxx
The case at bench concerns checks payable to the order of Concepcion
Emergency Hospital or its Chief. They were properly issued and bear the genuine
signatures of the drawer, the Province of Tarlac. The infirmity in the questioned
checks lies in the payee's (Concepcion Emergency Hospital) indorsements which
are forgeries. At the time of their indorsement, the checks were order instruments.
Checks having forged indorsements should be differentiated from forged checks
or checks bearing the forged signature of the drawer.
Section 23 of the Negotiable Instruments Law (NIL) provides:
Sec. 23. FORGED SIGNATURE, EFFECT OF. — When a signature
is forged or made without authority of the person whose signature it
purports to be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to enforce payment
thereof against any party thereto, can be acquired through or under
such signature unless the party against whom it is sought to enforce
such right is precluded from setting up the forgery or want of
authority.
A forged signature, whether it be that of the drawer or the payee, is wholly
inoperative and no one can gain title to the instrument through it. A person whose
signature to an instrument was forged was never a party and never consented to
the contract which allegedly gave rise to such instrument. 18 Section 23 does not
avoid the instrument but only the forged signature. 19 Thus, a forged indorsement
does not operate as the payee's indorsement.
The exception to the general rule in Section 23 is where "a party against whom it
is sought to enforce a right is precluded from setting up the forgery or want of
authority." Parties who warrant or admit the genuineness of the signature in
question and those who, by their acts, silence or negligence are estopped from
setting up the defense of forgery, are precluded from using this defense.
Indorsers, persons negotiating by delivery and acceptors are warrantors of the
genuineness of the signatures on the instrument. 20
In bearer instruments, the signature of the payee or holder is unnecessary to
pass title to the instrument. Hence, when the indorsement is a forgery, only the
person whose signature is forged can raise the defense of forgery against a
holder in due course. 21
The checks involved in this case are order instruments, hence, the following
discussion is made with reference to the effects of a forged indorsement on an
instrument payable to order.
Where the instrument is payable to order at the time of the forgery, such as the
checks in this case, the signature of its rightful holder (here, the payee hospital) is
essential to transfer title to the same instrument. When the holder's indorsement
is forged, all parties prior to the forgery may raise the real defense of forgery
against all parties subsequent thereto. 22
An indorser of an order instrument warrants "that the instrument is genuine and in
all respects what it purports to be; that he has a good title to it; that all prior
parties had capacity to contract; and that the instrument is at the time of his
indorsement valid and subsisting." 23 He cannot interpose the defense that
signatures prior to him are forged.

A collecting bank where a check is deposited and which indorses the check upon
presentment with the drawee bank, is such an indorser. So even if the
indorsement on the check deposited by the banks's client is forged, the collecting
bank is bound by his warranties as an indorser and cannot set up the defense of
forgery as against the drawee bank.
The bank on which a check is drawn, known as the drawee bank, is under strict
liability to pay the check to the order of the payee. The drawer's instructions are
reflected on the face and by the terms of the check. Payment under a forged
indorsement is not to the drawer's order. When the drawee bank pays a person
other than the payee, it does not comply with the terms of the check and violates
its duty to charge its customer's (the drawer) account only for properly payable
items. Since the drawee bank did not pay a holder or other person entitled to
receive payment, it has no right to reimbursement from the drawer. 24 The general
rule then is that the drawee bank may not debit the drawer's account and is not
entitled to indemnification from the drawer. 25 The risk of loss must perforce fall on
the drawee bank.
However, if the drawee bank can prove a failure by the customer/drawer to
exercise ordinary care that substantially contributed to the making of the forged
signature, the drawer is precluded from asserting the forgery.
If at the same time the drawee bank was also negligent to the point of
substantially contributing to the loss, then such loss from the forgery can be
apportioned between the negligent drawer and the negligent bank. 26
In cases involving a forged check, where the drawer's signature is forged, the
drawer can recover from the drawee bank. No drawee bank has a right to pay a
forged check. If it does, it shall have to recredit the amount of the check to the
account of the drawer. The liability chain ends with the drawee bank whose
responsibility it is to know the drawer's signature since the latter is its customer. 27
In cases involving checks with forged indorsements, such as the present petition,
the chain of liability does not end with the drawee bank. The drawee bank may
not debit the account of the drawer but may generally pass liability back through
the collection chain to the party who took from the forger and, of course, to the
forger himself, if available. 28 In other words, the drawee bank canseek
reimbursement or a return of the amount it paid from the presentor bank or
person. 29 Theoretically, the latter can demand reimbursement from the person
who indorsed the check to it and so on. The loss falls on the party who took the
check from the forger, or on the forger himself.
In this case, the checks were indorsed by the collecting bank (Associated Bank)
to the drawee bank (PNB). The former will necessarily be liable to the latter for
the checks bearing forged indorsements. If the forgery is that of the payee's or
holder's indorsement, the collecting bank is held liable, without prejudice to the
latter proceeding against the forger.
Since a forged indorsement is inoperative, the collecting bank had no right to be
paid by the drawee bank. The former must necessarily return the money paid by
the latter because it was paid wrongfully. 30
More importantly, by reason of the statutory warranty of a general indorser in
section 66 of the Negotiable Instruments Law, a collecting bank which indorses a
check bearing a forged indorsement and presents it to the drawee bank
guarantees all prior indorsements, including the forged indorsement. It warrants
that the instrument is genuine, and that it is valid and subsisting at the time of his
indorsement. Because the indorsement is a forgery, the collecting bank commits
a breach of this warranty and will be accountable to the drawee bank. This liability
scheme operates without regard to fault on the part of the collecting/presenting
bank. Even if the latter bank was not negligent, it would still be liable to the
drawee bank because of its indorsement.
The Court has consistently ruled that "the collecting bank or last endorser
generally suffers the loss because it has the duty to ascertain the genuineness of
all prior endorsements considering that the act of presenting the check for
payment to the drawee is an assertion that the party making the presentment has
done its duty to ascertain the genuineness of the endorsements." 31
The drawee bank is not similarly situated as the collecting bank because the
former makes no warranty as to the genuineness. of any indorsement. 32 The
drawee bank's duty is but to verify the genuineness of the drawer's signature and
not of the indorsement because the drawer is its client.
Moreover, the collecting bank is made liable because it is privy to the depositor
who negotiated the check. The bank knows him, his address and history because
he is a client. It has taken a risk on his deposit. The bank is also in a better
position to detect forgery, fraud or irregularity in the indorsement.
Hence, the drawee bank can recover the amount paid on the check bearing a
forged indorsement from the collecting bank. However, a drawee bank has the
duty to promptly inform the presentor of the forgery upon discovery. If the drawee
bank delays in informing the presentor of the forgery, thereby depriving said
presentor of the right to recover from the forger, the former is deemed negligent
and can no longer recover from the presentor. 33
Applying these rules to the case at bench, PNB, the drawee bank, cannot debit
the current account of the Province of Tarlac because it paid checks which bore
forged indorsements. However, if the Province of Tarlac as drawer was negligent
to the point of substantially contributing to the loss, then the drawee bank PNB
can charge its account. If both drawee bank-PNB and drawer-Province of Tarlac
were negligent, the loss should be properly apportioned between them.
The loss incurred by drawee bank-PNB can be passed on to the collecting bank-
Associated Bank which presented and indorsed the checks to it. Associated Bank
can, in turn, hold the forger, Fausto Pangilinan, liable.
If PNB negligently delayed in informing Associated Bank of the forgery, thus
depriving the latter of the opportunity to recover from the forger, it forfeits its right
to reimbursement and will be made to bear the loss.
After careful examination of the records, the Court finds that the Province of
Tarlac was equally negligent and should, therefore, share the burden of loss from
the checks bearing a forged indorsement.
The Province of Tarlac permitted Fausto Pangilinan to collect the checks when
the latter, having already retired from government service, was no longer
connected with the hospital. With the exception of the first check (dated January
17, 1978), all the checks were issued and released after Pangilinan's retirement
on February 28, 1978. After nearly three years, the Treasurer's office was still
releasing the checks to the retired cashier. In addition, some of the aid allotment
checks were released to Pangilinan and the others to Elizabeth Juco, the new
cashier. The fact that there were now two persons collecting the checks for the
hospital is an unmistakable sign of an irregularity which should have alerted
employees in the Treasurer's office of the fraud being committed. There is also
evidence indicating that the provincial employees were aware of Pangilinan's
retirement and consequent dissociation from the hospital. Jose Meru, the
Provincial Treasurer, testified:.
ATTY. MORGA:
Q Now, is it true that for a given month there were two releases of
checks, one went to Mr. Pangilinan and one went to Miss Juco?
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
Nego Instruments Set 1 (#s1-70) Page 6 of 112
Lumbas. Dadat
The failure of the Province of Tarlac to exercise due care contributed to a
significant degree to the loss tantamount to negligence. Hence, the Province of
Tarlac should be liable for part of the total amount paid on the questioned checks.
The drawee bank PNB also breached its duty to pay only according to the terms
of the check. Hence, it cannot escape liability and should also bear part of the
loss.
As earlier stated, PNB can recover from the collecting bank.
In the case of Associated Bank v. CA, 35 six crossed checks with forged
indorsements were deposited in the forger's account with the collecting bank and
were later paid by four different drawee banks. The Court found the collecting
bank (Associated) to be negligent and held:
The Bank should have first verified his right to endorse the crossed
checks, of which he was not the payee, and to deposit the proceeds
of the checks to his own account. The Bank was by reason of the
nature of the checks put upon notice that they were issued for
deposit only to the private respondent's account. . . .
The situation in the case at bench is analogous to the above case, for it was not
the payee who deposited the checks with the collecting bank. Here, the checks
were all payable to Concepcion Emergency Hospital but it was Fausto Pangilinan
who deposited the checks in his personal savings account.
Although Associated Bank claims that the guarantee stamped on the checks (All
prior and/or lack of endorsements guaranteed) is merely a requirement forced
upon it by clearing house rules, it cannot but remain liable. The stamp
guaranteeing prior indorsements is not an empty rubric which a bank must fulfill
for the sake of convenience. A bank is not required to accept all the checks
negotiated to it. It is within the bank's discretion to receive a check for no banking
institution would consciously or deliberately accept a check bearing a forged
indorsement. When a check is deposited with the collecting bank, it takes a risk
on its depositor. It is only logical that this bank be held accountable for checks
deposited by its customers.
A delay in informing the collecting bank (Associated Bank) of the forgery, which
deprives it of the opportunity to go after the forger, signifies negligence on the
part of the drawee bank (PNB) and will preclude it from claiming reimbursement.
It is here that Associated Bank's assignment of error concerning C.B. Circular No.
580 and Section 23 of the Philippine Clearing House Corporation Rules comes to
fore. Under Section 4(c) of CB Circular No. 580, items bearing a forged
endorsement shall be returned within twenty-Sour (24) hours after discovery of
the forgery but in no event beyond the period fixed or provided by law for filing of
a legal action by the returning bank. Section 23 of the PCHC Rules deleted the
requirement that items bearing a forged endorsement should be returned within
twenty-four hours. Associated Bank now argues that the aforementioned Central
Bank Circular is applicable. Since PNB did not return the questioned checks
within twenty-four hours, but several days later, Associated Bank alleges that
PNB should be considered negligent and not entitled to reimbursement of the
amount it paid on the checks.
The Court deems it unnecessary to discuss Associated Bank's assertions that CB
Circular No. 580 is an administrative regulation issued pursuant to law and as
such, must prevail over the PCHC rule. The Central Bank circular was in force for
all banks until June 1980 when the Philippine Clearing House Corporation
(PCHC) was set up and commenced operations. Banks in Metro Manila were
covered by the PCHC while banks located elsewhere still had to go through
Central Bank Clearing. In any event, the twenty-four-hour return rule was adopted
by the PCHC until it was changed in 1982. The contending banks herein, which
are both branches in Tarlac province, are therefore not covered by PCHC Rules
but by CB Circular No. 580. Clearly then, the CB circular was applicable when the
forgery of the checks was discovered in 1981.
The rule mandates that the checks be returned within twenty-four hours after
discovery of the forgery but in no event beyond the period fixed by law for filing a
legal action. The rationale of the rule is to give the collecting bank (which
indorsed the check) adequate opportunity to proceed against the forger. If prompt

notice is not given, the collecting bank maybe prejudiced and lose the opportunity
to go after its depositor.
The Court finds that even if PNB did not return the questioned checks to
Associated Bank within twenty-four hours, as mandated by the rule, PNB did not
commit negligent delay. Under the circumstances, PNB gave prompt notice to
Associated Bank and the latter bank was not prejudiced in going after Fausto
Pangilinan. After the Province of Tarlac informed PNB of the forgeries, PNB
necessarily had to inspect the checks and conduct its own investigation.
Thereafter, it requested the Provincial Treasurer's office on March 31, 1981 to
return the checks for verification. The Province of Tarlac returned the checks only
on April 22, 1981. Two days later, Associated Bank received the checks from
PNB. 36
Associated Bank was also furnished a copy of the Province's letter of demand to
PNB dated March 20, 1981, thus giving it notice of the forgeries. At this time,
however, Pangilinan's account with Associated had only P24.63 in it. 37Had
Associated Bank decided to debit Pangilinan's account, it could not have
recovered the amounts paid on the questioned checks. In addition, while
Associated Bank filed a fourth-party complaint against Fausto Pangilinan, it did
not present evidence against Pangilinan and even presented him as its rebuttal
witness. 38 Hence, Associated Bank was not prejudiced by PNB's failure to comply
with the twenty-four-hour return rule.
Next, Associated Bank contends that PNB is estopped from requiring
reimbursement because the latter paid and cleared the checks. The Court finds
this contention unmeritorious. Even if PNB cleared and paid the checks, it can still
recover from Associated Bank. This is true even if the payee's Chief Officer who
was supposed to have indorsed the checks is also a customer of the drawee
bank. 39 PNB's duty was to verify the genuineness of the drawer's signature and
not the genuineness of payee's indorsement. Associated Bank, as the collecting
bank, is the entity with the duty to verify the genuineness of the payee's
indorsement.
PNB also avers that respondent court erred in adjudging circuitous liability by
directing PNB to return to the Province of Tarlac the amount of the checks and
then directing Associated Bank to reimburse PNB. The Court finds nothing wrong
with the mode of the award. The drawer, Province of Tarlac, is a clientor
customer of the PNB, not of Associated Bank. There is no privity of contract
between the drawer and the collecting bank.
The trial court made PNB and Associated Bank liable with legal interest from
March 20, 1981, the date of extrajudicial demand made by the Province of Tarlac
on PNB. The payments to be made in this case stem from the deposits of the
Province of Tarlac in its current account with the PNB. Bank deposits are
considered under the law as loans. 40 Central Bank Circular No. 416 prescribes a
twelve percent (12%) interest per annum for loans, forebearance of money,
goods or credits in the absence of express stipulation. Normally, current accounts
are likewise interest-bearing, by express contract, thus excluding them from the
coverage of CB Circular No. 416. In this case, however, the actual interest rate, if
any, for the current account opened by the Province of Tarlac with PNB was not
given in evidence. Hence, the Court deems it wise to affirm the trial court's use of
the legal interest rate, or six percent (6%) per annum. The interest rate shall be
computed from the date of default, or the date of judicial or extrajudicial
demand. 41 The trial court did not err in granting legal interest from March 20,
1981, the date of extrajudicial demand.
The Court finds as reasonable, the proportionate sharing of fifty percent - fifty
percent (50%-50%). Due to the negligence of the Province of Tarlac in releasing
the checks to an unauthorized person (Fausto Pangilinan), in allowing the retired
hospital cashier to receive the checks for the payee hospital for a period close to
three years and in not properly ascertaining why the retired hospital cashier was
collecting checks for the payee hospital in addition to the hospital's real cashier,
respondent Province contributed to the loss amounting to P203,300.00 and shall
be liable to the PNB for fifty (50%) percent thereof. In effect, the Province of
Tarlac can only recover fifty percent (50%) of P203,300.00 from PNB.
The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%)
percent of P203,300.00. It is liable on its warranties as indorser of the checks
which were deposited by Fausto Pangilinan, having guaranteed the genuineness
of all prior indorsements, including that of the chief of the payee hospital, Dr.
Adena Canlas. Associated Bank was also remiss in its duty to ascertain the
genuineness of the payee's indorsement.
IN VIEW OF THE FOREGOING, the petition for review filed by the Philippine
National Bank (G.R. No. 107612) is hereby PARTIALLY GRANTED. The petition
for review filed by the Associated Bank (G.R. No. 107382) is hereby DENIED.
The decision of the trial court is MODIFIED. The Philippine National Bank shall
pay fifty percent (50%) of P203,300.00 to the Province of Tarlac, with legal
interest from March 20, 1981 until the payment thereof. Associated Bank shall
pay fifty percent (50%) of P203,300.00 to the Philippine National Bank, likewise,
with legal interest from March 20, 1981 until payment is made.SO ORDERED.
[G.R. No. 136729. September 23 ,2003]
ASTRO ELECTRONICS CORP. and PETER ROXAS, petitioner,
vs. PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE
CORPORATION, respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
Assailed in this petition for review on certiorari under Rule 45 of the Rules
of Court is the decision of the Court of Appeals in CA-G.R. CV No.
41274,[1]affirming the decision of the Regional Trial Court (Branch 147) of Makati,
then Metro Manila, whereby petitioners Peter Roxas and Astro Electronics Corp.
(Astro for brevity) were ordered to pay respondent Philippine Export and Foreign
Loan Guarantee Corporation (Philguarantee), jointly and severally, the amount of
P3,621,187.52 with interests and costs.
The antecedent facts are undisputed.
Astro was granted several loans by the Philippine Trust Company
(Philtrust) amounting to P3,000,000.00 with interest and secured by three
promissory notes: PN NO. PFX-254 dated December 14, 1981 for P600,000.00,
PN No. PFX-258 also dated December 14, 1981 for P400,000.00 and PN No.
15477 dated August 27, 1981 for P2,000,000.00. In each of these promissory
notes, it appears that petitioner Roxas signed twice, as President of Astro and in
his personal capacity.[2] Roxas also signed a Continuing Surety ship Agreement in
favor of Philtrust Bank, as President of Astro and as surety.[3]
Thereafter, Philguarantee, with the consent of Astro, guaranteed in favor
of Philtrust the payment of 70% of Astros loan,[4] subject to the condition that
upon payment by Philguanrantee of said amount, it shall be proportionally
subrogated to the rights of Philtrust against Astro.[5]
As a result of Astros failure to pay its loan obligations, despite demands,
Philguarantee paid 70% of the guaranteed loan to Philtrust. Subsequently,
Philguarantee filed against Astro and Roxas a complaint for sum of money with
the RTC of Makati.
In his Answer, Roxas disclaims any liability on the instruments,
alleging,inter alia, that he merely signed the same in blank and the phrases in his
personal capacity and in his official capacity were fraudulently inserted without his
knowledge.[6]
After trial, the RTC rendered its decision in favor of Philguarantee with the
following dispositive portion:
WHEREFORE, in view of all the foregoing, the Court hereby renders judgment in
favor or (sic) the plaintiff and against the defendants Astro Electronics
Corporation and Peter T. Roxas, ordering the then (sic) to pay, jointly and
severally, the plaintiff the sum of P3,621.187.52 representing the total obligation
of defendants in favor of plaintiff Philguarantee as of December 31, 1984 with
interest at the stipulated rate of 16% per annum and stipulated penalty charges of
16% per annum computed from January 1, 1985 until the amount is fully
paid. With costs.
SO ORDERED.[7]
Nego Instruments Set 1 (#s1-70) Page 7 of 112
Lumbas. Dadat
The trial court observed that if Roxas really intended to sign the
instruments merely in his capacity as President of Astro, then he should have
signed only once in the promissory note.[8]
On appeal, the Court of Appeals affirmed the RTC decision agreeing with
the trial court that Roxas failed to explain satisfactorily why he had to sign twice in
the contract and therefore the presumption that private transactions have been
fair and regular must be sustained.[9]
In the present petition, the principal issue to be resolved is whether or not
Roxas should be jointly and severally liable (solidary) with Astro for the sum
awarded by the RTC.
The answer is in the affirmative.
Astros loan with Philtrust Bank is secured by three promissory
notes.These promissory notes are valid and binding against Astro and Roxas. As
it appears on the notes, Roxas signed twice: first, as president of Astro and
second, in his personal capacity. In signing his name aside from being the
President of Asro, Roxas became a co-maker of the promissory notes and cannot
escape any liability arising from it. Under the Negotiable Instruments Law,
persons who write their names on the face of promissory notes are
makers,[10] promising that they will pay to the order of the payee or any holder
according to its tenor.[11] Thus, even without the phrase personal capacity, Roxas
will still be primarily liable as a joint and several debtor under the notes
considering that his intention to be liable as such is manifested by the fact that he
affixed his signature on each of the promissory notes twice which necessarily
would imply that he is undertaking the obligation in two different capacities, official
and personal.
Unnoticed by both the trial court and the Court of Appeals, a closer
examination of the signatures affixed by Roxas on the promissory notes, Exhibits
A-4 and 3-A and B-4 and 4-A readily reveals that portions of his signatures
covered portions of the typewritten words personal capacity indicating with
certainty that the typewritten words were already existing at the time Roxas
affixed his signatures thus demolishing his claim that the typewritten words were
just inserted after he signed the promissory notes. If what he claims is true, then
portions of the typewritten words would have covered portions of his signatures,
and not vice versa.
As to the third promissory note, Exhibit C-4 and 5-A, the copy submitted is
not clear so that this Court could not discern the same observations on the notes,
Exhibits A-4 and 3-A and B-4 and 4-A.
Nevertheless, the following discussions equally apply to all three
promissory notes.
The three promissory notes uniformly provide: FOR VALUE RECEIVED,
I/We jointly, severally and solidarily, promise to pay to PHILTRUST BANK or
order...[12] An instrument which begins with I, We, or Either of us promise to pay,
when signed by two or more persons, makes them solidarily liable.[13]Also, the
phrase joint and several binds the makers jointly and individually to the payee so
that all may be sued together for its enforcement, or the creditor may select one
or more as the object of the suit.[14] Having signed under such terms, Roxas
assumed the solidary liability of a debtor and Philtrust Bank may choose to
enforce the notes against him alone or jointly with Astro.
Roxas claim that the phrases in his personal capacity and in his official
capacity were inserted on the notes without his knowledge was correctly
disregarded by the RTC and the Court of Appeals. It is not disputed that Roxas
does not deny that he signed the notes twice. As aptly found by both the trial and
appellate court, Roxas did not offer any explanation why he did so. It devolves
upon him to overcome the presumptions that private transactions are presumed
to be fair and regular[15] and that a person takes ordinary care of his
concerns.[16] Aside from his self-serving allegations, Roxas failed to prove the
truth of such allegations. Thus, said presumptions prevail over his claims. Bare
allegations, when unsubstantiated by evidence, documentary or otherwise, are
not equivalent to proof under our Rules of Court.[17]
Roxas is the President of Astro and reasonably, a businessman who is
presumed to take ordinary care of his concerns. Absent any countervailing

evidence, it cannot be gainsaid that he will not sign document without first
informing himself of its contents and consequences. Clearly, he knew the nature
of the transactions and documents involved as he not only executed these notes
on two different dates but he also executed, and again, signed twice, a continuing
Surety ship Agreement notarized on July 31, 1981, wherein he guaranteed, jointly
and severally with Astro the repayment of P3,000,000.00 due to Philtrust. Such
continuing suretyship agreement even re-enforced his solidary liability Philtrust
because as a surety, he bound himself jointly and severally with Astros
obligation.[18] Roxas cannot now avoid liability by hiding under the convenient
excuse that he merely signed the notes in blank and the phrases in personal
capacity and in his official capacity were fraudulently inserted without his
knowledge.
Lastly, Philguarantee has all the right to proceed against petitioner, it is
subrogated to the rights of Philtrust to demand for and collect payment from both
Roxas and Astro since it already paid the value of 70% of roxas and Astro
Electronics Corp.s loan obligation. In compliance with its contract of Guarantee in
favor of Philtrust.
Subrogation is the transfer of all the rights of the creditor to a third person,
who substitutes him in all his rights.[19] It may either be legal or conventional.Legal
subrogation is that which takes place without agreement but by operation of law
because of certain acts.[20] Instances of legal subrogation are those provided in
Article 1302 of the Civil Code. Conventional subrogation, on the other hand, is
that which takes place by agreement of the parties.[21]
Roxas acquiescence is not necessary for subrogation to take place
because the instant case is one of the legal subrogation that occurs by operation
of law, and without need of the debtors knowledge.[22] Further, Philguarantee, as
guarantor, became the transferee of all the rights of Philtrust as against Roxas
and Astro because the guarantor who pays is subrogated by virtue thereof to all
the rights which the creditor had against the debtor.[23]
WHEREFORE, finding no error with the decision of the Court of Appeals
dated December 10, 1998, the same is hereby AFFIRMED in toto.SO
ORDERED.
FIRST DIVISIONG.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.
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 attorney's 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
attorney's 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 plaintiff's 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
attorney's 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-
Nego Instruments Set 1 (#s1-70) Page 8 of 112
Lumbas. Dadat
Cement Corporation, the sum of P20,000.00 as and for attorney's
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 attorney's 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 attorney's 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 viresact.
"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 payee's 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.1âwphi1.nêt
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 payee's account only. From the beginning, Atrium was aware of the
fact that the checks were all for deposit only to payee's 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.
FIRST DIVISIONG.R. No. 150228 July 30, 2009
BANK OF AMERICA NT & SA, Petitioner, vs. PHILIPPINE RACING
CLUB, Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court from
the Decision1 promulgated on July 16, 2001 by the former Second Division of the
Court of Appeals (CA), in CA-G.R. CV No. 45371 entitled "Philippine Racing Club,
Inc. v. Bank of America NT & SA," affirming the Decision 2 dated March 17, 1994
of the Regional Trial Court (RTC) of Makati, Branch 135 in Civil Case No. 89-
5650, in favor of the respondent. Likewise, the present petition assails the
Resolution3 promulgated on September 28, 2001, denying the Motion for
Reconsideration of the CA Decision.
The facts of this case as narrated in the assailed CA Decision are as follows:
Plaintiff-appellee PRCI is a domestic corporation which maintains several
accounts with different banks in the Metro Manila area. Among the accounts
maintained was Current Account No. 58891-012 with defendant-appellant BA
(Paseo de Roxas Branch). The authorized joint signatories with respect to said
Current Account were plaintiff-appellee’s President (Antonia Reyes) and Vice
President for Finance (Gregorio Reyes).
On or about the 2nd week of December 1988, the President and Vice President
of plaintiff-appellee corporation were scheduled to go out of the country in
connection with the corporation’s business. In order not to disrupt operations in
their absence, they pre-signed several checks relating to Current Account No.
58891-012. The intention was to insure continuity of plaintiff-appellee’s operations
by making available cash/money especially to settle obligations that might
become due. These checks were entrusted to the accountant with instruction to
make use of the same as the need arose. The internal arrangement was, in the
event there was need to make use of the checks, the accountant would prepare
the corresponding voucher and thereafter complete the entries on the pre-signed
checks.
It turned out that on December 16, 1988, a John Doe presented to defendant-
appellant bank for encashment a couple of plaintiff-appellee corporation’s checks
(Nos. 401116 and 401117) with the indicated value of P110,000.00 each. It is
admitted that these 2 checks were among those presigned by plaintiff-appellee
corporation’s authorized signatories.
The two (2) checks had similar entries with similar infirmities and irregularities. On
the space where the name of the payee should be indicated (Pay To The Order
Of) the following 2-line entries were instead typewritten: on the upper line was the
word "CASH" while the lower line had the following typewritten words, viz: "ONE
HUNDRED TEN THOUSAND PESOS ONLY." Despite the highly irregular entries
on the face of the checks, defendant-appellant bank, without as much as verifying
and/or confirming the legitimacy of the checks considering the substantial amount
involved and the obvious infirmity/defect of the checks on their faces, encashed
said checks. A verification process, even by was of a telephone call to PRCI
office, would have taken less than ten (10) minutes. But this was not done by BA.
Investigation conducted by plaintiff-appellee corporation yielded the fact that there
was no transaction involving PRCI that call for the payment of P220,000.00 to
anyone. The checks appeared to have come into the hands of an employee of
PRCI (one Clarita Mesina who was subsequently criminally charged for qualified
theft) who eventually completed without authority the entries on the pre-signed
checks. PRCI’s demand for defendant-appellant to pay fell on deaf ears. Hence,
the complaint.4
After due proceedings, the trial court rendered a Decision in favor of respondent,
the dispositive portion of which reads:
PREMISES CONSIDERED, judgment is hereby rendered in favor of plaintiff and
against the defendant, and the latter is ordered to pay plaintiff:
(1) The sum of Two Hundred Twenty Thousand (₱220,000.00)
Pesos, with legal interest to be computed from date of the filing of the
herein complaint;
(2) The sum of Twenty Thousand (₱20,000.00) Pesos by way of
attorney’s fees;
(3) The sum of Ten Thousand (₱10,000.00) Pesos for litigation
expenses, and
(4) To pay the costs of suit.SO ORDERED.5
Petitioner appealed the aforesaid trial court Decision to the CA which, however,
affirmed said decision in toto in its July 16, 2001 Decision. Petitioner’s Motion for
Reconsideration of the CA Decision was subsequently denied on September 28,
2001.
Petitioner now comes before this Court arguing that:
I. The Court of Appeals gravely erred in holding that the proximate cause of
respondent’s loss was petitioner’s encashment of the checks.
A. The Court of Appeals gravely erred in holding that petitioner was
liable for the amount of the checks despite the fact that petitioner was
merely fulfilling its obligation under law and contract.
Nego Instruments Set 1 (#s1-70) Page 9 of 112
Lumbas. Dadat
B. The Court of Appeals gravely erred in holding that petitioner had a
duty to verify the encashment, despite the absence of any obligation
to do so.
C. The Court of Appeals gravely erred in not applying Section 14 of
the Negotiable Instruments Law, despite its clear applicability to this
case;
II. The Court of Appeals gravely erred in not holding that the proximate cause of
respondent’s loss was its own grossly negligent practice of pre-signing checks
without payees and amounts and delivering these pre-signed checks to its
employees (other than their signatories).
III. The Court of Appeals gravely erred in affirming the trial court’s award of
attorney’s fees despite the absence of any applicable ground under Article 2208
of the Civil Code.
IV. The Court of Appeals gravely erred in not awarding attorney’s fees, moral and
exemplary damages, and costs of suit in favor of petitioner, who clearly deserves
them.6
From the discussions of both parties in their pleadings, the key issue to be
resolved in the present case is whether the proximate cause of the wrongful
encashment of the checks in question was due to (a) petitioner’s failure to make a
verification regarding the said checks with the respondent in view of the
misplacement of entries on the face of the checks or (b) the practice of the
respondent of pre-signing blank checks and leaving the same with its employees.
Petitioner insists that it merely fulfilled its obligation under law and contract when
it encashed the aforesaid checks. Invoking Sections 126 7 and 1858 of the
Negotiable Instruments Law (NIL), petitioner claims that its duty as a drawee
bank to a drawer-client maintaining a checking account with it is to pay orders for
checks bearing the drawer-client’s genuine signatures. The genuine signatures of
the client’s duly authorized signatories affixed on the checks signify the order for
payment. Thus, pursuant to the said obligation, the drawee bank has the duty to
determine whether the signatures appearing on the check are the drawer-client’s
or its duly authorized signatories. If the signatures are genuine, the bank has the
unavoidable legal and contractual duty to pay. If the signatures are forged and
falsified, the drawee bank has the corollary, but equally unavoidable legal and
contractual, duty not to pay.9
Furthermore, petitioner maintains that there exists a duty on the drawee bank to
inquire from the drawer before encashing a check only when the check bears a
material alteration. A material alteration is defined in Section 125 of the NIL to be
one which changes the date, the sum payable, the time or place of payment, the
number or relations of the parties, the currency in which payment is to be made or
one which adds a place of payment where no place of payment is specified, or
any other change or addition which alters the effect of the instrument in any
respect. With respect to the checks at issue, petitioner points out that they do not
contain any material alteration.10 This is a fact which was affirmed by the trial
court itself.11
There is no dispute that the signatures appearing on the subject checks were
genuine signatures of the respondent’s authorized joint signatories; namely,
Antonia Reyes and Gregorio Reyes who were respondent’s President and Vice-
President for Finance, respectively. Both pre-signed the said checks since they
were both scheduled to go abroad and it was apparently their practice to leave
with the company accountant checks signed in black to answer for company
obligations that might fall due during the signatories’ absence. It is likewise
admitted that neither of the subject checks contains any material alteration or
erasure.
However, on the blank space of each check reserved for the payee, the following
typewritten words appear: "ONE HUNDRED TEN THOUSAND PESOS ONLY."
Above the same is the typewritten word, "CASH." On the blank reserved for the
amount, the same amount of One Hundred Ten Thousand Pesos was indicated
with the use of a check writer. The presence of these irregularities in each check
should have alerted the petitioner to be cautious before proceeding to encash
them which it did not do.

It is well-settled that banks are engaged in a business impressed with public
interest, and it is their duty to protect in return their many clients and depositors
who transact business with them. They have the obligation to treat their client’s
account meticulously and with the highest degree of care, considering the
fiduciary nature of their relationship. The diligence required of banks, therefore, is
more than that of a good father of a family.12
Petitioner asserts that it was not duty-bound to verify with the respondent since
the amount below the typewritten word "CASH," expressed in words, is the very
same amount indicated in figures by means of a check writer on the amount
portion of the check. The amount stated in words is, therefore, a mere reiteration
of the amount stated in figures. Petitioner emphasizes that a reiteration of the
amount in words is merely a repetition and that a repetition is not an alteration
which if present and material would have enjoined it to commence verification
with respondent.13
We do not agree with petitioner’s myopic view and carefully crafted defense.
Although not in the strict sense "material alterations," the misplacement of the
typewritten entries for the payee and the amount on the same blank and the
repetition of the amount using a check writer were glaringly obvious irregularities
on the face of the check. Clearly, someone made a mistake in filling up the
checks and the repetition of the entries was possibly an attempt to rectify the
mistake. Also, if the check had been filled up by the person who customarily
accomplishes the checks of respondent, it should have occurred to petitioner’s
employees that it would be unlikely such mistakes would be made. All these
circumstances should have alerted the bank to the possibility that the holder or
the person who is attempting to encash the checks did not have proper title to the
checks or did not have authority to fill up and encash the same. As noted by the
CA, petitioner could have made a simple phone call to its client to clarify the
irregularities and the loss to respondent due to the encashment of the stolen
checks would have been prevented.
In the case at bar, extraordinary diligence demands that petitioner should have
ascertained from respondent the authenticity of the subject checks or the
accuracy of the entries therein not only because of the presence of highly
irregular entries on the face of the checks but also of the decidedly unusual
circumstances surrounding their encashment. Respondent’s witness testified that
for checks in amounts greater than Twenty Thousand Pesos (₱20,000.00) it is
the company’s practice to ensure that the payee is indicated by name in the
check.14 This was not rebutted by petitioner. Indeed, it is highly uncommon for a
corporation to make out checks payable to "CASH" for substantial amounts such
as in this case. If each irregular circumstance in this case were taken singly or
isolated, the bank’s employees might have been justified in ignoring them.
However, the confluence of the irregularities on the face of the checks and
circumstances that depart from the usual banking practice of respondent should
have put petitioner’s employees on guard that the checks were possibly not
issued by the respondent in due course of its business. Petitioner’s subtle
sophistry cannot exculpate it from behavior that fell extremely short of the highest
degree of care and diligence required of it as a banking institution.
Indeed, taking this with the testimony of petitioner’s operations manager that in
case of an irregularity on the face of the check (such as when blanks were not
properly filled out) the bank may or may not call the client depending on how busy
the bank is on a particular day,15 we are even more convinced that petitioner’s
safeguards to protect clients from check fraud are arbitrary and subjective. Every
client should be treated equally by a banking institution regardless of the amount
of his deposits and each client has the right to expect that every centavo he
entrusts to a bank would be handled with the same degree of care as the
accounts of other clients. Perforce, we find that petitioner plainly failed to adhere
to the high standard of diligence expected of it as a banking institution.
In defense of its cashier/teller’s questionable action, petitioner insists that
pursuant to Sections 1416 and 1617 of the NIL, it could validly presume, upon
presentation of the checks, that the party who filled up the blanks had authority
and that a valid and intentional delivery to the party presenting the checks had
taken place. Thus, in petitioner’s view, the sole blame for this debacle should be
shifted to respondent for having its signatories pre-sign and deliver the subject
checks.18 Petitioner argues that there was indeed delivery in this case because,
following American jurisprudence, the gross negligence of respondent’s
accountant in safekeeping the subject checks which resulted in their theft should
be treated as a voluntary delivery by the maker who is estopped from claiming
non-delivery of the instrument.19
Petitioner’s contention would have been correct if the subject checks were
correctly and properly filled out by the thief and presented to the bank in good
order. In that instance, there would be nothing to give notice to the bank of any
infirmity in the title of the holder of the checks and it could validly presume that
there was proper delivery to the holder. The bank could not be faulted if it
encashed the checks under those circumstances. However, the undisputed facts
plainly show that there were circumstances that should have alerted the bank to
the likelihood that the checks were not properly delivered to the person who
encashed the same. In all, we see no reason to depart from the finding in the
assailed CA Decision that the subject checks are properly characterized as
incomplete and undelivered instruments thus making Section 1520 of the NIL
applicable in this case.
However, we do agree with petitioner that respondent’s officers’ practice of pre-
signing of blank checks should be deemed seriously negligent behavior and a
highly risky means of purportedly ensuring the efficient operation of businesses. It
should have occurred to respondent’s officers and managers that the pre-signed
blank checks could fall into the wrong hands as they did in this case where the
said checks were stolen from the company accountant to whom the checks were
entrusted.
Nevertheless, even if we assume that both parties were guilty of negligent acts
that led to the loss, petitioner will still emerge as the party foremost liable in this
case. In instances where both parties are at fault, this Court has consistently
applied the doctrine of last clear chance in order to assign liability.
In Westmont Bank v. Ong,21 we ruled:
…[I]t is petitioner [bank] which had the last clear chance to stop the fraudulent
encashment of the subject checks had it exercised due diligence and followed the
proper and regular banking procedures in clearing checks. As we had earlier
ruled, the one who had a last clear opportunity to avoid the impending harm but
failed to do so is chargeable with the consequences thereof.22 (emphasis ours)
In the case at bar, petitioner cannot evade responsibility for the loss by attributing
negligence on the part of respondent because, even if we concur that the latter
was indeed negligent in pre-signing blank checks, the former had the last clear
chance to avoid the loss. To reiterate, petitioner’s own operations manager
admitted that they could have called up the client for verification or confirmation
before honoring the dubious checks. Verily, petitioner had the final opportunity to
avert the injury that befell the respondent. Failing to make the necessary
verification due to the volume of banking transactions on that particular day is a
flimsy and unacceptable excuse, considering that the "banking business is so
impressed with public interest where the trust and confidence of the public in
general is of paramount importance such that the appropriate standard of
diligence must be a high degree of diligence, if not the utmost
diligence."23 Petitioner’s negligence has been undoubtedly established and, thus,
pursuant to Art. 1170 of the NCC,24 it must suffer the consequence of said
negligence.
In the interest of fairness, however, we believe it is proper to consider
respondent’s own negligence to mitigate petitioner’s liability. Article 2179 of the
Civil Code provides:
Art. 2179. When the plaintiff’s own negligence was the immediate and proximate
cause of his injury, he cannot recover damages. But if his negligence was only
contributory, the immediate and proximate cause of the injury being the
defendant’s lack of due care, the plaintiff may recover damages, but the courts
shall mitigate the damages to be awarded.1avvph!1
Explaining this provision in Lambert v. Heirs of Ray Castillon,25 the Court held:
The underlying precept on contributory negligence is that a plaintiff who is partly
responsible for his own injury should not be entitled to recover damages in full but
Nego Instruments Set 1 (#s1-70) Page 10 of 112
Lumbas. Dadat
must bear the consequences of his own negligence. The defendant must thus be
held liable only for the damages actually caused by his negligence. xxx xxx xxx
As we previously stated, respondent’s practice of signing checks in blank
whenever its authorized bank signatories would travel abroad was a dangerous
policy, especially considering the lack of evidence on record that respondent had
appropriate safeguards or internal controls to prevent the pre-signed blank
checks from falling into the hands of unscrupulous individuals and being used to
commit a fraud against the company. We cannot believe that there was no other
secure and reasonable way to guarantee the non-disruption of respondent’s
business. As testified to by petitioner’s expert witness, other corporations would
ordinarily have another set of authorized bank signatories who would be able to
sign checks in the absence of the preferred signatories.26 Indeed, if not for the
fortunate happenstance that the thief failed to properly fill up the subject checks,
respondent would expectedly take the blame for the entire loss since the defense
of forgery of a drawer’s signature(s) would be unavailable to it. Considering that
respondent knowingly took the risk that the pre-signed blank checks might fall into
the hands of wrongdoers, it is but just that respondent shares in the responsibility
for the loss.
We also cannot ignore the fact that the person who stole the pre-signed checks
subject of this case from respondent’s accountant turned out to be another
employee, purportedly a clerk in respondent’s accounting department. As the
employer of the "thief," respondent supposedly had control and supervision over
its own employee. This gives the Court more reason to allocate part of the loss to
respondent.
Following established jurisprudential precedents,27 we believe the allocation of
sixty percent (60%) of the actual damages involved in this case (represented by
the amount of the checks with legal interest) to petitioner is proper under the
premises. Respondent should, in light of its contributory negligence, bear forty
percent (40%) of its own loss.
Finally, we find that the awards of attorney’s fees and litigation expenses in favor
of respondent are not justified under the circumstances and, thus, must be
deleted. The power of the court to award attorney’s fees and litigation expenses
under Article 2208 of the NCC28 demands factual, legal, and equitable
justification.
An adverse decision does not ipso facto justify an award of attorney’s fees to the
winning party.29 Even when a claimant is compelled to litigate with third persons
or to incur expenses to protect his rights, still attorney’s fees may not be awarded
where no sufficient showing of bad faith could be reflected in a party’s persistence
in a case other than an erroneous conviction of the righteousness of his cause.30
WHEREFORE, the Decision of the Court of Appeals dated July 16, 2001 and its
Resolution dated September 28, 2001 are AFFIRMED with the following
MODIFICATIONS: (a) petitioner Bank of America NT & SA shall pay to
respondent Philippine Racing Club sixty percent (60%) of the sum of Two
Hundred Twenty Thousand Pesos (₱220,000.00) with legal interest as awarded
by the trial court and (b) the awards of attorney’s fees and litigation expenses in
favor of respondent are deleted.Proportionate costs.SO ORDERED.
FIRST DIVISIONG.R. No. 149454 May 28, 2004
BANK OF THE PHILIPPINE ISLANDS, petitioner, vs.CASA MONTESSORI
INTERNATIONALE LEONARDO T. YABUT, respondents.
x ----------------------------- x
G.R. No. 149507 May 28, 2004
CASA MONTESSORI INTERNATIONALE, petitioner, vs.BANK OF THE
PHILIPPINE ISLANDS, respondent.
DECISION
PANGANIBAN, J.:
By the nature of its functions, a bank is required to take meticulous care of the
deposits of its clients, who have the right to expect high standards of integrity and
performance from it.

Among its obligations in furtherance thereof is knowing the signatures of its "On February 16, 1999, the RTC rendered the appealed decision in
clients. Depositors are not estopped from questioning wrongful withdrawals, even favor of the plaintiff."8
if they have failed to question those errors in the statements sent by the bank to Ruling of the Court of Appeals
them for verification. Modifying the Decision of the Regional Trial Court (RTC), the CA apportioned the
The Case loss between BPI and CASA. The appellate court took into account CASA’s
contributory negligence that resulted in the undetected forgery. It then ordered
Before us are two Petitions for Review1 under Rule 45 of the Rules of Court, Leonardo T. Yabut to reimburse BPI half the total amount claimed; and CASA,
assailing the March 23, 2001 Decision2and the August 17, 2001 Resolution3 of the other half. It also disallowed attorney’s fees and moral and exemplary
the Court of Appeals (CA) in CA-GR CV No. 63561. The decretal portion of the damages.
assailed Decision reads as follows: Hence, these Petitions.9
"WHEREFORE, upon the premises, the decision appealed from Issues
is AFFIRMED with the modification that defendant bank [Bank of the In GR No. 149454, Petitioner BPI submits the following issues for our
Philippine Islands (BPI)] is held liable only for one-half of the value of consideration:
the forged checks in the amount of ₱547,115.00 after deductions "I. The Honorable Court of Appeals erred in deciding this case NOT
subject to REIMBURSEMENT from third party defendant Yabut who in accord with the applicable decisions of this Honorable
is likewise ORDERED to pay the other half to plaintiff corporation Court to the effect that forgery cannot be presumed; that it must be
[Casa Montessori Internationale (CASA)]."4 proved by clear, positive and convincing evidence; and that the
The assailed Resolution denied all the parties’ Motions for Reconsideration. burden of proof lies on the party alleging the forgery.
The Facts "II. The Honorable Court of Appeals erred in deciding this case not in
The facts of the case are narrated by the CA as follows: accord with applicable laws, in particular the Negotiable
"On November 8, 1982, plaintiff CASA Montessori Instruments Law (NIL) which precludes CASA, on account of its own
International5 opened Current Account No. 0291-0081-01 with negligence, from asserting its forgery claim against BPI, specially
defendant BPI[,] with CASA’s President Ms. Ma. Carina C. Lebron as taking into account the absence of any negligence on the part of
one of its authorized signatories. BPI."10
"In 1991, after conducting an investigation, plaintiff discovered that In GR No. 149507, Petitioner CASA submits the following issues:
nine (9) of its checks had been encashed by a certain Sonny D. "1. The Honorable Court of Appeals erred when it ruled that ‘there is
Santos since 1990 in the total amount of ₱782,000.00, on the no showing that [BPI], although negligent, acted in bad faith x x x’
following dates and amounts: thus denying the prayer for the award of attorney’s fees, moral
‘Check No. Date Amount damages and exemplary damages to [CASA]. The Honorable Court
also erred when it did not order [BPI] to pay interest on the amounts
1. 839700 April 24, 1990 ₱ 43,400.00 due to [CASA].
"2. The Honorable Court of Appeals erred when it declared that
2. 839459 Nov. 2, 1990 110,500.00 [CASA] was likewise negligent in the case at bar, thus warranting its
conclusion that the loss in the amount of ₱547,115.00 be
3. 839609 Oct. 17, 1990 47,723.00 ‘apportioned between [CASA] and [BPI] x x x.’"11
These issues can be narrowed down to three. First, was there forgery under the
4. 839549 April 7, 1990 90,700.00 Negotiable Instruments Law (NIL)?Second, were any of the parties negligent and
therefore precluded from setting up forgery as a defense? Third,should moral and
5. 839569 Sept. 23, 1990 52,277.00
exemplary damages, attorney’s fees, and interest be awarded?
6. 729149 Mar. 22, 1990 148,000.00 The Court’s Ruling
The Petition in GR No. 149454 has no merit, while that in GR No. 149507 is partly
7. 729129 Mar. 16, 1990 51,015.00 meritorious.
First Issue:
8. 839684 Dec. 1, 1990 140,000.00 Forged Signature Wholly Inoperative
Section 23 of the NIL provides:
9. 729034 Mar. 2, 1990 98,985.00 "Section 23. Forged signature; effect of. -- When a signature is
forged or made without the authority of the person whose signature it
purports to be, it is wholly inoperative, and no right x x x to enforce
Total -- ₱ 782,600.006 payment thereof against any party thereto, can be acquired through
"It turned out that ‘Sonny D. Santos’ with account at BPI’s Greenbelt or under such signature, unless the party against whom it is sought
Branch [was] a fictitious name used by third party defendant to enforce such right is precluded from setting up the forgery or want
Leonardo T. Yabut who worked as external auditor of CASA. Third of authority."12
party defendant voluntarily admitted that he forged the signature of Under this provision, a forged signature is a real13 or absolute defense,14 and a
Ms. Lebron and encashed the checks. "The PNP Crime Laboratory person whose signature on a negotiable instrument is forged is deemed to have
conducted an examination of the nine (9) checks and concluded that never become a party thereto and to have never consented to the contract that
the handwritings thereon compared to the standard signature of Ms. allegedly gave rise to it.15
Lebron were not written by the latter. The counterfeiting of any writing, consisting in the signing of another’s name with
"On March 4, 1991, plaintiff filed the herein Complaint for Collection intent to defraud, is forgery.16
with Damages against defendant bank praying that the latter be In the present case, we hold that there was forgery of the drawer’s signature on
ordered to reinstate the amount of ₱782,500.007 in the current and the check.
savings accounts of the plaintiff with interest at 6% per annum.
Nego Instruments Set 1 (#s1-70) Page 11 of 112
Lumbas. Dadat
First, both the CA17 and the RTC18 found that Respondent Yabut himself had
voluntarily admitted, through an Affidavit, that he had forged the drawer’s
signature and encashed the checks.19 He never refuted these findings.20That he
had been coerced into admission was not corroborated by any evidence on
record.21
Second, the appellate and the trial courts also ruled that the PNP Crime
Laboratory, after its examination of the said checks,22 had concluded that the
handwritings thereon -- compared to the standard signature of the drawer -- were
not hers.23 This conclusion was the same as that in the Report24 that the PNP
Crime Laboratory had earlier issued to BPI -- the drawee bank -- upon the latter’s
request.
Indeed, we respect and affirm the RTC’s factual findings, especially when
affirmed by the CA, since these are supported by substantial evidence on
record.25
Voluntary Admission Not Violative of Constitutional Rights
The voluntary admission of Yabut did not violate his constitutional rights (1) on
custodial investigation, and (2) against self-incrimination.
In the first place, he was not under custodial investigation.26 His Affidavit was
executed in private and before private individuals.27 The mantle of protection
under Section 12 of Article III of the 1987 Constitution 28 covers only the period
"from the time a person is taken into custody for investigation of his possible
participation in the commission of a crime or from the time he is singled out as a
suspect in the commission of a crime although not yet in custody."29
Therefore, to fall within the ambit of Section 12, quoted above, there must be an
arrest or a deprivation of freedom, with "questions propounded on him by the
police authorities for the purpose of eliciting admissions, confessions, or any
information."30 The said constitutional provision does "not apply to spontaneous
statements made in a voluntary manner"31 whereby an individual orally admits to
authorship of a crime.32 "What the Constitution proscribes is the compulsory or
coercive disclosure of incriminating facts."33
Moreover, the right against self-incrimination34 under Section 17 of Article III35 of
the Constitution, which is ordinarily available only in criminal prosecutions,
extends to all other government proceedings -- including civil actions, legislative
investigations,36 and administrative proceedings that possess a criminal or penal
aspect37 -- but not to private investigations done by private individuals. Even in
such government proceedings, this right may be waived,38 provided the waiver is
certain; unequivocal; and intelligently, understandingly and willingly made.39
If in these government proceedings waiver is allowed, all the more is it so in
private investigations. It is of no moment that no criminal case has yet been filed
against Yabut. The filing thereof is entirely up to the appropriate authorities or to
the private individuals upon whom damage has been caused. As we shall also
explain later, it is not mandatory for CASA -- the plaintiff below -- to implead
Yabut in the civil case before the lower court.
Under these two constitutional provisions, "[t]he Bill of Rights40 does not concern
itself with the relation between a private individual and another individual. It
governs the relationship between the individual and the State."41Moreover, the Bill
of Rights "is a charter of liberties for the individual and a limitation upon the power
of the [S]tate."42 These rights43 are guaranteed to preclude the slightest coercion
by the State that may lead the accused "to admit something false, not prevent him
from freely and voluntarily telling the truth."44
Yabut is not an accused here. Besides, his mere invocation of the aforesaid rights
"does not automatically entitle him to the constitutional protection."45 When he
freely and voluntarily executed46 his Affidavit, the State was not even involved.
Such Affidavit may therefore be admitted without violating his constitutional rights
while under custodial investigation and against self-incrimination.
Clear, Positive and Convincing Examination and Evidence
The examination by the PNP, though inconclusive, was nevertheless clear,
positive and convincing.
Forgery "cannot be presumed."47 It must be established by clear, positive and
convincing evidence.48 Under the best evidence rule as applied to documentary
evidence like the checks in question, no secondary or substitutionary evidence

may inceptively be introduced, as the original writing itself must be produced in
court.49 But when, without bad faith on the part of the offeror, the original checks
have already been destroyed or cannot be produced in court, secondary evidence
may be produced.50 Without bad faith on its part, CASA proved the loss or
destruction of the original checks through the Affidavit of the one person who
knew of that fact51 -- Yabut. He clearly admitted to discarding the paid checks to
cover up his misdeed.52 In such a situation, secondary evidence like microfilm
copies may be introduced in court.
The drawer’s signatures on the microfilm copies were compared with the
standard signature. PNP Document Examiner II Josefina de la Cruz testified on
cross-examination that two different persons had written them.53Although no
conclusive report could be issued in the absence of the original checks,54 she
affirmed that her findings were 90 percent conclusive.55 According to her, even if
the microfilm copies were the only basis of comparison, the differences were
evident.56 Besides, the RTC explained that although the Report was inconclusive,
no conclusive report could have been given by the PNP, anyway, in the absence
of the original checks.57 This explanation is valid; otherwise, no such report can
ever be relied upon in court.
Even with respect to documentary evidence, the best evidence rule applies only
when the contents of a document -- such as the drawer’s signature on a check --
is the subject of inquiry.58 As to whether the document has been actually
executed, this rule does not apply; and testimonial as well as any other secondary
evidence is admissible.59Carina Lebron herself, the drawer’s authorized signatory,
testified many times that she had never signed those checks. Her testimonial
evidence is admissible; the checks have not been actually executed. The
genuineness of her handwriting is proved, not only through the court’s
comparison of the questioned handwritings and admittedly genuine specimens
thereof,60 but above all by her.
The failure of CASA to produce the original checks neither gives rise to the
presumption of suppression of evidence61 nor creates an unfavorable inference
against it.62 Such failure merely authorizes the introduction of secondary
evidence63 in the form of microfilm copies. Of no consequence is the fact that
CASA did not present the signature card containing the signatures with which
those on the checks were compared.64 Specimens of standard signatures are not
limited to such a card. Considering that it was not produced in evidence, other
documents that bear the drawer’s authentic signature may be resorted
to.65 Besides, that card was in the possession of BPI -- the adverse party.
We have held that without the original document containing the allegedly forged
signature, one cannot make a definitive comparison that would establish
forgery;66 and that a comparison based on a mere reproduction of the document
under controversy cannot produce reliable results.67 We have also said, however,
that a judge cannot merely rely on a handwriting expert’s testimony,68 but should
also exercise independent judgment in evaluating the authenticity of a signature
under scrutiny.69 In the present case, both the RTC and the CA conducted
independent examinations of the evidence presented and arrived at reasonable
and similar conclusions. Not only did they admit secondary evidence; they also
appositely considered testimonial and other documentary evidence in the form of
the Affidavit.
The best evidence rule admits of exceptions and, as we have discussed earlier,
the first of these has been met.70The result of examining a questioned
handwriting, even with the aid of experts and scientific instruments, may be
inconclusive;71 but it is a non sequitur to say that such result is not clear, positive
and convincing. The preponderance of evidence required in this case has been
satisfied.72
Second Issue:
Negligence Attributable to BPI Alone
Having established the forgery of the drawer’s signature, BPI -- the drawee --
erred in making payments by virtue thereof. The forged signatures are wholly
inoperative, and CASA -- the drawer whose authorized signatures do not appear
on the negotiable instruments -- cannot be held liable thereon. Neither is the latter
precluded from setting up forgery as a real defense.
Clear Negligence in Allowing Payment Under a Forged Signature
We have repeatedly emphasized that, since the banking business is impressed
with public interest, of paramount importance thereto is the trust and confidence
of the public in general. Consequently, the highest degree of diligence 73 is
expected,74 and high standards of integrity and performance are even required, of
it.75 By the nature of its functions, a bank is "under obligation to treat the accounts
of its depositors with meticulous care,76 always having in mind the fiduciary nature
of their relationship."77
BPI contends that it has a signature verification procedure, in which checks are
honored only when the signatures therein are verified to be the same with or
similar to the specimen signatures on the signature cards. Nonetheless, it still
failed to detect the eight instances of forgery. Its negligence consisted in the
omission of that degree of diligence required78 of a bank. It cannot now feign
ignorance, for very early on we have already ruled that a bank is "bound to know
the signatures of its customers; and if it pays a forged check, it must be
considered as making the payment out of its own funds, and cannot ordinarily
charge the amount so paid to the account of the depositor whose name was
forged."79 In fact, BPI was the same bank involved when we issued this ruling
seventy years ago.
Neither Waiver nor Estoppel Results from Failure to Report Error in Bank
Statement
The monthly statements issued by BPI to its clients contain a notice worded as
follows: "If no error is reported in ten (10) days, account will be correct."80 Such
notice cannot be considered a waiver, even if CASA failed to report the error.
Neither is it estopped from questioning the mistake after the lapse of the ten-day
period.
This notice is a simple confirmation81 or "circularization" -- in accounting parlance
-- that requests client-depositors to affirm the accuracy of items recorded by the
banks.82 Its purpose is to obtain from the depositors a direct corroboration of the
correctness of their account balances with their respective banks.83 Internal or
external auditors of a bank use it as a basic audit procedure 84 -- the results of
which its client-depositors are neither interested in nor privy to -- to test the details
of transactions and balances in the bank’s records.85 Evidential matter obtained
from independent sources outside a bank only serves to provide greater
assurance of reliability86 than that obtained solely within it for purposes of an audit
of its own financial statements, not those of its client-depositors.
Furthermore, there is always the audit risk that errors would not be detected87 for
various reasons. One, materiality is a consideration in audit
planning;88 and two, the information obtained from such a substantive test is
merely presumptive and cannot be the basis of a valid waiver.89 BPI has no right
to impose a condition unilaterally and thereafter consider failure to meet such
condition a waiver. Neither may CASA renounce a right90 it has never
possessed.91
Every right has subjects -- active and passive. While the active subject is entitled
to demand its enforcement, the passive one is duty-bound to suffer such
enforcement.92
On the one hand, BPI could not have been an active subject, because it could not
have demanded from CASA a response to its notice. Besides, the notice was a
measly request worded as follows: "Please examine x x x and report x x
x."93 CASA, on the other hand, could not have been a passive subject, either,
because it had no obligation to respond. It could -- as it did -- choose not to
respond.
Estoppel precludes individuals from denying or asserting, by their own deed or
representation, anything contrary to that established as the truth, in legal
contemplation.94 Our rules on evidence even make a juris et de
jurepresumption95 that whenever one has, by one’s own act or omission,
intentionally and deliberately led another to believe a particular thing to be true
and to act upon that belief, one cannot -- in any litigation arising from such act or
omission -- be permitted to falsify that supposed truth.96
In the instant case, CASA never made any deed or representation that misled
BPI. The former’s omission, if any, may only be deemed an innocent mistake
Nego Instruments Set 1 (#s1-70) Page 12 of 112
Lumbas. Dadat
oblivious to the procedures and consequences of periodic audits. Since its
conduct was due to such ignorance founded upon an innocent mistake, estoppel
will not arise.97 A person who has no knowledge of or consent to a transaction
may not be estopped by it.98 "Estoppel cannot be sustained by mere argument or
doubtful inference x x x."99 CASA is not barred from questioning BPI’s error even
after the lapse of the period given in the notice.
Loss Borne by Proximate Source of Negligence
For allowing payment100 on the checks to a wrongful and fictitious payee, BPI --
the drawee bank -- becomes liable to its depositor-drawer. Since the encashing
bank is one of its branches,101 BPI can easily go after it and hold it liable for
reimbursement.102 It "may not debit the drawer’s account103 and is not entitled to
indemnification from the drawer."104 In both law and equity, when one of two
innocent persons "must suffer by the wrongful act of a third person, the loss must
be borne by the one whose negligence was the proximate cause of the loss or
who put it into the power of the third person to perpetrate the wrong."105
Proximate cause is determined by the facts of the case.106 "It is that cause which,
in natural and continuous sequence, unbroken by any efficient intervening cause,
produces the injury, and without which the result would not have occurred."107
Pursuant to its prime duty to ascertain well the genuineness of the signatures of
its client-depositors on checks being encashed, BPI is "expected to use
reasonable business prudence."108 In the performance of that obligation, it is
bound by its internal banking rules and regulations that form part of the contract it
enters into with its depositors.109
Unfortunately, it failed in that regard. First, Yabut was able to open a bank
account in one of its branches without privity;110 that is, without the proper
verification of his corresponding identification papers. Second, BPI was unable to
discover early on not only this irregularity, but also the marked differences in the
signatures on the checks and those on the signature card. Third, despite the
examination procedures it conducted, the Central Verification Unit111of the bank
even passed off these evidently different signatures as genuine. Without
exercising the required prudence on its part, BPI accepted and encashed the
eight checks presented to it. As a result, it proximately contributed to the fraud
and should be held primarily liable112 for the "negligence of its officers or agents
when acting within the course and scope of their employment." 113 It must bear the
loss.
CASA Not Negligent in Its Financial Affairs
In this jurisdiction, the negligence of the party invoking forgery is recognized as
an exception114 to the general rule that a forged signature is wholly
inoperative.115 Contrary to BPI’s claim, however, we do not find CASA negligent in
handling its financial affairs. CASA, we stress, is not precluded from setting up
forgery as a real defense.
Role of Independent Auditor
The major purpose of an independent audit is to investigate and determine
objectively if the financial statements submitted for audit by a corporation have
been prepared in accordance with the appropriate financial reporting
practices116 of private entities. The relationship that arises therefrom is both legal
and moral.117 It begins with the execution of the engagement letter118 that
embodies the terms and conditions of the audit and ends with the fulfilled
expectation of the auditor’s ethical119 and competent performance in all aspects of
the audit.120
The financial statements are representations of the client; but it is the auditor who
has the responsibility for the accuracy in the recording of data that underlies their
preparation, their form of presentation, and the opinion121expressed
therein.122 The auditor does not assume the role of employee or of management
in the client’s conduct of operations123 and is never under the control or
supervision124 of the client.
Yabut was an independent auditor125 hired by CASA. He handled its monthly
bank reconciliations and had access to all relevant documents and
checkbooks.126 In him was reposed the client’s127 trust and confidence128 that he
would perform precisely those functions and apply the appropriate procedures in

accordance with generally accepted auditing standards.129 Yet he did not meet
these expectations. Nothing could be more horrible to a client than to discover
later on that the person tasked to detect fraud was the same one who perpetrated
it.
Cash Balances Open to Manipulation
It is a non sequitur to say that the person who receives the monthly bank
statements, together with the cancelled checks and other debit/credit
memoranda, shall examine the contents and give notice of any discrepancies
within a reasonable time. Awareness is not equipollent with discernment.
Besides, in the internal accounting control system prudently installed by
CASA,130 it was Yabut who should examine those documents in order to prepare
the bank reconciliations.131 He owned his working papers,132 and his output
consisted of his opinion as well as the client’s financial statements and
accompanying notes thereto. CASA had every right to rely solely upon his output
-- based on the terms of the audit engagement -- and could thus be unwittingly
duped into believing that everything was in order. Besides, "[g]ood faith is always
presumed and it is the burden of the party claiming otherwise to adduce clear and
convincing evidence to the contrary."133
Moreover, there was a time gap between the period covered by the bank
statement and the date of its actual receipt. Lebron personally received the
December 1990 bank statement only in January 1991134 -- when she was also
informed of the forgery for the first time, after which she immediately requested a
"stop payment order." She cannot be faulted for the late detection of the forged
December check. After all, the bank account with BPI was not personal but
corporate, and she could not be expected to monitor closely all its finances. A
preschool teacher charged with molding the minds of the youth cannot be
burdened with the intricacies or complexities of corporate existence.
There is also a cutoff period such that checks issued during a given month, but
not presented for payment within that period, will not be reflected therein. 135 An
experienced auditor with intent to defraud can easily conceal any devious scheme
from a client unwary of the accounting processes involved by manipulating the
cash balances on record -- especially when bank transactions are numerous,
large and frequent. CASA could only be blamed, if at all, for its unintelligent
choice in the selection and appointment of an auditor -- a fault that is not
tantamount to negligence.
Negligence is not presumed, but proven by whoever alleges it.136 Its mere
existence "is not sufficient without proof that it, and no other cause," 137 has given
rise to damages.138 In addition, this fault is common to, if not prevalent among,
small and medium-sized business entities, thus leading the Professional
Regulation Commission (PRC), through the Board of Accountancy (BOA), to
require today not only accreditation for the practice of public accountancy,139 but
also the registration of firms in the practice thereof. In fact, among the
attachments now required upon registration are the code of good
governance140 and a sworn statement on adequate and effective training.141
The missing checks were certainly reported by the bookkeeper142 to the
accountant143 -- her immediate supervisor -- and by the latter to the auditor.
However, both the accountant and the auditor, for reasons known only to them,
assured the bookkeeper that there were no irregularities.
The bookkeeper144 who had exclusive custody of the checkbooks145 did not have
to go directly to CASA’s president or to BPI. Although she rightfully reported the
matter, neither an investigation was conducted nor a resolution of it was arrived
at, precisely because the person at the top of the helm was the culprit. The
vouchers, invoices and check stubs in support of all check disbursements could
be concealed or fabricated -- even in collusion -- and management would still
have no way to verify its cash accountabilities.
Clearly then, Yabut was able to perpetrate the wrongful act through no fault of
CASA. If auditors may be held liable for breach of contract and negligence,146 with
all the more reason may they be charged with the perpetration of fraud upon an
unsuspecting client. CASA had the discretion to pursue BPI alone under the NIL,
by reason of expediency or munificence or both. Money paid under a mistake
may rightfully be recovered,147 and under such terms as the injured party may
choose.
Third Issue:
Award of Monetary Claims
Moral Damages Denied
We deny CASA’s claim for moral damages.
In the absence of a wrongful act or omission,148 or of fraud or bad faith,149 moral
damages cannot be awarded.150The adverse result of an action does not per se
make the action wrongful, or the party liable for it. One may err, but error alone is
not a ground for granting such damages.151 While no proof of pecuniary loss is
necessary therefor -- with the amount to be awarded left to the court’s
discretion152 -- the claimant must nonetheless satisfactorily prove the existence of
its factual basis153 and causal relation154 to the claimant’s act or omission.155
Regrettably, in this case CASA was unable to identify the particular instance --
enumerated in the Civil Code -- upon which its claim for moral damages is
predicated.156 Neither bad faith nor negligence so gross that it amounts to
malice157 can be imputed to BPI. Bad faith, under the law, "does not simply
connote bad judgment or negligence;158it imports a dishonest purpose or some
moral obliquity and conscious doing of a wrong, a breach of a known duty through
some motive or interest or ill will that partakes of the nature of fraud."159
As a general rule, a corporation -- being an artificial person without feelings,
emotions and senses, and having existence only in legal contemplation -- is not
entitled to moral damages,160 because it cannot experience physical suffering and
mental anguish.161 However, for breach of the fiduciary duty required of a bank, a
corporate client may claim such damages when its good reputation is besmirched
by such breach, and social humiliation results therefrom.162 CASA was unable to
prove that BPI had debased the good reputation of,163 and consequently caused
incalculable embarrassment to, the former. CASA’s mere allegation or
supposition thereof, without any sufficient evidence on record,164 is not enough.
Exemplary Damages Also Denied
We also deny CASA’s claim for exemplary damages.
Imposed by way of correction165 for the public good,166 exemplary damages
cannot be recovered as a matter of right.167 As we have said earlier, there is no
bad faith on the part of BPI for paying the checks of CASA upon forged
signatures. Therefore, the former cannot be said to have acted in a wanton,
fraudulent, reckless, oppressive or malevolent manner.168 The latter, having no
right to moral damages, cannot demand exemplary damages.169
Attorney’s Fees Granted
Although it is a sound policy not to set a premium on the right to litigate,170 we find
that CASA is entitled to reasonable attorney’s fees based on "factual, legal, and
equitable justification."171
When the act or omission of the defendant has compelled the plaintiff to incur
expenses to protect the latter’s interest,172 or where the court deems it just and
equitable,173 attorney’s fees may be recovered. In the present case, BPI
persistently denied the claim of CASA under the NIL to recredit the latter’s
account for the value of the forged checks. This denial constrained CASA to incur
expenses and exert effort for more than ten years in order to protect its corporate
interest in its bank account. Besides, we have already cautioned BPI on a similar
act of negligence it had committed seventy years ago, but it has remained
unrelenting. Therefore, the Court deems it just and equitable to grant ten percent
(10%)174 of the total value adjudged to CASA as attorney’s fees.
Interest Allowed
For the failure of BPI to pay CASA upon demand and for compelling the latter to
resort to the courts to obtain payment, legal interest may be adjudicated at the
discretion of the Court, the same to run from the filing175 of the
Complaint.176 Since a court judgment is not a loan or a forbearance of recovery,
the legal interest shall be at six percent (6%) per annum.177 "If the obligation
consists in the payment of a sum of money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the contrary, shall be the
payment of x x x legal interest, which is six percent per annum."178 The actual
base for its computation shall be "on the amount finally
Nego Instruments Set 1 (#s1-70) Page 13 of 112
Lumbas. Dadat
adjudged,"179 compounded180 annually to make up for the cost of
money181 already lost to CASA.
Moreover, the failure of the CA to award interest does not prevent us from
granting it upon damages awarded for breach of contract.182 Because BPI
evidently breached its contract of deposit with CASA, we award interest in
addition to the total amount adjudged. Under Section 196 of the NIL, any case not
provided for shall be "governed by the provisions of existing legislation or, in
default thereof, by the rules of the law merchant." 183 Damages are not provided
for in the NIL. Thus, we resort to the Code of Commerce and the Civil Code.
Under Article 2 of the Code of Commerce, acts of commerce shall be governed
by its provisions and, "in their absence, by the usages of commerce generally
observed in each place; and in the absence of both rules, by those of the civil
law."184 This law being silent, we look at Article 18 of the Civil Code, which states:
"In matters which are governed by the Code of Commerce and special laws, their
deficiency shall be supplied" by its provisions. A perusal of these three statutes
unmistakably shows that the award of interest under our civil law is justified.
WHEREFORE, the Petition in GR No. 149454 is hereby DENIED, and that in GR
No. 149507 PARTLY GRANTED. The assailed Decision of the Court of Appeals
is AFFIRMED with modification: BPI is held liable for ₱547,115, the total value of
the forged checks less the amount already recovered by CASA from Leonardo T.
Yabut, plus interest at the legal rate of six percent (6%) per annum --
compounded annually, from the filing of the complaint until paid in full; and
attorney’s fees of ten percent (10%) thereof, subject to reimbursement from
Respondent Yabut for the entire amount, excepting attorney’s fees. Let a copy of
this Decision be furnished the Board of Accountancy of the Professional
Regulation Commission for such action as it may deem appropriate against
Respondent Yabut. No costs.SO ORDERED.
EN BANCG.R. No. L-14883 July 31, 1963
NARCISA BUENCAMINO, AMADA DE LEON-ERAÑA, ENCARNACION DE
LEON and BIENVENIDO B. ERAÑA,petitioners-appellants, vs. C.
HERNANDEZ, as City Treasurer of Quezon City,
JAIME HERNANDEZ, as Secretary of Finance and
LAND TENURE ADMINISTRATION, respondents-appellees..
REGALA, J.:
This is an appeal from the order of the Quezon City Court of First Instance, Judge
Nicasio Yatco, presiding, dismissing the petition for mandamus filed by the herein
petitioners to compel the respondent City Treasurer of Quezon City to accept
Government negotiable land certificates as payment for land taxes.
The respondent City Treasurer accepts the following statement of facts set forth
in the petitioners' brief:
On May 11, 1957, the Land Tenure Administration, LTA for short, purchased from
the petitioners Narcisa Buencamino, Amada de Leon-Eraña, and Encarnacion de
Leon, and other members of the de Leon family their hacienda in Talavera,
Nueva Ecija for a total consideration of P2,746,000.00. For the purpose, a
Memorandum Agreement was executed on the said date which expressly
declared that the LTA was purchasing the hacienda upon petition of the tenants
thereof in accordance with Republic Act No. 1400, otherwise known as the Land
Reform Act of 1955.
The parties to the sale agreed that of the full price of P2,746,000.00, 50% or
P1,373,000.00 was to be paid in cash and the balance in negotiable land
certificates. Below is a reproduction of one such negotiable land certificate typical
of and identical to all the other issued by the LTA to the petitioners.
AMOUNT: P10,000.00
NEGOTIABLE LAND CERTIFICATE
THE GOVERNMENT OF THE REPUBLIC OF
THE PHILIPPINES
is indebted unto the
BEARER

in the sum of TEN THOUSAND PESOS. This certificate is issued in accordance
with the provisions of Section 9, Republic Act No. 1400, entitled "AN ACT
DEFINING A LAND TENURE POLICY, PROVIDING FOR AN
INSTRUMENTALITY TO CARRY OUT THE POLICY, AND APPROPRIATING
FUNDS FOR ITS IMPLEMENTATION", approved September 9, 1955, and is due
and payable to BEARER on demand and upon presentation at the Central Bank
of the Philippines without interest, if presented for payment within five years from
the date of issue; with interest at the rate of 4 per centum per annum, if presented
for payment after five years from the date of issue; with interest at the rate of 4-½
per centum per annum, if presented for payment after ten years from the date of
issue; and, with interest at the rate of 5 per centum per annum, if presented for
payment after fifteen years from the date of issue. Both principal and interest are
payable by the Treasurer of the Philippines, through the Central Bank of the
Philippines, in legal tender currency of the Philippines.
This land certificate is part of the total negotiable land certificates
issued and limited to the aggregate principal sum of SIXTY MILLION
PESOS a year, to be issued during the first two years from
September 9, 1955 when Republic Act No. 1400 was approved, and
P30 million each year during the succeeding years, for the purchase
of private agricultural lands for resale at cost to bona-fide tenants or
occupants, or, in the case of estates abandoned by the owners for
the last five years, to private individuals who will work the lands
themselves and who are qualified to acquire or own lands, but who
do not own more than six hectares of lands in the Philippines.
Manila, Philippines, August 9, 1957.
Encashment of this certificate may not be made until after five (5)
years from the date of execution of the Deed of Sale of Hacienda de
Leon, pursuant to the conditions under Paragraph "b" of the
Memorandum Agreement executed between the Land Tenure
Administration and the owners of Hacienda de Leon on May 11,
1957, acknowledged before Marcelo Lagramada, Notary Public for
Manila, as Doc. No. 324, Page 66, Book No. 6, Series of 1957.
(Sgd.) JUAN CAÑIZARES
Registrar of the Central
Bank of the Philippines
(Sgd.) CARLOS P. GARCIA
President of the Phil.
(Sgd.) VICENTE GELLA
Treasurer of the Phil.
Date of issue: August 9, 1957
Recorded: Illegible
Examined: Illegible
The condition in the certificate regarding its encashment only after the lapse of
five years from the date of execution of the Deed of Sale of Hacienda de Leon
was adopted or taken from the Memorandum Agreement of May 11, 1957 first
mentioned above and which was subsequently ratified by the Cabinet and the
President. As stipulated in the said document, the condition reads:
B. That the mode of payment shall be 50% in cash and 50% in
negotiable land certificates except that the encashment of the said
negotiable land certificate may not be made until after five (5) years
from the date of the execution of the deed of sale with the payments
of the corresponding interest, said negotiable land certificate may be
applied and used for all the purposes authorized by Republic Act No.
1400 and other pertinent laws on the matter within the said period of
five (5) years; (page 3, Memorandum Agreement).1äwphï1.ñët
Subsequently, this stipulation was incorporated and clarified in the Absolute Deed
of Sale executed to formalize the terms contained in the Memorandum
Agreement. Under the deed of sale, dated July 31, 1957, the above condition was
— that the 5-year restriction against encashment referred merely and exclusively to
Nego Instruments Set 1 (#s1-70) Page 14 of 112
Lumbas. Dadat
That the VENDORS shall not, however, within five (5) years, present the time when the certificates may be converted to cash and not anymore to the
for encashment the negotiable land certificates amounting to ONE utility of the said instruments as substitutes for tax obligations.
MILLION THREE HUNDRED SEVENTY THREE THOUSAND The court a quo sustained the position of the respondent Treasurer and
PESOS (P1,373,000.00) but nevertheless, shall be authorized to use dismissed the suit for mandamus. Thus, this appeal.
the same for payment of land taxes or obligations due and payable in Although the issue raised by the instant appeal has already been rendered moot,
favor of the Government and such other uses or purposes provided by time, it is the sense of this Court that a brief discussion of the point of
for by Section 10 of Republic Act No. 1400 within the said period of controversy will favor the best interest of justice as well as of the parties hereto.
five (5) years from this date. (page 4, Absolute Deed of Sale) We hold the refusal of the respondent Treasurer to accept the land certificates to
Doubtless, therefore, the aforecited provisions of the Memorandum Agreement be legally justified. They failed to comply with the requirements of Republic Act
and the Absolute Deed of Sale in relation to the condition in the negotiable land No. 1400.
certificate were mere implementation of Section 10 of Republic Act No. 1400, Under the above-mentioned law, the land certificates "shall be payable to bearer
which provided: on demand." (Section 9) The one issued, however, were payable to bearer only
Sec. 10. Uses of certificates. — Negotiable land certificates maybe after the lapse of five years from a given period. Obviously then, the requirement
used by the holder thereof for any of the following purposes: that they should be payable on demand was not met since an instrument payable
xxx xxx xxx on demand is one which (a) is expressed to be payable on demand, or at sight, or
(3) Payment of all tax obligations of the holder thereof, or of any debt on presentation; or (b) expresses no time for payment (Sec. 7, Negotiable
or monetary obligation of the holder to the Government or any of its Instruments Law) The 5-year period within which the certificates could not be
instrumentalities or agencies, including the Rehabilitation Finance encashed was an expression of the time for payment contrary to paragraph (b) of
Corporation and the Philippine National Bank; Provided, however, the last law cited.
That payment of indebtedness shall not be less than twenty per The petitioners maintain, as already indicated above, that although the
centum of the total indebtedness of the debtor; and . questioned certificates may not really be payable on demand, they may
xxx xxx xxx nevertheless be used for the payment of realty obligations to the Government
because of Section 10 of Republic Act No. 1400. As expressed by the petitioners,
Availing themselves of what they considered was their contractual and statutory "as to Government agencies and instrumentalities, the certificate is payable to
rights under the certificate, the petitioners presented two of them to the bearer on demand during that first five-year period."
respondent City Treasurer in payment of certain 1957 realty tax obligations to There is no merit in the above assertion. It is a conclusion unsupported by any
Quezon City. The respondent Treasurer refused to accept the same and claimed provision of law. While Section 10 of Republic Act No. 1400 expressly authorizes
that as per the opinion rendered by the Secretary of Finance, it was discretionary the use of the said certificates for the "payment of all tax obligations of the holder
on his part, the respondent Treasurer, to accept or reject the said certificates. thereof," the said section can only have meant such certificates as were issued
And, invoking his discretion in the premises, the respondent Treasurer explained strictly in accordance with Section 9 of the same Act, i.e., that the instrument is
that he could not accept the certificates offered as Quezon City was then in great payable on demand. And, as discussed above, the certificates issued were not
need of funds. payable on demand, then the benefits of Section 10 cannot be properly invoked.
The petitioners were thus obliged to settle in cash the 1957 tax obligation IN VIEW OF ALL THE FOREGOING, the order appealed from is hereby affirmed,
aforementioned. Subsequently, however, the petitioners tendered once more the with costs against the appellants.
same certificates in payment of their 1958 realty taxes and the respondent
Treasurer similarly rejected the tender. As a result, the petitioners filed the SECOND DIVISION G.R. No. 97753 August 10, 1992
instant mandamus proceedings with the Court of First Instance of Quezon City. CALTEX (PHILIPPINES), INC., petitioner, vs.COURT OF APPEALS and
To the above petition, the LTA filed a timely answer sustaining the petitioners' SECURITY BANK AND TRUST COMPANY, respondents.
stand. The Secretary of Finance, represented by the Solicitor General, also filed REGALADO, J.:
an answer, which argued that he was not a necessary party to the case as he
was not the officer with the duty of collecting taxes. This petition for review on certiorari impugns and seeks the reversal of the
The respondent Treasurer did not file an answer. Instead, represented by the City decision promulgated by respondent court on March 8, 1991 in CA-G.R. CV No.
Attorney's Office, he filed a Motion to Dismiss on the ground that the petition filed 23615 1 affirming with modifications, the earlier decision of the Regional Trial
to state a cause of action. Court of Manila, Branch XLII, 2 which dismissed the complaint filed therein by
The Motion to Dismiss discussed various arguments for the position of the herein petitioner against respondent bank.
respondent that he could not be compelled to accept the certificates. In effect, The undisputed background of this case, as found by the court a quo and
however, they resolve themselves into the single question of whether or not the adopted by respondent court, appears of record:
said certificates where drawn payable on demand as required by Section 9 of 1. On various dates, defendant, a commercial banking institution, through its
Republic Act 1400. Sucat Branch issued 280 certificates of time deposit (CTDs) in favor of one Angel
The respondent Treasurer contends that the certificates in question were not dela Cruz who deposited with herein defendant the aggregate amount of
issued strictly in accordance with the provisions of Republic Act No. 1400 P1,120,000.00, as follows: (Joint Partial Stipulation of Facts and Statement of
because while Section 9 of that Act inquires that "negotiable land certificates shall Issues, Original Records, p. 207; Defendant's Exhibits 1 to 280);
be issued in denominations of one thousand pesos or multiples of one thousand CTD CTD
pesos and shall be payable to bearer on demand . . ., " the ones issue to the Dates Serial Nos. Quantity Amount
petitioners were payable to bearer not on demand but, only upon the expiration of 22 Feb. 82 90101 to 90120 20 P80,000
the five-year period there in specified. 26 Feb. 82 74602 to 74691 90 360,000
On the other hand, the petitioners contend that although the certificates issued 2 Mar. 82 74701 to 74740 40 160,000
could not really be encashed within the period therein mentioned, they could, 4 Mar. 82 90127 to 90146 20 80,000
however, still be used for the settlement of tax liabilities at any time after their 5 Mar. 82 74797 to 94800 4 16,000
issue in accordance with Section 10 of the same Act. The petitioners maintain 5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000

8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000
——— ————
Total 280 P1,120,000
===== ========
2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein plaintiff
in connection with his purchased of fuel products from the latter (Original Record,
p. 208).
3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, the
Sucat Branch Manger, that he lost all the certificates of time deposit in dispute.
Mr. Tiangco advised said depositor to execute and submit a notarized Affidavit of
Loss, as required by defendant bank's procedure, if he desired replacement of
said lost CTDs (TSN, February 9, 1987, pp. 48-50).
4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant
bank the required Affidavit of Loss (Defendant's Exhibit 281). On the basis of said
affidavit of loss, 280 replacement CTDs were issued in favor of said depositor
(Defendant's Exhibits 282-561).
5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from
defendant bank in the amount of Eight Hundred Seventy Five Thousand Pesos
(P875,000.00). On the same date, said depositor executed a notarized Deed of
Assignment of Time Deposit (Exhibit 562) which stated, among others, that he
(de la Cruz) surrenders to defendant bank "full control of the indicated time
deposits from and after date" of the assignment and further authorizes said bank
to pre-terminate, set-off and "apply the said time deposits to the payment of
whatever amount or amounts may be due" on the loan upon its maturity (TSN,
February 9, 1987, pp. 60-62).
6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex
(Phils.) Inc., went to the defendant bank's Sucat branch and presented for
verification the CTDs declared lost by Angel dela Cruz alleging that the same
were delivered to herein plaintiff "as security for purchases made with Caltex
Philippines, Inc." by said depositor (TSN, February 9, 1987, pp. 54-68).
7. On November 26, 1982, defendant received a letter (Defendant's Exhibit 563)
from herein plaintiff formally informing it of its possession of the CTDs in question
and of its decision to pre-terminate the same.
8. On December 8, 1982, plaintiff was requested by herein defendant to furnish
the former "a copy of the document evidencing the guarantee agreement with Mr.
Angel dela Cruz" as well as "the details of Mr. Angel dela Cruz" obligation against
which plaintiff proposed to apply the time deposits (Defendant's Exhibit 564).
9. No copy of the requested documents was furnished herein defendant.
10. Accordingly, defendant bank rejected the plaintiff's demand and claim for
payment of the value of the CTDs in a letter dated February 7, 1983 (Defendant's
Exhibit 566).
11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured
and fell due and on August 5, 1983, the latter set-off and applied the time
deposits in question to the payment of the matured loan (TSN, February 9, 1987,
pp. 130-131).
12. In view of the foregoing, plaintiff filed the instant complaint, praying that
defendant bank be ordered to pay it the aggregate value of the certificates of time
deposit of P1,120,000.00 plus accrued interest and compounded interest therein
at 16% per annum, moral and exemplary damages as well as attorney's fees.
After trial, the court a quo rendered its decision dismissing the instant
complaint. 3
On appeal, as earlier stated, respondent court affirmed the lower court's dismissal
of the complaint, hence this petition wherein petitioner faults respondent court in
ruling (1) that the subject certificates of deposit are non-negotiable despite being
clearly negotiable instruments; (2) that petitioner did not become a holder in due
course of the said certificates of deposit; and (3) in disregarding the pertinent
provisions of the Code of Commerce relating to lost instruments payable to
bearer. 4
Nego Instruments Set 1 (#s1-70) Page 15 of 112
Lumbas. Dadat
The instant petition is bereft of merit. q In other words Mr. Witness, you are saying that per
A sample text of the certificates of time deposit is reproduced below to provide a books of the bank, the depositor referred (sic) in these
better understanding of the issues involved in this recourse. certificates states that it was Angel dela Cruz?
SECURITY BANK witness:a Yes, your Honor, and we have the record to show that Angel dela Cruz
AND TRUST COMPANY was the one who cause (sic) the amount.
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines Atty. Calida:q And no other person or entity or company, Mr. Witness?
SUCAT OFFICEP 4,000.00 witness:a None, your Honor. 7
CERTIFICATE OF DEPOSIT xxx xxx xxx
Rate 16% Atty. Calida:q Mr. Witness, who is the depositor identified in all of these
Date of Maturity FEB. 23, 1984 FEB 22, certificates of time deposit insofar as the bank is concerned?
1982, 19____ witness:a Angel dela Cruz is the depositor. 8
This is to Certify that B E A R E xxx xxx xxx
R has deposited in this Bank On this score, the accepted rule is that the negotiability or non-negotiability of an
the sum of PESOS: FOUR instrument is determined from the writing, that is, from the face of the instrument
THOUSAND ONLY, SECURITY itself.9 In the construction of a bill or note, the intention of the parties is to control,
BANK SUCAT OFFICE P4,000 if it can be legally ascertained. 10 While the writing may be read in the light of
& 00 CTS Pesos, Philippine surrounding circumstances in order to more perfectly understand the intent and
Currency, repayable to said meaning of the parties, yet as they have constituted the writing to be the only
depositor 731 days. after date, outward and visible expression of their meaning, no other words are to be added
upon presentation and to it or substituted in its stead. The duty of the court in such case is to ascertain,
surrender of this certificate, with not what the parties may have secretly intended as contradistinguished from what
interest at the rate of 16% per their words express, but what is the meaning of the words they have used. What
cent per annum. the parties meant must be determined by what they said. 11
(Sgd. Illegible) (Sgd. Illegible) Contrary to what respondent court held, the CTDs are negotiable instruments.
—————————— ——————————— The documents provide that the amounts deposited shall be repayable to the
AUTHORIZED SIGNATURES 5 depositor. And who, according to the document, is the depositor? It is the
Respondent court ruled that the CTDs in question are non-negotiable "bearer." The documents do not say that the depositor is Angel de la Cruz and
instruments, nationalizing as follows: that the amounts deposited are repayable specifically to him. Rather, the amounts
. . . While it may be true that the word "bearer" appears rather boldly are to be repayable to the bearer of the documents or, for that matter, whosoever
in the CTDs issued, it is important to note that after the word may be the bearer at the time of presentment.
"BEARER" stamped on the space provided supposedly for the name If it was really the intention of respondent bank to pay the amount to Angel de la
of the depositor, the words "has deposited" a certain amount follows. Cruz only, it could have with facility so expressed that fact in clear and categorical
The document further provides that the amount deposited shall be terms in the documents, instead of having the word "BEARER" stamped on the
"repayable to said depositor" on the period indicated. Therefore, the space provided for the name of the depositor in each CTD. On the wordings of
text of the instrument(s) themselves manifest with clarity that they are the documents, therefore, the amounts deposited are repayable to whoever may
payable, not to whoever purports to be the "bearer" but only to the be the bearer thereof. Thus, petitioner's aforesaid witness merely declared that
specified person indicated therein, the depositor. In effect, the Angel de la Cruz is the depositor "insofar as the bank is concerned," but
appellee bank acknowledges its depositor Angel dela Cruz as the obviously other parties not privy to the transaction between them would not be in
person who made the deposit and further engages itself to pay said a position to know that the depositor is not the bearer stated in the CTDs. Hence,
depositor the amount indicated thereon at the stipulated date. 6 the situation would require any party dealing with the CTDs to go behind the plain
We disagree with these findings and conclusions, and hereby hold that the CTDs import of what is written thereon to unravel the agreement of the parties thereto
in question are negotiable instruments. Section 1 Act No. 2031, otherwise known through facts aliunde. This need for resort to extrinsic evidence is what is sought
as the Negotiable Instruments Law, enumerates the requisites for an instrument to be avoided by the Negotiable Instruments Law and calls for the application of
to become negotiable, viz: the elementary rule that the interpretation of obscure words or stipulations in a
(a) It must be in writing and signed by the maker or drawer; contract shall not favor the party who caused the obscurity. 12
(b) Must contain an unconditional promise or order to pay a sum The next query is whether petitioner can rightfully recover on the CTDs. This time,
certain in money; the answer is in the negative. The records reveal that Angel de la Cruz, whom
(c) Must be payable on demand, or at a fixed or determinable future petitioner chose not to implead in this suit for reasons of its own, delivered the
time; CTDs amounting to P1,120,000.00 to petitioner without informing respondent
(d) Must be payable to order or to bearer; and bank thereof at any time. Unfortunately for petitioner, although the CTDs are
(e) Where the instrument is addressed to a drawee, he must be bearer instruments, a valid negotiation thereof for the true purpose and
named or otherwise indicated therein with reasonable certainty. agreement between it and De la Cruz, as ultimately ascertained, requires both
delivery and indorsement. For, although petitioner seeks to deflect this fact, the
The CTDs in question undoubtedly meet the requirements of the law for CTDs were in reality delivered to it as a security for De la Cruz' purchases of its
negotiability. The parties' bone of contention is with regard to requisite (d) set fuel products. Any doubt as to whether the CTDs were delivered as payment for
forth above. It is noted that Mr. Timoteo P. Tiangco, Security Bank's Branch the fuel products or as a security has been dissipated and resolved in favor of the
Manager way back in 1982, testified in open court that the depositor reffered to in latter by petitioner's own authorized and responsible representative himself.
the CTDs is no other than Mr. Angel de la Cruz. In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q.
xxx xxx xxx Aranas, Jr., Caltex Credit Manager, wrote: ". . . These certificates of deposit were
Atty. Calida: negotiated to us by Mr. Angel dela Cruz to guarantee his purchases of fuel

products" (Emphasis ours.) 13 This admission is conclusive upon petitioner, its
protestations notwithstanding. Under the doctrine of estoppel, an admission or
representation is rendered conclusive upon the person making it, and cannot be
denied or disproved as against the person relying thereon. 14 A party may not go
back on his own acts and representations to the prejudice of the other party who
relied upon them. 15 In the law of evidence, whenever a party has, by his own
declaration, act, or omission, intentionally and deliberately led another to believe
a particular thing true, and to act upon such belief, he cannot, in any litigation
arising out of such declaration, act, or omission, be permitted to falsify it. 16
If it were true that the CTDs were delivered as payment and not as security,
petitioner's credit manager could have easily said so, instead of using the words
"to guarantee" in the letter aforequoted. Besides, when respondent bank, as
defendant in the court below, moved for a bill of particularity therein 17 praying,
among others, that petitioner, as plaintiff, be required to aver with sufficient
definiteness or particularity (a) the due date or dates of payment of the alleged
indebtedness of Angel de la Cruz to plaintiff and (b) whether or not it issued a
receipt showing that the CTDs were delivered to it by De la Cruz as payment of
the latter's alleged indebtedness to it, plaintiff corporation opposed the
motion. 18 Had it produced the receipt prayed for, it could have proved, if such
truly was the fact, that the CTDs were delivered as payment and not as security.
Having opposed the motion, petitioner now labors under the presumption that
evidence willfully suppressed would be adverse if produced. 19
Under the foregoing circumstances, this disquisition in Intergrated Realty
Corporation, et al. vs. Philippine National Bank, et al. 20 is apropos:
. . . Adverting again to the Court's pronouncements in Lopez, supra,
we quote therefrom:
The character of the transaction between the parties is to
be determined by their intention, regardless of what
language was used or what the form of the transfer was.
If it was intended to secure the payment of money, it
must be construed as a pledge; but if there was some
other intention, it is not a pledge. However, even though
a transfer, if regarded by itself, appears to have been
absolute, its object and character might still be qualified
and explained by contemporaneous writing declaring it to
have been a deposit of the property as collateral
security. It has been said that a transfer of property by
the debtor to a creditor, even if sufficient on its face to
make an absolute conveyance, should be treated as a
pledge if the debt continues in inexistence and is not
discharged by the transfer, and that accordingly the use
of the terms ordinarily importing conveyance of absolute
ownership will not be given that effect in such a
transaction if they are also commonly used in pledges
and mortgages and therefore do not unqualifiedly
indicate a transfer of absolute ownership, in the absence
of clear and unambiguous language or other
circumstances excluding an intent to pledge.
Petitioner's insistence that the CTDs were negotiated to it begs the question.
Under the Negotiable Instruments Law, an instrument is negotiated when it is
transferred from one person to another in such a manner as to constitute the
transferee the holder thereof, 21 and a holder may be the payee or indorsee of a
bill or note, who is in possession of it, or the bearer thereof. 22 In the present
case, however, there was no negotiation in the sense of a transfer of the legal title
to the CTDs in favor of petitioner in which situation, for obvious reasons, mere
delivery of the bearer CTDs would have sufficed. Here, the delivery thereof only
as security for the purchases of Angel de la Cruz (and we even disregard the fact
that the amount involved was not disclosed) could at the most constitute
petitioner only as a holder for value by reason of his lien. Accordingly, a
negotiation for such purpose cannot be effected by mere delivery of the
instrument since, necessarily, the terms thereof and the subsequent disposition of
such security, in the event of non-payment of the principal obligation, must be
contractually provided for.
The pertinent law on this point is that where the holder has a lien on the
instrument arising from contract, he is deemed a holder for value to the extent of
his lien. 23 As such holder of collateral security, he would be a pledgee but the
requirements therefor and the effects thereof, not being provided for by the
Negotiable Instruments Law, shall be governed by the Civil Code provisions on
pledge of incorporeal rights, 24 which inceptively provide:
Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . .
. may also be pledged. The instrument proving the right pledged shall
be delivered to the creditor, and if negotiable, must be indorsed.
Art. 2096. A pledge shall not take effect against third persons if a
description of the thing pledged and the date of the pledge do not
appear in a public instrument.
Aside from the fact that the CTDs were only delivered but not indorsed, the
factual findings of respondent court quoted at the start of this opinion show that
petitioner failed to produce any document evidencing any contract of pledge or
guarantee agreement between it and Angel de la Cruz. 25 Consequently, the mere
delivery of the CTDs did not legally vest in petitioner any right effective against
and binding upon respondent bank. The requirement under Article 2096
aforementioned is not a mere rule of adjective law prescribing the mode whereby
proof may be made of the date of a pledge contract, but a rule of substantive law
prescribing a condition without which the execution of a pledge contract cannot
affect third persons adversely. 26
On the other hand, the assignment of the CTDs made by Angel de la Cruz in
favor of respondent bank was embodied in a public instrument. 27 With regard to
this other mode of transfer, the Civil Code specifically declares:
Art. 1625. An assignment of credit, right or action shall produce no
effect as against third persons, unless it appears in a public
instrument, or the instrument is recorded in the Registry of Property
in case the assignment involves real property.
Respondent bank duly complied with this statutory requirement. Contrarily,
petitioner, whether as purchaser, assignee or lien holder of the CTDs, neither
proved the amount of its credit or the extent of its lien nor the execution of any
public instrument which could affect or bind private respondent. Necessarily,
therefore, as between petitioner and respondent bank, the latter has definitely the
better right over the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the question of
whether or not private respondent observed the requirements of the law in the
case of lost negotiable instruments and the issuance of replacement certificates
therefor, on the ground that petitioner failed to raised that issue in the lower
court. 28
On this matter, we uphold respondent court's finding that the aspect of alleged
negligence of private respondent was not included in the stipulation of the parties
and in the statement of issues submitted by them to the trial court. 29 The issues
agreed upon by them for resolution in this case are:
1. Whether or not the CTDs as worded are negotiable instruments.
2. Whether or not defendant could legally apply the amount covered
by the CTDs against the depositor's loan by virtue of the assignment
(Annex "C").
3. Whether or not there was legal compensation or set off involving
the amount covered by the CTDs and the depositor's outstanding
account with defendant, if any.
4. Whether or not plaintiff could compel defendant to preterminate
the CTDs before the maturity date provided therein.
5. Whether or not plaintiff is entitled to the proceeds of the CTDs.
6. Whether or not the parties can recover damages, attorney's fees
and litigation expenses from each other.
As respondent court correctly observed, with appropriate citation of some
doctrinal authorities, the foregoing enumeration does not include the issue of
negligence on the part of respondent bank. An issue raised for the first time on
Nego Instruments Set 1 (#s1-70) Page 16 of 112
Lumbas. Dadat
appeal and not raised timely in the proceedings in the lower court is barred by
estoppel. 30 Questions raised on appeal must be within the issues framed by the
parties and, consequently, issues not raised in the trial court cannot be raised for
the first time on appeal. 31
Pre-trial is primarily intended to make certain that all issues necessary to the
disposition of a case are properly raised. Thus, to obviate the element of surprise,
parties are expected to disclose at a pre-trial conference all issues of law and fact
which they intend to raise at the trial, except such as may involve privileged or
impeaching matters. The determination of issues at a pre-trial conference bars
the consideration of other questions on appeal. 32
To accept petitioner's suggestion that respondent bank's supposed negligence
may be considered encompassed by the issues on its right to preterminate and
receive the proceeds of the CTDs would be tantamount to saying that petitioner
could raise on appeal any issue. We agree with private respondent that the broad
ultimate issue of petitioner's entitlement to the proceeds of the questioned
certificates can be premised on a multitude of other legal reasons and causes of
action, of which respondent bank's supposed negligence is only one. Hence,
petitioner's submission, if accepted, would render a pre-trial delimitation of issues
a useless exercise. 33
Still, even assuming arguendo that said issue of negligence was raised in the
court below, petitioner still cannot have the odds in its favor. A close scrutiny of
the provisions of the Code of Commerce laying down the rules to be followed in
case of lost instruments payable to bearer, which it invokes, will reveal that said
provisions, even assuming their applicability to the CTDs in the case at bar, are
merely permissive and not mandatory. The very first article cited by petitioner
speaks for itself.
Art 548. The dispossessed owner, no matter for what cause it may
be, may apply to the judge or court of competent jurisdiction, asking
that the principal, interest or dividends due or about to become due,
be not paid a third person, as well as in order to prevent the
ownership of the instrument that a duplicate be issued him.
(Emphasis ours.)
xxx xxx xxx
The use of the word "may" in said provision shows that it is not mandatory but
discretionary on the part of the "dispossessed owner" to apply to the judge or
court of competent jurisdiction for the issuance of a duplicate of the lost
instrument. Where the provision reads "may," this word shows that it is not
mandatory but discretional. 34 The word "may" is usually permissive, not
mandatory. 35 It is an auxiliary verb indicating liberty, opportunity, permission and
possibility. 36
Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of
the Code of Commerce, on which petitioner seeks to anchor respondent bank's
supposed negligence, merely established, on the one hand, a right of recourse in
favor of a dispossessed owner or holder of a bearer instrument so that he may
obtain a duplicate of the same, and, on the other, an option in favor of the party
liable thereon who, for some valid ground, may elect to refuse to issue a
replacement of the instrument. Significantly, none of the provisions cited by
petitioner categorically restricts or prohibits the issuance a duplicate or
replacement instrument sans compliance with the procedure outlined therein, and
none establishes a mandatory precedent requirement therefor.
WHEREFORE, on the modified premises above set forth, the petition is
DENIED and the appealed decision is hereby AFFIRMED.SO ORDERED.
FIRST DIVISIONG.R. No. 172954 October 5, 2011
ENGR. JOSE E. CAYANAN, Petitioner, vs.NORTH STAR INTERNATIONAL
TRAVEL, INC., Respondent.
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$60,0003 to View Sea Ventures Ltd., in Nigeria from her personal
account in Citibank Makati. On March 29, 1994, Virginia again sent US$40,000 to
View Sea Ventures by telegraphic transfer,4 with US$15,000 coming from
petitioner. Likewise, on various dates, North Star extended credit to petitioner for
the airplane tickets of his clients, with the total amount of such indebtedness
under the credit extensions eventually reaching ₱510,035.47.5
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 : ₱695,000.00
Dated/Postdated : May 15, 1994
Payable to : North Star International Travel, Inc.
Check No : 246823
Drawn Against : Republic Planters Bank
Amount : ₱278,000.00
Dated/Postdated : May 15, 1994
Payable to : North Star International Travel, Inc.
Check No : 246824
Drawn Against : Republic Planters Bank
Amount : ₱22,703.00
Dated/Postdated : May 15, 1994
Payable to : North Star International Travel, Inc.
Check No : 687803
Drawn Against : PCIB
Amount : ₱1,500,000.00
Dated/Postdated : April 14, 1994
Payable to : North Star International Travel, Inc.
Check No : 687804
Drawn Against : PCIB
Amount : ₱35,000.00
Dated/Postdated : April 14, 1994
Payable to : North Star International Travel, Inc.6
When presented for payment, the checks in the amount of ₱1,500,000 and
₱35,000 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] Int’l
Mgt & Cont. Serv. did then and there willfully, unlawfully and feloniously make
out[,] draw and issue to North Star Int’l. 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 (₱484,078.42) as interest of
the value of the checks subject matter of the instant case, deducting therefrom
the amount of TWO HUNDRED TWENTY THOUSAND PESOS (₱220,000.00)
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.x x x xSO ORDERED.10
On appeal, the Regional Trial Court (RTC) acquitted petitioner of the criminal
charges. The RTC also held that there is no basis for the imposition of the civil
liability on petitioner. The RTC ratiocinated that:
In the instant cases, the checks issued by the accused were presented beyond
the period of NINETY (90) DAYS and therefore, there is no violation of the
provision of Batas Pambansa Blg. 22 and the accused is not considered to have
committed the offense. There being no offense committed, accused is not
criminally liable and there would be no basis for the imposition of the civil liability
arising from the offense.11
Aggrieved, North Star elevated the case to the CA. On May 31, 2006, the CA
reversed the decision of the RTC insofar as the civil aspect is concerned and held
petitioner civilly liable for the value of the subject checks. The falloof the CA
decision reads:
WHEREFORE, the petition is GRANTED. The assailed Decision of the RTC
insofar as Cayanan's civil liability is concerned, is NULLIFIED and SET ASIDE.
The indemnity awarded by the MeTC in its September 1, 1999 Decision is
REINSTATED.SO ORDERED.12
The CA ruled that although Cayanan was acquitted of the criminal charges, he
may still be held civilly liable for the checks he issued since he never denied
having issued the five postdated checks which were dishonored.
Petitioner now assails the CA decision raising the lone issue of whether the CA
erred in holding him civilly liable to North Star for the value of the checks.13
Petitioner argues that the CA erred in holding him civilly liable to North Star for
the value of the checks since North Star did not give any valuable consideration
for the checks. He insists that the US$85,000 sent to View Sea Ventures was not
sent for the account of North Star but for the account of Virginia as her
investment. He points out that said amount was taken from Virginia’s personal
dollar account in Citibank and not from North Star’s 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 ₱2,530,703 plus interest of ₱264,078.45, and that the
₱220,000 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
Nego Instruments Set 1 (#s1-70) Page 17 of 112
Lumbas. Dadat
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 Star’s 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 ₱695,000.00 is equivalent to US$25,000; Check No. 246823 dated
May 15, 1994 in the amount of ₱278,000 is equivalent to US$10,000; Check No.
246824 in the amount of ₱22,703 represents the one month interest for
₱695,000 and ₱278,000 at the rate of twenty-eight (28%) percent per
annum;17 Check No. 687803 dated April 14, 1994 in the amount of ₱1,500,000 is
equivalent to US$50,000 andCheck No. 687804 dated 14 April 1994 in the
amount of ₱35,000 represents the one month interest for ₱1,500,000 at the rate
of twenty-eight (28%) percent per annum.18 Petitioner has not substantially
refuted these averments.1avvphi1
Concomitantly, petitioner’s 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 petitioner’s 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 Balagtas’s participation
was merely to send the money through telegraphic transfer in exchange for the
checks issued by petitioner to North Star. Indeed, the transaction between
petitioner and North Star is actually in the nature of a loan and the checks were
issued as payment of the principal and the interest.
As aptly found by the trial court:
It is to be noted that the checks subject matter of the instant case were issued in
the name of North Star International Inc., represented by private complainant
Virginia Balagtas in replacement of the amount of dollars remitted by the latter to
Vie[w] Sea Ventures in Nigeria. x x x But Virginia Balagtas has no business
transaction with Vie[w] Sea Ventures where accused has been sending his
contract workers and the North Star provided the trip tickets for said workers sent
by the accused. North Star International has no participation at all in the
transaction between accused and the Vie[w] Sea Ventures except in providing
plane ticket used by the contract workers of the accused upon its understanding
with the latter. The contention of the accused that the dollars were sent by
Virginia Balagtas to Nigeria as business investment has not been shown by any
proof to set aside the foregoing negative presumptions, thus negates accused
contentions regarding the absence of consideration for the issuance of checks. x
x x19
Petitioner claims that North Star did not give any valuable consideration for the
checks since the US$85,000 was taken from the personal dollar account of
Virginia and not the corporate funds of North Star. The contention, however,
deserves scant consideration. The subject checks, bearing petitioner’s signature,
speak for themselves. The fact that petitioner himself specifically named North
Star as the payee of the checks is an admission of his liability to North Star and
not to Virginia Balagtas, who as manager merely facilitated the transfer of funds.
Indeed, it is highly inconceivable that an experienced businessman like petitioner
would issue various checks in sizeable amounts to a payee if these are without

consideration. Moreover, we note that Virginia Balagtas averred in her
Affidavit20 that North Star caused the payment of the US$60,000 and US$25,000
to View Sea Ventures to accommodate petitioner, which statement petitioner
failed to refute. In addition, petitioner did not question the Statement of Account
No. 863921 dated August 31, 1994 issued by North Star which contained itemized
amounts including the US$60,000 and US$25,000 sent through telegraphic
transfer to View Sea Ventures per his instruction. Thus, the inevitable conclusion
is that when petitioner issued the subject checks to North Star as payee, he did
so to settle his obligation with North Star for the US$85,000. And since the only
payment petitioner made to North Star was in the amount of ₱220,000.00, which
was applied to interest due, his liability is not extinguished. Having failed to fully
settle his obligation under the checks, the appellate court was correct in holding
petitioner liable to pay the value of the five checks he issued in favor of North
Star.
WHEREFORE, the present appeal by way of a petition for review on certiorari is
DENIED for lack of merit. The Decision dated May 31, 2006 of the Court of
Appeals in CA-G.R. SP No. 65538 is AFFIRMED.With costs against petitioner.SO
ORDERED.
SECOND DIVISIONG.R. No. 72593 April 30, 1987
CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and
RODOLFO T. VERGARA, petitioners, vs.IFC LEASING AND ACCEPTANCE
CORPORATION, respondent.
GUTIERREZ, JR., J.:
This is a petition for certiorari under Rule 45 of the Rules of Court which assails
on questions of law a decision of the Intermediate Appellate Court in AC-G.R. CV
No. 68609 dated July 17, 1985, as well as its resolution dated October 17, 1985,
denying the motion for reconsideration.
The antecedent facts culled from the petition are as follows:
The petitioner is a corporation engaged in the logging business. It had for its
program of logging activities for the year 1978 the opening of additional roads,
and simultaneous logging operations along the route of said roads, in its logging
concession area at Baganga, Manay, and Caraga, Davao Oriental. For this
purpose, it needed two (2) additional units of tractors.
Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf & Pacific
Company of Manila, through its sister company and marketing arm, Industrial
Products Marketing (the "seller-assignor"), a corporation dealing in tractors and
other heavy equipment business, offered to sell to petitioner-corporation two (2)
"Used" Allis Crawler Tractors, one (1) an HDD-21-B and the other an HDD-16-B.
In order to ascertain the extent of work to which the tractors were to be exposed,
(t.s.n., May 28, 1980, p. 44) and to determine the capability of the "Used" tractors
being offered, petitioner-corporation requested the seller-assignor to inspect the
job site. After conducting said inspection, the seller-assignor assured petitioner-
corporation that the "Used" Allis Crawler Tractors which were being offered were
fit for the job, and gave the corresponding warranty of ninety (90) days
performance of the machines and availability of parts. (t.s.n., May 28, 1980, pp.
59-66).
With said assurance and warranty, and relying on the seller-assignor's skill and
judgment, petitioner-corporation through petitioners Wee and Vergara, president
and vice- president, respectively, agreed to purchase on installment said two (2)
units of "Used" Allis Crawler Tractors. It also paid the down payment of Two
Hundred Ten Thousand Pesos (P210,000.00).
On April 5, 1978, the seller-assignor issued the sales invoice for the two 2) units
of tractors (Exh. "3-A"). At the same time, the deed of sale with chattel mortgage
with promissory note was executed (Exh. "2").
Simultaneously with the execution of the deed of sale with chattel mortgage with
promissory note, the seller-assignor, by means of a deed of assignment (E exh. "
1 "), assigned its rights and interest in the chattel mortgage in favor of the
respondent.
Immediately thereafter, the seller-assignor delivered said two (2) units of "Used"
tractors to the petitioner-corporation's job site and as agreed, the seller-assignor
stationed its own mechanics to supervise the operations of the machines.
Barely fourteen (14) days had elapsed after their delivery when one of the tractors
broke down and after another nine (9) days, the other tractor likewise broke down
(t.s.n., May 28, 1980, pp. 68-69).
On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the seller-
assignor of the fact that the tractors broke down and requested for the seller-
assignor's usual prompt attention under the warranty (E exh. " 5 ").
In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit "5," the
seller-assignor sent to the job site its mechanics to conduct the necessary repairs
(Exhs. "6," "6-A," "6-B," 16 C," "16-C-1," "6-D," and "6-E"), but the tractors did not
come out to be what they should be after the repairs were undertaken because
the units were no longer serviceable (t. s. n., May 28, 1980, p. 78).
Because of the breaking down of the tractors, the road building and simultaneous
logging operations of petitioner-corporation were delayed and petitioner Vergara
advised the seller-assignor that the payments of the installments as listed in the
promissory note would likewise be delayed until the seller-assignor completely
fulfills its obligation under its warranty (t.s.n, May 28, 1980, p. 79).
Since the tractors were no longer serviceable, on April 7, 1979, petitioner Wee
asked the seller-assignor to pull out the units and have them reconditioned, and
thereafter to offer them for sale. The proceeds were to be given to the respondent
and the excess, if any, to be divided between the seller-assignor and petitioner-
corporation which offered to bear one-half (1/2) of the reconditioning cost (E exh.
" 7 ").
No response to this letter, Exhibit "7," was received by the petitioner-corporation
and despite several follow-up calls, the seller-assignor did nothing with regard to
the request, until the complaint in this case was filed by the respondent against
the petitioners, the corporation, Wee, and Vergara.
The complaint was filed by the respondent against the petitioners for the recovery
of the principal sum of One Million Ninety Three Thousand Seven Hundred Eighty
Nine Pesos & 71/100 (P1,093,789.71), accrued interest of One Hundred Fifty
One Thousand Six Hundred Eighteen Pesos & 86/100 (P151,618.86) as of
August 15, 1979, accruing interest thereafter at the rate of twelve (12%) percent
per annum, attorney's fees of Two Hundred Forty Nine Thousand Eighty One
Pesos & 71/100 (P249,081.7 1) and costs of suit.
The petitioners filed their amended answer praying for the dismissal of the
complaint and asking the trial court to order the respondent to pay the petitioners
damages in an amount at the sound discretion of the court, Twenty Thousand
Pesos (P20,000.00) as and for attorney's fees, and Five Thousand Pesos
(P5,000.00) for expenses of litigation. The petitioners likewise prayed for such
other and further relief as would be just under the premises.
In a decision dated April 20, 1981, the trial court rendered the following judgment:
WHEREFORE, judgment is hereby rendered:
1. ordering defendants to pay jointly and severally in their official and
personal capacities the principal sum of ONE MILLION NINETY
THREE THOUSAND SEVEN HUNDRED NINETY EIGHT PESOS &
71/100 (P1,093,798.71) with accrued interest of ONE HUNDRED
FIFTY ONE THOUSAND SIX HUNDRED EIGHTEEN PESOS &
86/100 (P151,618.,86) as of August 15, 1979 and accruing interest
thereafter at the rate of 12% per annum;
2. ordering defendants to pay jointly and severally attorney's fees
equivalent to ten percent (10%) of the principal and to pay the costs
of the suit.
Defendants' counterclaim is disallowed. (pp. 45-46, Rollo)
On June 8, 1981, the trial court issued an order denying the motion for
reconsideration filed by the petitioners.
Thus, the petitioners appealed to the Intermediate Appellate Court and assigned
therein the following errors:
I Hence, this petition was filed on the following grounds:
Nego Instruments Set 1 (#s1-70) Page 18 of 112
Lumbas. Dadat
THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER
ATLANTIC GULF AND PACIFIC COMPANY OF MANILA DID NOT APPROVE
DEFENDANTS-APPELLANTS CLAIM OF WARRANTY.
II
THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF- APPELLEE
IS A HOLDER IN DUE COURSE OF THE PROMISSORY NOTE AND SUED
UNDER SAID NOTE AS HOLDER THEREOF IN DUE COURSE.
On July 17, 1985, the Intermediate Appellate Court issued the challenged
decision affirming in toto the decision of the trial court. The pertinent portions of
the decision are as follows:
xxx xxx xxx
From the evidence presented by the parties on the issue of warranty, We are of
the considered opinion that aside from the fact that no provision of warranty
appears or is provided in the Deed of Sale of the tractors and even admitting that
in a contract of sale unless a contrary intention appears, there is an implied
warranty, the defense of breach of warranty, if there is any, as in this case, does
not lie in favor of the appellants and against the plaintiff-appellee who is the
assignee of the promissory note and a holder of the same in due course.
Warranty lies in this case only between Industrial Products Marketing and
Consolidated Plywood Industries, Inc. The plaintiff-appellant herein upon
application by appellant corporation granted financing for the purchase of the
questioned units of Fiat-Allis Crawler,Tractors.
xxx xxx xxx
Holding that breach of warranty if any, is not a defense available to appellants
either to withdraw from the contract and/or demand a proportionate reduction of
the price with damages in either case (Art. 1567, New Civil Code). We now come
to the issue as to whether the plaintiff-appellee is a holder in due course of the
promissory note.
To begin with, it is beyond arguments that the plaintiff-appellee is a financing
corporation engaged in financing and receivable discounting extending credit
facilities to consumers and industrial, commercial or agricultural enterprises by
discounting or factoring commercial papers or accounts receivable duly
authorized pursuant to R.A. 5980 otherwise known as the Financing Act.
A study of the questioned promissory note reveals that it is a negotiable
instrument which was discounted or sold to the IFC Leasing and Acceptance
Corporation for P800,000.00 (Exh. "A") considering the following. it is in writing
and signed by the maker; it contains an unconditional promise to pay a certain
sum of money payable at a fixed or determinable future time; it is payable to order
(Sec. 1, NIL); the promissory note was negotiated when it was transferred and
delivered by IPM to the appellee and duly endorsed to the latter (Sec. 30, NIL); it
was taken in the conditions that the note was complete and regular upon its face
before the same was overdue and without notice, that it had been previously
dishonored and that the note is in good faith and for value without notice of any
infirmity or defect in the title of IPM (Sec. 52, NIL); that IFC Leasing and
Acceptance Corporation held the instrument free from any defect of title of prior
parties and free from defenses available to prior parties among themselves and
may enforce payment of the instrument for the full amount thereof against all
parties liable thereon (Sec. 57, NIL); the appellants engaged that they would pay
the note according to its tenor, and admit the existence of the payee IPM and its
capacity to endorse (Sec. 60, NIL).
In view of the essential elements found in the questioned promissory
note, We opine that the same is legally and conclusively enforceable
against the defendants-appellants.
WHEREFORE, finding the decision appealed from according to law
and evidence, We find the appeal without merit and thus affirm the
decision in toto. With costs against the appellants. (pp. 50-55, Rollo)
The petitioners' motion for reconsideration of the decision of July 17, 1985 was
denied by the Intermediate Appellate Court in its resolution dated October 17,
1985, a copy of which was received by the petitioners on October 21, 1985.
I.

ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A NEGOTIABLE
INSTRUMENT AS DEFINED UNDER THE LAW SINCE IT IS NEITHER
PAYABLE TO ORDER NOR TO BEARER.
II
THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT IS A
MERE ASSIGNEE OF THE SUBJECT PROMISSORY NOTE.
III.
SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE INSTRUMENT
AND THE TRANSFER OF RIGHTS WAS THROUGH A MERE ASSIGNMENT,
THE PETITIONERS MAY RAISE AGAINST THE RESPONDENT ALL
DEFENSES THAT ARE AVAILABLE TO IT AS AGAINST THE SELLER-
ASSIGNOR, INDUSTRIAL PRODUCTS MARKETING.
IV.
THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE
PROMISSORY NOTE BECAUSE:
A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF WARRANTY UNDER
THE LAW;
B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE SELLER-
ASSIGNOR OF THE PROMISSORY NOTE.
V.
THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLER-
ASSIGNOR IN FAVOR OF THE RESPONDENT DOES NOT CHANGE THE
NATURE OF THE TRANSACTION FROM BEING A SALE ON INSTALLMENTS
TO A PURE LOAN.
VI.
THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN EVIDENCE
IN ANY COURT BECAUSE THE REQUISITE DOCUMENTARY STAMPS HAVE
NOT BEEN AFFIXED THEREON OR CANCELLED.
The petitioners prayed that judgment be rendered setting aside the decision
dated July 17, 1985, as well as the resolution dated October 17, 1985 and
dismissing the complaint but granting petitioners' counterclaims before the court
of origin.
On the other hand, the respondent corporation in its comment to the petition filed
on February 20, 1986, contended that the petition was filed out of time; that the
promissory note is a negotiable instrument and respondent a holder in due
course; that respondent is not liable for any breach of warranty; and finally, that
the promissory note is admissible in evidence.
The core issue herein is whether or not the promissory note in question is a
negotiable instrument so as to bar completely all the available defenses of the
petitioner against the respondent-assignee.
Preliminarily, it must be established at the outset that we consider the instant
petition to have been filed on time because the petitioners' motion for
reconsideration actually raised new issues. It cannot, therefore, be considered
pro- formal.
The petition is impressed with merit.
First, there is no question that the seller-assignor breached its express 90-day
warranty because the findings of the trial court, adopted by the respondent
appellate court, that "14 days after delivery, the first tractor broke down and 9
days, thereafter, the second tractor became inoperable" are sustained by the
records. The petitioner was clearly a victim of a warranty not honored by the
maker.
The Civil Code provides that:
ART. 1561. The vendor shall be responsible for warranty against the
hidden defects which the thing sold may have, should they render it
unfit for the use for which it is intended, or should they diminish its
fitness for such use to such an extent that, had the vendee been
aware thereof, he would not have acquired it or would have given a
lower price for it; but said vendor shall not be answerable for patent
defects or those which may be visible, or for those which are not
visible if the vendee is an expert who, by reason of his trade or
profession, should have known them.
ART. 1562. In a sale of goods, there is an implied warranty or
condition as to the quality or fitness of the goods, as follows:
(1) Where the buyer, expressly or by implication makes known to the
seller the particular purpose for which the goods are acquired, and it
appears that the buyer relies on the sellers skill or judge judgment
(whether he be the grower or manufacturer or not), there is an
implied warranty that the goods shall be reasonably fit for such
purpose;
xxx xxx xxx
ART. 1564. An implied warranty or condition as to the quality or
fitness for a particular purpose may be annexed by the usage of
trade.
xxx xxx xxx
ART. 1566. The vendor is responsible to the vendee for any hidden
faults or defects in the thing sold even though he was not aware
thereof.
This provision shall not apply if the contrary has been stipulated, and
the vendor was not aware of the hidden faults or defects in the thing
sold. (Emphasis supplied).
It is patent then, that the seller-assignor is liable for its breach of warranty against
the petitioner. This liability as a general rule, extends to the corporation to whom it
assigned its rights and interests unless the assignee is a holder in due course of
the promissory note in question, assuming the note is negotiable, in which case
the latter's rights are based on the negotiable instrument and assuming further
that the petitioner's defenses may not prevail against it.
Secondly, it likewise cannot be denied that as soon as the tractors broke down,
the petitioner-corporation notified the seller-assignor's sister company, AG & P,
about the breakdown based on the seller-assignor's express 90-day warranty,
with which the latter complied by sending its mechanics. However, due to the
seller-assignor's delay and its failure to comply with its warranty, the tractors
became totally unserviceable and useless for the purpose for which they were
purchased.
Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its contract
with the seller-assignor.
Articles 1191 and 1567 of the Civil Code provide that:
ART. 1191. The power to rescind obligations is implied in reciprocal
ones, in case one of the obligors should not comply with what is
incumbent upon him.
The injured party may choose between the fulfillment and the
rescission of the obligation with the payment of damages in either
case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.
xxx xxx xxx
ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and
1566, the vendee may elect between withdrawing from the contract
and demanding a proportionate reduction of the price, with damages
in either case. (Emphasis supplied)
Petitioner, having unilaterally and extrajudicially rescinded its contract with the
seller-assignor, necessarily can no longer sue the seller-assignor except by way
of counterclaim if the seller-assignor sues it because of the rescission.
In the case of the University of the Philippines v. De los Angeles (35 SCRA 102)
we held:
In other words, the party who deems the contract violated may
consider it resolved or rescinded, and act accordingly, without
previous court action, but it proceeds at its own risk. For it is only the
final judgment of the corresponding court that will conclusively and
finally settle whether the action taken was or was not correct in law.
But the law definitely does not require that the contracting party who
believes itself injured must first file suit and wait for adjudgement
before taking extrajudicial steps to protect its interest. Otherwise, the
Nego Instruments Set 1 (#s1-70) Page 19 of 112
Lumbas. Dadat
party injured by the other's breach will have to passively sit and
watch its damages accumulate during the pendency of the suit until
the final judgment of rescission is rendered when the law itself
requires that he should exercise due diligence to minimize its own
damages (Civil Code, Article 2203). (Emphasis supplied)
Going back to the core issue, we rule that the promissory note in question is not a
negotiable instrument.
The pertinent portion of the note is as follows:
FOR VALUE RECEIVED, I/we jointly and severally promise to pay to
the INDUSTRIAL PRODUCTS MARKETING, the sum of ONE
MILLION NINETY THREE THOUSAND SEVEN HUNDRED EIGHTY
NINE PESOS & 71/100 only (P 1,093,789.71), Philippine Currency,
the said principal sum, to be payable in 24 monthly installments
starting July 15, 1978 and every 15th of the month thereafter until
fully paid. ...
Considering that paragraph (d), Section 1 of the Negotiable Instruments Law
requires that a promissory note "must be payable to order or bearer, " it cannot be
denied that the promissory note in question is not a negotiable instrument.
The instrument in order to be considered negotiablility-i.e. must
contain the so-called 'words of negotiable, must be payable to 'order'
or 'bearer'. These words serve as an expression of consent that the
instrument may be transferred. This consent is indispensable since a
maker assumes greater risk under a negotiable instrument than
under a non-negotiable one. ...
xxx xxx xxx
When instrument is payable to order.
SEC. 8. WHEN PAYABLE TO ORDER. — The instrument is payable
to order where it is drawn payable to the order of a specified person
or to him or his order. . . .
xxx xxx xxx
These are the only two ways by which an instrument may be made
payable to order. There must always be a specified person named in
the instrument. It means that the bill or note is to be paid to the
person designated in the instrument or to any person to whom he
has indorsed and delivered the same. Without the words "or order"
or"to the order of, "the instrument is payable only to the person
designated therein and is therefore non-negotiable. Any subsequent
purchaser thereof will not enjoy the advantages of being a holder of a
negotiable instrument but will merely "step into the shoes" of the
person designated in the instrument and will thus be open to all
defenses available against the latter." (Campos and Campos, Notes
and Selected Cases on Negotiable Instruments Law, Third Edition,
page 38). (Emphasis supplied)
Therefore, considering that the subject promissory note is not a negotiable
instrument, it follows that the respondent can never be a holder in due course but
remains a mere assignee of the note in question. Thus, the petitioner may raise
against the respondent all defenses available to it as against the seller-assignor
Industrial Products Marketing.
This being so, there was no need for the petitioner to implied the seller-assignor
when it was sued by the respondent-assignee because the petitioner's defenses
apply to both or either of either of them. Actually, the records show that even the
respondent itself admitted to being a mere assignee of the promissory note in
question, to wit:
ATTY. PALACA:
Did we get it right from the counsel that what is being assigned is the
Deed of Sale with Chattel Mortgage with the promissory note which
is as testified to by the witness was indorsed? (Counsel for Plaintiff
nodding his head.) Then we have no further questions on cross,
COURT:

You confirm his manifestation? You are nodding your head? Do you
confirm that?
ATTY. ILAGAN:
The Deed of Sale cannot be assigned. A deed of sale is a transaction
between two persons; what is assigned are rights, the rights of the
mortgagee were assigned to the IFC Leasing & Acceptance
Corporation.
COURT:
He puts it in a simple way as one-deed of sale and chattel mortgage
were assigned; . . . you want to make a distinction, one is an
assignment of mortgage right and the other one is indorsement of the
promissory note. What counsel for defendants wants is that you
stipulate that it is contained in one single transaction?
ATTY. ILAGAN:
We stipulate it is one single transaction. (pp. 27-29, TSN., February
13, 1980).
Secondly, even conceding for purposes of discussion that the promissory note in
question is a negotiable instrument, the respondent cannot be a holder in due
course for a more significant reason.
The evidence presented in the instant case shows that prior to the sale on
installment of the tractors, there was an arrangement between the seller-assignor,
Industrial Products Marketing, and the respondent whereby the latter would pay
the seller-assignor the entire purchase price and the seller-assignor, in turn,
would assign its rights to the respondent which acquired the right to collect the
price from the buyer, herein petitioner Consolidated Plywood Industries, Inc.
A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory Note,
the Deed of Assignment and the Disclosure of Loan/Credit Transaction shows
that said documents evidencing the sale on installment of the tractors were all
executed on the same day by and among the buyer, which is herein petitioner
Consolidated Plywood Industries, Inc.; the seller-assignor which is the Industrial
Products Marketing; and the assignee-financing company, which is the
respondent. Therefore, the respondent had actual knowledge of the fact that the
seller-assignor's right to collect the purchase price was not unconditional, and that
it was subject to the condition that the tractors -sold were not defective. The
respondent knew that when the tractors turned out to be defective, it would be
subject to the defense of failure of consideration and cannot recover the purchase
price from the petitioners. Even assuming for the sake of argument that the
promissory note is negotiable, the respondent, which took the same with actual
knowledge of the foregoing facts so that its action in taking the instrument
amounted to bad faith, is not a holder in due course. As such, the respondent is
subject to all defenses which the petitioners may raise against the seller-assignor.
Any other interpretation would be most inequitous to the unfortunate buyer who is
not only saddled with two useless tractors but must also face a lawsuit from the
assignee for the entire purchase price and all its incidents without being able to
raise valid defenses available as against the assignor.
Lastly, the respondent failed to present any evidence to prove that it had no
knowledge of any fact, which would justify its act of taking the promissory note as
not amounting to bad faith.
Sections 52 and 56 of the Negotiable Instruments Law provide that: negotiating it.
xxx xxx xxx
SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE. — A
holder in due course is a holder who has taken the instrument under
the following conditions:
xxx xxx xxx
xxx xxx xxx
(c) That he took it in good faith and for value
(d) That the time it was negotiated by him he had no notice of any
infirmity in the instrument of deffect in the title of the person
negotiating it
xxx xxx xxx
SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. — To
constitute notice of an infirmity in the instrument or defect in the title
of the person negotiating the same, the person to whom it is
negotiated must have had actual knowledge of the infirmity or defect,
or knowledge of such facts that his action in taking the instrument
amounts to bad faith. (Emphasis supplied)
We subscribe to the view of Campos and Campos that a financing company is
not a holder in good faith as to the buyer, to wit:
In installment sales, the buyer usually issues a note payable to the
seller to cover the purchase price. Many times, in pursuance of a
previous arrangement with the seller, a finance company pays the full
price and the note is indorsed to it, subrogating it to the right to
collect the price from the buyer, with interest. With the increasing
frequency of installment buying in this country, it is most probable
that the tendency of the courts in the United States to protect the
buyer against the finance company will , the finance company will be
subject to the defense of failure of consideration and cannot recover
the purchase price from the buyer. As against the argument that such
a rule would seriously affect "a certain mode of transacting business
adopted throughout the State," a court in one case stated:
It may be that our holding here will require some
changes in business methods and will impose a greater
burden on the finance companies. We think the buyer-
Mr. & Mrs. General Public-should have some protection
somewhere along the line. We believe the finance
company is better able to bear the risk of the dealer's
insolvency than the buyer and in a far better position to
protect his interests against unscrupulous and insolvent
dealers. . . .
If this opinion imposes great burdens on finance
companies it is a potent argument in favor of a rule
which win afford public protection to the general buying
public against unscrupulous dealers in personal
property. . . . (Mutual Finance Co. v. Martin, 63 So. 2d
649, 44 ALR 2d 1 [1953]) (Campos and Campos, Notes
and Selected Cases on Negotiable Instruments Law,
Third Edition, p. 128).
In the case of Commercial Credit Corporation v. Orange Country Machine
Works (34 Cal. 2d 766) involving similar facts, it was held that in a very real
sense, the finance company was a moving force in the transaction from its very
inception and acted as a party to it. When a finance company actively participates
in a transaction of this type from its inception, it cannot be regarded as a holder in
due course of the note given in the transaction.
In like manner, therefore, even assuming that the subject promissory note is
negotiable, the respondent, a financing company which actively participated in the
sale on installment of the subject two Allis Crawler tractors, cannot be regarded
as a holder in due course of said note. It follows that the respondent's rights
under the promissory note involved in this case are subject to all defenses that
the petitioners have against the seller-assignor, Industrial Products Marketing.
For Section 58 of the Negotiable Instruments Law provides that "in the hands of
any holder other than a holder in due course, a negotiable instrument is subject to
the same defenses as if it were non-negotiable. ... "
Prescinding from the foregoing and setting aside other peripheral issues, we find
that both the trial and respondent appellate court erred in holding the promissory
note in question to be negotiable. Such a ruling does not only violate the law and
applicable jurisprudence, but would result in unjust enrichment on the part of both
the assigner- assignor and respondent assignee at the expense of the petitioner-
corporation which rightfully rescinded an inequitable contract. We note, however,
that since the seller-assignor has not been impleaded herein, there is no obstacle
for the respondent to file a civil Suit and litigate its claims against the seller-
assignor in the rather unlikely possibility that it so desires,
Nego Instruments Set 1 (#s1-70) Page 20 of 112
Lumbas. Dadat
WHEREFORE, in view of the foregoing, the decision of the respondent appellate
court dated July 17, 1985, as well as its resolution dated October 17, 1986, are
hereby ANNULLED and SET ASIDE. The complaint against the petitioner before
the trial court is DISMISSED.SO ORDERED.
FIRST DIVISION G.R. No. 111190 June 27, 1995
LORETO D. DE LA VICTORIA, as City Fiscal of Mandaue City and in his
personal capacity as garnishee,petitioner, vs.HON. JOSE P. BURGOS,
Presiding Judge, RTC, Br. XVII, Cebu City, and RAULH.
SESBREÑO, respondents.
BELLOSILLO, J.:
RAUL H. SESBREÑO filed a complaint for damages against Assistant City
Fiscals Bienvenido N. Mabanto, Jr., and Dario D. Rama, Jr., before the Regional
Trial Court of Cebu City. After trial judgment was rendered ordering the
defendants to pay P11,000.00 to the plaintiff, private respondent herein. The
decision having become final and executory, on motion of the latter, the trial court
ordered its execution. This order was questioned by the defendants before the
Court of Appeals. However, on 15 January 1992 a writ of execution was issued.
On 4 February 1992 a notice of garnishment was served on petitioner Loreto D.
de la Victoria as City Fiscal of Mandaue City where defendant Mabanto, Jr., was
then detailed. The notice directed petitioner not to disburse, transfer, release or
convey to any other person except to the deputy sheriff concerned the salary
checks or other checks, monies, or cash due or belonging to Mabanto, Jr., under
penalty of law. 1 On 10 March 1992 private respondent filed a motion before the
trial court for examination of the garnishees.
On 25 May 1992 the petition pending before the Court of Appeals was dismissed.
Thus the trial court, finding no more legal obstacle to act on the motion for
examination of the garnishees, directed petitioner on 4 November 1992 to submit
his report showing the amount of the garnished salaries of Mabanto, Jr., within
fifteen (15) days from receipt 2 taking into consideration the provisions of Sec. 12,
pars. (f) and (i), Rule 39 of the Rules of Court.
On 24 November 1992 private respondent filed a motion to require petitioner to
explain why he should not be cited in contempt of court for failing to comply with
the order of 4 November 1992.
On the other hand, on 19 January 1993 petitioner moved to quash the notice of
garnishment claiming that he was not in possession of any money, funds, credit,
property or anything of value belonging to Mabanto, Jr., except his salary and
RATA checks, but that said checks were not yet properties of Mabanto, Jr., until
delivered to him. He further claimed that, as such, they were still public funds
which could not be subject to garnishment.
On 9 March 1993 the trial court denied both motions and ordered petitioner to
immediately comply with its order of 4 November 1992. 3 It opined that the checks
of Mabanto, Jr., had already been released through petitioner by the Department
of Justice duly signed by the officer concerned. Upon service of the writ of
garnishment, petitioner as custodian of the checks was under obligation to hold
them for the judgment creditor. Petitioner became a virtual party to, or a forced
intervenor in, the case and the trial court thereby acquired jurisdiction to bind him
to its orders and processes with a view to the complete satisfaction of the
judgment. Additionally, there was no sufficient reason for petitioner to hold the
checks because they were no longer government funds and presumably
delivered to the payee, conformably with the last sentence of Sec. 16 of the
Negotiable Instruments Law.
With regard to the contempt charge, the trial court was not morally convinced of
petitioner's guilt. For, while his explanation suffered from procedural infirmities
nevertheless he took pains in enlightening the court by sending a written
explanation dated 22 July 1992 requesting for the lifting of the notice of
garnishment on the ground that the notice should have been sent to the Finance
Officer of the Department of Justice. Petitioner insists that he had no authority to
segregate a portion of the salary of Mabanto, Jr. The explanation however was

not submitted to the trial court for action since the stenographic reporter failed to
attach it to the record. 4
On 20 April 1993 the motion for reconsideration was denied. The trial court
explained that it was not the duty of the garnishee to inquire or judge for himself
whether the issuance of the order of execution, writ of execution and notice of
garnishment was justified. His only duty was to turn over the garnished checks to
the trial court which issued the order of execution. 5
Petitioner raises the following relevant issues: (1) whether a check still in the
hands of the maker or its duly authorized representative is owned by the payee
before physical delivery to the latter: and, (2) whether the salary check of a
government official or employee funded with public funds can be subject to
garnishment.
Petitioner reiterates his position that the salary checks were not owned by
Mabanto, Jr., because they were not yet delivered to him, and that petitioner as
garnishee has no legal obligation to hold and deliver them to the trial court to be
applied to Mabanto, Jr.'s judgment debt. The thesis of petitioner is that the salary
checks still formed part of public funds and therefore beyond the reach of
garnishment proceedings.
Petitioner has well argued his case.
Garnishment is considered as a species of attachment for reaching credits
belonging to the judgment debtor owing to him from a stranger to the
litigation. 6 Emphasis is laid on the phrase "belonging to the judgment debtor"
since it is the focal point in resolving the issues raised.
As Assistant City Fiscal, the source of the salary of Mabanto, Jr., is public funds.
He receives his compensation in the form of checks from the Department of
Justice through petitioner as City Fiscal of Mandaue City and head of office.
Under Sec. 16 of the Negotiable Instruments Law, every contract on a negotiable
instrument is incomplete and revocable until delivery of the instrument for the
purpose of giving effect thereto. As ordinarily understood, delivery means the
transfer of the possession of the instrument by the maker or drawer with intent to
transfer title to the payee and recognize him as the holder thereof.7
According to the trial court, the checks of Mabanto, Jr., were already released by
the Department of Justice duly signed by the officer concerned through petitioner
and upon service of the writ of garnishment by the sheriff petitioner was under
obligation to hold them for the judgment creditor. It recognized the role of
petitioner ascustodian of the checks. At the same time however it considered the
checks as no longer government funds and presumed delivered to the payee
based on the last sentence of Sec. 16 of the Negotiable Instruments Law which
states: "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."
Yet, the presumption is not conclusive because the last portion of the provision
says "until the contrary is proved." However this phrase was deleted by the trial
court for no apparent reason. Proof to the contrary is its own finding that the
checks were in the custody of petitioner. Inasmuch as said checks had not yet
been delivered to Mabanto, Jr., they did not belong to him and still had the
character of public funds. In Tiro v. Hontanosas 8 we ruled that —
The salary check of a government officer or employee such as a
teacher does not belong to him before it is physically delivered to
him. Until that time the check belongs to the government.
Accordingly, before there is actual delivery of the check, the payee
has no power over it; he cannot assign it without the consent of the
Government.
As a necessary consequence of being public fund, the checks may not be
garnished to satisfy the judgment. 9 The rationale behind this doctrine is obvious
consideration of public policy. The Court succinctly stated in Commissioner of
Public Highways v. San Diego 10 that —
The functions and public services rendered by the State cannot be
allowed to be paralyzed or disrupted by the diversion of public funds
from their legitimate and specific objects, as appropriated by law.
In denying petitioner's motion for reconsideration, the trial court expressed the
additional ratiocination that it was not the duty of the garnishee to inquire or judge
for himself whether the issuance of the order of execution, the writ of execution,
and the notice of garnishment was justified, citing our ruling in Philippine
Commercial Industrial Bank v. Court of Appeals. 11 Our precise ruling in that case
was that "[I]t is not incumbent upon the garnishee to inquire or to judge for itself
whether or not the order for the advance execution of a judgment is valid." But
that is invoking only the general rule. We have also established therein the
compelling reasons, as exceptions thereto, which were not taken into account by
the trial court, e.g., a defect on the face of the writ or actual knowledge by the
garnishee of lack of entitlement on the part of the garnisher. It is worth to note
that the ruling referred to the validity of advance execution of judgments, but a
careful scrutiny of that case and similar cases reveals that it was applicable to a
notice of garnishment as well. In the case at bench, it was incumbent upon
petitioner to inquire into the validity of the notice of garnishment as he had actual
knowledge of the non-entitlement of private respondent to the checks in question.
Consequently, we find no difficulty concluding that the trial court exceeded its
jurisdiction in issuing the notice of garnishment concerning the salary checks of
Mabanto, Jr., in the possession of petitioner.
WHEREFORE, the petition is GRANTED. The orders of 9 March 1993 and 20
April 1993 of the Regional Trial Court of Cebu City, Br. 17, subject of the petition
are SET ASIDE. The notice of garnishment served on petitioner dated 3 February
1992 is ordered DISCHARGED.SO ORDERED.
EN BANC G.R. No. L-24571 December 18, 1970
JOSE L. PONCE DE LEON, plaintiff-appellant, vs. REHABILITATION
FINANCE CORPORATION, defendant-appellant and third-party defendant-
appellant,ROSALINA SORIANO, TEOFILA SORIANO and REV. FR. EUGENIO
R. SORIANO, third-party plaintiffs-appellants.
CONCEPCION, C.J.:
Appeal from a decision of the Court of First Instance of Rizal, the dispositive part
of which reads:
IN VIEW OF THE FOREGOING, the Court hereby renders judgment
dismissing plaintiff's complaint with costs against plaintiff; ordering
plaintiff Jose Ponce de Leon to pay the defendant RFC the amount of
FIVE HUNDRED TWENTY-NINE THOUSAND TWO HUNDRED
SIXTY FIVE PESOS AND FIFTY FOUR (P529,265.54) CENTAVOS,
with interest at six percent per annum from November 24, 1954 until
fully paid, the further sum of ONE HUNDRED EIGHTY (P180.00)
pesos per month from May 20, 1955 until plaintiff vacates the house
and lot at Taft Avenue, Pasay City, and FIVE THOUSAND
(P5,000.00) PESOS as damages for the injunction and costs.
The Court declares the mortgage of one-half of the lot covered by
Original transfer certificate of title No. 8094 of the lands records of
Rizal Province belonging to the third-party plaintiffs, namely Rosalina
Soriano, Rev. Fr. Eugenio Soriano and Teofila Soriano del Rosario
null and void and the sheriff's sale in favor of the RFC of said one-
half share likewise null and void.1
As correctly set forth in said decision, the main facts are:
On August 14, 1945, herein plaintiff Jose L. Ponce de Leon and Francisco
Soriano, father of third-party plaintiffs Teofila Soriano del Rosario, Rosalina
Soriano and Rev. Fr. Eugenio Soriano, obtained a loan for P10,000.00 from the
Philippine National Bank (PNB), Manila, mortgaging a parcel of land situated at
Barrio Ibayo, Municipality of Parañaque, Rizal, covered by original certificate of
title No. 8094 of the land records of Rizal Province in the name of Francisco
Soriano, married to Tomasa Rodriguez, as security for the loan (Exhibit 15-
Soriano). On August 16, 1945, Ponce de Leon gave P2,000.00 to Soriano from
the proceeds of the loan (Exhibit "N"). The loan was subsequently increased to
P17,500.00 and an amendment to the real estate mortgage, Exhibit "15-Soriano,"
was executed by Jose L. Ponce de Leon and Francisco Soriano on March 13,
1946 (Exhibit "16-Soriano").
Nego Instruments Set 1 (#s1-70) Page 21 of 112
Lumbas. Dadat
On May 4, 1951, Jose L. Ponce de Leon filed with the Rehabilitation Finance
Corporation (RFC for short) Manila, his loan application, Exhibit "1-RFC," for an
industrial loan, for putting up a sawmill, in the amount of P800,000.00 offering as
security certain parcels of land, among which, was the parcel which Ponce de
Leon and Soriano mortgaged to the PNB. The application stated that the
properties offered for security for the RFC loan are encumbered to the PNB,
Bacolod, and to Cu Unjieng Bros. The properties offered for security to the RFC
were inspected by the appraisers of the latter, who submitted the following
appraisals:
1. Land ............................................. P480,228.00
2. Building ........................................ P 12,000.00
3. Machinery & equiptment .......... P 67,101.00
4. Transportation equipment ......... P 14,000.00
Total .............................................. P573,329.00
(Exh. "6-a RFC")
The application was approved for P495,000.00 and the mortgage contract
(Exhibit "A," also "16-RFC & "33-Soriano") was executed on October 8, 1951 by
Jose L. Ponce de Leon, his wife Carmelina Russel, and Francisco Soriano. The
same parties signed a promissory note (Exhibit "A") for P495,000.00, with interest
at 6% per annum, payable on installments every month for P28,831.64 in
connection with the mortgage deed. Before the mortgage deed was signed, the
Notary Public, Felipe Cuaderno, Jr. before whom it was acknowledged, translated
it in Tagalog to Francisco Soriano, who thereafter affixed his signature to the
document. At the time that Francisco Soriano signed the mortgage deed, Exhibit
"A," his spouse Tomasa Rodriguez was already dead leaving as her heirs, her
children namely, Rosalina, Teofila and Rev. Fr. Eugenio Soriano, none of whom
signed the said mortgage deed or the promissory note.
The mortgage deed specifically stipulated that the proceeds thereof shall be used
exclusively for the purchase of machinery and equipment, construction of
buildings and the payment of obligations and that the release of the amounts
loaned shall be at the discretion of the RFC. In view of these conditions, the RFC
paid Ponce de Leon's obligations of P100,000.00 to the PNB; P30,000.00 to Cu
Unjieng Bros; and P5,000.00 to Arturo Colmenares. From the balance of
P360,000.00, the sum of P352,000.00 was released to Jose L. Ponce de Leon at
various amounts during the period from December, 1951 to July 1952. The
checks covering these releases were issued to Jose L. Ponce de Leon in view of
the authority given to him in writing by Francisco Soriano and Carmelina Russel
(Exhibit "33-A-Soriano," Exhibit "A" and Exhibit "16-RFC").
On March 12, 1952, Jose L. Ponce de Leon and his wife Carmelina Russel
executed an addendum to the chattel mortgage for machineries and equipments
(Exhibit "F").
None of the amortization and interests which had become due was paid and, for
this reason, the RFC took steps for the extra-judicial foreclosure of the mortgaged
properties consisting of real estates and the sawmill and its equipments of Ponce
de Leon situated in two places in Samar. The RFC was the purchaser of all the
mortgaged properties in the ensuing sheriff's sales, with the exception of two
parcels of land situated in Bacolod City which were purchased by private
individuals. Many items of the mortgaged machineries and equipments could not
be found. The parcels of land mortgaged were sold as follows:
1) Nine parcels at Bacolod City
................................................P78,800.00
2) Two parcels acquired by private individuals
.................... P5,790.00
3) Two parcels at Pasay City with improvements
................. P15,000.00
4) The land of Soriano at Parañaque, Rizal
............................ P10,000.00
5) The Machineries & equipments that were left
............................. P6,000.00

The Sheriff sold the land covered by original certificate of Title No. 8094 in the
name of Francisco Soriano, married to Tomasa Rodriguez, on June 15, 1954 and
the deed of sale, dated April 19, 1955 was executed by the sheriff in favor of the
purchaser thereof, the RFC, including all the other properties sold (Exhibit "15-
RFC," also "54-Soriano").
Previous to the expiration of the one-year period of redemption, Francisco
Soriano, through Teofila Soriano del Rosario offered to repurchase the Soriano
lot for P14,000.00 and on June 14, 1955, the last day for the redemption of the
lot, Francisco Soriano, in company with his daughter, Rosalina and Teofila, went
to see Mr. Bernardo, Chief of the assets department of the RFC, and offered to
redeem said lot for P14,000.00 but the offer was rejected and they were told to
participate in the public sale of the land to be conducted by the RFC. Jose L.
Ponce de Leon did not offer to redeem the mortgaged properties sold at anytime
before the expiration of the period of redemption.
The RFC scheduled a public sale of the lot registered in the name of Francisco
Soriano and of the other lots which the RFC acquired in the Sheriff's sale for
February 20, 1956 in view of the inability of Ponce de Leon or Soriano to legally
redeem the properties sold by the Sheriff within the one year period after the sale.
On February 18, 1956, Jose L. Ponce de Leon instituted the present action
alleging that there was delay in the releases of the amount of the loan; that the
RFC withheld the amount of P19,000.00 from the loan until it had verified whether
Ponce de Leon had still an unpaid indebtedness to the defunct Agricultural and
Industrial Bank, the RFC's predecessor, and this was paid only after one year had
passed; that the typhoon in October and November, 1952 had caused
destructions to his sawmills and hampered his operations for which reason, he
asks, in his complaint, that the amortizations on his obligations which became
due since October, 1952 be declared extinguished; that the sheriff's sales be
declared null and void because the properties were sold at grossly inadequate
prices and that said sales were not conducted in accordance with law; that the
RFC be compelled to account for his machineries and equipments at his lumber
mill in Calbayog and to reimburse him for the value of the unaccounted
machineries and equipments; that the RFC be ordered to pay him actual and
moral damages for P105,000.00 and costs. De Leon asked for the issuance of a
writ of preliminary injunction to restrain the RFC from carrying out its
contemplated public sale. The Court set the petition for injunction for hearing but
no one appeared for the RFC at the hearing thereof so that the Court had to issue
the preliminary injunction prayed for. De Leon caused notice of lis pendens to be
recorded in relation with this case.
The RFC filed its answer sustaining the legality of the mortgage and Sheriff's
sales and counter-claimed that Ponce de Leon be ordered to pay the deficiency
claim representing the balance of the latter's indebtedness, rental of the lot and
house at Taft Avenue, Pasay City occupied by Ponce de Leon and damages.
Subsequent to the filing of Ponce de Leon's complaint against the RFC, Francisco
Soriano wrote a letter, dated February 20, 1956, to the President asking the
latter's intervention so that the projected sale on the same date to be conducted
by the RFC may be suspended insofar as the lot in his name is concerned and
that he be allowed to redeem it (Exhibit "27-Soriano"). This letter was referred by
the Executive Office to the RFC, which sent a letter, Exhibit "29-Soriano," to
Francisco Soriano informing the latter that he could redeem his former property
for not less than its appraised value of P59,647.05, payable 20% down and the
balance in ten years, with 6% interest. Soriano did not redeem the lot under the
conditions of the RFC. He then filed a third-party complaint in this case with the
RFC and Jose L. Ponce de Leon as the third-party defendants. Due to the death
of Francisco Soriano, he was substituted as third-party plaintiff by his children,
namely, Teofila Soriano del Rosario, Rosalina Soriano and Rev. Fr. Eugenio
Soriano.
The Sorianos contend that the mortgage in favor of the RFC and promissory note
signed by Francisco Soriano lacked the latter's consent and was without
consideration insofar as Francisco Soriano is concerned and hence null and void
as to him and his children; that the lot covered by original certificate of title No.
8094 in the name of Francisco Soriano belonged to the conjugal partnership of
the latter and his wife, Tomasa Rodriguez, now deceased, and since the latter
was already dead when the mortgage was executed and her children who have
thus inherited her share have not signed the mortgage contract and promissory
note, at least, the one-half share of the lot belonging now to the Soriano sisters
and brothers, the third-party plaintiffs, have not been legally included in the
mortgage to the RFC so that the latter had not acquired said one-half share in the
sheriff's sale. The Sorianos further ask that they be allowed to redeem the
remaining one-half share, that which belonged to their father, for one-half of
P10,000.00 which was the amount for which the RFC acquired the whole lot in
the sheriff's sale. The third party-plaintiffs also ask that Ponce de Leon be ordered
to reimburse them for whatever amount they may use in redeeming the lot and
expenses incident thereto and that Ponce de Leon and the RFC be made to pay
them moral damages which their father suffered and attorney's fees.
Answering the third-party complaint, the RFC and Ponce de Leon affirm the
legality of the mortgage deed insofar as Soriano is concerned. The RFC further
contends that the mortgage was binding on the whole Soriano lot and that there
was no valid redemption of this lot.
Ponce de Leon interposed a counterclaim for various sums of money allegedly
received from him by Francisco Soriano and the present third-party plaintiffs.2
In due course, the lower court rendered judgment the dispositive part
of which is quoted at the beginning of this decision. Said court held that the
typhoons in October and November 1952 did not relieve the plaintiff from his
obligations under the promissory note and the deed of mortgage in favor of the
RFC; that the sheriff's sale of the mortgaged properties is valid; that the RFC
need not account for the machineries and equipment of the sawmill in Samar or
reimburse the value of such machinery and equipment as may be unaccounted
for, they having become property of the RFC, owing to plaintiff's failure to
exercise the right of redemption in accordance with law; that neither may he
recover damages from the RFC for the alleged delay in the releases made by the
same, since their contract stipulates that the proceeds of the loan shall be
released at the discretion of the Mortgagee and plaintiff's offer of redemption
came long after the expiration of the period therefor, and was not for the full
amount of plaintiff's liability, which he, moreover, asked to be reduced and wanted
to pay in installments; and that, accordingly, plaintiff has no right to recover any
damages.
Upon the other hand, the court found that plaintiff should pay: (1) rentals for the
use of the mortgaged property (house and lot) at Pasay City, after the title thereto
had passed to the RFC, and (2) the sum of P529,265.54, representing the
balance of plaintiff's obligation in favor of the RFC — which, as of November 24,
1954, amounted to P583,270.49, plus 10% thereof, as stipulated penalty, or the
aggregate sum of P641,597.54 -after deducting therefrom the sum of
P112,332.00 for which the mortgaged properties had been sold, (3) apart from
the sum of P5,000.00, as damages for the injunction issued, at his behest, and
the costs.
As regards the third party complaint of the Sorianos, the lower court: (1) overruled
their claim to the effect that Francisco Soriano had signed the promissory note
and the deed of mortgage in favor of the RFC without knowledge of the contents
thereof and without any consideration therefor; but (b) held that, being registered
in the name of "Francisco Soriano, married to Tomasa Rodriguez," the property
covered by original certificate of title No. 8094 — hereinafter referred to as the
Parañaque property — is presumed to belong to the conjugal partnership of said
spouses, and that, the RFC having failed to offset this presumption, the mortgage
on and the sale of the property by the sheriff are null and void as to one-half (½)
thereof.
Moreover, the court declared: (a) that the RFC was justified in rejecting the offer,
made by the Sorianos, to redeem said property for, pursuant to section 78 of
Republic Act No. 337, redemption could be effected "only by paying the amount
fixed in the order of execution;" (b) that plaintiff's counterclaim against the
Sorianos is barred by the statute of limitations; (c) that neither may he recover
damages from the Sorianos, their alleged bad faith not bound to pay damages to
Nego Instruments Set 1 (#s1-70) Page 22 of 112
Lumbas. Dadat
the RFC, the action of the former against the latter not being altogether
unjustified.
All of the parties — namely, plaintiff, Jose Ponce de Leon, defendant,
Rehabilitation Finance Corporation, hereinafter referred to as RFC (now
Development Bank of the Philippines), and Rosalina Soriano, Fr. Eugenio
Soriano and Teofila Soriano del Rosario, hereinafter referred to as the Sorianos
— have appealed from said decision.
Appeal of the Sorianos
The Sorianos maintain that the lower court erred: (1) in holding that the
promissory note and the deed of mortgage executed by Francisco Soriano in
favor of the RFC are valid as regards one-half of the Parañaque property; (2) in
ruling that the extrajudicial sale thereof to the RFC is valid as to the
aforementioned one-half of said property; (3) in not sentencing the RFC to allow
the redemption of such half of said property by the Sorianos, as heirs of the
deceased Francisco Soriano, for one-half of the sum of P10,000 for which the
whole lot was sold to the RFC, or, at least, for the whole sum of P10,000; (4) in
not declaring that section 78 of Rep. Act No. 337 is unconstitutional and in
holding that the same, instead of Act No. 3135, as amended by Act No. 4118, is
the law applicable to the case; (5) in considering that the case of Villar v. de
Paderanga3 is authoritative or controlling in the case at bar; (6) in not sentencing
the plaintiff and the RFC to pay damages to the Sorianos; (7) in not ordering the
RFC to return OCT No. 8094, covering the Parañaque property, to the Sorianos,
free from any lien or encumbrance; and (8) in denying the motion for
reconsideration of the Sorianos.
The latter's first assignment of error is predicated upon theory that, when the
promissory note and the deed of mortgage in question were executed by
Francisco Soriano, he was somewhat absent-minded, owing to senility, he being
then a septuagenarian, apart from illiterate, for he could write only his name; that
he was persuaded to sign said promissory note and deed of mortrage thru fraud,
deceit and undue influence, and did not know the true nature of these instruments
when he affixed his signatures thereon; and that said instruments are also null
and void for lack of cause and consideration. In this connection, the appealed
decision has the following to say:
The third-party plaintiffs ask that the mortgage deed and promissory
note be declared null and void with respect to Francisco Soriano for
lack of consent and consideration. It is claimed that Francisco
Soriano was made to believe by Ponce de Leon when he signed the
mortgage deed and the promissory note that these were documents
releasing his land from the previous mortgage in favor of the PNB
and that Francisco Soriano did not receive a single centavo out of the
RFC loan.
The principal witness on the above allegation of the third-party
plaintiffs is Rosalina Soriano, who testified that her father, Francisco
was an old man who was absent-minded; that in 1945, Ponce de
Leon merely borrowed her father's certificate of title on the pretext
that he would see if it were valid; that she gave it to Ponce de Leon
who never returned the certificate and it turned out that the latter
mortgaged it to the PNB by deceiving her father in signing the
mortgage contract; that in 1951, her father received a sheriff's notice
that the land would be foreclosed; that her father went to see Ponce
de Leon in Negros but the latter assured him that nothing would
happen to his land; that in October, 1951, she and her father went to
see Ponce de Leon; that when the latter told her father that the
property was mortgaged to the RFC, her father got angry at Ponce
de Leon saying that the latter fooled him but Ponce de Leon assured
him that he would redeem the land but he failed to do so.
Ponce de Leon denied having deceived Francisco Soriano into
signing the mortgage deed covering his land, saying that the
transaction was with the full and complete knowledge and
understanding of Francisco Soriano. He was supported by Felipe
Cuaderno, Jr., the Notary Public, who notarized the mortgage deed,

who said that he explained and translated into Tagalog, a language
known and spoken by Francisco Soriano, the mortgage deed.
The fact that Francisco Soriano may have been absent-minded could
not be said to have the effect of vitiating his consent to the mortgage
deed because the execution and signing of a contract is not a matter
that concerns past events in which absent-mindedness may be taken
into account. Besides, the testimony of Rosalina Soriano to the effect
that her father told Ponce de Leon that the latter fooled him shows
that the old man Soriano could remember past events, for if truly
absent-minded, Francisco would not recollect what he claims to be
what really took place at the RFC office as testified to by Rosalina.
Neither could Francisco Soriano be considered feeble-minded if we
believe the testimony of Rosalina which shows Soriano's
determination to see to it that the wrong done him was righted and
that his property may not be taken away from him, for according to
Rosalina, he even went to Negros alone to see Ponce de Leon he
received the Sheriff's notice of foreclosure and as shown by his
alleged going to see Ponce de Leon a number of times about his
land and of his enlisting the aid of Ramon Lacson.
The Sorianos stress that, according to Felipe Cuaderno, Jr., the
Notary Public, when the latter asked Francisco Soriano, after he had
translated the mortgage deed into Tagalog if he (Francisco)
understood it, it was Ponce de Leon who said that the old man
already (k)new it. But, granting that this was what happened, yet,
Francisco Soriano would certainly have protested against the
statement of Ponce de Leon if Francisco did not really know what the
transaction was about or he would have told Cuaderno that the
document was not in accordance with the agreement between him
and Ponce de Leon considering that the document was already
translated to the old man by Cuaderno in the Tagalog language
which Soriano understood.
Besides, if Ponce de Leon really deceived Francisco Soriano into
signing the mortgage deed and promissory note so much so that in
October, 1951, the old man Soriano was so angry at Ponce de Leon
that he told the latter that he fooled him as testified to by Rosalina
Soriano, then why was it thatPonce de Leon was made one of the
sponsors of the thanksgiving mass of the Neo-Prysbeter Rev. Fr.
Eugenio Soriano, the old man's son and one of the present third-
party plaintiffs? The conduct of the Sorianos in making Ponce de
Leon one of the sponsors in the thanksgiving mass of Rev. Fr.
Eugenio Soriano in which Ponce de Leon spent a considerable
amount for the big feast that followed the mass is inconsistent with
the Sorianos' claim that Ponce de Leon had hoodwinked Francisco
Soriano into signing the mortgage instrument and the promissory
note.
Moreover, the mere oral unsupported testimony of Rosalina Soriano,
an interested party and one of the plaintiffs herein, is not sufficient to
overcome the legal presumption of the regularity of the mortgage
deed, a contract celebrated with all the legal requisites under the
safeguard of a notarial certificate (Naval, et al. v. Enriquez, 3 Phil.
670-72). Such unsupported testimony of the interested party
Rosalina Soriano is not that clear, strong and convincing evidence
beyond mere preponderance of evidence, required to show the falsity
or nullity of a notarial document (Sigue, et al. v. Escaro CA, 53 Q.C.
1161; Jocson v. Ratacion, G.R. No. 41687; Palanca v. Chillanchin v.
Coquinco, G.R. No. L-1355; Robinson v. Villafuerte, 18 Phil. 171).
With reference to the contention that there was no consideration
received by Francisco Soriano out of the mortgage contract and the
promissory note executed in connection therewith, this is a matter
which concerned merely Francisco Soriano and Jose L. Ponce de
Leon for Francisco Soriano had expressly in writing (Exhibit '33-a-
Soriano') authorized Jose L. Ponce de Leon to have the check or
checks covering the amount of the mortgage issued in the name of
said Jose L. Ponce de Leon. Whatever arrangements the latter and
Francisco Soriano may have had with respect to the amounts thus
given by the RFC on account of the mortgage is not the concern of
the RFC if Ponce de Leon did not in fact give any portion of the
amount to Francisco Soriano. At any rate, there is ample evidence to
show that Francisco Soriano received part of the consideration of the
loan from the RFC. It will be recalled thatpart of this loan was paid for
the obligation of Francisco Soriano and Ponce de Leon to the
Philippine National Bank secured by a mortgage of the lot in the
name of Francisco Soriano. That Francisco Soriano received
portions of this PNB loan from Ponce de Leon is shown by the fact
that on August 16, 1945, Francisco Soriano received the amount of
P2,000.00 from Ponce de Leon, evidenced by the receipt exhibit "N",
and this amount must have been part of the P10,000.00
consideration of the PNB mortgage because this mortgage was
executed on August 11, 1945 or two days before Soriano received
from Ponce de Leon the amount of P2,000.00 on August 16, 1945.
And two days thereafter, on August 18, 1945, Francisco Soriano
again received from Ponce de Leon the amount of P350.00 as shown
by the receipt exhibit '0-3' and, on April 27, 1945, the amount of
P1,000.00 was received by Francisco Soriano from Ponce de
Leon as shown by his receipt exhibit "0-1" to pay the mortgage on his
lot to Apolonio Pascual. On March 12, 1952, Francisco Soriano
received the amount of P3,000.00from de Leon as shown by the
check exhibit 'X-2" and on June 3, 1952, the amount of P50.00 as
shown by the check exhibit "X-6" and P200.00 on October 22,
1952 as shown by the check exhibit "X-7". Rosalina Soriano herself
received P50.00 on March 30, 1952 from Ponce de Leon as shown
by the check marked Exhibit "X-3" and third-party plaintiff Rev.
Eugenio Soriano received P100.00 on March 3, 1952 as shown by
the check exhibit "X-1" and P50.00 on March 13, 1952 as shown by
exhibit "X-4." There is therefore no ground for declaring the mortgage
contract and promissory note invalid for lack of consideration insofar
as Francisco Soriano and his children are concerned.4
The facts thus relied upon by His Honor, the Trial Judge, are borne out by the
record, and We are fully in accord with the conclusions drawn therefrom.
In support of their second assignment of error, the Sorianos maintain that the sum
of P10,000, for which the Parañaque property was sold to the RFC, is ridiculously
inadequate, considering that said property had been assessed at P59,647.05.
This pretense is devoid of merit, for said property was subject to redemption and:
... where there is the right to redeem ... — inadequacy of price should
not be material, because the judgment debtor may re-acquire the
property or else sell his right to redeem and thus recover any loss he
claims to have suffered by reason of the price obtained at the
execution sale.5
Then, again, as the trial court had correctly of served:
But, mere inadequacy of the price obtained at the sheriff's sale
unless shocking to the conscience will not be sufficient to set aside
the sale if there is no showing that, in the event of a regular sale, a
better price can be obtained. The reason is that, generally, and, in
forced sales, low prices are usually offered (1 Moran's Rules of
Court, pp. 834-835). Considering that in Gov't of P.I. v. Sorna, G.R.
No. 32196, wherein property worth P120,000.00 was sold for only
P15,000.00, in Philippine National Bank v. Gonzales, 45 Phil. 693,
wherein property valued at P45,000.00 was sold for P15,000.00 and
in Cu Unjieng & Sons v. Mabalacat Sugar Co., 58 Phil. 439, property
worth P300,000.00 to P400,000.00 was sold for P177,000.00, the
Court cannot consider the sale of the Bacolod properties, the Taft
Avenue house and lot and the Parañaque property of the Sorianos
Nego Instruments Set 1 (#s1-70) Page 23 of 112
Lumbas. Dadat
null and void for having been sold at inadequate prices shocking to
the conscience and there being no showing that in the event of a
resale, better prices can be obtained. 6
The third, fourth and fifth assignments of error of the Sorianos refer to the amount
for which they feel entitled to redeem the aforementioned property.
It will be recalled that, before the expiration of the redemption period, Teofila
Soriano del Rosario offered to repurchase said property for P14,000; that she and
her sister Rosalina reiterated the offer on the last day of said period; and that the
offer was rejected by the RFC, whose action was upheld by the lower court,
inasmuch as sec. 78 of Rep. Act 337 provides that, "(i)n the event of foreclosure
... the mortgagor or debtor whose real property has been sold at public auction ...
for the ... payment of an obligation to any bank, banking, or credit institution, ...
shall have the right ... to redeem the property by paying the amount fixed by the
court in the order of execution, ...," not the amount for which it had been
purchased by the buyer at public auction. We have already declared that" ...
(o)nly foreclosure of mortgages to banking institutions (including the
Rehabilitation Finance Corporation) and those madeextrajudicially are subject to
legal redemption, by express provision of statute, ..." 7 and, although neither an
ordinary bank nor the RFC was involved in the case in which this pronouncement
had been made, the same was relevant to the subject-matter of said case and to
the issue raised therein. At any rate, We reiterate the aforementioned
pronouncement, it being in accordance with law, for, pursuant to Rep. Act No.
337:
... The terms "banking institution" and "bank," as used in this Act, are
synonymous and interchangeable and specifically include
banks, banking institutions, commercial banks, savings banks,
mortgage banks, trust companies, building and loan associations,
branches and agencies in the Philippines of foreign banks,
hereinafter called Philippine branches, and all other corporations,
companies, partnerships, and associations performing banking
functions in the Philippines. 8
The Sorianos insist that the present case is governed, not by Rep. Act No. 337,
but by Act No. 3135, as amended by Act No. 4118 — pursuant to which, in
relation to section 465 of Act No. 190, the redemption may be made by "paying
the purchaser the amount of his purchase," with interest and taxes — the deed of
real estate mortgage in favor of the RFC having allegedly been executed and the
aforementioned property having been sold pursuant to said Acts Nos. 3135 and
4118.
The conclusion drawn by the Sorianos from these facts is untenable. As set forth
in its title, Act No. 3135 was promulgated "to regulate the sale of property under
special powers inserted in or annexed to real estate mortgages," Section 6
thereof provides that in all cases of "extrajudicial sale ... made under the special
power hereinbefore referred to," the property sold may be redeemed within "one
year from and after the date of the sale ...." Act No. 4118 amended Act No. 3135
by merely adding thereto three (3) new sections. Upon the other hand, Rep. Act
No. 337, otherwise known as "The General Banking Act," is entitled "An
Act Regulating Banks and Banking Institutionsand for other purposes." Section 78
thereof limits the amount of the loans that may be given by banks and banking or
credit institutions on the basis of the appraised value of the property given as
security, as well as provides that, in the event of foreclosure of a real estate
mortgage to said banks or institutions, the property sold may be redeemed "by
paying the amount fixed by the court in the order of execution," or the amount
judicially adjudicated to the creditor bank. This provision had the effect of
ammending section 6 of Act No. 3135, insofar as the redemption price is
concerned, when the mortgagee is a bank or a banking or credit institution, said
section 6 of Act No. 3135 being, in this respect, inconsistent with the above-
quoted portion of section 78 of Rep. Act No. 337. In short, the Parañaque
property was sold pursuant to said Act No. 3135, but the sum for which it is
redeemable shall be governed by Rep. Act No. 337, which partakes of the nature
of an amendment to Act No. 3135, insofar as mortgages to banks are banking or
credit institutions are concerned, to which class the RFC belongs. At any rate, the

conflict between the two (2) laws must be resolved in favor of Rep. Act No. 337,
both as a special and as the subsequent legislation. 9
The sixth, seventh and eighth assignments of error made by the Sorianos are
mere consequences of those already disposed of. Hence, no further discussion
thereof is necessary.
Plaintiff's Appeal
Plaintiff Ponce de Leon alleges that the lower court has erred: (1) "in not setting
aside the foreclosure sales on the mortgage contract dated October 8, 1951"; (2)
"in stating that the proceeds of the foreclosure sales were conscionable"; (3) in
not granting Ponce de Leon's claim for adjustment and not "giving him a
reasonable time to pay whatever obligations he may have"; (4) in not granting him
damages nor directing the return of his properties; (5) "in not ordering a new trial
for the purpose of adjusting" his "obligations and determining the terms and
conditions of his obligation"; and (6) in not granting his claim against the
Sorianos.
With respect to his first assignment of error, plaintiff maintains that his promissory
note Exhibit A was not yet overdue when the mortgage was foreclosed, because
the installments stipulated in said promissory note have "no fixed or determined
dates of payment," so that the note is unenforceable and "the RFC should have
first asked the court to determine the terms, conditions and period of maturity
thereof."
In this connection, it should be noted that, pursuant to Exhibit A, the total sum of
P495,000 involved therein shall be satisfied in quarterly installments of
P28,831.64 each — representing interest and amortization — and that, although
the date of maturity of the first installment was left blank, the promissory note
states that the "date of maturity (was) to be fixed as of the date of the last
release," completing the delivery to the plaintiff of the sum of P495,000 lent to him
by the RFC. He now says that this sum of P495,000 has not, as yet, been fully
released by the RFC. But this is contrary to the facts of record, for, during the
trial, his counsel, Atty. Jose Orozco, made the following admission:
Out of the loan of P495,000.00, the following were paid to the
creditors of Jose Ponce de Leon: P100,000.00 to the PNB,
P30,000.00 to Cu Unijeng Bros. P5,000.00 to Arturo Colmenares,
P1,000.00 to Lorenzo Balagtas. The total amount paid to the
creditors is P136,000.00 which were taken out of the proceeds of
P495,000.00. The rest were all paid in the name of Jose Ponce de
Leon. 10
In short, part of the sum of P495,000 had been delivered by the RFC to the
creditors of the plaintiff and Francisco Soriano, as agreed upon by them, in
payment of their outstanding obligations, and the balance of said sum of
P495,000 was turned over to the plaintiff, with the written authorization and
conformity of Francisco Soriano. This is borne out by the fact that, prior to the
institution of this case, plaintiff had not complained of failure of the RFC to fully
release the aforementioned sum of P495,000. Indeed, in his own complaint
herein, he merely alleged a "delay in the release." Even so, he impliedly admitted
that the first installment was due in October 1952 — or, more specifically, on
October 24, 1952, this being the date given therefor in the letter-demands of the
RFC, the accuracy of which were not questioned by the plaintiff — so that the last
release made by the RFC to complete the sum of P495,000 must have taken
place on July 24, 1952, although, in answer to a question propounded to him, by
his own counsel, as regards the date he "received the total amount granted by the
RFC," plaintiff said — on the witness stand — he "believed that it was in the last
part or quarter of 1953." At this juncture, it is noteworthy that plaintiff claims the
right to a suspension of payment or an extension of the period to pay the RFC
owing to the typhoons that had lashed his sawmill in October and November
1952, thus indicating clearly that the amount of the loan extended to him and
Francisco Soriano had then been fully released by the RFC three (3) months
before October 1952 and that the first installment under the promissory note
Exhibit A was due that month, as claimed by the RFC.
At any rate, Annex A, in effect, authorized the RFC to fix the date of maturity of
the installments therein stipulated, which is allowed by the Negotiable Instruments
Law 11 and when a promissory note expresses "no time for payment," it is
deemed "payable on demand." 12
Under his second assignment of error, plaintiff maintains that the aggregate price
of P112,332.00, for which the mortgaged properties had been sold at public
auction, is unconscionable, said properties being allegedly worth P1,202,976.
This premise is inaccurate.
It should be noted that plaintiff and Francisco Soriano were granted a P495,000
loan on the security, not only, of theexisting properties offered as guarantee, but,
also, on that of assets — appraised at P570,000 — yet to be acquiredonly
plaintiff, partly with money thus received from the RFC and partly with his own
funds. After obtaining said loan and receiving the amount thereof, less the sum of
P136,000 applied to the payment of outstanding obligations, plaintiff failed to
purchase the machinery and equiptment he had promised to get, or to set up the
constructions he had undertaken to make. Moreover, the RFC found that the
mortgaged lots in the cities of Pasay and Bacolod, which were originally
appraised at P492,288.00, were actually worth P172,530,00 only. Again, a good
part of the machinery and equipment existing in one of the mortgaged lands,
when it was inspected before the granting of the loan, were subsequently lost or
missing, and those that remained were, at the time of the sale to the RFC, in bad
shape, so that the appraised value thereof was then estimated at P10,000 only.
Under these circumstances, it is clear that the lower court did not err in approving
the sale of the mortgaged properties for the aggregate sum of P112,332.
As regards his third assignment of error, it is urged by the plaintiff that he is
entitled to a "suspension of payment," or a postponement of the date of maturity
of obligation to pay, in view of the typhoons that had "practically wiped out" his
sawmill in Samar during the months of October and November 1952. This claim is
predicated upon Article 1174 of our Civil Code, reading:
... Except in cases expressly specified by the law, or when it is
otherwise declared by stipulation, or when the nature of the
obligation requires the assumption of risk, no person shall be
responsible for those events which could not be foreseen, or which,
though foreseen, were inevitable.
Plaintiff cannot avail of the benefits of this provision since he was not bound to
deliver the aforementioned sawmill, or any other specific thing damaged or
destroyed by typhoons, to the RFC. His obligation was merely generic, namely, to
pay certain sums of money to the RFC, at stated intervals. As His Honor, the Trial
Judge had aptly put it:
... in the instant case, there was an obligation on the part of the
debtor to pay his loan, independently of the purpose for which the
money loaned was intended to be used and this obligation to pay
continues to subsist notwithstanding the fact that it may have
become impossible for the debtor to use the money loaned for the
particular purpose that was intended (Milan v. Rio y Glabarrieta, 45
Phil. 718). There is hence no ground for declaring the amortizations
due on the principal loan since October, 1952 as extinguished due to
fortuitous event or to grant plaintiff a reasonable time to pay the due
amortizations as asked for by Ponce de Leon in his complaint. 13
Being mere corollaries to his first three assignments of error, which cannot be
sustained, plaintiff's fourth, fifth and sixth assignments of error must have the
same fate.
Defendant's Appeals
The RFC contends that the lower court erred: (1) in holding that the Parañaque
property is presumed to belong to the conjugal partnership of Mr. and Mrs.
Francisco Soriano; (2) in failing to give due weight to the testimony of Gregorio
Soriano, and in holding that the same is insufficient to overcome the presumption
in favor of the conjugal nature of said property; (3) in failing to consider that the
Sorianos are now estopped from questioning the validity of the mortgage on and
the foreclosure sale of said property; (4) in annulling the mortgage insofar as one-
half of said property is concerned, despite the finding that part of the proceeds of
the RFC loan was paid to settle the PNB loan secured by the same property; and
Nego Instruments Set 1 (#s1-70) Page 24 of 112
Lumbas. Dadat
(5) in holding that the mortgage thereon and the sheriff's sale thereof to the RFC
are null and void as regards, one-half of said property. These assignments of
error may be reduced to one, namely that the lower court erred in avoiding the
sale to the RFC of the Parañaque property, upon the ground that the same
formed part of the conjugal partnership of Mr. and Mrs. Francisco Soriano.
In this connection, it appears that the property was registered in the name of
"Francisco Soriano, married to Tomasa Rodriguez," and that based upon this fact
alone — without any proof establishing satisfactorily that the property had
been acquired during coverture — the lower court presumed that it belongs to the
conjugal partnership of said spouses. We agree with the RFC that the lower court
has erred in applying said presumption.
We should not overlook the fact that the title to said property was not a transfer
certificate of title, but an original one, issued in accordance with a decree which,
pursuant to law, merely confirms a pre-existing title. 14 Said original certificate of
title does not establish, therefore, the time of acquisition of the Parañaque
property by the registered owner thereof.
Then, again, the lower court applied said presumption, having in mind,
presumably, Article 160 of our Civil Code, which reads:
... All property of the marriage is presumed to belong to the conjugal
partnership, unless it be proved that it pertains exclusively to the
husband or to the wife.
This provision must be construed in relation to Articles 153 to 159 of the same
Code, enumerating the properties "acquired ... during the marriage" that
constitute the conjugal partnership. Consistently therewith, We have held that "the
party who invokes this presumption must first prove that the property in
controversy was acquired during the marriage. In other words, proof of acquisition
during coverture is a condition sine qua non for the operation of the
presumption in favor of conjugal partnership." 15 It had, earlier, been
declared, 16 that "(t)he presumption under Article 160 of the Civil Code refers to
property acquired during the marriage ...." We even added that, there being "no
showing as to when the property in question was acquired ... the fact that the title
is in the wife's name alone is determinative." This is borne out by the fact that, in
the previous cases applying said presumption, 17 it was duly established that the
property in question therein had been acquired during coverture. Such was, also,
the situation obtaining in Servidad v. Alejandrino 18 cited in the decision appealed
from.
The case at bar is differently situated. The Sorianos have not succeeded in
proving that the Parañaque property was acquired "during the marriage" of their
parents. What is more, there is substantial evidence to the contrary.
Gregorio Soriano testified that his first cousin, Francisco Soriano, had acquired
said property from his parents, long before he got married. In this connection, the
lower court, however, said that:
... the credibility of this witness is subject to doubt for it was shown
that he had an improper motive in testifying against the third-party
plaintiffs because he had a niece who was prosecuted by the third-
party plaintiffs for estafa, .... 19
This observation is, to our mind, hardly justifiable. To begin with, when counsel
for the Sorianos asked the witness whether or not his grandchild or grandniece
Flordeliza Clemente had been accused of "estafa" by the Sorianos, counsel for
the RFC objected thereto, and the court sustained the objection, upon the ground
that the question was "irrelevant." As a consequence, there is no evidence of the
prosecution of Flordeliza Clemente by the Sorianos. What is more, the ruling of
the court declaring the matter "irrelevant" to the present case rendered it
unnecessary for the RFC to prove that said prosecution — if it were a fact — had
nothing to do with the testimony of Gregorio Soriano. It would, therefore, be less
than fair to the RFC to draw an inference adverse thereto resulting from the
absence of evidence to this effect. At any rate, said prosecution does not
necessarily warrant the conclusion that Gregorio Soriano was impelled by an
"improper motive" in testifying as he did. After all, the Sorianos are, likewise,
nieces of Gregorio Soriano and he was not the party allegedly accused by them.

Again, this witness testified in a straightforward manner, and disclosed a good
number of details bearing the ear-marks of veracity. What is more, his
testimony was corroborated, not only by Felipe Cuaderno, Jr. and OCT No. 8094,
but, also, by the testimony of third-party plaintiff Rosalina Soriano. Indeed, Felipe
Cuaderno, Jr. — an assistant attorney and notary public of the RFC, before whom
the deed of mortgage was acknowledged — testified that, in a conference he had
before the execution of the promissory note and the deed of mortgage in favor of
said institution, Francisco Soriano assured him that the Parañaque property was
"his own separate property, having acquired it from his deceased father by
inheritance and that his children have nothing to do with the property." This was,
in effect, confirmed by no less than Rosalina Soriano, for she stated, on cross-
examination, that her father, Francisco Soriano, "was born and ... raised" in said
property, so that — contrary to her testimony in chief — he could not have told
her that he and his wife had bought it, as the Sorianos would have Us believe.
Needless to say, had the property been acquired by them during coverture, it
would have been registered, in the name not of "Francisco Soriano, married to
Tomasa Rodriguez," but of the spouses "Francisco Soriano and Tomasa
Rodriguez." In Litam v. Espiritu, 20 We quoted with approval the following
observation made in the decision under review therein:
Further strong proofs that the properties in question are the
paraphernal properties of Marcosa Rivera, are the very Torrens Titles
covering said properties. All the said properties are registered in the
name of "Marcosa Rivera, married to Rafael Litam." This
circumstance indicates that the properties in question belong to the
registered owner, Marcosa Rivera, as her paraphernal properties,
for if they were conjugal, the titles coveting the same should have
been issued in the names of Rafael Litam and Marcosa Rivera. The
words 'married to Rafael Litam'written after the name of Marcosa
Rivera, in each of the above mentioned titles are merely descriptive
of the civil status of Marcosa Rivera, the registered owner of the
properties covered by said titles.
The records further show that on August 16, 1945 — or two (2) days after the
execution of the deed of mortgage for P10,000 in favor of the PNB — Francisco
Soriano received P2,000 from plaintiff herein; that, early in 1951, Francisco
Soriano received a letter informing him that the PNB mortgage on the Parañaque
property would be foreclosed, unless the debt guaranteed therewith were settled;
that, accordingly, his children came to know of the mortgage in favor of the PNB;
that on October 8, 1951, said mortgage was transferred to the RFC; that,
thereafter, or from March to October 1952, Francisco Soriano and his children,
Rosalina Soriano and Eugenio Soriano, received several sums of money,
aggregating P3,450, from plaintiff herein; that the latter, moreover, spent over
P6,000 on the occasion of the ordination of third-party plaintiff, Eugenio Soriano,
as a priest, on April 20, 1952; that plaintiff, also, paid the bills of Francisco
Soriano in the Singian Clinic when he fell sick in 1953; and that the former had,
likewise, paid the real estate tax on the Parañaque property from 1947 to 1952.
Under these circumstances, it is difficult to believe that Sorianos did not know
then of the mortgage constituted by Francisco Soriano, on October 8, 1951, in
favor of the RFC. In fact, Rosalina Soriano testified that when, that month,
Francisco Soriano and she conferred with the plaintiff, he stated that the
Parañaque property was mortgaged to the RFC, whereupon her father got angry
at the plaintiff and said that he had fooled him (Francisco Soriano). Being thus
aware of said mortgage since October 1951, the Sorianos did not question its
validity — until January 12, 1957, when they filed in this cage their third-party
complaint in intervention — as regards, at least, one-half of the Parañaque
property, which they now claim to be their mother's share in the conjugal
partnership. Worse still, after the foreclosure sale in favor of the RFC, they tried to
redeem the property for P14,000, and, when the RFC did not agree thereto, they
even sought the help of the Office of the President to effect said redemption.
Their aforementioned failure to contest the legality of the mortgage for over five
(5) years and these attempts to redeem the property constitute further indicia that
the same belonged exclusively to Francisco Soriano, not to the conjugal
partnership with his deceased wife, Tomasa Rodriguez. Apart from the fact that
said attempts to redeem the property constitute an implied admission of
the validity of its sale — and, hence, of its mortgage to the RFC — there are
authorities to the effect that they bar the Sorianos from assailing the same.
... defendants, by their repeated requests for time to redeem
had impliedly admitted — and were estopped to question — the
validity and regularity of the Sheriff's sale. 21
The petitioner himself believed that the company had a right to
cancel, because in March, 1932, i.e., after the cancellation,
he proposed the repurchase of the property, and the company
agreed to resell it to him .... Unluckily he could make no down
payment and the repurchase fell through. Wherefore, it is now too
late for him to question the cancellation, inasmuch as he practically
ratified it, .... 22
The fact that Mallorca failed to exercise her right of redemption,
which she sought to enforce in a judicial court, ends her interest to
the land she claims, and, doubtless, estops her from denying PNB's
mortgage lien thereon. 23
It is thus clear that the lower court erred in annulling the RFC mortgage on the
Parañaque property and its sale to the RFC as regards one-half of said property,
and that the decision appealed from should, accordingly, be modified, by
eliminating therefrom the second paragraph of its dispositive part, quoted earlier
in this decision.
With this modification and that of other pertinent parts of the decision appealed
from, the same is hereby affirmed in all other respects, with the costs of this
instance against plaintiff, Jose L. Ponce de Leon and third-party plaintiffs,
Rosalina Soriano, Teofila Soriano del Rosario and Father Eugenio Soriano. It is
so ordered.
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.
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:
Nego Instruments Set 1 (#s1-70) Page 25 of 112
Lumbas. Dadat
In consideration for a loan extended by petitioner Bank to respondent Sima Wei,
the latter executed and delivered to the former a promissory note, engaging to
pay the petitioner Bank or order the amount of P1,820,000.00 on or before June
24, 1983 with interest at 32% per annum. Sima Wei made partial payments on
the note, leaving a balance of P1,032,450.02. On November 18, 1983, Sima Wei
issued two crossed checks payable to petitioner Bank drawn against China
Banking Corporation, bearing respectively the serial numbers 384934, for the
amount of P550,000.00 and 384935, for the amount of P500,000.00. The said
checks were allegedly issued in full settlement of the drawer's account evidenced
by the promissory note. These two checks were not delivered to the petitioner-
payee or to any of its authorized representatives. For reasons not shown, these
checks came into the possession of respondent Lee Kian Huat, who deposited
the checks without the petitioner-payee's indorsement (forged or otherwise) to the
account of respondent Plastic Corporation, at the Balintawak branch, Caloocan
City, of the Producers Bank. Cheng Uy, Branch Manager of the Balintawak
branch of Producers Bank, relying on the assurance of respondent Samson Tung,
President of Plastic Corporation, that the transaction was legal and regular,
instructed the cashier of Producers Bank to accept the checks for deposit and to
credit them to the account of said Plastic Corporation, inspite of the fact that the
checks were crossed and payable to petitioner Bank and bore no indorsement of
the latter. Hence, petitioner filed the complaint as aforestated.
The main issue before Us is whether petitioner Bank has a cause of action
against any or all of the defendants, in the alternative or otherwise.
A cause of action is defined as an act or omission of one party in violation of the
legal right or rights of another. The essential elements are: (1) legal right of the
plaintiff; (2) correlative obligation of the defendant; and (3) an act or omission of
the defendant in violation of said legal right.2
The normal parties to a check are the drawer, the payee and the drawee bank.
Courts have long recognized the business custom of using printed checks where
blanks are provided for the date of issuance, the name of the payee, the amount
payable and the drawer's signature. All the drawer has to do when he wishes to
issue a check is to properly fill up the blanks and sign it. However, the mere fact
that he has done these does not give rise to any liability on his part, until and
unless the check is delivered to the payee or his representative. A negotiable
instrument, of which a check is, is not only a written evidence of a contract right
but is also a species of property. Just as a deed to a piece of land must be
delivered in order to convey title to the grantee, so must a negotiable instrument
be delivered to the payee in order to evidence its existence as a binding contract.
Section 16 of the Negotiable Instruments Law, which governs checks, provides in
part:
Every contract on a negotiable instrument is incomplete and
revocable until delivery of the instrument for the purpose of giving
effect thereto. . . .
Thus, the payee of a negotiable instrument acquires no interest with respect
thereto until its delivery to him.3Delivery of an instrument means transfer of
possession, actual or constructive, from one person to another.4 Without the initial
delivery of the instrument from the drawer to the payee, there can be no liability
on the instrument. Moreover, such delivery must be intended to give effect to the
instrument.
The allegations of the petitioner in the original complaint show that the two (2)
China Bank checks, numbered 384934 and 384935, were not delivered to the
payee, the petitioner herein. Without the delivery of said checks to petitioner-
payee, the former did not acquire any right or interest therein and cannot
therefore assert any cause of action, founded on said checks, whether against
the drawer Sima Wei or against the Producers Bank or any of the other
respondents.
In the original complaint, petitioner Bank, as plaintiff, sued respondent Sima Wei
on the promissory note, and the alternative defendants, including Sima Wei, on
the two checks. On appeal from the orders of dismissal of the Regional Trial
Court, petitioner Bank alleged that its cause of action was not based on collecting
the sum of money evidenced by the negotiable instruments stated but on quasi-

delict — a claim for damages on the ground of fraudulent acts and evident bad
faith of the alternative respondents. This was clearly an attempt by the petitioner
Bank to change not only the theory of its case but the basis of his cause of action.
It is well-settled that a party cannot change his theory on appeal, as this would in
effect deprive the other party of his day in court.5
Notwithstanding the above, it does not necessarily follow that the drawer Sima
Wei is freed from liability to petitioner Bank under the loan evidenced by the
promissory note agreed to by her. Her allegation that she has paid the balance of
her loan with the two checks payable to petitioner Bank has no merit for, as We
have earlier explained, these checks were never delivered to petitioner Bank. And
even granting, without admitting, that there was delivery to petitioner Bank, the
delivery of checks in payment of an obligation does not constitute payment unless
they are cashed or their value is impaired through the fault of the creditor.6 None
of these exceptions were alleged by respondent Sima Wei.
Therefore, unless respondent Sima Wei proves that she has been relieved from
liability on the promissory note by some other cause, petitioner Bank has a right
of action against her for the balance due thereon.
However, insofar as the other respondents are concerned, petitioner Bank has no
privity with them. Since petitioner Bank never received the checks on which it
based its action against said respondents, it never owned them (the checks) nor
did it acquire any interest therein. Thus, anything which the respondents may
have done with respect to said checks could not have prejudiced petitioner Bank.
It had no right or interest in the checks which could have been violated by said
respondents. Petitioner Bank has therefore no cause of action against said
respondents, in the alternative or otherwise. If at all, it is Sima Wei, the drawer,
who would have a cause of action against her
co-respondents, if the allegations in the complaint are found to be true.
With respect to the second assignment of error raised by petitioner Bank
regarding the applicability of Section 13, Rule 3 of the Rules of Court, We find it
unnecessary to discuss the same in view of Our finding that the petitioner Bank
did not acquire any right or interest in the checks due to lack of delivery. It
therefore has no cause of action against the respondents, in the alternative or
otherwise.
In the light of the foregoing, the judgment of the Court of Appeals dismissing the
petitioner's complaint is AFFIRMED insofar as the second cause of action is
concerned. On the first cause of action, the case is REMANDED to the trial court
for a trial on the merits, consistent with this decision, in order to determine
whether respondent Sima Wei is liable to the Development Bank of Rizal for any
amount under the promissory note allegedly signed by her.SO ORDERED.
SECOND DIVISION G.R. No. 170912 April 19, 2010
ROBERT DINO, Petitioner, vs.MARIA LUISA JUDAL-LOOT, joined by her
husband VICENTE LOOT, Respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for review1 of the 16 August 2005 Decision2 and 30 November
2005 Resolution3 of the Court of Appeals in CA-G.R. CV No. 57994. The Court of
Appeals affirmed the decision of the Regional Trial Court, 7th Judicial Region,
Branch 56, Mandaue City (trial court), with the deletion of the award of interest,
moral damages, attorney’s fees and litigation expenses. The trial court ruled that
respondents Maria Luisa Judal-Loot and Vicente Loot are holders in due course
of Metrobank Check No. C-MA 142119406 CA and ordered petitioner Robert
Dino as drawer, together with co-defendant Fe Lobitana as indorser, to solidarily
pay respondents the face value of the check, among others.
The Facts
Sometime in December 1992, a syndicate, one of whose members posed as an
owner of several parcels of land situated in Canjulao, Lapu-lapu City, approached
petitioner and induced him to lend the group ₱3,000,000.00 to be secured by a
real estate mortgage on the properties. A member of the group, particularly a
woman pretending to be a certain Vivencia Ompok Consing, even offered to
execute a Deed of Absolute Sale covering the properties, instead of the usual
mortgage contract.4 Enticed and convinced by the syndicate’s offer, petitioner
issued three Metrobank checks totaling ₱3,000,000.00, one of which is Check
No. C-MA-142119406-CA postdated 13 February 1993 in the amount of
₱1,000,000.00 payable to Vivencia Ompok Consing and/or Fe Lobitana.5
Upon scrutinizing the documents involving the properties, petitioner discovered
that the documents covered rights over government properties. Realizing he had
been deceived, petitioner advised Metrobank to stop payment of his checks.
However, only the payment of Check No. C-MA- 142119406-CA was ordered
stopped. The other two checks were already encashed by the payees.
Meanwhile, Lobitana negotiated and indorsed Check No. C-MA- 142119406-CA
to respondents in exchange for cash in the sum of ₱948,000.00, which
respondents borrowed from Metrobank and charged against their credit line.
Before respondents accepted the check, they first inquired from the drawee bank,
Metrobank, Cebu-Mabolo Branch which is also their depositary bank, if the
subject check was sufficiently funded, to which Metrobank answered in the
positive. However, when respondents deposited the check with Metrobank, Cebu-
Mabolo Branch, the same was dishonored by the drawee bank for reason
"PAYMENT STOPPED."
Respondents filed a collection suit6 against petitioner and Lobitana before the trial
court. In their Complaint, respondents alleged, among other things, that they are
holders in due course and for value of Metrobank Check No. C-MA-142119406-
CA and that they had no prior information concerning the transaction between
defendants.
In his Answer, petitioner denied respondents’ allegations that "on the face of the
subject check, no condition or limitation was imposed" and that respondents are
holders in due course and for value of the check. For her part, Lobitana denied
the allegations in the complaint and basically claimed that the transaction leading
to the issuance of the subject check is a sale of a parcel of land by Vivencia
Ompok Consing to petitioner and that she was made a payee of the check only to
facilitate its discounting.
The trial court ruled in favor of respondents and declared them due course
holders of the subject check, since there was no privity between respondents and
defendants. The dispositive portion of the 14 March 1996 Decision of the trial
court reads:
In summation, this Court rules for the Plaintiff and against the Defendants and
hereby orders:
1.) defendants to pay to Plaintiff, and severally, the amount of
₱1,000,000.00 representing the face value of subject Metrobank
check;
2.) to pay to Plaintiff herein, jointly and severally, the sum of
₱101,748.00 for accrued and paid interest;
3.) to pay to Plaintiff, jointly and severally, moral damages in the
amount of ₱100,000.00;
4.) to pay to Plaintiff, jointly and severally, the sum of ₱200,000.00
for attorney’s fees; and
5.) to pay to Plaintiff, jointly and severally, litigation expenses in the
sum of ₱10,000.00 and costs of the suit.SO ORDERED.7
Only petitioner filed an appeal. Lobitana did not appeal the trial court’s judgment.
The Ruling of the Court of Appeals
The Court of Appeals affirmed the trial court’s finding that respondents are
holders in due course of Metrobank Check No. C-MA- 142119406-CA. The Court
of Appeals pointed out that petitioner’s own admission that respondents were
never parties to the transaction among petitioner, Lobitana, Concordio Toring,
Cecilia Villacarlos, and Consing, proved respondents’ lack of knowledge of any
infirmity in the instrument or defect in the title of the person negotiating it.
Moreover, respondents verified from Metrobank whether the check was
sufficiently funded before they accepted it. Therefore, respondents must be
excluded from the ambit of petitioner’s stop payment order.
Nego Instruments Set 1 (#s1-70) Page 26 of 112
Lumbas. Dadat
The Court of Appeals modified the trial court’s decision by deleting the award of
interest, moral damages, attorney’s fees and litigation expenses. The Court of
Appeals opined that petitioner "was only exercising (although incorrectly), what he
perceived to be his right to stop the payment of the check which he rediscounted."
The Court of Appeals ruled that petitioner acted in good faith in ordering the
stoppage of payment of the subject check and thus, he must not be made liable
for those amounts.
In its 16 August 2005 Decision, the Court of Appeals affirmed the trial court’s
decision with modifications, thus:
WHEREFORE, premises considered, finding no reversible error in the decision of
the lower court, WE hereby DISMISS the appeal and AFFIRM the decision of the
court a quo with modifications that the award of interest, moral damages,
attorney’s fees and litigation expenses be deleted.
No pronouncement as to costs.SO ORDERED.8
In its 30 November 2005 Resolution, the Court of Appeals denied petitioner’s
motion for reconsideration.
In denying the petitioner’s motion for reconsideration, the Court of Appeals noted
that petitioner raised the defense that the check is a crossed check for the first
time on appeal (particularly in the motion for reconsideration). The Court of
Appeals rejected such defense considering that to entertain the same would be
offensive to the basic rules of fair play, justice, and due process.
Hence, this petition.
The Issues
Petitioner raises the following issues:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RESPONDENTS
WERE HOLDERS IN DUE COURSE. THE FACT THAT METROBANK CHECK
NO. 142119406 IS A CROSSED CHECK CONSTITUTES SUFFICIENT
WARNING TO THE RESPONDENTS TO EXERCISE EXTRAORDINARY
DILIGENCE TO DETERMINE THE TITLE OF THE INDORSER.
II. THE COURT OF APPEALS ERRED IN DENYING PETITIONER’S MOTION
FOR RECONSIDERATION UPON THE GROUND THAT THE ARGUMENTS
RELIED UPON HAVE ONLY BEEN RAISED FOR THE FIRST TIME. EQUITY
DEMANDS THAT THE COURT OF APPEALS SHOULD HAVE MADE AN
EXCEPTION TO PREVENT THE COMMISSION OF MANIFEST WRONG AND
INJUSTICE UPON THE PETITIONER.9
The Ruling of this Court
The petition is meritorious.
Respondents point out that petitioner raised the defense that Metrobank Check
No. C-MA-142119406-CA is a crossed check for the first time in his motion for
reconsideration before the Court of Appeals. Respondents insist that issues not
raised during the trial cannot be raised for the first time on appeal as it would be
offensive to the elementary rules of fair play, justice and due process.
Respondents further assert that a change of theory on appeal is improper.
In his Answer, petitioner specifically denied, among others, (1) Paragraph 4 of the
Complaint, concerning the allegation that on the face of the subject check, no
condition or limitation was imposed, and (2) Paragraph 8 of the Complaint,
regarding the allegation that respondents were holders in due course and for
value of the subject check. In his "Special Affirmative Defenses," petitioner
claimed that "for want or lack of the prestation," he could validly stop the payment
of his check, and that by rediscounting petitioner’s check, respondents "took the
risk of what might happen on the check." Essentially, petitioner maintained that
respondents are not holders in due course of the subject check, and as such,
respondents could not recover any liability on the check from petitioner.
Indeed, petitioner did not expressly state in his Answer or raise during the trial
that Metrobank Check No. C-MA-142119406-CA is a crossed check. It must be
stressed, however, that petitioner consistently argues that respondents are not
holders in due course of the subject check, which is one of the possible effects of
crossing a check. The act of crossing a check serves as a warning to the holder
that the check has been issued for a definite purpose so that the holder thereof
must inquire if he has received the check pursuant to that purpose; otherwise, he
is not a holder in due course.10 Contrary to respondents’ view, petitioner never

changed his theory, that respondents are not holders in due course of the subject
check, as would violate fundamental rules of justice, fair play, and due process.
Besides, the subject check was presented and admitted as evidence during the
trial and respondents did not and in fact cannot deny that it is a crossed check.
In any event, the Court is clothed with ample authority to entertain issues or
matters not raised in the lower courts in the interest of substantial
justice.11 In Casa Filipina Realty v. Office of the President,12 the Court held:
[T]he trend in modern-day procedure is to accord the courts broad discretionary
power such that the appellate court may consider matters bearing on the issues
submitted for resolution which the parties failed to raise or which the lower court
ignored. Since rules of procedure are mere tools designed to facilitate the
attainment of justice, their strict and rigid application which would result in
technicalities that tend to frustrate rather than promote substantial justice, must
always be avoided. Technicality should not be allowed to stand in the way of
equitably and completely resolving the rights and obligations of the parties.13
Having disposed of the procedural issue, the Court shall now proceed to the
merits of the case. The main issue is whether respondents are holders in due
course of Metrobank Check No. C-MA 142119406 CA as to entitle them to collect
the face value of the check from its drawer or petitioner herein.
Section 52 of the Negotiable Instruments Law defines a holder in due course,
thus:
A holder in due course is a holder who has taken the instrument under the
following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and
without notice that it has been previously dishonored, if such was the
fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no notice of any
infirmity in the instrument or defect in the title of the person
negotiating it.
In the case of a crossed check, as in this case, the following principles must
additionally be considered: A crossed check (a) may not be encashed but only
deposited in the bank; (b) may be negotiated only once — to one who has an
account with a bank; and (c) warns the holder that it has been issued for a
definite purpose so that the holder thereof must inquire if he has received the
check pursuant to that purpose; otherwise, he is not a holder in due course.14
Based on the foregoing, respondents had the duty to ascertain the indorser’s, in
this case Lobitana’s, title to the check or the nature of her possession. This
respondents failed to do. Respondents’ verification from Metrobank on the
funding of the check does not amount to determination of Lobitana’s title to the
check. Failing in this respect, respondents are guilty of gross negligence
amounting to legal absence of good faith,15 contrary to Section 52(c) of the
Negotiable Instruments Law. Hence, respondents are not deemed holders in due
course of the subject check.16
State Investment House v. Intermediate Appellate Court17 squarely applies to this
case. There, New Sikatuna Wood Industries, Inc. sold at a discount to State
Investment House three post-dated crossed checks, issued by Anita Peña Chua
naming as payee New Sikatuna Wood Industries, Inc. The Court found State
Investment House not a holder in due course of the checks. The Court also
expounded on the effect of crossing a check, thus:
Under usual practice, crossing a check is done by placing two parallel lines
diagonally on the left top portion of the check. The crossing may be special
wherein between the two parallel lines is written the name of a bank or a business
institution, in which case the drawee should pay only with the intervention of that
bank or company, or crossing may be general wherein between two parallel
diagonal lines are written the words "and Co." or none at all as in the case at bar,
in which case the drawee should not encash the same but merely accept the
same for deposit.
The effect therefore of crossing a check relates to the mode of its presentment for
payment. Under Section 72 of the Negotiable Instruments Law, presentment for
Nego Instruments Set 1 (#s1-70) Page 27 of 112
Lumbas. Dadat
payment to be sufficient must be made (a) by the holder, or by some person was called for preliminary hearing, it was postponed by agreement of the parties.
authorized to receive payment on his behalf x x x As to who the holder or Subsequently, it was set for trial. On the date of the trial, the parties agreed to
authorized person will be depends on the instructions stated on the face of the present, in lieu of any other evidence, a stipulation of facts, which they did on May
check. 27, 1958, as follows:
The three subject checks in the case at bar had been crossed generally and 1. That petitioner is a domestic corporation duly organized and
issued payable to New Sikatuna Wood Industries, Inc. which could only mean existing under the laws of the Philippines, with principal place of
that the drawer had intended the same for deposit only by the rightful person, i.e., business at Biñan, Laguna;
the payee named therein. Apparently, it was not the payee who presented the 2. That respondent is an agency created under Republic Act No.
same for payment and therefore, there was no proper presentment, and the 1161, as amended by Republic Act No. 1792, with the principal place
liability did not attach to the drawer. of business at the new GSIS Bldg., corner Arroceros and Concepcion
Thus, in the absence of due presentment, the drawer did not become liable. Streets, Manila, where it may be served with summons;
Consequently, no right of recourse is available to petitioner against the drawer of 3. That respondent has served notice upon the petitioner requiring it
the subject checks, private respondent wife, considering that petitioner is not the to register as member of the System and to remit the premiums due
proper party authorized to make presentment of the checks in question. from all the employees of the petitioner and the contribution of the
In this case, there is no question that the payees of the check, Lobitana or latter to the System beginning the month of September, 1957;
Consing, were not the ones who presented the check for payment. Lobitana 4. That sometime in 1949, the Biñan Transportation Co., a
negotiated and indorsed the check to respondents in exchange for ₱948,000.00. corporation duly registered with the Securities and Exchange
It was respondents who presented the subject check for payment; however, the Commission, sold part of the lines and equipment it operates to
check was dishonored for reason "PAYMENT STOPPED." In other words, it was Gonzalo Mercado, Artemio Mercado, Florentino Mata and Dominador
not the payee who presented the check for payment; and thus, there was no Vera Cruz;
proper presentment. As a result, liability did not attach to the drawer. Accordingly, 5. That after the sale, the said vendees formed an unregistered
no right of recourse is available to respondents against the drawer of the check, partnership under the name of Laguna Transportation Company
petitioner herein, since respondents are not the proper party authorized to make which continued to operate the lines and equipment bought from the
presentment of the subject check. Biñan Transportation Company, in addition to new lines which it was
However, the fact that respondents are not holders in due course does not able to secure from the Public Service Commission;
automatically mean that they cannot recover on the check.18 The Negotiable 6. That the original partners forming the Laguna Transportation
Instruments Law does not provide that a holder who is not a holder in due course Company, with the addition of two new members, organized a
may not in any case recover on the instrument. The only disadvantage of a holder corporation known as the Laguna Transportation Company, Inc.,
who is not in due course is that the negotiable instrument is subject to defenses which was registered with the Securities and Exchange Commission
as if it were non-negotiable.19 Among such defenses is the absence or failure of on June 20, 1956, and which corporation is the plaintiff now in this
consideration,20 which petitioner sufficiently established in this case. Petitioner case;
issued the subject check supposedly for a loan in favor of Consing’s group, who 7. That the incorporators of the Laguna Transportation Company,
turned out to be a syndicate defrauding gullible individuals. Since there is in fact Inc., and their corresponding shares are as follows:
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 Name No. of Amount Amount
check.1avvphi1 Shares Subscribed Paid
Respondents can collect from the immediate indorser,21 in this case Lobitana.
Significantly, Lobitana did not appeal the trial court’s decision, finding her Dominador 333 P33,300.00 P9,160.81
solidarily liable to pay, among others, the face value of the subject check. Cruz shares
Therefore, the trial court’s judgment has long become final and executory as to
Lobitana. Maura 333 33,300.00 9,160.81
WHEREFORE, we GRANT the petition. We SET ASIDE the 16 August 2005 Mendoza shares
Decision and 30 November 2005 Resolution of the Court of Appeals in CA-G.R.
CV No. 57994.SO ORDERED. Gonzalo 66 6,600.00 1,822.49
Mercado shares
EN BANC G.R. No. L-14606 April 28, 1960
LAGUNA TRANSPORTATION CO., INC., petitioner-appellant, vs.SOCIAL Artemio 94 9,400.00 2,565.90
SECURITY SYSTEM, respondent-appellee. Mercado shares
BARRERA, J.:
Florentino 110 11,000.00 3,021.54
On January 24, 1958, petitioner Laguna Transportation Co., Inc. filed with the Mata shares
Court of First Instance of Laguna petition praying that an order be issued by the
court declaring that it is not bound to register as a member of respondent Social Sabina 64 6,400.00
Security System and, therefore, not obliged to pay to the latter the contributions Borja shares 1,750.00
required under the Social Security Act.1 To this petition, respondent filed its
answer on February 11, 1958 praying for its dismissal due to petitioner's failure to
exhaust administrative remedies, and for a declaration that petitioner is covered 1,000 P100,000.00 P27,481.55
by said Act, since the latter's business has been in operation for at least 2 years shares
prior to September 1, 1957. 8. That the corporation continued the same transportation business
On February 11, 1958, respondent filed a motion for preliminary hearing on its of the unregistered partnership;
defense that petitioner failed to exhaust administrative remedies. When the case

9. That the plaintiff filed on August 30, 1957 an Employee's Data
Record . . . and a supplemental Information Sheet . . .;
10. That prior to November 11, 1957, plaintiff requested for
exemption from coverage by the System on the ground that it started
operation only on June 20, 1956, when it was registered with the
Securities and Exchange Commission but on November 11, 1957,
the Social Security System notified plaintiff that it was covered;
11. On November 14, 1957, plaintiff through counsel sent a letter to
the Social Security System contesting the claim of the System that
plaintiff was covered, . . .
12. On November 27, 1957, Carlos Sanchez, Manager of the
Production Department of the respondent System for and in behalf of
the Acting Administrator, informed plaintiff that plaintiff's business has
been in actual operation for at least two years, . . .
On the basis of the foregoing stipulation of facts, the court, on August 15, 1958,
rendered a decision the dispositive part of which reads:
Wherefore, the Court is of the opinion and so declares that the
petitioner was an employer engaged in business as common carrier
which had been in operation for at least two years prior to the
enactment of Republic Act No. 1161, as amended by Republic Act
1792 and by virtue thereof, it was subject to compulsory coverage
under said law. . . .
From this decision, petitioner appealed directly to us, raising purely questions of
law.
Petitioner claims that the lower court erred in holding that it is an employer
engaged in business as a common carrier which had been in operation for at
least 2 years prior to the enactment of the Social Security Act and, therefore,
subject to compulsory coverage thereunder.
Section 9 of the Social Security Act, in part, provides:
SEC. 9 Compulsory Coverage. — Coverage in the System shall be
compulsory upon all employees between the ages of sixteen and
sixty years, inclusive, if they have been for at least six months in the
service of an employer who is a member of the System. Provided,
That the Commission may not compel any employer to become a
member of the System unless he shall have been in operation for at
least two years . . . . (Italics supplied.).
It is not disputed that the Laguna Transportation Company, an unregistered
partnership composed of Gonzalo Mercado, Artemio Mercado, Florentina Mata,
and Dominador Vera Cruz, commenced the operation of its business as a
common carrier on April 1, 1949. These 4 original partners, with 2 others (Maura
Mendoza and Sabina Borja) later converted the partnership into a corporate
entity, by registering its articles of incorporation with the Securities and Exchange
Commission on June 20, 1956. The firm name "Laguna Transportation Company"
was not altered, except with the addition of the word "Inc." to indicate that
petitioner was duly incorporated under existing laws. The corporation continued
the same transportation business of the unregistered partnership, using the same
lines and equipment. There was, in effect, only a change in the form of the
organization of the entity engaged in the business of transportation of
passengers. Hence, said entity as an employer engaged in business, was already
in operation for at least 3 years prior to the enactment of the Social Security Act
on June 18, 1954 and for at least two years prior to the passage of the
amendatory act on June 21, 1957. Petitioner argues that, since it was registered
as a corporation with the Securities and Exchange Commission only on June 20,
1956, it must be considered to have been in operation only on said date. While it
is true that a corporation once formed is conferred a juridical personality separate
and district from the persons composing it, it is but a legal fiction introduced for
purposes of convenience and to subserve the ends of justice. The concept cannot
be extended to a point beyond its reasons and policy, and when invoked in
support of an end subversive of this policy, will be disregarded by the courts. (13
Am. Jur. 160.)
If any general rule can be laid down, in the present state of authority,
it is that a corporation will be looked upon as a legal entity as a
general rule, and until sufficient reason to the contrary appears; but,
when the motion of legal entity is used to defeat public convenience,
justify wrong, protect fraud, or defend crime, the law will regard the
corporation as an association of persons. (1 Fletcher Cyclopedia
Corporations [Perm. Ed.] 135-136; U.S. Milwaukee Refrigeration
Transit Co., 142 Fed. 247, cited in Koppel Philippines, Inc. vs. Yatco,
43 Off. Gaz., 4604.)
To adopt petitioner's argument would defeat, rather than promote, the ends for
which the Social Security Act was enacted. An employer could easily circumvent
the statute by simply changing his form of organization every other year, and then
claim exemption from contribution to the System as required, on the theory that,
as a new entity, it has not been in operation for a period of at least 2 years. the
door to fraudulent circumvention of the statute would, thereby, be opened.
Moreover, petitioner admitted that as an employer engaged in the business of a
common carrier, its operation commenced on April 1, 1949 while it was a
partnership and continued by the corporation upon its formation on June 20,
1956. Unlike in the conveyance made by the Biñan Transportation Company to
the partners Gonzalo Mercado, Artemio Mercado, Florentino Mata, and
Dominador Vera Cruz, no mention whatsoever is made either in the pleadings or
in the stipulation of facts that the lines and equipment of the unregistered
partnership had been sold and transferred to the corporation, petitioner herein.
This omission, to our mind, clearly indicates that there was, in fact, no transfer of
interest, but a mere change in the form of the organization of the employer
engaged in the transportation business, i.e., from an unregistered partnership to
that of a corporation. As a rule, courts will look to the substance and not to the
form.(Colonial Trust Co. vs. Montolo Eric Works, 172 Fed. 310; Metropolitan
Holding Co. vs. Snyder, 79 F. 2d 263, 103 A.L.R. 612; Arnold vs. Willits, et al., 44
Phil., 634; 1 Fletcher Cyclopedia Corporations [Perm. Ed.] 139-140.)
Finally, the weight of authority supports the view that where a corporation was
formed by, and consisted of members of a partnership whose business and
property was conveyed and transferred to the corporation for the purpose of
continuing its business, in payment for which corporate capital stock was issued,
such corporation is presumed to have assumed partnership debts, and is prima
facie liable therefor. (Stowell vs. Garden City News Corps., 57 P. 2d 12; Chicago
Smelting & Refining Corp. vs. Sullivan, 246 IU, App. 538; Ball vs. Bross., 83 June
19, N.Y. Supp. 692.) The reason for the rule is that the members of the
partnership may be said to have simply put on a new coat, or taken on a
corporate cloak, and the corporation is a mere continuation of the partnership. (8
Fletcher Cyclopedia Corporations [Perm. Ed.] 402-411.)
Wherefore, finding no error in the judgment of the court a quo, the same is hereby
affirmed, with costs against petitioner-appellant. So ordered.
FIRST DIVISION G.R. No. 175350 June 13, 2012
EQUITABLE BANKING CORPORATION, INC. Petitioner, vs. SPECIAL STEEL
PRODUCTS, and AUGUSTO L. PARDO, Respondents.
DECISION
DEL CASTILLO, J.:
A crossed check with the notation "account payee only" can only be deposited in
the named payee’s account. It is gross negligence for a bank to ignore this rule
solely on the basis of a third party’s 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
Nego Instruments Set 1 (#s1-70) Page 28 of 112
Lumbas. Dadat
Respondent Special Steel Products, Inc. (SSPI) is a private domestic corporation
selling steel products. Its co-respondent Augusto L. Pardo (Pardo) is SSPI’s
President and majority stockholder.2
International Copra Export Corporation (Interco) is its regular customer.3
Jose Isidoro4 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 banking6and 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 ₱325,976.347
Sales Invoice No. 65842 dated April 11, 1991 for ₱345,412.808
Sales Invoice No. 65843 dated April 11, 1991 for ₱313,845.849
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, Interco’s 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 Uy’s demands on the assumption that Uy, as the son-in-law
of Interco’s majority stockholder,15was acting pursuant to Interco’s orders. The
bank also relied on Uy’s status as a valued client.16 Thus, Equitable accepted the
checks for deposit in Uy’s personal accounts17 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 ₱985,234.98.19 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 Interco’s and SSPI’s
eventual discovery of Uy’s 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
₱767,345.64 on the ground that it was not responsible for the delay. Thus, SSPI
was unable to collect ₱437,040.35 (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 Uy’s fraudulent representations, and Equitable’s
indispensable connivance or gross negligence, the restrictive nature of the
checks was ignored and the checks were deposited in Uy’s 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 ₱3 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 SSPI’s income in 1991) and those of SSPI (which
reported the income only in 1993). Since Uy and Equitable were responsible for
Pardo’s worries, they should compensate him jointly and severally therefor.24
SSPI and Pardo also prayed for exemplary damages and attorney’s 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, 1993,28upon the filing of plaintiffs’ bond for
₱500,000.00. The sheriff served and implemented the writ against the personal
properties of both defendants.29
Upon Equitable’s motion and filing of a counter-bond, however, the trial court
eventually discharged the attachment30 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, SSPI’s acceptance of Interco’s payment on the sales invoices
is a waiver or extinction of SSPI’s 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.34Equitable averred that, due to Uy’s 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 payee’s 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 Equitable’s 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 bank’s 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 Equitable’s evidence as his own.
Ruling of the Regional Trial Court 38
The RTC clarified that SSPI’s 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 Uy’s 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 Equitable’s explanation regarding Uy’s close relations
with the drawer unacceptable.40
Uy’s conversion of the checks and Equitable’s 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 ₱437,040.35 to SSPI as actual damages.42
It also ordered the defendants to pay exemplary damages of ₱500,000.00,
attorney’s fees amounting to ₱200,000.00, as well as costs of suit.43
The trial court likewise found merit in Pardo’s 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 ₱3
million in moral damages.44
The dispositive portion of the trial court’s 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. ₱437,040.35 as actual damages;
2. ₱3,000,000.00 as moral damages to Augusto L. Pardo;
3. ₱500,000.00 as exemplary damages;
4. ₱200,000.00 as attorney’s fees; and
5. Costs of suit.
Defendant EBC’s 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 Equitable’s 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 Appeals48
The appellate court found no merit in Equitable’s appeal.
It affirmed the trial court’s 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 SSPI’s account only. Equitable violated this
duty when it allowed the deposit of the crossed checks in Uy’s account.51
The CA found factual and legal basis to affirm the trial court’s award of moral
damages in favor of Pardo.52
It likewise affirmed the award of exemplary damages and attorney’s 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 Equitable’s personal properties was wrongful.
Our Ruling
SSPI’s 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 Uy’s
wilful and illegal conversion of the checks payable to SSPI, and of Equitable’s
gross negligence, which facilitated Uy’s 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.
Nego Instruments Set 1 (#s1-70) Page 29 of 112
Lumbas. Dadat
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 Wei55 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.
Equitable’s argument is misplaced and beside the point. SSPI’s 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 SSPI’s 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 payee’s 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 Uy’s 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 Uy’s 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 bank’s mislaid trust wrought for them.

Equitable’s pretension that there is nothing under the circumstances that
rendered Uy’s title to the checks questionable is outrageous. These are crossed
checks, whose manner of discharge, in banking practice, is restrictive and
specific. Uy’s 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. Uy’s
relationship to Interco’s 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 Interco’s 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, SSPI’s 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.61SSPI 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 ₱3 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 Pardo’s fears are all imagined and should not be
compensated. The bank points out that none of Pardo’s fears panned out.64
Moral damages are recoverable only when they are the proximate result of the
defendant’s 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 party’s moral sufferings are the result of
the defendants’ actions, he may recover moral damages.
The Court, however, finds the award of ₱3 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
₱50,000.0067 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 Uy’s scheme. Equitable’s 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 Uy’s scheme. Disallowing Equitable’s cross-claim
against Uy is tantamount to allowing Uy to unjustly enrich himself at the expense
of Equitable. For this reason, the Court allows Equitable’s cross-claim against Uy.
Preliminary attachment
Equitable next assails as error the trial court’s dismissal of its counter-claim for
wrongful preliminary attachment. It maintains that, contrary to SSPI’s 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 ₱30,204.26, and caused it to sustain damage, amounting to ₱5 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 SSPI’s 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 latter’s 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
Nego Instruments Set 1 (#s1-70) Page 30 of 112
Lumbas. Dadat
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
STEEL’s 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 STEEL’s 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 Equitable’s participation
in the transactions involved fraud or was a result of its negligence. Despite such
uncertainty with respect to Equitable’s participation, SSPI applied for and
obtained a preliminary attachment of Equitable’s 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 Uy’s scheme.
That the plaintiffs eventually obtained a judgment in their favor does not detract
from the wrongfulness of the preliminary attachment.1âwphi1 While "the evidence
warrants [a] judgment in favor of [the] applicant, the proofs may nevertheless also
establish that said applicant’s 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 Equitable’s properties, the bank was compelled to pay the total
amount of ₱30,204.26 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
Equitable’s 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 ₱3,000,000.00 to ₱ 50,000.00; and
3. REVERSING the dismissal of Equitable Banking Corporation’s
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
Corporation’s 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 ₱30,204.36, for the wrongful
preliminary attachment of its properties.
The rest of the assailed Decision is AFFIRMED.SO ORDERED.

SECOND DIVISIONG.R. No. 74451 May 25, 1988
EQUITABLE BANKING CORPORATION, petitioner, vs.THE HONORABLE
INTERMEDIATE APPELLATE COURT and THE EDWARD J. NELL
CO., respondents.
MELENCIO-HERRERA, J.:
In this Petition for Review on certiorari petitioner, Equitable Banking Corporation,
prays that the adverse judgment against it rendered by respondent Appellate
Court, 1dated 4 October 1985, and its majority Resolution, dated 28 April 1986,
denying petitioner's Motion for Reconsideration, 2 be annulled and set aside.
The facts pertinent to this Petition, as summarized by the Trial Court and adopted
by reference by Respondent Appellate Court, emanated from the case entitled
"Edward J. Nell Co. vs. Liberato V. Casals, Casville Enterprises, Inc., and
Equitable Banking Corporation" of the Court of First Instance of Rizal (Civil Case
No. 25112), and read:
From the evidence submitted by the parties, the Court finds that sometime in
1975 defendant Liberato Casals went to plaintiff Edward J. Nell Company and
told its senior sales engineer, Amado Claustro that he was interested in buying
one of the plaintiff's garrett skidders. Plaintiff was a dealer of machineries,
equipment and supplies. Defendant Casals represented himself as the majority
stockholder, president and general manager of Casville Enterprises, Inc., a firm
engaged in the large scale production, procurement and processing of logs and
lumber products, which had a plywood plant in Sta. Ana, Metro Manila.
After defendant Casals talked with plaintiff's sales engineer, he was referred to
plaintiffs executive vice-president, Apolonio Javier, for negotiation in connection
with the manner of payment. When Javier asked for cash payment for the
skidders, defendant Casals informed him that his corporation, defendant Casville
Enterprises, Inc., had a credit line with defendant Equitable Banking Corporation.
Apparently, impressed with this assertion, Javier agreed to have the skidders paid
by way of a domestic letter of credit which defendant Casals promised to open in
plaintiffs favor, in lieu of cash payment. Accordingly, on December 22, 1975,
defendant Casville, through its president, defendant Casals, ordered from plaintiff
two units of garrett skidders ...
The purchase order for the garrett skidders bearing No. 0051 and dated
December 22, 1975 (Exhibit "A") contained the following terms and conditions:
Two (2) units GARRETT Skidders Model 30A complete as basically described in
the bulletin
PRICE: F.O.B. dock
Manila P485,000.00/unit
For two (2) units P970,000.00
SHIPMENT: We will inform you the date and name of the vessel as soon as
arranged.
TERMS: By irrevocable domestic letter of credit to be issued in favor of THE
EDWARD J. NELL CO. or ORDER payable in thirty six (36) months and will be
opened within ninety (90) days after date of shipment. at first installment will be
due one hundred eighty (180) days after date of shipment. Interest-14% per
annum (Exhibit A)
xxx xxx xxx
... in a letter dated April 21, 1976, defendants Casals and Casville requested from
plaintiff the delivery of one (1) unit of the bidders, complete with tools and cables,
to Cagayan de Oro, on or before Saturday, April 24,1976, on board a Lorenzo
shipping vessel, with the information that an irrevocable Domestic Letter of Credit
would be opened in plaintiff's favor on or before June 30, 1976 under the terms
and conditions agreed upon (Exhibit "B")
On May 3, 1976, in compliance with defendant Casvile's recognition request,
plaintiff shipped to Cagayan de Oro City a Garrett skidder. Plaintiff paid the
shipping cost in the amount of P10,640.00 because of the verbal assurance of
defendant Casville that it would be covered by the letter of credit soon to be
opened.
xxx xxx xxx
On July 15, 1976, defendant Casals handed to plaintiff a check in the amount of
P300,000.00 postdated August 4, 1976, which was followed by another check of
same date. Plaintiff considered these checks either as partial payment for the
skidder that was already delivered to Cagayan de Oro or as reimbursement for
the marginal deposit that plaintiff was supposed to pay.
In a letter dated August 3, 1976 (Exhibit "C"), defendants Casville informed the
plaintiff that their application for a letter of credit for the payment of the Garrett
skidders had been approved by the Equitable Banking Corporation. However, the
defendants said that they would need the sum of P300,000.00 to stand as
collateral or marginal deposit in favor of Equitable Banking Corporation and an
additional amount of P100,000.00, also in favor of Equitable Banking Corporation,
to clear the title of the Estrada property belonging to defendant Casals which had
been approved as security for the trust receipts to be issued by the bank,
covering the above-mentioned equipment.
Although the marginal deposit was supposed to be produced by defendant
Casville Enterprises, plaintiff agreed to advance the necessary amount in order to
facilitate the transaction. Accordingly, on August 5,1976, plaintiff issued a check
in the amount of P400,000.00 (Exhibit "2") drawn against the First National City
Bank and made payable to the order of Equitable Banking Corporation and with
the following notation or memorandum:
a/c of Casville Enterprises Inc. for Marginal deposit and payment of
balance on Estrada Property to be used as security for trust receipt
for opening L/C of Garrett Skidders in favor of the Edward J. Nell
Co." Said check together with the cash disbursement voucher
(Exhibit "2-A") containing the explanation:
Payment for marginal deposit and other expenses re
opening of L/C for account of Casville Ent..
A covering letter (Exhibit "3") was also sent and when the three documents were
presented to Severino Santos, executive vice president of defendant bank,
Santos did not accept them because the terms and conditions required by the
bank for the opening of the letter of credit had not yet been agreed on.
On August 9, 1976, defendant Casville wrote the bank applying for two letters of
credit to cover its purchase from plaintiff of two Garrett skidders, under the
following terms and conditions:
a) On sight Letter of Credit for P485,000.00; b) One 36 months Letter of Credit for
P606,000.00; c) P300,000.00 CASH marginal deposit1 d) Real Estate Collateral
to secure the Trust Receipts; e) We shall chattel mortgage the equipments
purchased even after payment of the first L/C as additional security for the
balance of the second L/C and f) Other conditions you deem necessary to protect
the interest of the bank."
In a letter dated August 11, 1976 (Exhibit "D-l"), defendant bank replied stating
that it was ready to open the letters of credit upon defendant's compliance of the
following terms and conditions:
c) 30% cash margin deposit; d) Acceptable Real Estate Collateral to secure the
Trust Receipts; e) Chattel Mortgage on the equipment; and Ashville f) Other
terms and conditions that our bank may impose.
Defendant Casville sent a copy of the foregoing letter to the plaintiff enclosing
three postdated checks. In said letter, plaintiff was informed of the requirements
imposed by the defendant bank pointing out that the "cash marginal required
under paragraph (c) is 30% of Pl,091,000.00 or P327,300.00 plus another
P100,000.00 to clean up the Estrada property or a total of P427,300.00" and that
the check covering said amount should be made payable "to the Order of
EQUITABLE BANKING CORPORATION for the account of Casville Enterprises
Inc." Defendant Casville also stated that the three (3) enclosed postdated checks
were intended as replacement of the checks that were previously issued to
plaintiff to secure the sum of P427,300.00 that plaintiff would advance to
defendant bank for the account of defendant Casville. All the new checks were
postdated November 19, 1976 and drawn in the sum of Pl45,500.00 (Exhibit "F"),
P181,800.00 (Exhibit "G") and P100,000.00 (Exhibit "H").
Nego Instruments Set 1 (#s1-70) Page 31 of 112
Lumbas. Dadat
On the same occasion, defendant Casals delivered to plaintiff TCT No. 11891 of
the Register of Deeds of Quezon City and TCT No. 50851 of the Register of
Deeds of Rizal covering two pieces of real estate properties.
Subsequently, Cesar Umali, plaintiffs credit and collection manager, accompanied
by a representative of defendant Casville, went to see Severino Santos to find out
the status of the credit line being sought by defendant Casville. Santos assured
Umali that the letters of credit would be opened as soon as the requirements
imposed by defendant bank in its letter dated August 11, 1976 had been complied
with by defendant Casville.
On August 16, 1976, plaintiff issued a check for P427,300.00, payable to the
"order of EQUITABLE BANKING CORPORATION A/C CASVILLE
ENTERPRISES, INC." and drawn against the first National City Bank (Exhibit "E-
l"). The check did not contain the notation found in the previous check issued by
the plaintiff (Exhibit "2") but the substance of said notation was reproduced in a
covering letter dated August 16,1976 that went with the check (Exhibit
"E").<äre||anº•1àw> Both the check and the covering letter were sent to
defendant bank through defendant Casals. Plaintiff entrusted the delivery of the
check and the latter to defendant Casals because it believed that no one,
including defendant Casals, could encash the same as it was made payable to
the defendant bank alone. Besides, defendant Casals was known to the bank as
the one following up the application for the letters of credit.
Upon receiving the check for P427,300.00 entrusted to him by plaintiff defendant
Casals immediately deposited it with the defendant bank and the bank teller
accepted the same for deposit in defendant Casville's checking account. After
depositing said check, defendant Casville, acting through defendant Casals, then
withdrew all the amount deposited.
Meanwhile, upon their presentation for encashment, plaintiff discovered that the
three checks (Exhibits "F, "G" and "H") in the total amount of P427,300.00, that
were issued by defendant Casville as collateral were all dishonored for having
been drawn against a closed account.
As defendant Casville failed to pay its obligation to defendant bank, the latter
foreclosed the mortgage executed by defendant Casville on the Estrada property
which was sold in a public auction sale to a third party.
Plaintiff allowed some time before following up the application for the letters of
credit knowing that it took time to process the same. However, when the three
checks issued to it by defendant Casville were dishonored, plaintiff became
apprehensive and sent Umali on November 29, 1976, to inquire about the status
of the application for the letters of credit. When plaintiff was informed that no
letters of credit were opened by the defendant bank in its favor and then
discovered that defendant Casville had in the meanwhile withdrawn the entire
amount of P427,300.00, without paying its obligation to the bank plaintiff filed the
instant action.
While the the instant case was being tried, defendants Casals and Casville
assigned the garrett skidder to plaintiff which credited in favor of defendants the
amount of P450,000.00, as partial satisfaction of plaintiff's claim against them.
Defendants Casals and Casville hardly disputed their liability to plaintiff. Not only
did they show lack of interest in disputing plaintiff's claim by not appearing in most
of the hearings, but they also assigned to plaintiff the garrett skidder which is an
action of clear recognition of their liability.
What is left for the Court to determine, therefore, is only the liability of
defendant bank to plaintiff.
xxx xxx xxx
Resolving that issue, the Trial Court rendered judgment, affirmed by Respondent
Court in toto, the pertinent portion of which reads:
xxx xxx xxx
Defendants Casals and Casville Enterprises and Equitable Banking
Corporation are ordered to pay plaintiff, jointly and severally, the sum
of P427,300.00, representing the amount of plaintiff's check which
defendant bank erroneously credited to the account of defendant
Casville and which defendants Casal and Casville misappropriated,

with 12% interest thereon from April 5, 1977, until the said sum is
fully paid.
Defendant Equitable Banking Corporation is ordered to pay plaintiff
attorney's fees in the sum of P25,000.00 .
Proportionate cost against all the defendants.SO ORDERED.
The crucial issue to resolve is whether or not petitioner Equitable Banking
Corporation (briefly, the Bank) is liable to private respondent Edward J. Nell Co.
(NELL, for short) for the value of the second check issued by NELL, Exhibit "E-l,"
which was made payable
to the order of EQUITABLE Ashville BANIUNG
CORPORATION A/C OF CASVILLE ENTERPRISES
INC.
and which the Bank teller credited to the account of Casville.
The Trial Court found that the amount of the second check had been erroneously
credited to the Casville account; held the Bank liable for the mistake of its
employees; and ordered the Bank to pay NELL the value of the check in the sum
of P427,300.00, with legal interest. Explained the Trial Court:
The Court finds that the check in question was payable only to the
defendant bank and to no one else. Although the words "A/C OF
CASVILLE ENTERPRISES INC. "appear on the face of the check
after or under the name of defendant bank, the payee was still the
latter. The addition of said words did not in any way make Casville
Enterprises, Inc. the Payee of the instrument for the words merely
indicated for whose account or in connection with what account the
check was issued by the plaintiff.
Indeed, the bank teller who received it was fully aware that the check
was not negotiable since he stamped thereon the words "NON-
NEGOTIABLE For Payee's Account Only" and "NON-NEGOTIABLE
TELLER NO. 4, August 17,1976 EQUITABLE BANKING
CORPORATION.
But said teller should have exercised more prudence in the handling
of Id check because it was not made out in the usual manner. The
addition of the words A/C OF CASVILLE ENTERPRISES INC."
should have placed the teller on guard and he should have clarified
the matter with his superiors. Instead of doing so, however, the teller
decided to rely on his own judgment and at the risk of making a
wrong decision, credited the entire amount in the name of defendant
Casville although the latter was not the payee named in the check.
Such mistake was crucial and was, without doubt, the proximate
cause of plaintiffs defraudation.
xxx xxx xxx
Respondent Appellate Court upheld the above conclusions stating in addition:
1) The appellee made the subject check payable to appellant's order,
for the account of Casville Enterprises, Inc. In the light of the other
facts, the directive was for the appellant bank to apply the value of
the check as payment for the letter of credit which Casville
Enterprises, Inc. had previously applied for in favor of the appellee
(Exhibit D-1, p. 5). The issuance of the subject check was precisely
to meet the bank's prior requirement of payment before issuing the
letter of credit previously applied for by Casville Enterprises in favor
of the appellee;
xxx xxx xxx
We disagree.
1) The subject check was equivocal and patently ambiguous. By making the
check read:
Pay to the EQUITABLE BANKING CORPORATION Order of A/C OF
CASVILLE ENTERPRISES, INC.
the payee ceased to be indicated with reasonable certainty in contravention of
Section 8 of the Negotiable Instruments Law. 3 As worded, it could be accepted
as deposit to the account of the party named after the symbols "A/C," or payable
to the Bank as trustee, or as an agent, for Casville Enterprises, Inc., with the latter
being the ultimate beneficiary. That ambiguity is to be
taken contra proferentem that is, construed against NELL who caused the
ambiguity and could have also avoided it by the exercise of a little more care.
Thus, Article 1377 of the Civil Code, provides:
Art. 1377. The interpretation of obscure words or stipulations in a
contract shall not favor the party who caused the obscurity.
2) Contrary to the finding of respondent Appellate Court, the subject check was,
initially, not non-negotiable. Neither was it a crossed check. The rubber-stamping
transversall on the face of the subject check of the words "Non-negotiable for
Payee's Account Only" between two (2) parallel lines, and "Non-negotiable,
Teller- No. 4, August 17, 1976," separately boxed, was made only by the Bank
teller in accordance with customary bank practice, and not by NELL as the drawer
of the check, and simply meant that thereafter the same check could no longer be
negotiated.
3) NELL's own acts and omissions in connection with the drawing, issuance and
delivery of the 16 August 1976 check, Exhibit "E-l," and its implicit trust in Casals,
were the proximate cause of its own defraudation: (a) The original check of 5
August 1976, Exhibit "2," was payable to the order solely of "Equitable Banking
Corporation." NELL changed the payee in the subject check, Exhibit "E",
however, to "Equitable Banking Corporation, A/C of Casville Enterprises Inc.,"
upon Casals request. NELL also eliminated both the cash disbursement voucher
accompanying the check which read:
Payment for marginal deposit and other expense re opening of L/C
for account of Casville Enterprises.
and the memorandum:
a/c of Casville Enterprises Inc. for Marginal deposit and payment of
balance on Estrada Property to be used as security for trust receipt
for opening L/C of Garrett Skidders in favor of the Edward Ashville J
Nell Co.
Evidencing the real nature of the transaction was merely a separate covering
letter, dated 16 August 1976, which Casals, sinisterly enough, suppressed from
the Bank officials and teller.
(b) NELL entrusted the subject check and its covering letter, Exhibit "E," to Casals
who, obviously, had his own antagonistic interests to promote. Thus it was that
Casals did not purposely present the subject check to the Executive Vice-
President of the Bank, who was aware of the negotiations regarding the Letter of
Credit, and who had rejected the previous check, Exhibit "2," including its three
documents because the terms and conditions required by the Bank for the
opening of the Letter of Credit had not yet been agreed on.
(c) NELL was extremely accommodating to Casals. Thus, to facilitate the sales
transaction, NELL even advanced the marginal deposit for the garrett skidder. It
is, indeed, abnormal for the seller of goods, the price of which is to be covered by
a letter of credit, to advance the marginal deposit for the same.
(d) NELL had received three (3) postdated checks all dated 16 November, 1976
from Casvine to secure the subject check and had accepted the deposit with it of
two (2) titles of real properties as collateral for said postdated checks. Thus,
NELL was erroneously confident that its interests were sufficiently protected.
Never had it suspected that those postdated checks would be dishonored, nor
that the subject check would be utilized by Casals for a purpose other than for
opening the letter of credit.
In the last analysis, it was NELL's own acts, which put it into the power of Casals
and Casville Enterprises to perpetuate the fraud against it and, consequently, it
must bear the loss (Blondeau, et al., vs. Nano, et al., 61 Phil. 625 [1935]; Sta.
Maria vs. Hongkong and Shanghai Banking Corporation, 89 Phil. 780 [1951];
Republic of the Philippines vs. Equitable Banking Corporation, L-15895, January
30,1964, 10 SCRA 8).
... As between two innocent persons, one of whom must suffer the
consequence of a breach of trust, the one who made it possible by
his act of confidence must bear the loss.
WHEREFORE, the Petition is granted and the Decision of respondent Appellate
Court, dated 4 October 1985, and its majority Resolution, dated 28 April 1986,
Nego Instruments Set 1 (#s1-70) Page 32 of 112
Lumbas. Dadat
denying petitioner's Motion for Reconsideration, are hereby SET ASIDE. The
Decision of the then Court of First Instance of Rizal, Branch XI. is modified in that
petitioner Equitable Banking Corporation is absolved from any and all liabilities to
the private respondent, Edward J. Nell Company, and the Amended Complaint
against petitioner bank is hereby ordered dismissed. No costs.SO ORDERED.
SECOND DIVISIONG.R. No. 165339 August 23, 2010
EQUITABLE PCI BANK, Petitioner, vs.ARCELITO B. TAN, Respondent.
DECISION
PERALTA, J.:
Before this Court is a petition for review on certiorari under Rule 45 of the Rules
of Court seeking to set aside the Decision1 and the Resolution2 of the Court of
Appeals (CA) in CA-G.R. CV No. 41928.
The antecedents are as follows:
Respondent Arcelito B.Tan maintained a current and savings account with
Philippine Commercial International Bank (PCIB), now petitioner Equitable PCI
Bank.3 On May 13, 1992, respondent issued PCIB Check No. 275100 postdated
May 30, 19924 in the amount of ₱34,588.72 in favor of Sulpicio Lines, Inc. As of
May 14, 1992, respondent's balance with petitioner was ₱35,147.59. On May 14,
1992, Sulpicio Lines, Inc. deposited the aforesaid check to its account with Solid
Bank, Carbon Branch, Cebu City. After clearing, the amount of the check was
immediately debited by petitioner from respondent's account thereby leaving him
with a balance of only ₱558.87.
Meanwhile, respondent issued three checks from May 9 to May 16, 1992,
specifically, PCIB Check No. 275080 dated May 9, 1992, payable to Agusan del
Sur Electric Cooperative Inc. (ASELCO) for the amount of ₱6,427.68; PCIB
Check No. 275097 dated May 10, 1992 payable to Agusan del Norte Electric
Cooperative Inc., (ANECO) for the amount of ₱6,472.01; and PCIB Check No.
314104 dated May 16, 1992 payable in cash for the amount of ₱10,000.00.
When presented for payment, PCIB Check Nos. 275080, 275097 and 314014
were dishonored for being drawn against insufficient funds.
As a result of the dishonor of Check Nos. 275080 and 275097 which were
payable to ASELCO and ANECO, respectively, the electric power supply for the
two mini-sawmills owned and operated by respondent, located in Talacogon,
Agusan del Sur; and in Golden Ribbon, Butuan City, was cut off on June 1, 1992
and May 28, 1992, respectively, and it was restored only on July 20 and August
24, 1992, respectively.
Due to the foregoing, respondent filed with the Regional Trial Court (RTC) of
Cebu City a complaint against petitioner, praying for payment of losses consisting
of unrealized income in the amount of ₱1,864,500.00. He also prayed for
payment of moral damages, exemplary damages, attorney's fees and litigation
expenses.
Respondent claimed that Check No. 275100 was a postdated check in payment
of Bills of Lading Nos. 15, 16 and 17, and that his account with petitioner would
have had sufficient funds to cover payment of the three other checks were it not
for the negligence of petitioner in immediately debiting from his account Check
No. 275100, in the amount of ₱34,588.72, even as the said check was postdated
to May 30, 1992. As a consequence of petitioner's error, which brought about the
dishonor of the two checks paid to ASELCO and ANECO, the electric supply to
his two mini-sawmills was cut off, the business operations thereof were stopped,
and purchase orders were not duly served causing tremendous losses to him.
In its defense, petitioner denied that the questioned check was postdated May 30,
1992 and claimed that it was a current check dated May 3, 1992. It alleged further
that the disconnection of the electric supply to respondent's sawmills was not due
to the dishonor of the checks, but for other reasons not attributable to the bank.
After trial, the RTC, in its Decision5 dated June 21, 1993, ruled in favor of
petitioner and dismissed the complaint.
Aggrieved by the Decision, respondent filed a Notice of Appeal.6 In its Decision
dated May 31, 2004, the Court of Appeals reversed the decision of the trial court
and directed petitioner to pay respondent the sum of ₱1,864,500.00 as actual

damages, ₱50,000.00 by way of moral damages, ₱50,000.00 as exemplary
damages and attorney's fees in the amount of ₱30,000.00. Petitioner filed a
motion for reconsideration, which the CA denied in a Resolution dated August 24,
2004.
Hence, the instant petition assigning the following errors:
I Upon the effectivity of this Act, all pending cases, except those which have
THE FOURTH DIVISION OF THE COURT OF APPEALS DEFIED OFFICE
ORDER NO. 82-04-CG BY HOLDING ON TO THIS CASE AND DECIDING IT
INSTEAD OF UNLOADING IT AND HAVING IT RE-RAFFLED AMONG THE
DIVISIONS IN CEBU CITY.
II
THE COURT OF APPEALS ERRED IN REVERSING THE FINDING OF THE
REGIONAL TRIAL COURT THAT CHECK NO. 275100 WAS DATED MAY 3,
1992.
III
THE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT'S
WAY OF WRITING THE DATE ON CHECK NO. 275100 WAS THE PROXIMATE
CAUSE OF THE DISHONOR OF HIS THREE OTHER CHECKS.
IV
THE COURT OF APPEALS ERRED IN AWARDING ACTUAL DAMAGES,
MORAL DAMAGES, EXEMPLARY DAMAGES AND ATTORNEY'S FEES.
Anent the first issue, petitioner submits that the CA defied Office Order No. 82-04-
CG dated April 5, 2004 issued by then CA Presiding Justice Cancio C. Garcia
when it failed to unload CA-G.R. CV No. 41928 so that it may be re-raffled among
the Divisions in Cebu City.
Office Order No. 82-04-CG7 provides:
xxxx
In view of the reorganization of the different Divisions due to the appointment of
eighteen (18) new Justices to the additional divisions in the cities of Cebu and
Cagayan de Oro, the raffle of civil, criminal and special cases submitted for
decision and falling within the jurisdiction of the additional divisions shall
commence on April 6, 2004.
The raffle of newly-filed cases and those for completion likewise falling within the
jurisdiction of the additional divisions, shall start on April 12, 2004.
xxxx
Petitioner alleged that since the aforementioned Office Order directed the raffle of
civil, criminal and special cases submitted for decision and falling within the
jurisdiction of the additional divisions on April 6, 2004, CA-G.R. CV No. 41928
should have been unloaded by the CA's Fourth Division and re-raffled to the CA's
Division in Cebu City instead of deciding the case on May 31, 2004.
Respondent argued that the CA's Fourth Division correctly acted in taking
cognizance of the case. The CA defended its jurisdiction by ruling that cases
already submitted for decision as of the effectivity of Republic Act (R.A.) 8246 8 on
February 1, 1997 were no longer included for re-raffle to the newly-created
Visayas and Mindanao Divisions of the CA, conformable to Section 5 of the said
statute.
Petitioner's argument is misplaced. Under Section 3 of R.A. 8246, it is provided
that:
Section 3. Section 10 of Batas Pambansa Blg. 129, as amended, is hereby
further amended to read as follows:
Sec. 10. Place of Holding Sessions. — The Court of Appeals shall have its
permanent stations as follows: The first seventeen (17) divisions shall be
stationed in the City of Manila for cases coming from the First to the Fifth Judicial
Regions; the Eighteenth, Nineteenth, and Twentieth Divisions shall be in Cebu
City for cases coming from the Sixth, Seventh and Eighth Judicial Regions; the
Twenty-first, Twenty-second and Twenty-third Divisions shall be in Cagayan de
Oro City for cases coming from the Ninth, Tenth, Eleventh, and Twelfth Judicial
Regions. Whenever demanded by public interest, or whenever justified by an
increase in case load, the Supreme Court, upon its own initiative or upon
recommendation of the Presiding Justice of the Court of Appeals, may authorize
any division of the Court to hold sessions periodically, or for such periods and at
such places as the Supreme Court may determine, for the purpose of hearing and
deciding cases. Trials or hearings in the Court of Appeals must be continuous
and must be completed within three (3) months unless extended by the Chief
Justice of the Supreme Court.
Further, Section 5 of the same Act provides:
been submitted for resolution, shall be referred to the proper division of the
Court of Appeals.9
Although CA-G.R. CV No. 41928 originated from Cebu City and is thus referable
to the CA's Divisions in Cebu City, the said case was already submitted for
decision as of July 25, 1994.10 Hence, CA-G.R. CV No. 41928, which was already
submitted for decision as of the effectivity of R.A. 8246, i.e., February 1, 1997,
can no longer be referred to the CA's Division in Cebu City. Thus, the CA's
Former Fourth Division correctly ruled that CA-G.R. CV No. 41928 pending in its
division was not among those cases that had to be re-raffled to the newly-created
CA Divisions in the Visayas Region.
Further, administrative issuances must not override, supplant or modify the law,
but must remain consistent with the law they intend to carry out.11 Thus, Office
Order No. 82-04-CG cannot defeat the provisions of R.A. 8246.
As to the second issue, petitioner maintains that the CA erred in reversing the
finding of the RTC that Check No. 275100 was dated May 3, 1992. Petitioner
argued that in arriving at the conclusion that Check No. 275100 was postdated
May 30, 1992, the CA just made a visual examination of the check, unlike the
RTC which verified the truth of respondent's testimony relative to the issuance of
Check No. 275100. Respondent argued that the check was carefully examined by
the CA which correctly found that Check No. 275100 was postdated to May 30,
1992 and not May 3, 1992.
The principle is well established that this Court is not a trier of facts. Therefore, in
an appeal by certiorari under Rule 45 of the Rules of Court, only questions of law
may be raised. The resolution of factual issues is the function of the lower courts
whose findings on these matters are received with respect and are, as a rule,
binding on this Court. However, this rule is subject to certain exceptions. One of
these is when the findings of the appellate court are contrary to those of the trial
court.12 Due to the divergence of the findings of the CA and the RTC, We shall re-
examine the facts and evidence presented before the lower courts.
The RTC ruled that:
xxxx
The issue to be resolved in this case is whether or not the date of PCIB Check
No. 275100 is May 3, 1992 as contended by the defendant, or May 30, 1992 as
claimed by the plaintiff. The date of the check is written as follows – 5/3/0/92.
From the manner by which the date of the check is written, the Court cannot
really make a pronouncement as to whether the true date of the check is May 3 or
May 30, 1992, without inquiring into the background facts leading to the issuance
of said check.
According to the plaintiff, the check was issued to Sulpicio Lines in payment of bill
of lading nos. 15, 16 and 17. An examination of bill of lading no. 15, however,
shows that the same was issued, not in favor of plaintiff but in favor of Coca Cola
Bottlers Philippines, Inc. Bill of Lading No. 16 is issued in favor of Suson Lumber
and not to plaintiff. Likewise, Bill of Lading No. 17 shows that it was issued to
Jazz Cola and not to plaintiff. Furthermore, the receipt for the payment of the
freight for the shipments reflected in these three bills of lading shows that the
freight was paid by Coca Cola Bottlers Philippines, Inc. and not by plaintiff.
Moreover, the said receipt shows that it was paid in cash and not by check. From
the foregoing, the evidence on record does not support the claim of the plaintiff
that Check No. 275100 was issued in payment of bills of lading nos. 15, 16 and
17.
Hence, the conclusion of the Court is that the date of the check was May 3, 1992
and not May 30, 1992.13
xxxx
Nego Instruments Set 1 (#s1-70) Page 33 of 112
Lumbas. Dadat
In fine, the RTC concluded that the check was dated May 3, 1992 and not May
30, 1992, because the same check was not issued to pay for Bills of Lading Nos.
15, 16 and 17, as respondent claims. The trial court's conclusion is preposterous
and illogical. The purpose for the issuance of the check has no logical connection
with the date of the check. Besides, the trial court need not look into the purpose
for which the check was issued. A reading of Check No. 27510014 would readily
show that it was dated May 30, 1992. As correctly observed by the CA:
On the first issue, we agree with appellant that appellee Bank apparently erred in
misappreciating the date of Check No. 275100. We have carefully examined the
check in question (Exh. DDDD) and we are convinced that it was indeed
postdated to May 30, 1992 and not May 3, 1992 as urged by appellee. The date
written on the check clearly appears as "5/30/1992" (Exh. DDDD-4). The first bar
(/) which separates the numbers "5" and "30" and the second bar (/) which further
separates the number "30" from the year 1992 appear to have been done in
heavy, well-defined and bold strokes, clearly indicating the date of the check as
"5/30/1992" which obviously means May 30, 1992. On the other hand, the alleged
bar (/) which appellee points out as allegedly separating the numbers "3" and "0,"
thereby leading it to read the date as May 3, 1992, is not actually a bar or a slant
but appears to be more of an unintentional marking or line done with a very light
stroke. The presence of the figure "0" after the number "3" is quite significant. In
fact, a close examination thereof would unerringly show that the said number zero
or "0" is connected to the preceeding number "3." In other words, the drawer of
the check wrote the figures "30" in one continuous stroke, thereby contradicting
appellee’s theory that the number "3" is separated from the figure "0" by a bar.
Besides, appellee’s theory that the date of the check is May 3, 1992 is clearly
untenable considering the presence of the figure "0" after "3" and another bar
before the year 1992. And if we were to accept appellee’s theory that what we
find to be an unintentional mark or line between the figures "3" and "0" is a bar
separating the two numbers, the date of the check would then appear as
"5/3/0/1992, which is simply absurd. Hence, we cannot go along with appellee’s
theory which will lead us to an absurd result. It is therefore our conclusion that the
check was postdated to May 30, 1992 and appellee Bank or its personnel erred in
debiting the amount of the check from appellant’s account even before the
check’s due date. Undoubtedly, had not appellee bank prematurely debited the
amount of the check from appellant’s account before its due date, the two other
checks (Exhs. LLLL and GGGG) successively dated May 9, 1992 and May 16,
1992 which were paid by appellant to ASELCO and ANECO, respectively, would
not have been dishonored and the said payees would not have disconnected their
supply of electric power to appellant’s sawmills, and the latter would not have
suffered losses.
The law imposes on banks high standards in view of the fiduciary nature of
banking. Section 2 of R.A. 879115decrees:
Declaration of Policy. – The State recognizes the vital role of banks in providing
an environment conducive to the sustained development of the national economy
and the fiduciary nature of banking that requires high standards of integrity and
performance. In furtherance thereof, the State shall promote and maintain a
stable and efficient banking and financial system that is globally competitive,
dynamic and responsive to the demands of a developing economy.
Although R.A. 8791 took effect only in the year 2000, the Court had already
imposed on banks the same high standard of diligence required under R.A. 8791
at the time of the untimely debiting of respondent's account by petitioner in May
1992. In Simex International (Manila), Inc. v. Court of Appeals,16 which was
decided in 1990, the Court held 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.
The diligence required of banks, therefore, is more than that of a good father of a
family.17 In every case, the depositor expects the bank to treat his account with
the utmost fidelity, whether such account consists only of a few hundred pesos or
of millions. The bank must record every single transaction accurately, down to the
last centavo, and as promptly as possible. This has to be done if the account is to

reflect at any given time the amount of money the depositor can dispose of as he
sees fit, confident that the bank will deliver it as and to whomever he
directs.18From the foregoing, it is clear that petitioner bank did not exercise the
degree of diligence that it ought to have exercised in dealing with its client.
With respect to the third issue, petitioner submits that respondent's way of writing
the date on Check No. 275100 was the proximate cause of the dishonor of his
three other checks. Contrary to petitioner’s view, the Court finds that its
negligence is the proximate cause of respondent’s loss.
Proximate cause is that cause which, in a natural and continuous sequence,
unbroken by any efficient intervening cause, produces the injury, and without
which the result would not have occurred.19 The proximate cause of the loss is
not respondent's manner of writing the date of the check, as it was very clear that
he intended Check No. 275100 to be dated May 30, 1992 and not May 3, 1992.
The proximate cause is petitioner’s own negligence in debiting the account of the
respondent prior to the date as appearing in the check, which resulted in the
subsequent dishonor of several checks issued by the respondent and the
disconnection by ASELCO and ANECO of his electric supply.
The bank on which the check is drawn, known as the drawee bank, is under strict
liability to pay to the order of the payee in accordance with the drawer’s
instructions as reflected on the face and by the terms of the check.20 Thus,
payment made before the date specified by the drawer is clearly against the
drawee bank's duty to its client.
In its memorandum21 filed before the RTC, petitioner submits that respondent
caused confusion on the true date of the check by writing the date of the check as
5/3/0/92. If, indeed, petitioner was confused on whether the check was dated May
3 or May 30 because of the "/" which allegedly separated the number "3" from the
"0," petitioner should have required respondent drawer to countersign the said "/"
in order to ascertain the true intent of the drawer before honoring the check. As a
matter of practice, bank tellers would not receive nor honor such checks which
they believe to be unclear, without the counter-signature of its drawer. Petitioner
should have exercised the highest degree of diligence required of it by
ascertaining from the respondent the accuracy of the entries therein, in order to
settle the confusion, instead of proceeding to honor and receive the check.
Further, petitioner's branch manager, Pedro D. Tradio, in a letter22 addressed to
ANECO, explained the circumstances surrounding the dishonor of PCIB Check
No. 275097. Thus:
June 11, 1992
ANECO
Agusan del Norte
Gentlemen:
This refer (sic) to PCIB Check No. 275097 dated May 16, 1992 in the amount of
₱6,472.01 payable to your goodselves issued by Mr. Arcelito B. Tan
(MANWOOD Industries) which was returned by PCIB Mandaue Branch for
insufficiency of funds.
Please be advised that the return of the aforesaid check was a result of an earlier
negotiation to PCIB-Mandaue Branch through a deposit made on May 14, 1992
with SOLIDBANK Carbon Branch, or through Central Bank clearing via Philippine
Clearing House Corporation facilities, of a postdated check which ironically and
without bad faith passed undetected through several eyes from the payee of the
check down to the depository bank and finally the drawee bank (PCIB) the
aforesaid Check No. 275097 issued to you would have been honored because it
would have been sufficiently funded at the time it was negotiated. It should be
emphasized, however, that Mr. Arcelito B. Tan was in no way responsible for the
dishonor of said PCIB Check No. 275097.
We hope that the foregoing will sufficiently explain the circumstances of the
dishonor of PCIB Check No. 275097 and would clear the name and credit of Mr.
Arcelito Tan from any misimpressions which may have resulted from the dishonor
of said check.
Thank you.
xxxx
Although petitioner failed to specify in the letter the other details of this "postdated
check," which passed undetected from the eyes of the payee down to the
petitioner drawee bank, the Court finds that petitioner was evidently referring to
no other than Check No. 275100 which was deposited to Solidbank, and was
postdated May 30, 1992. As correctly found by the CA:
In the aforequoted letter of its Manager, appellee Bank expressly acknowledged
that Check No. 275097 (Exh. GGGG) which appellant paid to ANECO "was
sufficiently funded at the time it was negotiated," but it was dishonored as a
"result of an earlier negotiation to PCIB-Mandaue Branch through a deposit made
on May 14, 1992 with SOLIDBANK xxx xxx xxx of a postdated check which xxx
xxx passed undetected." He further admitted that "Mr. Arcelito B. Tan was in no
way responsible for the dishonor of said PCIB Check No. 275097." Needless to
state, since appellee's Manager has cleared appellant of any fault in the dishonor
of the ANECO check, it [necessarily] follows that responsibility therefor or fault for
the dishonor of the check should fall on appellee bank. Appellee's attempt to
extricate itself from its inadvertence must therefore fail in the face of its Manager's
explicit acknowledgment of responsibility for the inadvertent dishonor of the
ANECO check.23
Evidently, the bank's negligence was the result of lack of due care required of its
managers and employees in handling the accounts of its clients. Petitioner was
negligent in the selection and supervision of its employees. InCitibank, N.A. v.
Cabamongan,24 the Court ruled:
x x x Banks handle daily transactions involving millions of pesos. By the very
nature of their works the degree of responsibility, care and trustworthiness
expected of their employees and officials is far greater than those of ordinary
clerks and employees. Banks are expected to exercise the highest degree of
diligence in the selection and supervision of their employees.
We now resolve the question on the award of actual, moral and exemplary
damages, as well as attorney's fees by the CA to the respondent.
The CA based the award of actual damages in the amount of ₱1,864,500.00 on
the purchase orders25 submitted by respondent. The CA ruled that:
x x x In the case at bar, appellant [respondent herein] presented adequate
evidence to prove losses consisting of unrealized income that he sustained as a
result of the appellee Bank's gross negligence. Appellant identified certain
Purchase Orders from various customers which were not met by reason of the
disruption of the operation of his sawmills when ANECO and ASELCO
disconnected their supply of electricity thereto. x x x
Actual or compensatory damages are those awarded in order to compensate a
party for an injury or loss he suffered. They arise out of a sense of natural justice
and are aimed at repairing the wrong done. Except as provided by law or by
stipulation, a party is entitled to an adequate compensation only for such
pecuniary loss as he has duly proven.26 To recover actual damages, not only
must the amount of loss be capable of proof; it must also be actually proven with
a reasonable degree of certainty, premised upon competent proof or the best
evidence obtainable.27
Respondent's claim for damages was based on purchase orders from various
customers which were allegedly not met due to the disruption of the operation of
his sawmills. However, aside from the purchase orders and his testimony,
respondent failed to present competent proof on the specific amount of actual
damages he suffered during the entire period his power was cut off. No other
evidence was provided by respondent to show that the foregoing purchase orders
were not met or were canceled by his various customers. The Court cannot
simply rely on speculation, conjecture or guesswork in determining the amount of
damages.28
Moreover, an examination of the purchase orders and job orders reveal that the
orders were due for delivery prior to the period when the power supply of
respondent's two sawmills was cut off on June 1, 1992 to July 20, 1992 and May
28, 1992 to August 24, 1992, respectively. Purchase Order No. 9906 29 delivery
date is May 4, 1992; Purchase Order No. 926930 delivery date is March 19, 1992;
Purchase Order No. 14779631 is due for delivery on January 31, 1992; Purchase
Order No. 7600032 delivery date is February and March 1992; and Job Order No.
Nego Instruments Set 1 (#s1-70) Page 34 of 112
Lumbas. Dadat
1824,33 dated March 18, 1992, has a 15 days duration of work. Clearly, the
disconnection of his electricity during the period May 28, 1992 to August 24, 1992
could not possibly affect his sawmill operations and prior orders therefrom.
Given the dearth of respondent's evidence on the matter, the Court resolves to
delete the award of actual damages rendered by the CA in favor of respondent for
his unrealized income.
Nonetheless, in the absence of competent proof on the actual damages suffered,
respondent is entitled to temperate damages. Under Article 2224 of the Civil
Code of the Philippines, temperate or moderate damages, which are more than
nominal but less than compensatory damages, may be recovered when the court
finds that some pecuniary loss has been suffered but its amount cannot, from the
nature of the case, be proved with certainty.34 The allowance of temperate
damages when actual damages were not adequately proven is ultimately a rule
drawn from equity, the principle affording relief to those definitely injured who are
unable to prove how definite the injury.35
It is apparent that respondent suffered pecuniary loss. The negligence of
petitioner triggered the disconnection of his electrical supply, which temporarily
halted his business operations and the consequent loss of business opportunity.
However, due to the insufficiency of evidence before Us, We cannot place its
amount with certainty. Article 221636of the Civil Code instructs that assessment of
damages is left to the discretion of the court according to the circumstances of
each case. Under the circumstances, the sum of ₱50,000.00 as temperate
damages is reasonable.
Anent the award of moral damages, it is settled that moral damages are meant to
compensate the claimant for any physical suffering, mental anguish, fright,
serious anxiety, besmirched reputation, wounded feelings, moral shock, social
humiliation and similar injuries unjustly caused.37 In Philippine National Bank v.
Court of Appeals,38 the Court held that a bank is under obligation to treat the
accounts of its depositors with meticulous care whether such account consists
only of a few hundred pesos or of millions of pesos. Responsibility arising from
negligence in the performance of every kind of obligation is demandable. While
petitioner's negligence in that case may not have been attended with malice and
bad faith, the banks' negligence caused respondent to suffer mental anguish,
serious anxiety, embarrassment and humiliation. In said case, We ruled that
respondent therein was entitled to recover reasonable moral damages.1âwphi1
In this case, the unexpected cutting off of respondent's electricity, which resulted
in the stoppage of his business operations, had caused him to suffer humiliation,
mental anguish and serious anxiety. The award of ₱50,000.00 is reasonable,
considering the reputation and social standing of respondent. As found by the CA,
as an accredited supplier, respondent had been reposed with a certain degree of
trust by various reputable and well- established corporations.
On the award of exemplary damages, Article 2229 of the Civil Code states:
Art. 2229. Exemplary or corrective damages are imposed, by way of example or
correction for the public good, in addition to the moral, temperate, liquidated or
compensatory damages.
The law allows the grant of exemplary damages to set an example for the public
good. The banking system has become an indispensable institution in the modern
world and plays a vital role in the economic life of every civilized society. Whether
as mere passive entities for the safekeeping and saving of money or as active
instruments of business and commerce, banks have attained an ubiquitous
presence among the people, who have come to regard them with respect and
even gratitude and most of all, confidence. For this reason, banks should guard
against injury attributable to negligence or bad faith on its part. Without a doubt, it
has been repeatedly emphasized that since the banking business is impressed
with public interest, of paramount importance thereto is the trust and confidence
of the public in general. Consequently, the highest degree of diligence is
expected, and high standards of integrity and performance are even required of
it.39 Petitioner, having failed in this respect, the award of exemplary damages in
the amount of ₱50,000.00 is in order.
As to the award of attorney's fees, Article 220840 of the Civil Code provides,
among others, that attorney's fees may be recovered when exemplary damages

are awarded or when the defendant's act or omission has compelled the plaintiff
to litigate with third persons or to incur expenses to protect his
interest.41 Respondent has been forced to undergo unnecessary trouble and
expense to protect his interest. The Court affirms the appellate court’s award of
attorney’s fees in the amount of ₱30,000.00.
WHEREFORE, the petition is PARTIALLY GRANTED. The Decision and
Resolution of the Court of Appeals in CA-G.R. CV No. 41928, dated May 31,
2004 and August 24, 2004, respectively, are AFFIRMED with the
followingMODIFICATIONS:
1. The award of One Million Eight Hundred Sixty-Four Thousand and
Five Hundred Pesos (₱1,864,500.00) as actual damages, in favor of
respondent Arcelito B. Tan, is DELETED; and
2. Petitioner Equitable PCI Bank is instead directed to pay
respondent the amount of Fifty Thousand Pesos (₱50,000.00) as
temperate damages.SO ORDERED.
THIRD DIVISIONG.R. No. 168274 August 20, 2008
FAR EAST BANK & TRUST COMPANY, petitioner, vs.GOLD PALACE
JEWELLERY CO., as represented by Judy L. Yang, Julie Yang-Go and Kho
Soon Huat, respondent.
DECISION
NACHURA, J.:
For the review of the Court through a Rule 45 petition are the following issuances
of the Court of Appeals (CA) in CA-G.R. CV No. 71858: (1) the March 15, 2005
Decision1 which reversed the trial court's ruling, and (2) the May 26, 2005
Resolution2 which denied the motion for reconsideration of the said CA decision.
The instant controversy traces its roots to a transaction consummated sometime
in June 1998, when a foreigner, identified as Samuel Tagoe, purchased from the
respondent Gold Palace Jewellery Co.'s (Gold Palace's) store at SM-North EDSA
several pieces of jewelry valued at P258,000.00.3 In payment of the same, he
offered Foreign Draft No. M-069670 issued by the United Overseas Bank
(Malaysia) BHD Medan Pasar, Kuala Lumpur Branch (UOB), addressed to the
Land Bank of the Philippines, Manila (LBP), and payable to the respondent
company for P380,000.00.4
Before receiving the draft, respondent Judy Yang, the assistant general manager
of Gold Palace, inquired from petitioner Far East Bank & Trust Company's (Far
East's) SM North EDSA Branch, its neighbor mall tenant, the nature of the draft.
The teller informed her that the same was similar to a manager's check, but
advised her not to release the pieces of jewelry until the draft had been
cleared.5 Following the bank's advice, Yang issued Cash Invoice No. 1609 6 to the
foreigner, asked him to come back, and informed him that the pieces of jewelry
would be released when the draft had already been cleared.7 Respondent Julie
Yang-Go, the manager of Gold Palace, consequently deposited the draft in the
company's account with the aforementioned Far East branch on June 2, 1998.8
When Far East, the collecting bank, presented the draft for clearing to LBP, the
drawee bank, the latter cleared the same9-UOB's account with LBP was
debited,10 and Gold Palace's account with Far East was credited with the amount
stated in the draft.11
The foreigner eventually returned to respondent's store on June 6, 1998 to claim
the purchased goods. After ascertaining that the draft had been cleared,
respondent Yang released the pieces of jewelry to Samuel Tagoe; and because
the amount in the draft was more than the value of the goods purchased, she
issued, as his change, Far East Check No. 173088112 for P122,000.00.13 This
check was later presented for encashment and was, in fact, paid by the said
bank.14
On June 26, 1998, or after around three weeks, LBP informed Far East that the
amount in Foreign Draft No. M-069670 had been materially altered from P300.00
to P380,000.00 and that it was returning the same. Attached to its official
correspondence were Special Clearing Receipt No. 002593 and the duly
notarized and consul-authenticated affidavit of a corporate officer of the drawer,
UOB.15It is noted at this point that the material alteration was discovered by UOB
after LBP had informed it that its funds were being depleted following the
encashment of the subject draft.16 Intending to debit the amount from
respondent's account, Far East subsequently refunded the P380,000.00 earlier
paid by LBP.
Gold Palace, in the meantime, had already utilized portions of the amount. Thus,
on July 20, 1998, as the outstanding balance of its account was already
inadequate, Far East was able to debit onlyP168,053.36,17 but this was done
without a prior written notice to the account holder.18 Far East only notified by
phone the representatives of the respondent company.19
On August 12, 1998, petitioner demanded from respondents the payment
of P211,946.64 or the difference between the amount in the materially altered
draft and the amount debited from the respondent company's account.20 Because
Gold Palace did not heed the demand, Far East consequently instituted Civil
Case No. 99-296 for sum of money and damages before the Regional Trial Court
(RTC), Branch 64 of Makati City.21
In their Answer, respondents specifically denied the material allegations in the
complaint and interposed as a defense that the complaint states no cause of
action-the subject foreign draft having been cleared and the respondent not being
the party who made the material alteration. Respondents further counterclaimed
for actual damages, moral and exemplary damages, and attorney's fees
considering, among others, that the petitioner had confiscated without basis Gold
Palace's balance in its account resulting in operational loss, and had maliciously
imputed to the latter the act of alteration.22
After trial on the merits, the RTC rendered its July 30, 2001 Decision 23 in favor of
Far East, ordering Gold Palace to pay the former P211,946.64 as actual damages
and P50,000.00 as attorney's fees.24The trial court ruled that, on the basis of its
warranties as a general indorser, Gold Palace was liable to Far East.25
On appeal, the CA, in the assailed March 15, 2005 Decision,26 reversed the ruling
of the trial court and awarded respondents' counterclaim. It ruled in the main that
Far East failed to undergo the proceedings on the protest of the foreign draft or to
notify Gold Palace of the draft's dishonor; thus, Far East could not charge Gold
Palace on its secondary liability as an indorser.27 The appellate court further ruled
that the drawee bank had cleared the check, and its remedy should be against
the party responsible for the alteration. Considering that, in this case, Gold Palace
neither altered the draft nor knew of the alteration, it could not be held
liable.28 The dispositive portion of the CA decision reads:
WHEREFORE, premises considered, the appeal is GRANTED; the
assailed Decision dated 30 July 2001 of the Regional Trial Court of
Makati City, Branch 64 is hereby REVERSED and SET ASIDE; the
Complaint dated January 1999 is DISMISSED; and appellee Far
East Bank and Trust Company is hereby ordered to pay appellant
Gold Palace Jewellery Company the amount of Php168,053.36 for
actual damages plus legal interest of 12% per annum from 20 July
1998, Php50,000.00 for exemplary damages, and Php50,000.00 for
attorney's fees. Costs against appellee Far East Bank and Trust
Company.29
The appellate court, in the further challenged May 26, 2005 Resolution,30 denied
petitioner's Motion for Reconsideration,31 which prompted the petitioner to
institute before the Court the instant Petition for Review on Certiorari.32
We deny the petition.
Act No. 2031, or the Negotiable Instruments Law (NIL), explicitly provides that the
acceptor, by accepting the instrument, engages that he will pay it according to the
tenor of his acceptance.33 This provision applies with equal force in case the
drawee pays a bill without having previously accepted it. His actual payment of
the amount in the check implies not only his assent to the order of the drawer and
a recognition of his corresponding obligation to pay the aforementioned sum, but
also, his clear compliance with that obligation.34 Actual payment by the drawee is
greater than his acceptance, which is merely a promise in writing to pay. The
payment of a check includes its acceptance.35
Nego Instruments Set 1 (#s1-70) Page 35 of 112
Lumbas. Dadat
Unmistakable herein is the fact that the drawee bank cleared and paid the subject
foreign draft and forwarded the amount thereof to the collecting bank. The latter
then credited to Gold Palace's account the payment it received. Following the
plain language of the law, the drawee, by the said payment, recognized and
complied with its obligation to pay in accordance with the tenor of his acceptance.
The tenor of the acceptance is determined by the terms of the bill as it is when
the drawee accepts.36Stated simply, LBP was liable on its payment of the check
according to the tenor of the check at the time of payment, which was the raised
amount.
Because of that engagement, LBP could no longer repudiate the payment it
erroneously made to a due course holder. We note at this point that Gold Palace
was not a participant in the alteration of the draft, was not negligent, and was a
holder in due course-it received the draft complete and regular on its face, before
it became overdue and without notice of any dishonor, in good faith and for value,
and absent any knowledge of any infirmity in the instrument or defect in the title of
the person negotiating it.37 Having relied on the drawee bank's clearance and
payment of the draft and not being negligent (it delivered the purchased jewelry
only when the draft was cleared and paid), respondent is amply protected by the
said Section 62. Commercial policy favors the protection of any one who, in due
course, changes his position on the faith of the drawee bank's clearance and
payment of a check or draft.38
This construction and application of the law gives effect to the plain language of
the NIL39 and is in line with the sound principle that where one of two innocent
parties must suffer a loss, the law will leave the loss where it finds it.40 It further
reasserts the usefulness, stability and currency of negotiable paper without
seriously endangering accepted banking practices. Indeed, banking institutions
can readily protect themselves against liability on altered instruments either by
qualifying their acceptance or certification, or by relying on forgery insurance and
special paper which will make alterations obvious.41 This is not to mention, but we
state nevertheless for emphasis, that the drawee bank, in most cases, is in a
better position, compared to the holder, to verify with the drawer the matters
stated in the instrument. As we have observed in this case, were it not for LBP's
communication with the drawer that its account in the Philippines was being
depleted after the subject foreign draft had been encashed, then, the alteration
would not have been discovered. What we cannot understand is why LBP, having
the most convenient means to correspond with UOB, did not first verify the
amount of the draft before it cleared and paid the same. Gold Palace, on the
other hand, had no facility to ascertain with the drawer, UOB Malaysia, the true
amount in the draft. It was left with no option but to rely on the representations of
LBP that the draft was good.
In arriving at this conclusion, the Court is not closing its eyes to the other view
espoused in common law jurisdictions that a drawee bank, having paid to an
innocent holder the amount of an uncertified, altered check in good faith and
without negligence which contributed to the loss, could recover from the person to
whom payment was made as for money paid by mistake.42 However, given the
foregoing discussion, we find no compelling reason to apply the principle to the
instant case.
The Court is also aware that under the Uniform Commercial Code in the United
States of America, if an unaccepted draft is presented to a drawee for payment or
acceptance and the drawee pays or accepts the draft, the person obtaining
payment or acceptance, at the time of presentment, and a previous transferor of
the draft, at the time of transfer, warrant to the drawee making payment or
accepting the draft in good faith that the draft has not been
altered.43 Nonetheless, absent any similar provision in our law, we cannot extend
the same preferential treatment to the paying bank.
Thus, considering that, in this case, Gold Palace is protected by Section 62 of the
NIL, its collecting agent, Far East, should not have debited the money paid by the
drawee bank from respondent company's account. When Gold Palace deposited
the check with Far East, the latter, under the terms of the deposit and the
provisions of the NIL, became an agent of the former for the collection of the
amount in the draft.44 The subsequent payment by the drawee bank and the

collection of the amount by the collecting bank closed the transaction insofar as
the drawee and the holder of the check or his agent are concerned, converted the
check into a mere voucher,45 and, as already discussed, foreclosed the recovery
by the drawee of the amount paid. This closure of the transaction is a matter of
course; otherwise, uncertainty in commercial transactions, delay and annoyance
will arise if a bank at some future time will call on the payee for the return of the
money paid to him on the check.46
As the transaction in this case had been closed and the principal-agent
relationship between the payee and the collecting bank had already ceased, the
latter in returning the amount to the drawee bank was already acting on its own
and should now be responsible for its own actions. Neither can petitioner be
considered to have acted as the representative of the drawee bank when it
debited respondent's account, because, as already explained, the drawee bank
had no right to recover what it paid. Likewise, Far East cannot invoke the
warranty of the payee/depositor who indorsed the instrument for collection to shift
the burden it brought upon itself. This is precisely because the said indorsement
is only for purposes of collection which, under Section 36 of the NIL, is a
restrictive indorsement.47 It did not in any way transfer the title of the instrument to
the collecting bank. Far East did not own the draft, it merely presented it for
payment. Considering that the warranties of a general indorser as provided in
Section 66 of the NIL are based upon a transfer of title and are available only to
holders in due course,48 these warranties did not attach to the indorsement for
deposit and collection made by Gold Palace to Far East. Without any legal right to
do so, the collecting bank, therefore, could not debit respondent's account for the
amount it refunded to the drawee bank.
The foregoing considered, we affirm the ruling of the appellate court to the extent
that Far East could not debit the account of Gold Palace, and for doing so, it must
return what it had erroneously taken. Far East's remedy under the law is not
against Gold Palace but against the drawee-bank or the person responsible for
the alteration. That, however, is another issue which we do not find necessary to
discuss in this case.
However, we delete the exemplary damages awarded by the appellate court.
Respondents have not shown that they are entitled to moral, temperate or
compensatory damages.49 Neither was petitioner impelled by malice or bad faith
in debiting the account of the respondent company and in pursuing its
cause.50 On the contrary, petitioner was honestly convinced of the propriety of the
debit. We also delete the award of attorney's fees for, in a plethora of cases, we
have ruled that it is not a sound public policy to place a premium on the right to
litigate. No damages can be charged to those who exercise such precious right in
good faith, even if done erroneously.51
WHEREFORE, premises considered, the March 15, 2005 Decision and the May
26, 2005 Resolution of the Court of Appeals in CA-G.R. CV No. 71858
are AFFIRMED WITH THE MODIFICATION that the award of exemplary
damages and attorney's fees is DELETED.SO ORDERED.
SECOND DIVISIONG.R. No. 113236 March 5, 2001
FIRESTONE TIRE & RUBBER COMPANY OF THE PHILIPPINES, petitioner,
vs.COURT OF APPEALS and LUZON DEVELOPMENT BANK, respondents.
QUISUMBING, J.:
This petition assails the decision 1 dated December 29, 1993 of the Court of
Appeals in CA-G.R. CV No. 29546, which affirmed the judgment 2 of the Regional
Trial Court of Pasay City, Branch 113 in Civil Case No. PQ-7854-P, dismissing
Firestone's complaint for damages.
The facts of this case, adopted by the CA and based on findings by the trial court,
are as follows:
. . . [D]efendant is a banking corporation. It operates under a certificate of
authority issued by the Central Bank of the Philippines, and among its activities,
accepts savings and time deposits. Said defendant had as one of its client-
depositors the Fojas-Arca Enterprises Company ("Fojas-Arca" for brevity). Fojas-
Arca maintaining a special savings account with the defendant, the latter
Nego Instruments Set 1 (#s1-70) Page 36 of 112
Lumbas. Dadat
authorized and allowed withdrawals of funds therefrom through the medium of blame itself for being grossly negligent in treating the withdrawal slips
special withdrawal slips. These are supplied by the defendant to Fojas-Arca. as check when it is clearly stated therein that the withdrawal slips are
In January 1978, plaintiff and Fojas-Arca entered into a "Franchised Dealership non-negotiable; that defendant is not a privy to any of the
Agreement" (Exh. B) whereby Fojas-Arca has the privilege to purchase on credit transactions between Fojas-Arca and plaintiff for which reason
and sell plaintiff's products. defendant is not duty bound to notify nor give notice of anything to
On January 14, 1978 up to May 15, 1978. Pursuant to the aforesaid Agreement, plaintiff. If at first defendant had given notice to plaintiff it is merely an
Fojas-Arca purchased on credit Firestone products from plaintiff with a total extension of usual bank courtesy to a prospective client; that
amount of P4,896,000.00. In payment of these purchases, Fojas-Arca delivered defendant is only dealing with its depositor Fojas-Arca and not the
to plaintiff six (6) special withdrawal slips drawn upon the defendant. In turn, plaintiff. In summation, defendant categorically stated that plaintiff
these were deposited by the plaintiff with its current account with the Citibank. All has no cause of action against it (pp. 1-3, Dec.; pp. 368-370, id).3
of them were honored and paid by the defendant. This singular circumstance Petitioner's complaint4 for a sum of money and damages with the Regional Trial
made plaintiff believe [sic] and relied [sic] on the fact that the succeeding special Court of Pasay City, Branch 113, docketed as Civil Case No. 29546, was
withdrawal slips drawn upon the defendant would be equally sufficiently funded. dismissed together with the counterclaim of defendant.
Relying on such confidence and belief and as a direct consequence thereof, Petitioner appealed the decision to the Court of Appeals. It averred that
plaintiff extended to Fojas-Arca other purchases on credit of its products. respondent Luzon Development Bank was liable for damages under Article
On the following dates Fojas-Arca purchased Firestone products on credit (Exh. 21765 in relation to Articles 196 and 207 of the Civil Code. As noted by the CA,
M, I, J, K) and delivered to plaintiff the corresponding special withdrawal slips in petitioner alleged the following tortious acts on the part of private respondent: 1)
payment thereof drawn upon the defendant, to wit: the acceptance and payment of the special withdrawal slips without the
DATE WITHDRAWAL SLIP NO. AMOUNT presentation of the depositor's passbook thereby giving the impression that the
withdrawal slips are instruments payable upon presentment; 2) giving the special
June 15, 1978 42127 P1,198,092.80withdrawal slips the general appearance of checks; and 3) the failure of
July 15, 1978 42128 940,190.00 respondent bank to seasonably warn petitioner that it would not honor two of the
four special withdrawal slips.
Aug. 15, 1978 42129 880,000.00 On December 29, 1993, the Court of Appeals promulgated its assailed decision. It
Sep. 15, 1978 42130 981,500.00 denied the appeal and affirmed the judgment of the trial court. According to the
appellate court, respondent bank notified the depositor to present the passbook
These were likewise deposited by plaintiff in its current account with Citibank and
whenever it received a collection note from another bank, belying petitioner's
in turn the Citibank forwarded it [sic] to the defendant for payment and collection,
claim that respondent bank was negligent in not requiring a passbook under the
as it had done in respect of the previous special withdrawal slips. Out of these
subject transaction. The appellate court also found that the special withdrawal
four (4) withdrawal slips only withdrawal slip No. 42130 in the amount of
slips in question were not purposely given the appearance of checks, contrary to
P981,500.00 was honored and paid by the defendant in October 1978. Because
petitioner's assertions, and thus should not have been mistaken for checks.
of the absence for a long period coupled with the fact that defendant honored and
Lastly, the appellate court ruled that the respondent bank was under no obligation
paid withdrawal slips No. 42128 dated July 15, 1978, in the amount of
to inform petitioner of the dishonor of the special withdrawal slips, for to do so
P981,500.00 plaintiff's belief was all the more strengthened that the other
would have been a violation of the law on the secrecy of bank deposits.
withdrawal slips were likewise sufficiently funded, and that it had received full
Hence, the instant petition, alleging the following assignment of error:
value and payment of Fojas-Arca's credit purchased then outstanding at the time.
25. The CA grievously erred in holding that the [Luzon Development]
On this basis, plaintiff was induced to continue extending to Fojas-Arca further
Bank was free from any fault or negligence regarding the dishonor, or
purchase on credit of its products as per agreement (Exh. "B").
in failing to give fair and timely advice of the dishonor, of the
However, on December 14, 1978, plaintiff was informed by Citibank that special
twointermediate LDB Slips and in failing to award damages to
withdrawal slips No. 42127 dated June 15, 1978 for P1,198,092.80 and No.
Firestone pursuant to Article 2176 of the New Civil Code.8
42129 dated August 15, 1978 for P880,000.00 were dishonored and not paid for
The issue for our consideration is whether or not respondent bank should be held
the reason 'NO ARRANGEMENT.' As a consequence, the Citibank debited
liable for damages suffered by petitioner, due to its allegedly belated notice of
plaintiff's account for the total sum of P2,078,092.80 representing the aggregate
non-payment of the subject withdrawal slips.
amount of the above-two special withdrawal slips. Under such situation, plaintiff
The initial transaction in this case was between petitioner and Fojas-Arca,
averred that the pecuniary losses it suffered is caused by and directly attributable
whereby the latter purchased tires from the former with special withdrawal slips
to defendant's gross negligence.
drawn upon Fojas-Arca's special savings account with respondent bank.
On September 25, 1979, counsel of plaintiff served a written demand upon the
Petitioner in turn deposited these withdrawal slips with Citibank. The latter
defendant for the satisfaction of the damages suffered by it. And due to
credited the same to petitioner's current account, then presented the slips for
defendant's refusal to pay plaintiff's claim, plaintiff has been constrained to file
payment to respondent bank. It was at this point that the bone of contention
this complaint, thereby compelling plaintiff to incur litigation expenses and
arose.
attorney's fees which amount are recoverable from the defendant.
On December 14, 1978, Citibank informed petitioner that special withdrawal slips
Controverting the foregoing asseverations of plaintiff, defendant
Nos. 42127 and 42129 dated June 15, 1978 and August 15, 1978, respectively,
asserted, inter alia that the transactions mentioned by plaintiff are
were refused payment by respondent bank due to insufficiency of Fojas-Arca's
that of plaintiff and Fojas-Arca only, [in] which defendant is not
funds on deposit. That information came about six months from the time Fojas-
involved; Vehemently, it was denied by defendant that the special
Arca purchased tires from petitioner using the subject withdrawal slips. Citibank
withdrawal slips were honored and treated as if it were checks, the
then debited the amount of these withdrawal slips from petitioner's account,
truth being that when the special withdrawal slips were received by
causing the alleged pecuniary damage subject of petitioner's cause of action.
defendant, it only verified whether or not the signatures therein were
At the outset, we note that petitioner admits that the withdrawal slips in question
authentic, and whether or not the deposit level in the passbook
were non-negotiable.9 Hence, the rules governing the giving of immediate notice
concurred with the savings ledger, and whether or not the deposit is
of dishonor of negotiable instruments do not apply in this case.10Petitioner itself
sufficient to cover the withdrawal; if plaintiff treated the special
concedes this point.11 Thus, respondent bank was under no obligation to give
withdrawal slips paid by Fojas-Arca as checks then plaintiff has to

immediate notice that it would not make payment on the subject withdrawal slips.
Citibank should have known that withdrawal slips were not negotiable
instruments. It could not expect these slips to be treated as checks by other
entities. Payment or notice of dishonor from respondent bank could not be
expected immediately, in contrast to the situation involving checks.
In the case at bar, it appears that Citibank, with the knowledge that respondent
Luzon Development Bank, had honored and paid the previous withdrawal slips,
automatically credited petitioner's current account with the amount of the subject
withdrawal slips, then merely waited for the same to be honored and paid by
respondent bank. It presumed that the withdrawal slips were "good."
It bears stressing that Citibank could not have missed the non-negotiable nature
of the withdrawal slips. The essence of negotiability which characterizes a
negotiable paper as a credit instrument lies in its freedom to circulate freely as a
substitute for money.12 The withdrawal slips in question lacked this character.
A bank is under obligation to treat the accounts of its depositors with meticulous
care, whether such account consists only of a few hundred pesos or of millions of
pesos.13 The fact that the other withdrawal slips were honored and paid by
respondent bank was no license for Citibank to presume that subsequent slips
would be honored and paid immediately. By doing so, it failed in its fiduciary duty
to treat the accounts of its clients with the highest degree of care.14
In the ordinary and usual course of banking operations, current account deposits
are accepted by the bank on the basis of deposit slips prepared and signed by
the depositor, or the latter's agent or representative, who indicates therein the
current account number to which the deposit is to be credited, the name of the
depositor or current account holder, the date of the deposit, and the amount of
the deposit either in cash or in check.15
The withdrawal slips deposited with petitioner's current account with Citibank
were not checks, as petitioner admits. Citibank was not bound to accept the
withdrawal slips as a valid mode of deposit. But having erroneously accepted
them as such, Citibank — and petitioner as account-holder — must bear the risks
attendant to the acceptance of these instruments. Petitioner and Citibank could
not now shift the risk and hold private respondent liable for their admitted mistake.
WHEREFORE, the petition is DENIED and the decision of the Court of Appeals in
CA-G.R. CV No. 29546 is AFFIRMED. Costs against petitioner.SO ORDERED.
THIRD DIVISION G.R. No. 116320 November 29, 1999
ADALIA FRANCISCO, petitioner, vs.
COURT OF APPEALS, HERBY COMMERCIAL & CONSTRUCTION
CORPORATION AND JAIME C. ONG,respondents.
GONZAGA-REYES, J.:
Assailed in this petition for review on certiorari is the decision 1 of the Court of
Appeals affirming the decision 2rendered by Branch 168 of the Regional Trial
Court of Pasig in Civil Case No. 35231 in favor of private respondents.
The controversy before this Court finds its origins in a Land Development and
Construction Contract which was entered into on June 23, 1977 by A. Francisco
Realty & Development Corporation (AFRDC), of which petitioner Adalia Francisco
(Francisco) is the president, and private respondent Herby Commercial &
Construction Corporation (HCCC), represented by its President and General
Manager private respondent Jaime C. Ong (Ong), pursuant to a housing project
of AFRDC at San Jose del Monte, Bulacan, financed by the Government Service
Insurance System (GSIS). Under the contract, HCCC agreed to undertake the
construction of 35 housing units and the development of 35 hectares of land. The
payment of HCCC for its services was on a turn-key basis, that is, HCCC was to
be paid on the basis of the completed houses and developed lands delivered to
and accepted by AFRDC and the GSIS. To facilitate payment, AFRDC executed
a Deed of Assignment in favor of HCCC to enable the latter to collect payments
directly from the GSIS. Furthermore, the GSIS and AFRDC put up an Executive
Committee Account with the Insular Bank of Asia & America (IBAA) in the amount
of P4,000,000.00 from which checks would be issued and co-signed by petitioner
Francisco and the GSIS Vice-President Armando Diaz (Diaz).
On February 10, 1978, HCCC filed a complaint 3 with the Regional Trial Court of
Quezon City against Francisco, AFRDC and the GSIS for the collection of the
unpaid balance under the Land Development and Construction Contract in the
amount of P515,493.89 for completed and delivered housing units and land
development. However, the parties eventually arrived at an amicable settlement
of their differences, which was embodied in a Memorandum Agreement executed
by HCCC and AFRDC on July 21, 1978. Under the agreement, the parties
stipulated that HCCC had turned over 83 housing units which have been
accepted and paid for by the GSIS. The GSIS acknowledged that it still owed
HCCC P520,177.50 representing incomplete construction of housing units,
incomplete land development and 5% retention, which amount will be discharged
when the defects and deficiencies are finally completed by HCCC. It was also
provided that HCCC was indebted to AFRDC in the amount of P180,234.91 which
the former agreed would be paid out of the proceeds from the 40 housing units
still to be turned over by HCCC or from any amount due to HCCC from the GSIS.
Consequently, the trial court dismissed the case upon the filing by the parties of a
joint motion to dismiss.
Sometime in 1979, after an examination of the records of the GSIS, Ong
discovered that Diaz and Francisco had executed and signed seven checks 4 , of
various dates and amounts, drawn against the IBAA and payable to HCCC for
completed and delivered work under the contract. Ong, however, claims that
these checks were never delivered to HCCC. Upon inquiry with Diaz, Ong
learned that the GSIS gave Francisco custody of the checks since she promised
that she would deliver the same to HCCC. Instead, Francisco forged the
signature of Ong, without his knowledge or consent, at the dorsal portion of the
said checks to make it appear that HCCC had indorsed the checks; Francisco
then indorsed the checks for a second time by signing her name at the back of
the checks and deposited the checks in her IBAA savings account. IBAA credited
Francisco's account with the amount of the checks and the latter withdrew the
amount so credited.
On June 7, 1979, Ong filed complaints with the office of the city fiscal of Quezon
City, charging Francisco with estafa thru falsification of commercial documents.
Francisco denied having forged Ong's signature on the checks, claiming that Ong
himself indorsed the seven checks in behalf of HCCC and delivered the same to
Francisco in payment of the loans extended by Francisco to HCCC. According to
Francisco, she agreed to grant HCCC the loans in the total amount of
P585,000.00 and covered by eighteen promissory notes in order to obviate the
risk of the non-completion of the project. As a means of repayment, Ong allegedly
issued a Certification authorizing Francisco to collect HCCC's receivables from
the GSIS. Assistant City Fiscal Ramon M. Gerona gave credence to Francisco's
claims and accordingly, dismissed the complaints, which dismissal was affirmed
by the Minister of Justice in a resolution issued on June 5, 1981.
The present case was brought by private respondents on November 19, 1979
against Francisco and IBAA for the recovery of P370,475.00, representing the
total value of the seven checks, and for damages, attorney's fees, expenses of
litigation and costs. After trial on the merits, the trial court rendered its decision in
favor of private respondents, the dispositive portion of which provides —
WHEREFORE, premises considered, judgment is hereby rendered in
favor of the plaintiffs and against the defendants INSULAR BANK OF
ASIA & AMERICA and ATTY. ADALIA FRANCISCO, to jointly and
severally pay the plaintiffs the amount of P370.475.00 plus interest
thereon at the rate of 12% per annum from the date of the filing of the
complaint until the full amount is paid; moral damages to plaintiff
Jaime Ong in the sum of P50,000.00; exemplary damages of
P50,000.00; litigation expenses of P5,000.00; and attorney's fees of
P50,000.00.
With respect to the cross-claim of the defendant IBAA against its co-
defendant Atty. Adalia Francisco, the latter is ordered to reimburse
the former for the sums that the Bank shall pay to the plaintiff on the
forged checks including the interests paid thereon.
Further, the defendants are ordered to pay the costs.
Nego Instruments Set 1 (#s1-70) Page 37 of 112
Lumbas. Dadat
Based upon the findings of handwriting experts from the National Bureau of
Investigation (NBI), the trial court held that Francisco had indeed forged the
signature of Ong to make it appear that he had indorsed the checks. Also, the
court ruled that there were no loans extended, reasoning that it was unbelievable
that HCCC was experiencing financial difficulties so as to compel it to obtain the
loans from AFRDC in view of the fact that the GSIS had issued checks in favor of
HCCC at about the same time that the alleged advances were made. The trial
court stated that it was plausible that Francisco concealed the fact of issuance of
the checks from private respondents in order to make it appear as if she were
accommodating private respondents, when in truth she was lending HCCC its
own money.
With regards to the Memorandum Agreement entered into between AFRDC and
HCCC in Civil Case No. Q-24628, the trial court held that the same did not make
any mention of the forged checks since private respondents were as of yet
unaware of their existence, that fact having been effectively concealed by
Francisco, until private respondents acquired knowledge of Francisco's misdeeds
in 1979.
IBAA was held liable to private respondents for having honored the checks
despite such obvious irregularities as the lack of initials to validate the alterations
made on the check, the absence of the signature of a co-signatory in the
corporate checks of HCCC and the deposit of the checks on a second
indorsement in the savings account of Francisco. However, the trial court allowed
IBAA recourse against Francisco, who was ordered to reimburse the IBAA for any
sums it shall have to pay to private respondents. 5
Both Francisco and IBAA appealed the trial court's decision, but the Court of
Appeals dismissed IBAA's appeal for its failure to file its brief within the 45-day
extension granted by the appellate court. IBAA's motion for reconsideration and
petition for review on certiorari filed with this Court were also similarly denied. On
November 21, 1989, IBAA and HCCC entered into a Compromise Agreement
which was approved by the trial court, wherein HCCC acknowledged receipt of
the amount of P370,475.00 in full satisfaction of its claims against IBAA, without
prejudice to the right of the latter to pursue its claims against Francisco.
On June 29, 1992, the Court of Appeals affirmed the trial court's ruling, hence this
petition for review on certiorarifiled by petitioner, assigning the following errors to
the appealed decision —
1. The respondent Court of Appeals erred in concluding that private
respondents did not owe Petitioner the sum covered by the
Promissory Notes Exh. 2-2-A-2-P (FRANCISCO). Such conclusion
was based mainly on conjectures, surmises and speculation contrary
to the unrebutted pleadings and evidence presented by petitioner.
2. The respondent Court of Appeals erred in holding that Petitioner
falsified the signature of private respondent ONG on the checks in
question without any authority therefor which is patently contradictory
to the unrebutted pleading and evidence that petitioner was
expressly authorized by respondent HERBY thru ONG to collect all
receivables of HERBY from GSIS to pay the loans extended to them.
(Exhibit 3).
3. That respondent Court of Appeals erred in holding that the seven
checks in question were not taken up in the liquidation and
reconciliation of all outstanding account between AFRDC and
HERBY as acknowledged by the parties in Memorandum Agreement
(Exh. 5) is a pure conjecture, surmise and speculation contrary to the
unrebutted evidence presented by petitioners. It is an inference made
which is manifestly mistaken.
4. The respondent Court of Appeals erred in affirming the decision of
the lower court and dismissing the appeal. 6
The pivotal issue in this case is whether or not Francisco forged the signature of
Ong on the seven checks. In this connection, we uphold the lower courts' finding
that the subject matter of the present case, specifically the seven checks, drawn
by GSIS and AFRDC, dated between October to November 1977, in the total
amount of P370,475.00 and payable to HCCC, was not included in the

Memorandum Agreement executed by HCCC and AFRDC in Civil Case No. Q-
24628. As observed by the trial court, aside from there being absolutely no
mention of the checks in the said agreement, the amounts represented by said
checks could not have been included in the Memorandum Agreement executed in
1978 because private respondents only discovered Francisco's acts of forgery in
1979. The lower courts found that Francisco was able to easily conceal from
private respondents even the fact of the issuance of the checks since she was a
co-signatory thereof. 7 We also note that Francisco had custody of the checks, as
proven by the check vouchers bearing her uncontested signature, 8 by which she,
in effect, acknowledged having received the checks intended for HCCC. This
contradicts Francisco's claims that the checks were issued to Ong who delivered
them to Francisco already indorsed. 9
As regards the forgery, we concur with the lower courts', finding that Francisco
forged the signature of Ong on the checks to make it appear as if Ong had
indorsed said checks and that, after indorsing the checks for a second time by
signing her name at the back of the checks, Francisco deposited said checks in
her savings account with IBAA. The forgery was satisfactorily established in the
trial court upon the strength of the findings of the NBI handwriting expert. 10 Other
than petitioner's self-serving denials, there is nothing in the records to rebut the
NBI's findings. Well-entrenched is the rule that findings of trial courts which are
factual in nature, especially when affirmed by the Court of Appeals, deserve to be
respected and affirmed by the Supreme Court, provided it is supported by
substantial evidence on record, 11 as it is in the case at bench.
Petitioner claims that she was, in any event, authorized to sign Ong's name on
the checks by virtue of the Certification executed by Ong in her favor giving her
the authority to collect all the receivables of HCCC from the GSIS, including the
questioned checks. 12 Petitioner's alternative defense must similarly fail. The
Negotiable Instruments Law provides that where any person is under obligation to
indorse in a representative capacity, he may indorse in such terms as to negative
personal liability. 13 An agent, when so signing, should indicate that he is merely
signing in behalf of the principal and must disclose the name of his principal;
otherwise he shall be held personally liable. 14 Even assuming that Francisco was
authorized by HCCC to sign Ong's name, still, Francisco did not indorse the
instrument in accordance with law. Instead of signing Ong's name, Francisco
should have signed her own name and expressly indicated that she was signing
as an agent of HCCC. Thus, the Certification cannot be used by Francisco to
validate her act of forgery.
Every person who, contrary to law, wilfully or negligently causes damage to
another, shall indemnify the latter for the same. 15 Due to her forgery of Ong's
signature which enabled her to deposit the checks in her own account, Francisco
deprived HCCC of the money due it from the GSIS pursuant to the Land
Development and Construction Contract. Thus, we affirm respondent court's
award of compensatory damages in the amount of P370,475.00, but with a
modification as to the interest rate which shall be six percent (6%) per annum, to
be computed from the date of the filing of the complaint since the amount of
damages was alleged in the complaint; 16 however, the rate of interest shall be
twelve percent (12%) per annum from the time the judgment in this case
becomes final and executory until its satisfaction and the basis for the
computation of this twelve percent (12%) rate of interest shall be the amount of
P370,475.00. This is in accordance with the doctrine enunciated in Eastern
Shipping Lines, Inc. vs.Court of Appeals, et al., 17 which was reiterated
in Philippine National Bank vs. Court of Appeals, 18 Philippine
Airlines, Inc. vs. Court of Appeals 19 and in Keng Hua Paper Products
Co., Inc. vs. Court of Appeals, 20 which provides that —
1. 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. Furthermore, the interest due shall itself earn
legal interest from the time it is judicially demanded. In the absence of stipulation,
the rate of interest shall be 12% per annum to be computed from default, i.e.,
from judicial or extrajudicial demand under and subject to the provisions of Article
1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be imposed at the
discretion of the court at the rate of six percent (6%) per annum. No interest,
however, shall be adjudged on unliquidated claims or damages except when or
until the demand can be established with reasonable certainty. Accordingly,
where the demand is established with reasonable certainty, the interest shall
begin to run from the time the claim is made judicially or extrajudicially (Art. 1169,
Civil Code) but when such certainty cannot be so reasonably established at the
time the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may
be deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount finally
adjudged.
3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be twelve percent (12%) per annum from such finality
until its satisfaction, this interim period being deemed to be by then an equivalent
to a forbearance of credit.
We also sustain the award of exemplary damages in the amount of P50,000.00.
Under Article 2229 of the Civil Code, exemplary damages are imposed by way of
example or correction for the public good, in addition to the moral, temperate,
liquidated or compensatory damages. Considering petitioner's fraudulent act, we
hold that an award of P50,000.00 would be adequate, fair and reasonable. The
grant of exemplary damages justifies the award of attorney's fees in the amount
of P50,000.00, and the award of P5,000.00 for litigation
expenses. 21
The appellate court's award of P50,000.00 in moral damages is warranted. Under
Article 2217 of the Civil Code, moral damages may be granted upon proof of
physical suffering, mental anguish, fright, serious anxiety, besmirched reputation,
wounded feelings, moral shock, social humiliation and similar injury. 22 Ong
testitified that he suffered sleepless nights, embarrassment, humiliation and
anxiety upon discovering that the checks due his company were forged by
petitioner and that petitioner had filed baseless criminal complaints against him
before the fiscal's office of Quezon City which disrupted HCCC's business
operations. 23
WHEREFORE, we AFFIRM the respondent court's decision promulgated on June
29, 1992, upholding the February 16, 1988 decision of the trial court in favor of
private respondents, with the modification that the interest upon the actual
damages awarded shall be at six percent (6%) per annum, which interest rate
shall be computed from the time of the filing of the complaint on November 19,
1979. However, the interest rate shall be twelve percent (12%)per annum from
the time the judgment in this case becomes final and executory and until such
amount is fully paid. The basis for computation of the six percent and twelve
percent rates of interest shall be the amount of P370,475.00. No pronouncement
as to costs.SO ORDERED.
SECOND DIVISION G.R. No. 92244 February 9, 1993
NATIVIDAD GEMPESAW, petitioner, vs. THE HONORABLE COURT OF
APPEALS and PHILIPPINE BANK OF COMMUNICATIONS, respondents.
CAMPOS, JR., J.:
From the adverse decision * of the Court of Appeals (CA-G.R. CV No. 16447),
petitioner, Natividad Gempesaw, appealed to this Court in a Petition for Review,
on the issue of the right of the drawer to recover from the drawee bank who pays
a check with a forged indorsement of the payee, debiting the same against the
drawer's account.
The records show that on January 23, 1985, petitioner filed a Complaint against
the private respondent Philippine Bank of Communications (respondent drawee
Bank) for recovery of the money value of eighty-two (82) checks charged against
the petitioner's account with the respondent drawee Bank on the ground that the
payees' indorsements were forgeries. The Regional Trial Court, Branch CXXVIII
of Caloocan City, which tried the case, rendered a decision on November 17,
Nego Instruments Set 1 (#s1-70) Page 38 of 112
Lumbas. Dadat
1987 dismissing the complaint as well as the respondent drawee Bank's
counterclaim. On appeal, the Court of Appeals in a decision rendered on
February 22, 1990, affirmed the decision of the RTC on two grounds, namely (1)
that the plaintiff's (petitioner herein) gross negligence in issuing the checks was
the proximate cause of the loss and (2) assuming that the bank was also
negligent, the loss must nevertheless be borne by the party whose negligence
was the proximate cause of the loss. On March 5, 1990, the petitioner filed this
petition under Rule 45 of the Rules of Court setting forth the following as the
alleged errors of the respondent Court:1
I
THE RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE
NEGLIGENCE OF THE DRAWER IS THE PROXIMATE CAUSE OF THE
RESULTING INJURY TO THE DRAWEE BANK, AND THE DRAWER IS
PRECLUDED FROM SETTING UP THE FORGERY OR WANT OF AUTHORITY.
II
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT FINDING
AND RULING THAT IT IS THE GROSS AND INEXCUSABLE NEGLIGENCE
AND FRAUDULENT ACTS OF THE OFFICIALS AND EMPLOYEES OF THE
RESPONDENT BANK IN FORGING THE SIGNATURE OF THE PAYEES AND
THE WRONG AND/OR ILLEGAL PAYMENTS MADE TO PERSONS, OTHER
THAN TO THE INTENDED PAYEES SPECIFIED IN THE CHECKS, IS THE
DIRECT AND PROXIMATE CAUSE OF THE DAMAGE TO PETITIONER
WHOSE SAVING (SIC) ACCOUNT WAS DEBITED.
III
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT ORDERING
THE RESPONDENT BANK TO RESTORE OR RE-CREDIT THE CHECKING
ACCOUNT OF THE PETITIONER IN THE CALOOCAN CITY BRANCH BY THE
VALUE OF THE EIGHTY-TWO (82) CHECKS WHICH IS IN THE AMOUNT OF
P1,208,606.89 WITH LEGAL INTEREST.
From the records, the relevant facts are as follows:
Petitioner Natividad O. Gempesaw (petitioner) owns and operates four grocery
stores located at Rizal Avenue Extension and at Second Avenue, Caloocan City.
Among these groceries are D.G. Shopper's Mart and D.G. Whole Sale Mart.
Petitioner maintains a checking account numbered 13-00038-1 with the Caloocan
City Branch of the respondent drawee Bank. To facilitate payment of debts to her
suppliers, petitioner draws checks against her checking account with the
respondent bank as drawee. Her customary practice of issuing checks in
payment of her suppliers was as follows: the checks were prepared and filled up
as to all material particulars by her trusted bookkeeper, Alicia Galang, an
employee for more than eight (8) years. After the bookkeeper prepared the
checks, the completed checks were submitted to the petitioner for her signature,
together with the corresponding invoice receipts which indicate the correct
obligations due and payable to her suppliers. Petitioner signed each and every
check without bothering to verify the accuracy of the checks against the
corresponding invoices because she reposed full and implicit trust and confidence
on her bookkeeper. The issuance and delivery of the checks to the payees
named therein were left to the bookkeeper. Petitioner admitted that she did not
make any verification as to whether or not the checks were delivered to their
respective payees. Although the respondent drawee Bank notified her of all
checks presented to and paid by the bank, petitioner did not verify he correctness
of the returned checks, much less check if the payees actually received the
checks in payment for the supplies she received. In the course of her business
operations covering a period of two years, petitioner issued, following her usual
practice stated above, a total of eighty-two (82) checks in favor of several
suppliers. These checks were all presented by the indorsees as holders thereof
to, and honored by, the respondent drawee Bank. Respondent drawee Bank
correspondingly debited the amounts thereof against petitioner's checking
account numbered 30-00038-1. Most of the aforementioned checks were for
amounts in excess of her actual obligations to the various payees as shown in
their corresponding invoices. To mention a few:

. . . 1) in Check No. 621127, dated June 27, 1984 in the amount of
P11,895.23 in favor of Kawsek Inc. (Exh. A-60), appellant's actual
obligation to said payee was only P895.33 (Exh. A-83); (2) in Check
No. 652282 issued on September 18, 1984 in favor of Senson
Enterprises in the amount of P11,041.20 (Exh. A-67) appellant's
actual obligation to said payee was only P1,041.20 (Exh. 7); (3) in
Check No. 589092 dated April 7, 1984 for the amount of P11,672.47
in favor of Marchem (Exh. A-61) appellant's obligation was only
P1,672.47 (Exh. B); (4) in Check No. 620450 dated May 10, 1984 in
favor of Knotberry for P11,677.10 (Exh. A-31) her actual obligation
was only P677.10 (Exhs. C and C-1); (5) in Check No. 651862 dated
August 9, 1984 in favor of Malinta Exchange Mart for P11,107.16
(Exh. A-62), her obligation was only P1,107.16 (Exh. D-2); (6) in
Check No. 651863 dated August 11, 1984 in favor of Grocer's
International Food Corp. in the amount of P11,335.60 (Exh. A-66),
her obligation was only P1,335.60 (Exh. E and E-1); (7) in Check No.
589019 dated March 17, 1984 in favor of Sophy Products in the
amount of P11,648.00 (Exh. A-78), her obligation was only P648.00
(Exh. G); (8) in Check No. 589028 dated March 10, 1984 for the
amount of P11,520.00 in favor of the Yakult Philippines (Exh. A-73),
the latter's invoice was only P520.00 (Exh. H-2); (9) in Check No.
62033 dated May 23, 1984 in the amount of P11,504.00 in favor of
Monde Denmark Biscuit (Exh. A-34), her obligation was only P504.00
(Exhs. I-1 and I-2).2
Practically, all the checks issued and honored by the respondent drawee bank
were crossed checks.3 Aside from the daily notice given to the petitioner by the
respondent drawee Bank, the latter also furnished her with a monthly statement
of her transactions, attaching thereto all the cancelled checks she had issued and
which were debited against her current account. It was only after the lapse of
more two (2) years that petitioner found out about the fraudulent manipulations of
her bookkeeper.
All the eighty-two (82) checks with forged signatures of the payees were brought
to Ernest L. Boon, Chief Accountant of respondent drawee Bank at the Buendia
branch, who, without authority therefor, accepted them all for deposit at the
Buendia branch to the credit and/or in the accounts of Alfredo Y. Romero and
Benito Lam. Ernest L. Boon was a very close friend of Alfredo Y. Romero. Sixty-
three (63) out of the eighty-two (82) checks were deposited in Savings Account
No. 00844-5 of Alfredo Y. Romero at the respondent drawee Bank's Buendia
branch, and four (4) checks in his Savings Account No. 32-81-9 at its Ongpin
branch. The rest of the checks were deposited in Account No. 0443-4, under the
name of Benito Lam at the Elcaño branch of the respondent drawee Bank.
About thirty (30) of the payees whose names were specifically written on the
checks testified that they did not receive nor even see the subject checks and that
the indorsements appearing at the back of the checks were not theirs.
The team of auditors from the main office of the respondent drawee Bank which
conducted periodic inspection of the branches' operations failed to discover,
check or stop the unauthorized acts of Ernest L. Boon. Under the rules of the
respondent drawee Bank, only a Branch Manager and no other official of the
respondent drawee bank, may accept a second indorsement on a check for
deposit. In the case at bar, all the deposit slips of the eighty-two (82) checks in
question were initialed and/or approved for deposit by Ernest L. Boon. The
Branch Managers of the Ongpin and Elcaño branches accepted the deposits
made in the Buendia branch and credited the accounts of Alfredo Y. Romero and
Benito Lam in their respective branches.
On November 7, 1984, petitioner made a written demand on respondent drawee
Bank to credit her account with the money value of the eighty-two (82) checks
totalling P1,208.606.89 for having been wrongfully charged against her account.
Respondent drawee Bank refused to grant petitioner's demand. On January 23,
1985, petitioner filed the complaint with the Regional Trial Court.
This is not a suit by the party whose signature was forged on a check drawn
against the drawee bank. The payees are not parties to the case. Rather, it is the
drawer, whose signature is genuine, who instituted this action to recover from the
drawee bank the money value of eighty-two (82) checks paid out by the drawee
bank to holders of those checks where the indorsements of the payees were
forged. How and by whom the forgeries were committed are not established on
the record, but the respective payees admitted that they did not receive those
checks and therefore never indorsed the same. The applicable law is the
Negotiable Instruments Law4 (heretofore referred to as the NIL). Section 23 of the
NIL provides:
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.
Under the aforecited provision, forgery is a real or absolute defense by the party
whose signature is forged. A party whose signature to an instrument was forged
was never a party and never gave his consent to the contract which gave rise to
the instrument. Since his signature does not appear in the instrument, he cannot
be held liable thereon by anyone, not even by a holder in due course. Thus, if a
person's signature is forged as a maker of a promissory note, he cannot be made
to pay because he never made the promise to pay. Or where a person's signature
as a drawer of a check is forged, the drawee bank cannot charge the amount
thereof against the drawer's account because he never gave the bank the order
to pay. And said section does not refer only to the forged signature of the maker
of a promissory note and of the drawer of a check. It covers also a forged
indorsement, i.e., the forged signature of the payee or indorsee of a note or
check. Since under said provision a forged signature is "wholly inoperative", no
one can gain title to the instrument through such forged indorsement. Such an
indorsement prevents any subsequent party from acquiring any right as against
any party whose name appears prior to the forgery. Although rights may exist
between and among parties subsequent to the forged indorsement, not one of
them can acquire rights against parties prior to the forgery. Such forged
indorsement cuts off the rights of all subsequent parties as against parties prior to
the forgery. However, the law makes an exception to these rules where a party is
precluded from setting up forgery as a defense.
As a matter of practical significance, problems arising from forged indorsements
of checks may generally be broken into two types of cases: (1) where forgery was
accomplished by a person not associated with the drawer — for example a mail
robbery; and (2) where the indorsement was forged by an agent of the drawer.
This difference in situations would determine the effect of the drawer's negligence
with respect to forged indorsements. While there is no duty resting on the
depositor to look for forged indorsements on his cancelled checks in contrast to a
duty imposed upon him to look for forgeries of his own name, a depositor is under
a duty to set up an accounting system and a business procedure as are
reasonably calculated to prevent or render difficult the forgery of indorsements,
particularly by the depositor's own employees. And if the drawer (depositor)
learns that a check drawn by him has been paid under a forged indorsement, the
drawer is under duty promptly to report such fact to the drawee bank.5For his
negligence or failure either to discover or to report promptly the fact of such
forgery to the drawee, the drawer loses his right against the drawee who has
debited his account under a forged indorsement.6 In other words, he is precluded
from using forgery as a basis for his claim for re-crediting of his account.
In the case at bar, petitioner admitted that the checks were filled up and
completed by her trusted employee, Alicia Galang, and were given to her for her
signature. Her signing the checks made the negotiable instrument complete. Prior
to signing the checks, there was no valid contract yet.
Every contract on a negotiable instrument is incomplete and revocable until
delivery of the instrument to the payee for the purpose of giving effect
thereto.7 The first delivery of the instrument, complete in form, to the payee who
takes it as a holder, is called issuance of the instrument.8 Without the initial
Nego Instruments Set 1 (#s1-70) Page 39 of 112
Lumbas. Dadat
delivery of the instrument from the drawer of the check to the payee, there can be
no valid and binding contract and no liability on the instrument.
Petitioner completed the checks by signing them as drawer and thereafter
authorized her employee Alicia Galang to deliver the eighty-two (82) checks to
their respective payees. Instead of issuing the checks to the payees as named in
the checks, Alicia Galang delivered them to the Chief Accountant of the Buendia
branch of the respondent drawee Bank, a certain Ernest L. Boon. It was
established that the signatures of the payees as first indorsers were forged. The
record fails to show the identity of the party who made the forged signatures. The
checks were then indorsed for the second time with the names of Alfredo Y.
Romero and Benito Lam, and were deposited in the latter's accounts as earlier
noted. The second indorsements were all genuine signatures of the alleged
holders. All the eighty-two (82) checks bearing the forged indorsements of the
payees and the genuine second indorsements of Alfredo Y. Romero and Benito
Lam were accepted for deposit at the Buendia branch of respondent drawee
Bank to the credit of their respective savings accounts in the Buendia, Ongpin
and Elcaño branches of the same bank. The total amount of P1,208,606.89,
represented by eighty-two (82) checks, were credited and paid out by respondent
drawee Bank to Alfredo Y. Romero and Benito Lam, and debited against
petitioner's checking account No. 13-00038-1, Caloocan branch.
As a rule, a drawee bank who has paid a check on which an indorsement has
been forged cannot charge the drawer's account for the amount of said check. An
exception to this rule is where the drawer is guilty of such negligence which
causes the bank to honor such a check or checks. If a check is stolen from the
payee, it is quite obvious that the drawer cannot possibly discover the forged
indorsement by mere examination of his cancelled check. This accounts for the
rule that although a depositor owes a duty to his drawee bank to examine his
cancelled checks for forgery of his own signature, he has no similar duty as to
forged indorsements. A different situation arises where the indorsement was
forged by an employee or agent of the drawer, or done with the active
participation of the latter. Most of the cases involving forgery by an agent or
employee deal with the payee's indorsement. The drawer and the payee often
time shave business relations of long standing. The continued occurrence of
business transactions of the same nature provides the opportunity for the
agent/employee to commit the fraud after having developed familiarity with the
signatures of the parties. However, sooner or later, some leak will show on the
drawer's books. It will then be just a question of time until the fraud is discovered.
This is specially true when the agent perpetrates a series of forgeries as in the
case at bar.
The negligence of a depositor which will prevent recovery of an unauthorized
payment is based on failure of the depositor to act as a prudent businessman
would under the circumstances. In the case at bar, the petitioner relied implicitly
upon the honesty and loyalty of her bookkeeper, and did not even verify the
accuracy of amounts of the checks she signed against the invoices attached
thereto. Furthermore, although she regularly received her bank statements, she
apparently did not carefully examine the same nor the check stubs and the
returned checks, and did not compare them with the same invoices. Otherwise,
she could have easily discovered the discrepancies between the checks and the
documents serving as bases for the checks. With such discovery, the subsequent
forgeries would not have been accomplished. It was not until two years after the
bookkeeper commenced her fraudulent scheme that petitioner discovered that
eighty-two (82) checks were wrongfully charged to her account, at which she
notified the respondent drawee bank.
It is highly improbable that in a period of two years, not one of Petitioner's
suppliers complained of non-payment. Assuming that even one single complaint
had been made, petitioner would have been duty-bound, as far as the respondent
drawee Bank was concerned, to make an adequate investigation on the matter.
Had this been done, the discrepancies would have been discovered, sooner or
later. Petitioner's failure to make such adequate inquiry constituted negligence
which resulted in the bank's honoring of the subsequent checks with forged
indorsements. On the other hand, since the record mentions nothing about such a

complaint, the possibility exists that the checks in question covered inexistent
sales. But even in such a case, considering the length of a period of two (2)
years, it is hard to believe that petitioner did not know or realize that she was
paying more than she should for the supplies she was actually getting. A
depositor may not sit idly by, after knowledge has come to her that her funds
seem to be disappearing or that there may be a leak in her business, and refrain
from taking the steps that a careful and prudent businessman would take in such
circumstances and if taken, would result in stopping the continuance of the
fraudulent scheme. If she fails to take steps, the facts may establish her
negligence, and in that event, she would be estopped from recovering from the
bank.9
One thing is clear from the records — that the petitioner failed to examine her
records with reasonable diligence whether before she signed the checks or after
receiving her bank statements. Had the petitioner examined her records more
carefully, particularly the invoice receipts, cancelled checks, check book stubs,
and had she compared the sums written as amounts payable in the eighty-two
(82) checks with the pertinent sales invoices, she would have easily discovered
that in some checks, the amounts did not tally with those appearing in the sales
invoices. Had she noticed these discrepancies, she should not have signed those
checks, and should have conducted an inquiry as to the reason for the irregular
entries. Likewise had petitioner been more vigilant in going over her current
account by taking careful note of the daily reports made by respondent drawee
Bank in her issued checks, or at least made random scrutiny of cancelled checks
returned by respondent drawee Bank at the close of each month, she could have
easily discovered the fraud being perpetrated by Alicia Galang, and could have
reported the matter to the respondent drawee Bank. The respondent drawee
Bank then could have taken immediate steps to prevent further commission of
such fraud. Thus, petitioner's negligence was the proximate cause of her loss.
And since it was her negligence which caused the respondent drawee Bank to
honor the forged checks or prevented it from recovering the amount it had already
paid on the checks, petitioner cannot now complain should the bank refuse to
recredit her account with the amount of such checks. 10 Under Section 23 of the
NIL, she is now precluded from using the forgery to prevent the bank's debiting of
her account.
The doctrine in the case of Great Eastern Life Insurance Co. vs. Hongkong &
Shanghai Bank 11 is not applicable to the case at bar because in said case, the
check was fraudulently taken and the signature of the payee was forged not by an
agent or employee of the drawer. The drawer was not found to be negligent in the
handling of its business affairs and the theft of the check by a total stranger was
not attributable to negligence of the drawer; neither was the forging of the payee's
indorsement due to the drawer's negligence. Since the drawer was not negligent,
the drawee was duty-bound to restore to the drawer's account the amount
theretofore paid under the check with a forged payee's indorsement because the
drawee did not pay as ordered by the drawer.
Petitioner argues that respondent drawee Bank should not have honored the
checks because they were crossed checks. Issuing a crossed check imposes no
legal obligation on the drawee not to honor such a check. It is more of a warning
to the holder that the check cannot be presented to the drawee bank for payment
in cash. Instead, the check can only be deposited with the payee's bank which in
turn must present it for payment against the drawee bank in the course of normal
banking transactions between banks. The crossed check cannot be presented for
payment but it can only be deposited and the drawee bank may only pay to
another bank in the payee's or indorser's account.
Petitioner likewise contends that banking rules prohibit the drawee bank from
having checks with more than one indorsement. The banking rule banning
acceptance of checks for deposit or cash payment with more than one
indorsement unless cleared by some bank officials does not invalidate the
instrument; neither does it invalidate the negotiation or transfer of the said check.
In effect, this rule destroys the negotiability of bills/checks by limiting their
negotiation by indorsement of only the payee. Under the NIL, the only kind of
indorsement which stops the further negotiation of an instrument is a restrictive
indorsement which prohibits the further negotiation thereof.
Sec. 36. When indorsement restrictive. — An indorsement is
restrictive which either
(a) Prohibits further negotiation of the instrument; or
xxx xxx xxx
In this kind of restrictive indorsement, the prohibition to transfer or negotiate must
be written in express words at the back of the instrument, so that any subsequent
party may be forewarned that ceases to be negotiable. However, the restrictive
indorsee acquires the right to receive payment and bring any action thereon as
any indorser, but he can no longer transfer his rights as such indorsee where the
form of the indorsement does not authorize him to do so. 12
Although the holder of a check cannot compel a drawee bank to honor it because
there is no privity between them, as far as the drawer-depositor is concerned,
such bank may not legally refuse to honor a negotiable bill of exchange or a
check drawn against it with more than one indorsement if there is nothing
irregular with the bill or check and the drawer has sufficient funds. The drawee
cannot be compelled to accept or pay the check by the drawer or any holder
because as a drawee, he incurs no liability on the check unless he accepts it. But
the drawee will make itself liable to a suit for damages at the instance of the
drawer for wrongful dishonor of the bill or check.
Thus, it is clear that under the NIL, petitioner is precluded from raising the
defense of forgery by reason of her gross negligence. But under Section 196 of
the NIL, any case not provided for in the Act shall be governed by the provisions
of existing legislation. Under the laws of quasi-delict, she cannot point to the
negligence of the respondent drawee Bank in the selection and supervision of its
employees as being the cause of the loss because negligence is the proximate
cause thereof and under Article 2179 of the Civil Code, she may not be awarded
damages. However, under Article 1170 of the same Code the respondent drawee
Bank may be held liable for damages. The article provides —
Those who in the performance of their obligations are guilty of fraud,
negligence or delay, and those who in any manner contravene the
tenor thereof, are liable for damages.
There is no question that there is a contractual relation between petitioner as
depositor (obligee) and the respondent drawee bank as the obligor. In the
performance of its obligation, the drawee bank is bound by its internal banking
rules and regulations which form part of any contract it enters into with any of its
depositors. When it violated its internal rules that second endorsements are not to
be accepted without the approval of its branch managers and it did accept the
same upon the mere approval of Boon, a chief accountant, it contravened the
tenor of its obligation at the very least, if it were not actually guilty of fraud or
negligence.
Furthermore, the fact that the respondent drawee Bank did not discover the
irregularity with respect to the acceptance of checks with second indorsement for
deposit even without the approval of the branch manager despite periodic
inspection conducted by a team of auditors from the main office constitutes
negligence on the part of the bank in carrying out its obligations to its depositors.
Article 1173 provides —
The fault or negligence of the obligor consists in the omission of that
diligence which is required by the nature of the obligation and
corresponds with the circumstance of the persons, of the time and of
the place. . . .
We hold that banking business is so impressed with public interest where the
trust and confidence of the public in general is of paramount importance such that
the appropriate standard of diligence must be a high degree of diligence, if not the
utmost diligence. Surely, respondent drawee Bank cannot claim it exercised such
a degree of diligence that is required of it. There is no way We can allow it now to
escape liability for such negligence. Its liability as obligor is not merely vicarious
Nego Instruments Set 1 (#s1-70) Page 40 of 112
Lumbas. Dadat
but primary wherein the defense of exercise of due diligence in the selection and
supervision of its employees is of no moment.
Premises considered, respondent drawee Bank is adjudged liable to share the
loss with the petitioner on a fifty-fifty ratio in accordance with Article 172 which
provides:
Responsibility 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.
With the foregoing provisions of the Civil Code being relied upon, it is being made
clear that the decision to hold the drawee bank liable is based on law and
substantial justice and not on mere equity. And although the case was brought
before the court not on breach of contractual obligations, the courts are not
precluded from applying to the circumstances of the case the laws pertinent
thereto. Thus, the fact that petitioner's negligence was found to be the proximate
cause of her loss does not preclude her from recovering damages. The reason
why the decision dealt on a discussion on proximate cause is due to the error
pointed out by petitioner as allegedly committed by the respondent court. And in
breaches of contract under Article 1173, due diligence on the part of the
defendant is not a defense.
PREMISES CONSIDERED, the case is hereby ordered REMANDED to the trial
court for the reception of evidence to determine the exact amount of loss suffered
by the petitioner, considering that she partly benefited from the issuance of the
questioned checks since the obligation for which she issued them were
apparently extinguished, such that only the excess amount over and above the
total of these actual obligations must be considered as loss of which one half
must be paid by respondent drawee bank to herein petitioner.SO ORDERED.
SECOND DIVISIONG.R. No. 168842 August 11, 2010
VICENTE GO, Petitioner, vs.METROPOLITAN BANK AND TRUST
CO., Respondent.
DECISION
NACHURA, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of
Court, assailing the Decision1dated May 27, 2005 and the Resolution2 dated
August 31, 2005 of the Court of Appeals (CA) in CA-G.R. CV No. 63469.
The Facts
The facts of the case are as follows:
Petitioner filed two separate cases before the Regional Trial Court (RTC) of
Cebu. Civil Case No. CEB-9713 was filed by petitioner against Ma. Teresa Chua
(Chua) and Glyndah Tabañag (Tabañag) for a sum of money with preliminary
attachment. Civil Case No. CEB-9866 was filed by petitioner for a sum of money
with damages against herein respondent Metropolitan Bank and Trust Company
(Metrobank) and Chua.3
In both cases, petitioner alleged that he was doing business under the name
"Hope Pharmacy" which sells medicine and other pharmaceutical products in the
City of Cebu. Petitioner had in his employ Chua as his pharmacist and trustee or
caretaker of the business; Tabañag, on the other hand, took care of the receipts
and invoices and assisted Chua in making deposits for petitioner’s accounts in
the business operations of Hope Pharmacy.4
In CEB-9713, petitioner claimed that there were unauthorized deposits and
encashments made by Chua and Tabañag in the total amount of One Hundred
Nine Thousand Four Hundred Thirty-three Pesos and Thirty Centavos
(₱109,433.30). He questioned particularly the following:
(1) FEBTC Check No. 251111 dated April 29, 1990 in the amount of ₱22,635.00
which was issued by plaintiff’s [petitioner’s] customer Loy Libron in payment of
the stocks purchased was deposited under Metrobank Savings Account No. 420-
920-6 belonging to the defendant Ma. Teresa Chua;
(2) RCBC Checks Nos. 330958 and 294515, which were in blank but pre-signed
by him (plaintiff [petitioner] Vicente Go) for convenience and intended for payment
to plaintiff’s [petitioner’s] suppliers, were filled up and dated September 22, 1990
 Nego Instruments Set 1 (#s1-70) Page 41 of 112
Lumbas. Dadat
and September 7, 1990 in the amount of ₱30,000.00 and ₱50,000.00 (2) RCBC Check Nos. 294519 and 330958 were checks belonging to
BPI 204358 9-19-90 5,402.60
respectively, and were deposited with defendant Chua’s aforestated account with plaintiff Vicente Go payable to cash x x x; these checks were
Metrobank; replacements of the sums earlier advanced by Ma. Teresa Chua, but
BPI 204252 7-31-90 6,715.60
(3) PBC Check No. 005874, drawn by Elizabeth Enriquez payable to the Hope which were deposited in the account of Vicente Go with RCBC, as
Pharmacy in the amount of ₱6,798.30 was encashed by the defendant Glyndah shown by the deposit slips x x x, and confirmed by the statement of
FEBTC 251171 6-27-90 83,175.54
Tabañag; account of Vicente Go with RCBC.
(4) There were unauthorized deposits and encashments in the total FEBTC 251165 6-28-90 231,936.10 (3) Check No. PCIB 005374 drawn by Elizabeth Enriquez payable to
sum of ₱109,433.30;5 Hope Pharmacy/Cash in the amount of ₱6,798.30 dated September
In CEB-9866, petitioner averred that there were thirty-two (32) checks with Hope FEBTC 251251 6-30-90 47,087.25 6, 1990, was admittedly encashed by the defendant, Glyndah
Pharmacy as payee, for varying sums, amounting to One Million Four Hundred Tabañag. As per instruction by Vicente Go, Glyndah requested the
Ninety-Two Thousand Five Hundred Ninety-Five Pesos and Six Centavos FEBTC 251163 6-21-90 170,600.85 drawer to insert the word "Cash," so that she could encash the same
(₱1,492,595.06), that were not endorsed by him but were deposited under the with PCIB, to meet the Hope Pharmacy’s overdraft.
personal account of Chua with respondent bank,6 and these are the following: FEBTC 251170 5-23-90 16,440.00 The listings x x x, made by Glyndah Tabañag and Flor Ouano will show that the
corresponding amounts covered thereby were in fact deposited to the account of
CHECK NO. DATE AMOUNT Mr. Vicente Go with RCBC; the Bank Statement of Mr. Go x x x, confirms
FEBTC 251112 5-31-90 211,592.69
defendants’ claim independently of the deposit slip[s] x x x.12
FEBTC 251166 5-23-90 ₱ 65,214.88
FEBTC 239400 6-15-90 47,664.03 The trial court absolved Chua in CEB-9866 because of the finding that the subject
checks in CEB-9866 were payments of petitioner for his loans or borrowings from
FEBTC 239399 5-08-90 24,917.75
FEBTC 251162 6-22-90 82,697.85 the parents of Ma. Teresa Chua, through Ma. Teresa, who was given the total
discretion by petitioner to transfer money from the offices of Hope Pharmacy to
FEBTC 251350 7-24-90 212,326.56
pay the advances and other obligations of the drugstore; she was also given the
₱1,492,595.067 full discretion where to source the funds to cover the daily overdrafts, even to the
PBC 279887 6-27-90 2,000.00
extent of borrowing money with interest from other persons.13
Petitioner claimed that the said checks were crossed checks payable to Hope While the trial court exonerated Chua in CEB-9866, it however declared
PBC 162387 1-24-90 6,300.00 Pharmacy only; and that without the participation and connivance of respondent respondent bank liable for being negligent in allowing the deposit of crossed
bank, the checks could not have been accepted for deposit to any other account, checks without the proper indorsement.
PBC 162317 12-22-89 3,300.00 except petitioner’s account.8 Petitioner filed an appeal before the CA. On May 27, 2005, the CA rendered a
Thus, in CEB-9866, petitioner prayed that Chua and respondent bank be ordered, Decision,14 the fallo of which reads:
PBC 279881 6-23-90 7,650.00 jointly and severally, to pay the principal amount of ₱1,492,595.06, plus interest WHEREFORE, except for the award of attorney’s fees and litigation expenses in
at 12% from the dates of the checks, until the obligation shall have been fully favor of defendants Chua and Tabañag which is hereby deleted, the decision of
PBC 009005 7-21-89 3,584.00
paid; moral damages of Five Hundred Thousand Pesos (₱500,000.00); the lower court is hereby AFFIRMED.SO ORDERED.15
exemplary damages of ₱500,000.00; and attorney’s fees and costs in the amount Hence, this petition.
PBC 279771 5-14-90 3,600.00
of ₱500,000.00.9 The Issue
On February 23, 1995, the RTC rendered a Joint Decision,10 the dispositive Petitioner presented this sole issue for resolution:
PBC 279726 4-25-90 2,000.00
portion of which reads: The Court of Appeals Erred In Not Holding Metrobank Liable For Allowing The
WHEREFORE, premises considered, the Court hereby renders judgment Deposit, Of Crossed Checks Which Were Issued In Favor Of And Payable To
PBC 168004 3-22-90 2,800.00
dismissing plaintiff Vicente Go’s complaint against the defendant Ma. Teresa Petitioner And Without Being Indorsed By The Petitioner, To The Account Of
Chua and Glyndah Tabañag in Civil Case No. CEB-9713, as well as plaintiff’s Maria Teresa Chua.16
PBC 167963 3-07-90 1,700.00
complaint against the same defendant Ma. Teresa Chua in Civil Case No. CEB- The Ruling of the Court
9866. A check is a bill of exchange drawn on a bank payable on demand.17 There are
FEBTC 267793 8-20-90 80,085.66
Plaintiff Vicente Go is moreover sentenced to pay ₱50,000.00 in attorney’s fees different kinds of checks. In this case, crossed checks are the subject of the
FEBTC 267761 7-21-90 45,304.63 and litigation expenses to the defendants Ma. Teresa Chua and Glyndah controversy. A crossed check is one where two parallel lines are drawn across its
Tabañag in Civil Case No. CEB-9713. face or across the corner thereof. It may be crossed generally or specially.18
FEBTC 251252 6-03-90 64,000.00 Defendant Metrobank in Civil Case No. CEB-9866 is hereby condemned to pay A check is crossed specially when the name of a particular banker or a company
unto plaintiff Vicente Go/Hope Pharmacy the amount of ₱50,000.00 as moral is written between the parallel lines drawn. It is crossed generally when only the
FEBTC 267798 8-15-90 40,078.67 damages, and attorney’s fees and litigation expenses in the aggregate sum of words "and company" are written or nothing is written at all between the parallel
₱25,000.00. lines, as in this case. It may be issued so that presentment can be made only by
PBC 367292 8-06-90 2,100.00 The defendant Metrobank’s crossclaim against its co-defendant Ma. Teresa Chua a bank.19
in Civil Case No. CEB-9866 is dismissed for lack of merit. In order to preserve the credit worthiness of checks, jurisprudence has
PBC 376445 9-26-90 1,125.00 No special pronouncement as to costs in both instances.SO ORDERED.11 pronounced that crossing of a check has the following effects: (a) the check may
In striking down the complaint of the petitioner against Chua and Tabañag in not be encashed but only deposited in the bank; (b) the check may be
CEB-9713, the RTC made the following findings: negotiated only once — to one who has an account with a bank; and (c) the act of
PBC 009056 8-07-89 2,500.00 (1) FEBTC Check No. 251111, dated April 29, 1990, in the amount of crossing the check serves as warning to the holder that the check has been
₱22,635.00 payable to cash, was drawn by Loy Libron in payment of issued for a definite purpose so that he must inquire if he has received the check
her purchases of medicines and other drugs which Ma. Teresa Chua pursuant to that purpose, otherwise, he is not a holder in due course.20
PBC 376402 9-12-90 12,105.40
was selling side by side with the medicines and drugs of the Hope The Court has taken judicial cognizance of the practice that a check with two
Pharmacy, for which she (Maritess) was granted permission by its parallel lines in the upper left hand corner means that it could only be deposited
BPI 197074 7-17-90 5,240.00
owner, Mr. Vicente Chua. These medicines and drugs from Thailand and not converted into cash. The effect of crossing a check,
were Maritess’ sideline, and were segregated from the stocks of thus, relates to the mode of payment, meaning that the drawer had intended the
BPI 197051 7-06-90 1,350.00
Hope Pharmacy; x x x. check for deposit only by the rightful person, i.e., the payee named therein.21 The
crossing of a check is a warning that the check should be deposited only in the

account of the payee. Thus, it is the duty of the collecting bank to ascertain that
the check be deposited to the payee’s account only.22
In the instant case, there is no dispute that the subject 32 checks with the total
amount of ₱1,492,595.06 were crossed checks with petitioner as the named
payee. It is the submission of petitioner that respondent bank should be held
accountable for the entire amount of the checks because it accepted the checks
for deposit under Chua’s account despite the fact that the checks were crossed
and that the payee named therein was not Chua.
In its defense, respondent bank countered that petitioner is not entitled to
reimbursement of the total sum of ₱1,492,595.06 from either Maria Teresa Chua
or respondent bank because petitioner was not damaged thereby.23
Respondent bank’s contention is meritorious. Respondent bank should not be
held liable for the entire amount of the checks considering that, as found by the
RTC and affirmed by the CA, the checks were actually given to Chua as
payments by petitioner for loans obtained from the parents of Chua. Furthermore,
petitioner’s non-inclusion of Chua and Tabañag in the petition before this Court is,
in effect, an admission by the petitioner that Chua, in representation of her
parents, had rightful claim to the proceeds of the checks, as payments by
petitioner for money he borrowed from the parents of Chua. Therefore, petitioner
suffered no pecuniary loss in the deposit of the checks to the account of
Chua.ten.lihpwal
However, we affirm the finding of the RTC that respondent bank was negligent in
permitting the deposit and encashment of the crossed checks without the proper
indorsement. An indorsement is necessary for the proper negotiation of checks
specially if the payee named therein or holder thereof is not the one depositing or
encashing it. Knowing fully well that the subject checks were crossed, that the
payee was not the holder and that the checks contained no indorsement,
respondent bank should have taken reasonable steps in order to determine the
validity of the representations made by Chua. Respondent bank was amiss in its
duty as an agent of the payee. Prudence dictates that respondent bank should
not have merely relied on the assurances given by Chua.1avvphi1
Respondent presented Jonathan Davis as its witness in the trial before the RTC.
He was the officer-in-charge and ranked second to the assistant vice president of
the bank at the time material to this case. Davis’ testimony was summarized by
the RTC as follows:
Davis also testified that he allowed Ma. Teresa Chua to deposit the checks
subject of this litigation which were payable to Hope Pharmacy. According to him,
it was a privilege given to valued customers on a highly selective case to case
basis, for marketing purposes, based on trust and confidence, because Ma.
Teresa [Chua] told him that those checks belonged to her as payment for the
advances she extended to Mr. Go/Hope Pharmacy. x x x
Davis stressed that Metrobank granted the privilege to Ma. Teresa Chua that for
every check she deposited with Metrobank, the same would be credited outright
to her account, meaning that she could immediately make use of the amount
credited; this arrangement went on for about three years, without any complaint
from Mr. Go/Hope Pharmacy, and Ma. Teresa Chua made warranty that she
would reimburse Metrobank if Mr. Go complained. He did not however call or
inform Mr. Go about this arrangement, because their bank being a Chinese bank,
transactions are based on trust and confidence, and for him to inform Mr. Vicente
Go about it, was tantamount to questioning the integrity of their client, Ma. Teresa
Chua. Besides, this special privilege or arrangement would not bring any
monetary gain to the bank.24
Negligence was committed by respondent bank in accepting for deposit the
crossed checks without indorsement and in not verifying the authenticity of the
negotiation of the checks. The law imposes a duty of extraordinary diligence on
the collecting bank to scrutinize checks deposited with it, for the purpose of
determining their genuineness and regularity.25 As a business affected with public
interest and because of the nature of its functions, the banks are under obligation
to treat the accounts of its depositors with meticulous care, always having in mind
the fiduciary nature of the relationship.26 The fact that this arrangement had been
practiced for three years without Mr. Go/Hope Pharmacy raising any objection
does not detract from the duty of the bank to exercise extraordinary diligence.
Thus, the Decision of the RTC, as affirmed by the CA, holding respondent bank
liable for moral damages is sufficient to remind it of its responsibility to exercise
extraordinary diligence in the course of its business which is imbued with public
interest.
WHEREFORE, the Decision dated May 27, 2005 and the Resolution dated
August 31, 2005 of the Court of Appeals in CA-G.R. CV No. 63469 are hereby
AFFIRMED.SO ORDERED.
FIRST DIVISION G.R. No. 180257 February 23, 2011
EUSEBIO GONZALES, Petitioner, vs.PHILIPPINE COMMERCIAL AND
INTERNATIONAL BANK, EDNA OCAMPO, and ROBERTO
NOCEDA,Respondents.
DECISION
VELASCO, JR., J.:
The Case
This is an appeal via a Petition for Review on Certiorari under Rule 45 from the
Decision1 dated October 22, 2007 of the Court of Appeals (CA) in CA-G.R. CV
No. 74466, which denied petitioner’s appeal from the December 10, 2001
Decision2 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
petitioner’s 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 Agreement3 (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
Nego Instruments Set 1 (#s1-70) Page 42 of 112
Lumbas. Dadat
Association (PCA) where they are both members, which caused great
embarrassment and humiliation to Gonzales. Thereafter, on November 5, 1998,
Unson sent a demand letter5 to Gonzales for the PhP 250,000. And on December
3, 1998, the counsel of Unson sent a second demand letter6 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
PCIB’s 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
latter’s 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 totothe 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 RTC’s 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 PETITIONER’S 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 Court’s 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 Panlilio’s 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. Panlilio’s 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 Panlilio—as shown by the
fact that the proceeds went to the spouses Panlilio who were servicing or paying
the monthly dues—is 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 surety—the
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 surety’s 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
Nego Instruments Set 1 (#s1-70) Page 43 of 112
Lumbas. Dadat
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 bank’s right to set off or apply all moneys of the debtor in
PCIB’s hand and the stipulations in the COHLA on the PCIB’s 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 PCIB’s 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 Panlilio’s 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. Panlilio’s 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 that’s
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
account28 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. PCIB’s
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, it’s 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 letter30 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 latter’s 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
Ticket32 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.
Nego Instruments Set 1 (#s1-70) Page 44 of 112
Lumbas. Dadat
Q: And it is only now that you claim that it was verbally relayed to him, it’s 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 don’t 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 don’t 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 don’t, 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 don’t 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 bank’s 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 PCIB––to 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 loans39 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 Lender’s 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 Lender’s 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 accordingly—whether 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 bank—with gross negligence—failed to accord Gonzales, a
valued client for more than 15 years.
Fourth. We find the testimony43 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 PCIB’s negligence in not giving Gonzales—an accommodation
party—proper 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 PCIB’s 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 society—banks 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
Santos46 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."
Nego Instruments Set 1 (#s1-70) Page 45 of 112
Lumbas. Dadat
Accordingly, this Court finds that such acts warrant the payment of indemnity in
the form of nominal damages.1avvphi1Nominal 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. Cariño:
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 plaintiff’s 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 defendant’s 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 ante—it must always reasonably approximate
the extent of injury and be proportional to the wrong committed.55Thus, 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 bank’s omission in not properly
informing Gonzales of the outstanding interest dues––aggravated 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 line––justifies 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 attorney’s fees is likewise called for from PCIB’s negligence
which compelled Gonzales to litigate to protect his interest. In accordance with
Art. 2208(1) of the Code, attorney’s fees may be recovered when exemplary
damages are awarded. We find that the amount of PhP 50,000 as attorney’s 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 attorney’s fees.
No pronouncement as to costs.SO ORDERED.
SECOND DIVISIONG.R. No. 156294 November 29, 2006
MELVA THERESA ALVIAR GONZALES, Petitioner, vs.RIZAL COMMERCIAL
BANKING CORPORATION, Respondent.
DECISION
GARCIA, J.:
An action for a sum of money originating from the Regional Trial Court (RTC) of
Makati City, Branch 61, thereat docketed as Civil Case No. 88-1502, was decided
in favor of therein plaintiff, now respondent Rizal Commercial Banking
Corporation (RCBC). On appeal to the Court of Appeals (CA) in CA-G.R. CV No.
48596, that court, in a decision1 dated August 30, 2002, affirmed the RTC minus
the award of attorney’s fees. Upon the instance of herein petitioner Melva
Theresa Alviar Gonzales, the case is now before this Court via this petition for
review on certiorari, based on the following undisputed facts as unanimously
found by the RTC and the CA, which the latter summarized as follows:
Gonzales was an employee of Rizal Commercial Banking Corporation (or RCBC)
as New Accounts Clerk in the Retail Banking Department at its Head Office.
A foreign check in the amount of $7,500 was drawn by Dr. Don Zapanta of the
Ade Medical Group with address at 569 Western Avenue, Los Angeles,
California, against the drawee bank Wilshire Center Bank, N.A., of Los Angeles,
California, U.S.A., and payable to Gonzales’ mother, defendant Eva Alviar (or
Alviar). Alviar then endorsed this check. Since RCBC gives special
accommodations to its employees to receive the check’s value without awaiting
the clearing period, Gonzales presented the foreign check to Olivia Gomez, the
RCBC’s Head of Retail Banking. After examining this, Olivia Gomez requested
Gonzales to endorse it which she did. Olivia Gomez then acquiesced to the early
encashment of the check and signed the check but indicated thereon her
authority of "up to ₱17,500.00 only". Afterwards, Olivia Gomez directed Gonzales
to present the check to RCBC employee Carlos Ramos and procure his
signature. After inspecting the check, Carlos Ramos also signed it with an "ok"
annotation. After getting the said signatures Gonzales presented the check to
Rolando Zornosa, Supervisor of the Remittance section of the Foreign
Department of the RCBC Head Office, who after scrutinizing the entries and
signatures therein authorized its encashment. Gonzales then received its peso
equivalent of ₱155,270.85.
RCBC then tried to collect the amount of the check with the drawee bank by the
latter through its correspondent bank, the First Interstate Bank of California, on
two occasions dishonored the check because of "END. IRREG" or irregular
indorsement. Insisting, RCBC again sent the check to the drawee bank, but this
time the check was returned due to "account closed". Unable to collect, RCBC
demanded from Gonzales the payment of the peso equivalent of the check that
she received. Gonzales settled the matter by agreeing that payment be made thru
salary deduction. This temporary arrangement for salary deductions was
communicated by Gonzales to RCBC through a letter dated November 27, 1987
xxx
xxx xxx xxx
The deductions was implemented starting October 1987. On March 7, 1988
RCBC sent a demand letter to Alviar for the payment of her obligation but this fell
on deaf ears as RCBC did not receive any response from Alviar. Taking further
action to collect, RCBC then conveyed the matter to its counsel and on June 16,
1988, a letter was sent to Gonzales reminding her of her liability as an indorser of
the subject check and that for her to avoid litigation she has to fulfill her
commitment to settle her obligation as assured in her said letter. On July 1988
Gonzales resigned from RCBC. What had been deducted from her salary was
only ₱12,822.20 covering ten months.
It was against the foregoing factual backdrop that RCBC filed a complaint for a
sum of money against Eva Alviar, Melva Theresa Alviar-Gonzales and the latter’s
husband Gino Gonzales. The spouses Gonzales filed an Answer with
Counterclaim praying for the dismissal of the complaint as well as payment of
₱10,822.20 as actual damages, ₱20,000.00 as moral damages, ₱20,000.00 as
exemplary damages, and ₱20,000.00 as attorney’s fees and litigation expenses.
Defendant Eva Alviar, on the other hand, was declared in default for having filed
her Answer out of time.
After trial, the RTC, in its three-page decision,2 held two of the three defendants
liable as follows:
WHEREFORE, premises above considered and plaintiff having established its
case against the defendants as above stated, judgment is hereby rendered for
plaintiff and as against defendant EVA. P. ALVIAR as principal debtor and
defendants MELVA THERESA ALVIAR GONZLAES as guarantor as follows:
1. To pay plaintiff the amount of ₱142,648.65 (₱155,270.85 less the
amount of ₱12,622.20, as salary deduction of [Gonzales]),
representing the outstanding obligation of the defendants with
interest of 12% per annum starting February 1987 until fully paid;
2. To pay the amount of ₱40,000.00 as and for attorney’s fees; and
to
3. Pay the costs of this suit.SO ORDERED.
On appeal, the CA, except for the award of attorney’s fees, affirmed the RTC
judgment.
Hence, this recourse by the petitioner on her submission that the CA erred ̶
XXX IN FINDING [PETITIONER], AN ACCOMMODATION PARTY
TO A CHECK SUBSEQUENTLY ENDORSED PARTIALLY, LIABLE
TO RCBC AS GUARANTOR;
XXX IN FINDING THAT THE SIGNATURE OF GOMEZ, AN RCBC
EMPLOYEE, DOES NOT CONSTITUTE AS AN ENDORSEMENT
BUT ONLY AN INTER-BANK APPROVAL OF SIGNATURE
NECESSARY FOR THE ENCASHMENT OF THE CHECK;
XXX IN NOT FINDING RCBC LIABLE ON THE COUNTERCLAIMS
OF [THE PETITIONER].
The recourse is impressed with merit.
The dollar-check3 in question in the amount of $7,500.00 drawn by Don Zapanta
of Ade Medical Group (U.S.A.) against a Los Angeles, California bank, Wilshire
Center Bank N.A., was dishonored because of "End. Irregular," i.e., an irregular
endorsement. While the foreign drawee bank did not specifically state which
among the four signatures found on the dorsal portion of the check made the
check irregularly endorsed, it is absolutely undeniable that only the signature of
Olivia Gomez, an RCBC employee, was a qualified endorsement because of the
phrase "up to ₱17,500.00 only." There can be no other acceptable explanation
for the dishonor of the foreign check than this signature of Olivia Gomez with the
phrase "up to ₱17,500.00 only" accompanying it. This Court definitely agrees with
the petitioner that the foreign drawee bank would not have dishonored the check
had it not been for this signature of Gomez with the same phrase written by her.
The foreign drawee bank, Wilshire Center Bank N.A., refused to pay the bearer of
this dollar-check drawn by Don Zapanta because of the defect introduced by
RCBC, through its employee, Olivia Gomez. It is, therefore, a useless piece of
paper if returned in that state to its original payee, Eva Alviar.
There is no doubt in the mind of the Court that a subsequent party which caused
the defect in the instrument cannot have any recourse against any of the prior
endorsers in good faith. Eva Alviar’s and the petitioner’s liability to subsequent
holders of the foreign check is governed by the Negotiable Instruments Law as
follows:
Sec. 66. Liability of general indorser. - Every indorser who indorses without
qualification, warrants to all subsequent holders in due course;
(a) The matters and things mentioned in subdivisions (a), (b), and (c)
of the next preceding section; and
(b) That the instrument is, at the time of his indorsement, valid and
subsisting;
And, in addition, he engages that, on due presentment, it shall be accepted or
paid, or both, as the case may be, according to its tenor, and that if it be
Nego Instruments Set 1 (#s1-70) Page 46 of 112
Lumbas. Dadat
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 petitioner’s counterclaim against RCBC for the amount of
₱12,822.20 which it admittedly deducted from petitioner’s salary, the Court must
order the return thereof to the petitioner, with legal interest of 12% per annum,
notwithstanding the petitioner’s apparent acquiescence to such an arrangement.
It must be noted that petitioner is not any ordinary client or depositor with whom
RCBC had this isolated transaction. Petitioner was a rank-and-file employee of
RCBC, being a new accounts clerk thereat. It is easy to understand how a
vulnerable Gonzales, who is financially dependent upon RCBC, would rather bite
the bullet, so to speak, and expectedly opt for salary deduction rather than lose
her job and her entire salary altogether. In this sense, we cannot take petitioner’s

apparent acquiescence to the salary deduction as being an entirely free and
voluntary act on her part. Additionally, under the obtaining facts and
circumstances surrounding the present complaint for collection of sum of money
by RCBC against its employee, which may be deemed tantamount to
harassment, and the fact that RCBC itself was the one, acting through its
employee, Olivia Gomez, which gave reason for the dishonor of the dollar-check
in question, RCBC may likewise be held liable for moral and exemplary damages
and attorney’s fees by way of damages, in the amount of ₱20,000.00 for each.
WHEREFORE, the assailed CA Decision dated August 30, 2002 is REVERSED
and SET ASIDE and the Complaint in this case DISMISSED for lack of merit.
Petitioner’s counterclaim is GRANTED, ordering the respondent RCBC to
reimburse petitioner the amount ₱12,822.20, with legal interest computed from
the time of salary deduction up to actual payment, and to pay petitioner the total
amount of ₱60,000.00 as moral and exemplary damages, and attorney’s fees.
Costs against the respondent.SO ORDERED
THIRD DIVISIONG.R. No. 105774 April 25, 2002
GREAT ASIAN SALES CENTER CORPORATION and TAN CHONG
LIN, petitioners, vs.THE COURT OF APPEALS and BANCASIA FINANCE AND
INVESTMENT CORPORATION, respondents.
CARPIO, J.:
The Case
Before us is a Petition for Review on Certiorari under Rule 45 of the Revised
Rules on Civil Procedure assailing the June 9, 1992 Decision 1 of the Court of
Appeals2 in CA-G.R. CV No. 20167. The Court of Appeals affirmed the January
26, 1988 Decision3 of the Regional Trial Court of Manila, Branch 52,4 ordering
petitioners Great Asian Sales Center Corporation ("Great Asian" for brevity) and
Tan Chong Lin to pay, solidarily, respondent Bancasia Finance and Investment
Corporation ("Bancasia" for brevity) the amount of P1,042,005.00. The Court of
Appeals affirmed the trial court’s award of interest and costs of suit but deleted
the award of attorney’s fees.
The Facts
Great Asian is engaged in the business of buying and selling general
merchandise, in particular household appliances. On March 17, 1981, the board
of directors of Great Asian approved a resolution authorizing its Treasurer and
General Manager, Arsenio Lim Piat, Jr. ("Arsenio" for brevity) to secure a loan
from Bancasia in an amount not to exceed P1.0 million. The board resolution also
authorized Arsenio to sign all papers, documents or promissory notes necessary
to secure the loan. On February 10, 1982, the board of directors of Great Asian
approved a second resolution authorizing Great Asian to secure a discounting
line with Bancasia in an amount not exceeding P2.0 million. The second board
resolution also designated Arsenio as the authorized signatory to sign all
instruments, documents and checks necessary to secure the discounting line.
On March 4, 1981, Tan Chong Lin signed a Surety Agreement in favor of
Bancasia to guarantee, solidarily, the debts of Great Asian to Bancasia. On
January 29, 1982, Tan Chong Lin signed a Comprehensive and Continuing
Surety Agreement in favor of Bancasia to guarantee, solidarily, the debts of Great
Asian to Bancasia. Thus, Tan Chong Lin signed two surety agreements ("Surety
Agreements" for brevity) in favor of Bancasia.
Great Asian, through its Treasurer and General Manager Arsenio, signed four (4)
Deeds of Assignment of Receivables ("Deeds of Assignment" for brevity),
assigning to Bancasia fifteen (15) postdated checks. Nine of the checks were
payable to Great Asian, three were payable to "New Asian Emp.", and the last
three were payable to cash. Various customers of Great Asian issued these
postdated checks in payment for appliances and other merchandise.
Great Asian and Bancasia signed the first Deed of Assignment on January 12,
1982 covering four postdated checks with a total face value of P244,225.82, with
maturity dates not later than March 17, 1982. Of these four postdated checks, two
were dishonored. Great Asian and Bancasia signed the second Deed of
Assignment also on January 12, 1982 covering four postdated checks with a total
face value of P312,819.00, with maturity dates not later than April 1, 1982. All
Nego Instruments Set 1 (#s1-70) Page 47 of 112
Lumbas. Dadat
these four checks were dishonored. Great Asian and Bancasia signed the third Tan. Attached to the verified petition was a "Schedule and Inventory of Liabilities
Deed of Assignment on February 11, 1982 covering eight postdated checks with and Creditors of Great Asian Sales Center Corporation," listing Bancasia as one
a total face value of P344,475.00, with maturity dates not later than April 30, of the creditors of Great Asian in the amount of P1,243,632.00.
1982. All these eight checks were dishonored. Great Asian and Bancasia signed On June 23, 1982, Bancasia filed a complaint for collection of a sum of money
the fourth Deed of Assignment on March 5, 1982 covering one postdated check against Great Asian and Tan Chong Lin. Bancasia impleaded Tan Chong Lin
with a face value of P200,000.00, with maturity date on March 18, 1982. This last because of the Surety Agreements he signed in favor of Bancasia. In its answer,
check was also dishonored. Great Asian assigned the postdated checks to Great Asian denied the material allegations of the complaint claiming it was
Bancasia at a discount rate of less than 24% of the face value of the checks. unfounded, malicious, baseless, and unlawfully instituted since there was already
Arsenio endorsed all the fifteen dishonored checks by signing his name at the a pending insolvency proceedings, although Great Asian subsequently withdrew
back of the checks. Eight of the dishonored checks bore the endorsement of its petition for voluntary insolvency. Great Asian further raised the alleged lack of
Arsenio below the stamped name of "Great Asian Sales Center", while the rest of authority of Arsenio to sign the Deeds of Assignment as well as the absence of
the dishonored checks just bore the signature of Arsenio. The drawee banks consideration and consent of all the parties to the Surety Agreements signed by
dishonored the fifteen checks on maturity when deposited for collection by Tan Chong Lin.
Bancasia, with any of the following as reason for the dishonor: "account closed", Ruling of the Trial Court
"payment stopped", "account under garnishment", and "insufficiency of funds". The trial court rendered its decision on January 26, 1988 with the following
The total amount of the fifteen dishonored checks is P1,042,005.00. Below is a findings and conclusions:
table of the fifteen dishonored checks: "From the foregoing facts and circumstances, the Court finds that the plaintiff has
established its causes of action against the defendants. The Board Resolution
Drawee Bank Check No. Amount Maturity Date
(Exh. "T"), dated March 17, 1981, authorizing Arsenio Lim Piat, Jr., general
1st Deed manager and treasurer of the defendant Great Asian to apply and negotiate for a
loan accommodation or credit line with the plaintiff Bancasia in an amount not
Solid Bank C-A097480 P137,500.00 March 16, 1982 exceeding One Million Pesos (P1,000,000.00), and the other Board Resolution
approved on February 10, 1982, authorizing Arsenio Lim Piat, Jr., to obtain for
Pacific Banking Corp. 23950 P47,211.00 March 17, 1982 defendant Asian Center a discounting line with Bancasia at prevailing discounting
2nd Deed rates in an amount not to exceed Two Million Pesos (P2,000,000.00), both of
which were intended to secure money from the plaintiff financing firm to finance
Metrobank 030925 P68,722.00 March 19, 1982 the business operations of defendant Great Asian, and pursuant to which Arsenio
Lim Piat, Jr. was able to have the aforementioned fifteen (15) checks totaling
030926 P45,230.00 March 19, 1982 P1,042,005.00 discounted with the plaintiff, which transactions were obviously
known by the beneficiary thereof, defendant Great Asian, as in fact, in its
Solidbank C-A097478 P140,000.00 March 23, 1982 aforementioned Schedule and Inventory of Liabilities and Creditors (Exh. DD, DD-
Pacific Banking Corp. CC 769910 P58,867.00 April 1, 1982 1) attached to its Verified Petition for Insolvency, dated May 12, 1982 (pp. 50-56),
the defendant Great Asian admitted an existing liability to the plaintiff, in the
3rd Deed amount of P1,243,632.00, secured by it, by way of ‘financing accommodation,’
from the said financing institution Bancasia Finance and Investment Corporation,
Phil. Trust Company 060835 P21,228.00 April 21, 1982 plaintiff herein, sufficiently establish the liability of the defendant Great Asian to
the plaintiff for the amount of P1,042,005.00 sought to be recovered by the latter
060836 P22,187.00 April 28, 1982
in this case.5
Allied Banking Corp. 11251624 P41,773.00 April 22, 1982 xxx
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against
11251625 P38,592.00 April 29, 1982 the two (2) defendants ordering the latter, jointly and severally, to pay the former:
(a) The amount of P1,042,005.00, plus interest thereon at the legal rate from the
Pacific Banking Corp. 237984 P37,886.00 April 23, 1982 filing of the complaint until the same is fully paid;
(b) Attorney’s fees equivalent to twenty per cent (20%) of the total amount due;
237988 P47,385.00 April 28, 1982
and
237985 P46,748.00 April 30, 1982 (c) The costs of suit.SO ORDERED."6
Ruling of the Court of Appeals
Security Bank & Trust Co. 22061 P88,676.00 April 30, 1982 On appeal, the Court of Appeals sustained the decision of the lower court,
deleting only the award of attorney’s fees, as follows:
4th Deed "As against appellants’ bare denial of it, the Court is more inclined to accept the
Pacific Banking Corp. 860178 P200,000.00 March 18, 1982 appellee’s version, to the effect that the subject deeds of assignment are but
individual transactions which -- being collectively evidentiary of the loan
After the drawee bank dishonored Check No. 097480 dated March 16, 1982, accommodation and/or credit line it granted the appellant corporation -- should
Bancasia referred the matter to its lawyer, Atty. Eladia Reyes, who sent by not be taken singly and distinct therefrom. In addition to its plausibility, the
registered mail to Tan Chong Lin a letter dated March 18, 1982, notifying him of proposition is, more importantly, adequately backed by the documentary evidence
the dishonor and demanding payment from him. Subsequently, Bancasia sent by on record. Aside from the aforesaid Deeds of Assignment (Exhs. "A", "D", "I", and
personal delivery a letter dated June 16, 1982 to Tan Chong Lin, notifying him of "R") and the Board Resolutions of the appellant corporation’s Board of Directors
the dishonor of the fifteen checks and demanding payment from him. Neither (Exhs. "T", "U" and "V"), the appellee -- consistent with its theory -- interposed the
Great Asian nor Tan Chong Lin paid Bancasia the dishonored checks. Surety Agreements the appellant Tan Chong Lin executed (Exhs. "W" and "X"),
On May 21, 1982, Great Asian filed with the then Court of First Instance of Manila as well as the demand letters it served upon the latter as surety (Exhs. "Y" and
a petition for insolvency, verified under oath by its Corporate Secretary, Mario "Z"). It bears emphasis that the second Resolution of the appellant corporation’s

Board of Directors (Exh. "V") even closely coincides with the execution of the
February 11, 1982 and March 5, 1982 Deeds of Assignment (Exhs. "I" and "R").
Were the appellants’ posturings true, it seems rather strange that the appellant
Tan Chong Lin did not even protest or, at least, make known to the appellee what
he -- together with the appellant corporation -- represented to be a corporate
larceny to which all of them supposedly fell prey. In the petition for voluntary
insolvency it filed, the appellant corporation, instead, indirectly acknowledged its
indebtedness in terms of financing accommodations to the appellee, in an amount
which, while not exactly matching the sum herein sought to be collected,
approximates the same (Exhs. "CC", "DD" and "DD-1").7
xxx
The appellants contend that the foregoing warranties enlarged or increased the
surety’s risk, such that appellant Tan Chong Lin should be released from his
liabilities (pp. 37-44, Appellant’s Brief). Without saying more, the appellants’
position is, however, soundly debunked by the undertaking expressed in the
Comprehensive and Continuing Surety Agreements (Exhs. "W" and "X"), to the
effect that the "xxx surety/ies, jointly and severally among themselves and
likewise with the principal, hereby agree/s and bind/s himself to pay at maturity all
the notes, drafts, bills of exchange, overdrafts and other obligations which the
principal may now or may hereafter owe the creditor xxx." With the possible
exception of the fixed ceiling for the amount of loan obtainable, the surety
undertaking in the case at bar is so comprehensive as to contemplate each and
every condition, term or warranty which the principal parties may have or may be
minded to agree on. Having affixed his signature thereto, the appellant Tan
Chong Lin is expected to have, at least, read and understood the same.
xxx
With the foregoing disquisition, the Court sees little or no reason to go into the
appellants’ remaining assignments of error, save the matter of attorney’s fees.
For want of a statement of the rationale therefore in the body of the challenged
decision, the trial court’s award of attorney’s fees should be deleted and
disallowed (Abrogar vs. Intermediate Appellate Court, 157 SCRA 57).
WHEREFORE, the decision appealed from is MODIFIED, to delete the trial
court’s award of attorney’s fees. The rest is AFFIRMED in toto.SO ORDERED."8
The Issues
The petition is anchored on the following assigned errors:
"1. The respondent Court erred in not holding that the proper parties against
whom this action for collection should be brought are the drawers and indorser of
the checks in question, being the real parties in interest, and not the herein
petitioners.
2. The respondent Court erred in not holding that the petitioner-corporation is
discharged from liability for failure of the private respondent to comply with the
provisions of the Negotiable Instruments Law on the dishonor of the checks.
3. The respondent Court erred in its appreciation and interpretation of the effect
and legal consequences of the signing of the deeds of assignment and the
subsequent indorsement of the checks by Arsenio Lim Piat, Jr. in his individual
and personal capacity and without stating or indicating the name of his supposed
principal.
4. The respondent Court erred in holding that the assignment of the checks is a
loan accommodation or credit line accorded by the private respondent to
petitioner-corporation, and not a purchase and sale thereof.
5. The respondent Court erred in not holding that there was a material alteration
of the risk assumed by the petitioner-surety under his surety agreement by the
terms, conditions, warranties and obligations assumed by the assignor Arsenio
Lim Piat, Jr. under the deeds of assignment or receivables.
6. The respondent Court erred in holding that the petitioner-corporation impliedly
admitted its liability to private respondent when the former included the latter as
one of its creditors in its petition for voluntary insolvency, although no claim was
filed and proved by the private respondent in the insolvency court.
7. The respondent Court erred in holding the petitioners liable to private
respondent on the transactions in question."9
The issues to be resolved in this petition can be summarized into three:
1. WHETHER ARSENIO HAD AUTHORITY TO EXECUTE THE DEEDS OF
ASSIGNMENT AND THUS BIND GREAT ASIAN;
2. WHETHER GREAT ASIAN IS LIABLE TO BANCASIA UNDER THE DEEDS
OF ASSIGNMENT FOR BREACH OF CONTRACT PURSUANT TO THE CIVIL
CODE, INDEPENDENT OF THE NEGOTIABLE INSTRUMENTS LAW;
3. WHETHER TAN CHONG LIN IS LIABLE TO GREAT ASIAN UNDER THE
SURETY AGREEMENTS.
The Court’s Ruling
The petition is bereft of merit.
First Issue: Authority of Arsenio to Sign the Deeds of Assignment
Great Asian asserts that Arsenio signed the Deeds of Assignment and indorsed
the checks in his personal capacity. The primordial question that must be
resolved is whether Great Asian authorized Arsenio to sign the Deeds of
Assignment. If Great Asian so authorized Arsenio, then Great Asian is bound by
the Deeds of Assignment and must honor its terms.
The Corporation Code of the Philippines vests in the board of directors the
exercise of the corporate powers of the corporation, save in those instances
where the Code requires stockholders’ approval for certain specific acts. Section
23 of the Code provides:
"SEC. 23. The Board of Directors or Trustees. Unless otherwise
provided in this Code, the corporate powers of all corporations
formed under this Code shall be exercised, all business conducted
and all property of such corporations controlled and held by the
board of directors or trustees x x x."
In the ordinary course of business, a corporation can borrow funds or dispose of
assets of the corporation only on authority of the board of directors. The board of
directors normally designates one or more corporate officers to sign loan
documents or deeds of assignment for the corporation.
To secure a credit accommodation from Bancasia, the board of directors of Great
Asian adopted two board resolutions on different dates, the first on March 17,
1981, and the second on February 10, 1982. These two board resolutions, as
certified under oath by Great Asian’s Corporate Secretary Mario K. Tan, state:
First Board Resolution
"RESOLVED, that the Treasurer of the corporation, Mr. Arsenio Lim
Piat, Jr., be authorized as he is authorized to apply for and negotiate
for a loan accommodation or credit line in the amount not to exceed
ONE MILLION PESOS (P1,000,000.00), with Bancasia Finance and
Investment Corporation, and likewise to sign any and all papers,
documents, and/or promissory notes in connection with said loan
accommodation or credit line, including the power to mortgage such
properties of the corporation as may be needed to effectuate the
same."10 (Emphasis supplied)
Second Board Resolution
"RESOLVED that Great Asian Sales Center Corp. obtain a
discounting line with BANCASIA FINANCE & INVESTMENT
CORPORATION, at prevailing discounting rates, in an amount not to
exceed** TWO MILLION PESOS ONLY (P2,000,000),** Philippine
Currency.
RESOLVED FURTHER, that the corporation secure such other forms
of credit lines with BANCASIA FINANCE & INVESTMENT
CORPORATION in an amount not to exceed** TWO MILLION
PESOS ONLY (P2,000,000.00),** PESOS, under such terms and
conditions as the signatories may deem fit and proper.
RESOLVED FURTHER, that the following persons be authorized
individually, jointly or collectively to sign, execute and deliver any and
all instruments, documents, checks, sureties, etc. necessary or
incidental to secure any of the foregoing obligation:
(signed)
Specimen Signature
1. ARSENIO LIM PIAT, JR.
2. _______________________
Nego Instruments Set 1 (#s1-70) Page 48 of 112
Lumbas. Dadat
3. _______________________
4. _______________________
PROVIDED FINALLY that this authority shall be valid, binding and
effective until revoked by the Board of Directors in the manner
prescribed by law, and that BANCASIA FINANCE & INVESTMENT
CORPORATION shall not be bound by any such revocation until
such time as it is noticed in writing of such revocation." 11(Emphasis
supplied)
The first board resolution expressly authorizes Arsenio, as Treasurer of Great
Asian, to apply for a "loan accommodation or credit line" with Bancasia for not
more than P1.0 million. Also, the first resolution explicitly authorizes Arsenio to
sign any document, paper or promissory note, including mortgage deeds over
properties of Great Asian, to secure the loan or credit line from Bancasia.
The second board resolution expressly authorizes Great Asian to secure a
"discounting line" from Bancasia for not more than P2.0 million. The second
board resolution also expressly empowers Arsenio, as the authorized signatory of
Great Asian, "to sign, execute and deliver any and all documents, checks x x x
necessary or incidental to secure" the discounting line. The second board
resolution specifically authorizes Arsenio to secure the discounting line "under
such terms and conditions as (he) x x x may deem fit and proper."
As plain as daylight, the two board resolutions clearly authorize Great Asian to
secure a loan or discounting linefrom Bancasia. The two board resolutions also
categorically designate Arsenio as the authorized signatory to sign and deliver all
the implementing documents, including checks, for Great Asian. There is no iota
of doubt whatsoever about the purpose of the two board resolutions, and about
the authority of Arsenio to act and sign for Great Asian. The second board
resolution even gave Arsenio full authority to agree with Bancasia on the terms
and conditions of the discounting line. Great Asian adopted the correct and
proper board resolutions to secure a loan or discounting line from Bancasia, and
Bancasia had a right to rely on the two board resolutions of Great Asian.
Significantly, the two board resolutions specifically refer to Bancasia as the
financing institution from whom Great Asian will secure the loan accommodation
or discounting line.
Armed with the two board resolutions, Arsenio signed the Deeds of Assignment
selling, and endorsing, the fifteen checks of Great Asian to Bancasia. On the face
of the Deeds of Assignment, the contracting parties are indisputably Great Asian
and Bancasia as the names of these entities are expressly mentioned therein as
the assignor and assignee, respectively. Great Asian claims that Arsenio signed
the Deeds of Assignment in his personal capacity because Arsenio signed above
his printed name, below which was the word "Assignor", thereby making Arsenio
the assignor. Great Asian conveniently omits to state that the first paragraph of
the Deeds expressly contains the following words: "the ASSIGNOR, Great Asian
Sales Center, a domestic corporation x x x herein represented by its Treasurer
Arsenio Lim Piat, Jr." The assignor is undoubtedly Great Asian, represented by its
Treasurer, Arsenio. The only issue to determine is whether the Deeds of
Assignment are indeed the transactions the board of directors of Great Asian
authorized Arsenio to sign under the two board resolutions.
Under the Deeds of Assignment, Great Asian sold fifteen postdated checks at a
discount, over three months, to Bancasia. The Deeds of Assignment uniformly
state that Great Asian, –
"x x x for valuable consideration received, does hereby SELL,
TRANSFER, CONVEY, and ASSIGN, unto the ASSIGNEE,
BANCASIA FINANCE & INVESTMENT CORP., a domestic
corporation x x x, the following ACCOUNTS RECEIVABLES due and
payable to it, having an aggregate face value of x x x."
The Deeds of Assignment enabled Great Asian to generate instant cash from its
fifteen checks, which were still not due and demandable then. In short, instead of
waiting for the maturity dates of the fifteen postdated checks, Great Asian sold
the checks to Bancasia at less than the total face value of the checks. In
exchange for receiving an amount less than the face value of the checks, Great
Asian obtained immediately much needed cash. Over three months, Great Asian

entered into four transactions of this nature with Bancasia, showing that Great
Asian availed of a discounting line with Bancasia.
In the financing industry, the term "discounting line" means a credit facility with a
financing company or bank, which allows a business entity to sell, on a continuing
basis, its accounts receivable at a discount.12 The term "discount" means the sale
of a receivable at less than its face value. The purpose of a discounting line is to
enable a business entity to generate instant cash out of its receivables which are
still to mature at future dates. The financing company or bank which buys the
receivables makes its profit out of the difference between the face value of the
receivable and the discounted price. Thus, Section 3 (a) of the Financing
Company Act of 1998 provides:
"Financing companies" are corporations x x x primarily organized for
the purpose of extending credit facilities to consumers and to
industrial, commercial or agricultural enterprises by discounting or
factoring commercial papers or accounts receivable, or by buying
and selling contracts, leases, chattel mortgages, or otherevidences of
indebtedness, or by financial leasing of movable as well as
immovable property." (Emphasis supplied)
This definition of "financing companies" is substantially the same definition as in
the old Financing Company Act (R.A. No. 5980).13
Moreover, Section 1 (h) of the New Rules and Regulations adopted by the
Securities and Exchange Commission to implement the Financing Company Act
of 1998 states:
"Discounting" is a type of receivables financing whereby evidences of
indebtedness of a third party, such as installment contracts, promissory notes and
similar instruments, are purchased by, or assigned to, a financing company in an
amount or for a consideration less than their face value." (Emphasis supplied)
Likewise, this definition of "discounting" is an exact reproduction of the definition
of "discounting" in the implementing rules of the old Finance Company Act.
Clearly, the discounting arrangements entered into by Arsenio under the Deeds of
Assignment were the very transactions envisioned in the two board resolutions of
Great Asian to raise funds for its business. Arsenio acted completely within the
limits of his authority under the two board resolutions. Arsenio did exactly what
the board of directors of Great Asian directed and authorized him to do.
Arsenio had all the proper and necessary authority from the board of directors of
Great Asian to sign the Deeds of Assignment and to endorse the fifteen
postdated checks. Arsenio signed the Deeds of Assignment as agent and
authorized signatory of Great Asian under an authority expressly granted by its
board of directors. The signature of Arsenio on the Deeds of Assignment is
effectively also the signature of the board of directors of Great Asian, binding on
the board of directors and on Great Asian itself. Evidently, Great Asian shows its
bad faith in disowning the Deeds of Assignment signed by its own Treasurer, after
receiving valuable consideration for the checks assigned under the Deeds.
Second Issue: Breach of Contract by Great Asian
Bancasia’s complaint against Great Asian is founded on the latter’s breach of
contract under the Deeds of Assignment. The Deeds of Assignment uniformly
stipulate14 as follows:
"If for any reason the receivables or any part thereof cannot be paid
by the obligor/s, the ASSIGNOR unconditionally and irrevocably
agrees to pay the same, assuming the liability to pay, by way of
penalty three per cent (3%) of the total amount unpaid, for the period
of delay until the same is fully paid.
In case of any litigation which the ASSIGNEE may institute to enforce
the terms of this agreement, the ASSIGNOR shall be liable for all the
costs, plus attorney’s fees equivalent to twenty-five (25%) per cent of
the total amount due. Further thereto, the ASSIGNOR agrees that
any and all actions which may be instituted relative hereto shall be
filed before the proper courts of the City of Manila, all other
appropriate venues being hereby waived.
The last Deed of Assignment15 contains the following added stipulation:
"xxx Likewise, it is hereby understood that the warranties which the
ASSIGNOR hereby made are deemed part of the consideration for
this transaction, such that any violation of any one, some, or all of
said warranties shall be deemed as deliberate misrepresentation on
the part of the ASSIGNOR. In such event, the monetary obligation
herein conveyed unto the ASSIGNEE shall be conclusively deemed
defaulted, giving rise to the immediate responsibility on the part of
the ASSIGNOR to make good said obligation, and making the
ASSIGNOR liable to pay the penalty stipulated hereinabove as if the
original obligor/s of the receivables actually defaulted. xxx"
Obviously, there is one vital suspensive condition in the Deeds of Assignment.
That is, in case the drawers fail to pay the checks on maturity, Great Asian
obligated itself to pay Bancasia the full face value of the dishonored checks,
including penalty and attorney’s fees. The failure of the drawers to pay the checks
is a suspensive condition,16 the happening of which gives rise to Bancasia’s right
to demand payment from Great Asian. This conditional obligation of Great Asian
arises from its written contracts with Bancasia as embodied in the Deeds of
Assignment. Article 1157 of the Civil Code provides that -
"Obligations arise from:
(1) Law;
(2) Contracts;
(3) Quasi-contracts;
(4) Acts or omissions punished by law; and
(5) Quasi-delicts."
By express provision in the Deeds of Assignment, Great Asian unconditionally
obligated itself to pay Bancasia the full value of the dishonored checks. In short,
Great Asian sold the postdated checks on with recourse basis against itself. This
is an obligation that Great Asian is bound to faithfully comply because it has the
force of law as between Great Asian and Bancasia. Article 1159 of the Civil Code
further provides that –
"Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith."
Great Asian and Bancasia agreed on this specific with recourse stipulation,
despite the fact that the receivables were negotiable instruments with the
endorsement of Arsenio. The contracting parties had the right to adopt the with
recourse stipulation which is separate and distinct from the warranties of an
endorser under the Negotiable Instruments Law. Article 1306 of the Civil Code
provides that –
"The contracting parties may establish such stipulations, clauses,
terms and conditions as they may deem convenient, provided they
are not contrary to law, morals, good customs, public order, or public
policy."
The explicit with recourse stipulation against Great Asian effectively enlarges, by
agreement of the parties, the liability of Great Asian beyond that of a mere
endorser of a negotiable instrument. Thus, whether or not Bancasia gives notice
of dishonor to Great Asian, the latter remains liable to Bancasia because of
the with recourse stipulation which is independent of the warranties of an
endorser under the Negotiable Instruments Law.
There is nothing in the Negotiable Instruments Law or in the Financing Company
Act (old or new), that prohibits Great Asian and Bancasia parties from adopting
the with recourse stipulation uniformly found in the Deeds of Assignment. Instead
of being negotiated, a negotiable instrument may be assigned.17 Assignment of a
negotiable instrument is actually the principal mode of conveying accounts
receivable under the Financing Company Act. Since in discounting of receivables
the assignee is subrogated as creditor of the receivable, the endorsement of the
negotiable instrument becomes necessary to enable the assignee to collect from
the drawer. This is particularly true with checks because collecting banks will not
accept checks unless endorsed by the payee. The purpose of the endorsement is
merely to facilitate collection of the proceeds of the checks.
Nego Instruments Set 1 (#s1-70) Page 49 of 112
Lumbas. Dadat
The purpose of the endorsement is not to make the assignee finance company a
holder in due course because policy considerations militate against according
finance companies the rights of a holder in due course.18 Otherwise, consumers
who purchase appliances on installment, giving their promissory notes or checks
to the seller, will have no defense against the finance company should the
appliances later turn out to be defective. Thus, the endorsement does not operate
to make the finance company a holder in due course. For its own protection,
therefore, the finance company usually requires the assignor, in a separate and
distinct contract, to pay the finance company in the event of dishonor of the notes
or checks.
As endorsee of Great Asian, Bancasia had the option to proceed against Great
Asian under the Negotiable Instruments Law. Had it so proceeded, the Negotiable
Instruments Law would have governed Bancasia’s cause of action. Bancasia,
however, did not choose this route. Instead, Bancasia decided to sue Great Asian
for breach of contract under the Civil Code, a right that Bancasia had under the
express with recourse stipulation in the Deeds of Assignment.
The exercise by Bancasia of its option to sue for breach of contract under the
Civil Code will not leave Great Asian holding an empty bag. Great Asian, after
paying Bancasia, is subrogated back as creditor of the receivables. Great Asian
can then proceed against the drawers who issued the checks. Even if Bancasia
failed to give timely notice of dishonor, still there would be no prejudice whatever
to Great Asian. Under the Negotiable Instruments Law, notice of dishonor is not
required if the drawer has no right to expect or require the bank to honor the
check, or if the drawer has countermanded payment.19 In the instant case, all the
checks were dishonored for any of the following reasons: "account closed",
"account under garnishment", insufficiency of funds", or "payment stopped". In the
first three instances, the drawers had no right to expect or require the bank to
honor the checks, and in the last instance, the drawers had countermanded
payment.
Moreover, under common law, delay in notice of dishonor, where such notice is
required, discharges the drawer only to the extent of the loss caused by the
delay.20 This rule finds application in this jurisdiction pursuant to Section 196 of
the Negotiable Instruments Law which states, "Any case not provided for in this
Act shall be governed by the provisions of existing legislation, or in default
thereof, by the rules of the Law Merchant." Under Section 186 of the Negotiable
Instruments Law, delay in the presentment of checks discharges the drawer.
However, Section 186 refers only to delay in presentment of checks but is silent
on delay in giving notice of dishonor. Consequently, the common law or Law
Merchant can supply this gap in accordance with Section 196 of the Negotiable
Instruments Law.
One other issue raised by Great Asian, that of lack of consideration for the Deeds
of Assignment, is completely unsubstantiated. The Deeds of Assignment
uniformly provide that the fifteen postdated checks were assigned to Bancasia
"for valuable consideration." Moreover, Article 1354 of the Civil Code states that,
"Although the cause is not stated in the contract, it is presumed that it exists and
is lawful, unless the debtor proves the contrary." The record is devoid of any
showing on the part of Great Asian rebutting this presumption. On the other hand,
Bancasia’s Loan Section Manager, Cynthia Maclan, testified that Bancasia paid
Great Asian a consideration at the discount rate of less than 24% of the face
value of the postdated checks.21 Moreover, in its verified petition for voluntary
insolvency, Great Asian admitted its debt to Bancasia when it listed Bancasia as
one of its creditors, an extra-judicial admission that Bancasia proved when it
formally offered in evidence the verified petition for insolvency.22 The Insolvency
Law requires the petitioner to submit a schedule of debts that must "contain a full
and true statement of all his debts and liabilities."23 The Insolvency Law even
requires the petitioner to state in his verification that the schedule of debts
contains "a full, correct and true discovery of all my debts and liabilities x x
x."24 Great Asian cannot now claim that the listing of Bancasia as a creditor was
not an admission of its debt to Bancasia but merely an acknowledgment that
Bancasia had sent a demand letter to Great Asian.

Great Asian, moreover, claims that the assignment of the checks is not a loan
accommodation but a sale of the checks. With the sale, ownership of the checks
passed to Bancasia, which must now, according to Great Asian, sue the drawers
and indorser of the check who are the parties primarily liable on the checks. Great
Asian forgets that under the Deeds of Assignment, Great Asian expressly
undertook to pay the full value of the checks in case of dishonor. Again, we
reiterate that this obligation of Great Asian is separate and distinct from its
warranties as indorser under the Negotiable Instruments Law.
Great Asian is, however, correct in saying that the assignment of the checks is a
sale, or more properly a discounting, of the checks and not a loan
accommodation. However, it is precisely because the transaction is a sale or a
discounting of receivables, embodied in separate Deeds of Assignment, that the
relevant provisions of the Civil Code are applicable and not the Negotiable
Instruments Law.
At any rate, there is indeed a fine distinction between a discounting line and a
loan accommodation. If the accounts receivable, like postdated checks, are sold
for a consideration less than their face value, the transaction is one of
discounting, and is subject to the provisions of the Financing Company Act. The
assignee is immediately subrogated as creditor of the accounts receivable.
However, if the accounts receivable are merely used as collateral for the loan, the
transaction is only a simple loan, and the lender is not subrogated as creditor until
there is a default and the collateral is foreclosed.
In summary, Great Asian’s four contracts assigning its fifteen postdated checks to
Bancasia expressly stipulate the suspensive condition that in the event the
drawers of the checks fail to pay, Great Asian itself will pay Bancasia. Since the
common condition in the contracts had transpired, an obligation on the part of
Great Asian arose from the four contracts, and that obligation is to pay Bancasia
the full value of the checks, including the stipulated penalty and attorney’s fees.
Third Issue: The liability of surety Tan Chong Lin
Tan Chong Lin, the President of Great Asian, is being sued in his personal
capacity based on the Surety Agreements he signed wherein he solidarily held
himself liable with Great Asian for the payment of its debts to Bancasia. The
Surety Agreements contain the following common condition:
"Upon failure of the Principal to pay at maturity, with or without
demand, any of the obligations above mentioned, or in case of the
Principal’s failure promptly to respond to any other lawful demand
made by the Creditor, its successors, administrators or assigns, both
the Principal and the Surety/ies shall be considered in default and the
Surety/ies agree/s to pay jointly and severally to the Creditor all
outstanding obligations of the Principal, whether due or not due, and
whether held by the Creditor as Principal or agent, and it is agreed
that a certified statement by the Creditor as to the amount due from
the Principal shall be accepted by the Surety/ies as correct and final
for all legal intents and purposes."
Indisputably, Tan Chong Lin explicitly and unconditionally bound himself to pay
Bancasia, solidarily with Great Asian, if the drawers of the checks fail to pay on
due date. The condition on which Tan Chong Lin’s obligation hinged had
happened. As surety, Tan Chong Lin automatically became liable for the entire
obligation to the same extent as Great Asian.
Tan Chong Lin, however, contends that the following warranties in the Deeds of
Assignment enlarge or increase his risks under the Surety Agreements:
"The ASSIGNOR warrants:
1. the soundness of the receivables herein assigned;
2. that said receivables are duly noted in its books and are supported
by appropriate documents;
3. that said receivables are genuine, valid and subsisting;
4. that said receivables represent bona fide sale of goods,
merchandise, and/or services rendered in the ordinary course of its
business transactions;
5. that the obligors of the receivables herein assigned are solvent;
6. that it has valid and genuine title to and indefeasible right to
dispose of said accounts;
7. that said receivables are free from all liens and encumbrances;
8. that the said receivables are freely and legally transferable, and
that the obligor/s therein will not interpose any objection to this
assignment, and has in fact given his/their consent hereto."
Tan Chong Lin maintains that these warranties in the Deeds of Assignment
materially altered his obligations under the Surety Agreements, and therefore he
is released from any liability to Bancasia. Under Article 1215 of the Civil Code,
what releases a solidary debtor is a "novation, compensation, confusion or
remission of the debt" made by the creditor with any of the solidary debtors.
These warranties, however, are the usual warranties made by one who discounts
receivables with a financing company or bank. The Surety Agreements, written on
the letter head of "Bancasia Finance & Investment Corporation," uniformly state
that "Great Asian Sales Center x x x has obtained and/or desires to obtain loans,
overdrafts, discounts and/or other forms of credits from" Bancasia. Tan Chong Lin
was clearly on notice that he was holding himself as surety of Great Asian which
was discounting postdated checks issued by its buyers of goods and
merchandise. Moreover, Tan Chong Lin, as President of Great Asian, cannot
feign ignorance of Great Asian’s business activities or discounting transactions
with Bancasia. Thus, the warranties do not increase or enlarge the risks of Tan
Chong Lin under the Surety Agreements. There is, moreover, no novation of the
debt of Great Asian that would warrant release of the surety.
In any event, the provisions of the Surety Agreements are broad enough to
include the obligations of Great Asian to Bancasia under the warranties. The first
Surety Agreement states that:
"x x x herein Surety/ies, jointly and severally among themselves and
likewise with principal, hereby agree/s and bind/s himself/themselves
to pay at maturity all the notes, drafts, bills of exchange, overdraft
and other obligations of every kind which the Principal may now or
may hereafter owe the Creditor, including extensions or renewals
thereof in the sum *** ONE MILLION ONLY*** PESOS
(P1,000,000.00), Philippine Currency, plus stipulated interest thereon
at the rate of sixteen percent (16%) per annum, or at such increased
rate of interest which the Creditor may charge on the Principal’s
obligations or renewals or the reduced amount thereof, plus all the
costs and expenses which the Creditor may incur in connection
therewith.
xxx
Upon failure of the Principal to pay at maturity, with or without
demand, any of the obligations above mentioned, or in case of the
Principal’s failure promptly to respond to any other lawful demand
made by the Creditor, its successors, administrators or assigns, both
the Principal and the Surety/ies shall be considered in default and
the Surety/ies agree/s to pay jointly and severally to the Creditor all
outstanding obligations of the Principal, whether due or not due, and
whether held by the Creditor as Principal or agent, and it is agreed
that a certified statement by the Creditor as to the amount due from
the Principal shall be accepted by the Surety/ies as correct and final
for all legal intents and purposes. (Emphasis supplied)
The second Surety Agreement contains the following provisions:
"x x x herein Surety/ies, jointly and severally among themselves and
likewise with PRINCIPAL, hereby agree and bind themselves to pay
at maturity all the notes, drafts, bills of exchange, overdraft and other
obligations of every kind which the PRINCIPAL may now or may
hereafter owe the Creditor, including extensions and/or renewals
thereof in the principal sum not to exceed TWO MILLION
(P2,000,000.00) PESOS, Philippine Currency, plus stipulated interest
thereon, or such increased or decreased rate of interest which the
Creditor may charge on the principal sum outstanding pursuant to the
rules and regulations which the Monetary Board may from time to
Nego Instruments Set 1 (#s1-70) Page 50 of 112
Lumbas. Dadat
time promulgate, together with all the cost and expenses which the
CREDITOR may incur in connection therewith.
If for any reason whatsoever, the PRINCIPAL should fail to pay at
maturity any of the obligations or amounts due to the CREDITOR, or
if for any reason whatsoever the PRINCIPAL fails to promptly
respond to and comply with any other lawful demand made by the
CREDITOR, or if for any reason whatsoever any obligation of the
PRINCIPAL in favor of any person or entity should be considered as
defaulted, then both the PRINCIPAL and the SURETY/IES shall be
considered in default under the terms of this Agreement. Pursuant
thereto, the SURETY/IES agree/s to pay jointly and severally with the
PRINCIPAL, all outstanding obligations of the CREDITOR, whether
due or not due, and whether owing to the PRINCIPAL in its personal
capacity or as agent of any person, endorsee, assignee or
transferee. x x x. (Emphasis supplied)
Article 1207 of the Civil Code provides, "xxx There is a solidary liability only when
the obligation expressly so states, or when the law or nature of the obligation
requires solidarity." The stipulations in the Surety Agreements undeniably
mandate the solidary liability of Tan Chong Lin with Great Asian. Moreover, the
stipulations in the Surety Agreements are sufficiently broad, expressly
encompassing "all the notes, drafts, bills of exchange, overdraft and other
obligations of every kind which the PRINCIPAL may now or may hereafter owe
the Creditor". Consequently, Tan Chong Lin must be held solidarily liable with
Great Asian for the nonpayment of the fifteen dishonored checks, including
penalty and attorney’s fees in accordance with the Deeds of Assignment.
The Deeds of Assignment stipulate that in case of suit Great Asian shall pay
attorney’s fees equivalent to 25% of the outstanding debt. The award of attorney’s
fees in the instant case is justified,25 not only because of such stipulation, but also
because Great Asian and Tan Chong Lin acted in gross and evident bad faith in
refusing to pay Bancasia’s plainly valid, just and demandable claim. We deem it
just and equitable that the stipulated attorney’s fee should be awarded to
Bancasia.
The Deeds of Assignment also provide for a 3% penalty on the total amount due
in case of failure to pay, but the Deeds are silent on whether this penalty is a
running monthly or annual penalty. Thus, the 3% penalty can only be considered
as a one-time penalty. Moreover, the Deeds of Assignment do not provide for
interest if Great Asian fails to pay. We can only award Bancasia legal interest at
12% interest per annum, and only from the time it filed the complaint because the
records do not show that Bancasia made a written demand on Great Asian prior
to filing the complaint.26 Bancasia made an extrajudicial demand on Tan Chong
Lin, the surety, but not on the principal debtor, Great Asian.
WHEREFORE, the assailed Decision of the Court of Appeals in CA-G.R. CV No.
20167 is AFFIRMED with MODIFICATION. Petitioners are ordered to pay,
solidarily, private respondent the following amounts: (a) P1,042,005.00 plus 3%
penalty thereon, (b) interest on the total outstanding amount in item (a) at the
legal rate of 12% per annum from the filing of the complaint until the same is fully
paid, (c) attorney’s fees equivalent to 25% of the total amount in item (a),
including interest at 12% per annum on the outstanding amount of the attorney’s
fees from the finality of this judgment until the same is fully paid, and (c) costs of
suit.SO ORDERED.
THIRD DIVISIONG.R. No. 129910 September 5, 2006
THE INTERNATIONAL CORPORATE BANK, INC., petitioner, vs.COURT OF
APPEALS and PHILIPPINE NATIONAL BANK, respondents.
DECISION
CARPIO, J.:
The Case
Before the Court is a petition for review1 assailing the 9 August 1994 Amended
Decision2 and the 16 July 1997 Resolution3 of the Court of Appeals in CA-G.R.
CV No. 25209.
The Antecedent Facts
 Nego Instruments Set 1 (#s1-70) Page 51 of 112
Lumbas. Dadat
The case originated from an action for collection of sum of money filed on 16 respondent, as drawee bank, about the status of the checks before paying their inspite thereof, avail itself of the maximum period allowed by the
March 1982 by the International Corporate Bank, Inc.4 ("petitioner") against the value. Since the immediate cause of petitioner’s loss was the lack of caution of its above-cited Circular. The discovery must be made within a
Philippine National Bank ("respondent"). The case was raffled to the then Court of personnel, the trial court held that petitioner is not entitled to recover the value of reasonable time taking into consideration the facts and
First Instance (CFI) of Manila, Branch 6. The complaint was amended on 19 the checks from respondent. circumstances of the case. In other words, the aforementioned C.B.
March 1982. The case was eventually re-raffled to the Regional Trial Court of The dispositive portion of the trial court’s Decision reads: Circular does not provide the drawee bank the license to be grossly
Manila, Branch 52 ("trial court"). WHEREFORE, judgment is hereby rendered dismissing both the negligent on the one hand nor does it preclude the collecting bank
The Ministry of Education and Culture issued 15 checks5 drawn against complaint and the counterclaim. Costs shall, however be assessed from raising available defenses even if the check is properly returned
respondent which petitioner accepted for deposit on various dates. The checks against the plaintiff.SO ORDERED.7 within the 24-hour period after discovery of the material alteration.10
are as follows: Petitioner appealed the trial court’s Decision before the Court of Appeals. The Court of Appeals rejected the trial court’s opinion that petitioner could have
Check Number Date Payee Amount The Ruling of the Court of Appeals verified the status of the checks by telephone call since such imposition is not
7-3694621-4 7-20-81 Trade Factors, Inc. P 97,500.00 In its 10 October 1991 Decision,8 the Court of Appeals reversed the trial court’s required under Central Bank rules. The dispositive portion of the 10 October 1991
7-3694609-6 7-27-81 Romero D. 98,500.50 Decision. Applying Section 4(c) of Central Bank Circular No. 580, series of Decision reads:
Palmares 1977,9 the Court of Appeals held that checks that have been materially altered PREMISES CONSIDERED, the decision appealed from is hereby
shall be returned within 24 hours after discovery of the alteration. However, the REVERSED and the defendant-appellee Philippine National Bank is
7-3666224-4 8-03-81 Trade Factors, Inc. 99,800.00 Court of Appeals ruled that even if the drawee bank returns a check with material declared liable for the value of the fifteen checks specified and
7-3528348-4 8-07-81 Trade Factors, Inc. 98,600.00 alterations after discovery of the alteration, the return would not relieve the enumerated in the decision of the trial court (page 3) in the amount
7-3666225-5 8-10-81 Antonio Lisan 98,900.00 drawee bank from any liability for its failure to return the checks within the 24-hour of P1,447,920.00SO ORDERED.11
7-3688945-6 8-10-81 Antonio Lisan 97,700.00 clearing period. The Court of Appeals explained: Respondent filed a motion for reconsideration of the 10 October 1991 Decision. In
7-4535674-1 8-21-81 Golden City Trading 95,300.00 Does this mean that, as long as the drawee bank returns a check its 9 August 1994 Amended Decision, the Court of Appeals reversed itself and
7-4535675-2 8-21-81 Red Arrow Trading 96,400.00 with material alteration within 24 hour[s] after discovery of such affirmed the Decision of the trial court dismissing the complaint.
alteration, such return would have the effect of relieving the bank of In reversing itself, the Court of Appeals held that its 10 October 1991 Decision
7-4535699-5 8-24-81 Antonio Lisan 94,200.00
any liability whatsoever despite its failure to return the check within failed to appreciate that the rule on the return of altered checks within 24 hours
7-4535700-6 8-24-81 Antonio Lisan 95,100.00 the 24- hour clearing house rule? from the discovery of the alteration had been duly passed by the Central Bank
7-4697902-2 9-18-81 Ace Enterprises, Inc. 96,000.00 We do not think so. and accepted by the members of the banking system. Until the rule is repealed or
7-4697925-6 9-18-81 Golden City Trading 93,030.00 Obviously, such bank cannot be held liable for its failure to return the amended, the rule has to be applied.
7-4697011-6 10-02-81 Wintrade Marketing 90,960.00 check in question not later than the next regular clearing. However, Petitioner moved for the reconsideration of the Amended Decision. In its 16 July
7-4697909-4 10-02-81 ABC Trading, Inc. 99,300.00 this Court is of the opinion and so holds that it could still be held 1997 Resolution, the Court of Appeals denied the motion for lack of merit.
liable if it fails to exercise due diligence in verifying the alterations Hence, the recourse to this Court.
7-4697922-3 10-05-81 Golden Enterprises 96,630.00
made. In other words, such bank would still be expected, nay The Issues
The checks were deposited on the following dates for the following accounts: required, to make the proper verification before the 24-hour regular Petitioner raises the following issues in its Memorandum:
Check Number Date Deposited Account Deposited clearing period lapses, or in cases where such lapses may be 1. Whether the checks were materially altered;
7-3694621-4 7-23-81 CA 0060 02360 3 deemed inevitable, that the required verification should be made 2. Whether respondent was negligent in failing to recognize within a
7-3694609-6 7-28-81 CA 0060 02360 3 within a reasonable time. reasonable period the altered checks and in not returning the checks
7-3666224-4 8-4-81 CA 0060 02360 3 The implication of the rule that a check shall be returned within the within the period; and
7-3528348-4 8-11-81 CA 0060 02360 3 24-hour clearing period is that if the collecting bank paid the check 3. Whether the motion for reconsideration filed by respondent was
before the end of the aforesaid 24-hour clearing period, it would be out of time thus making the 10 October 1991 Decision final and
7-3666225-5 8-11-81 SA 0061 32331 7
responsible therefor such that if the said check is dishonored and executory.12
7-3688945-6 8-17-81 CA 0060 30982 5 returned within the 24-hour clearing period, the drawee bank cannot The Ruling of This Court
7-4535674-1 8-26-81 CA 0060 02360 3 be held liable. Would such an implication apply in the case of Filing of the Petition under both Rules 45 and 65
7-4535675-2 8-27-81 CA 0060 02360 3 materially altered checks returned within 24 hours after discovery? Respondent asserts that the petition should be dismissed outright since petitioner
7-4535699-5 8-31-81 CA 0060 30982 5 This Court finds nothing in the letter of the above-cited C.B. Circular availed of a wrong mode of appeal. Respondent cites Ybañez v. Court of
7-4535700-6 8-24-81 SA 0061 32331 7 that would justify a negative answer. Nonetheless, the drawee bank Appeals13 where the Court ruled that "a petition cannot be subsumed
could still be held liable in certain instances. Even if the return of the simultaneously under Rule 45 and Rule 65 of the Rules of Court, and neither may
7-4697902-2 9-23-81 CA 0060 02360 3
check/s in question is done within 24 hours after discovery, if it can petitioners delegate upon the court the task of determining under which rule the
7-4697925-6 9-23-81 CA 0060 30982 5 be shown that the drawee bank had been patently negligent in the petition should fall."
7-4697011-6 10-7-81 CA 0060 02360 3 performance of its verification function, this Court finds no reason The remedies of appeal and certiorari are mutually exclusive and not alternative
7-4697909-4 10-7-81 CA 0060 30982 56 why the said bank should be relieved of liability. or successive.14 However, this Court may set aside technicality for justifiable
After 24 hours from submission of the checks to respondent for clearing, Although banking practice has it that the presumption of clearance is reasons. The petition before the Court is clearly meritorious. Further, the petition
petitioner paid the value of the checks and allowed the withdrawals of the conclusive when it comes to the application of the 24-hour clearing was filed on time both under Rules 45 and 65.15 Hence, in accordance with the
deposits. However, on 14 October 1981, respondent returned all the checks to period, the same principle may not be applied to the 24-hour period liberal spirit which pervades the Rules of Court and in the interest of justice,16 we
petitioner without clearing them on the ground that they were materially altered. vis-a-vis material alterations in the sense that the drawee bank which will treat the petition as having been filed under Rule 45.
Thus, petitioner instituted an action for collection of sums of money against returns materially altered checks within 24 hours after discovery Alteration of Serial Number Not Material
respondent to recover the value of the checks. would be conclusively relieved of any liability thereon. This is The alterations in the checks were made on their serial numbers.
The Ruling of the Trial Court because there could well be various intervening events or factors that Sections 124 and 125 of Act No. 2031, otherwise known as the Negotiable
The trial court ruled that respondent is expected to use reasonable business could affect the rights and obligations of the parties in cases such as Instruments Law, provide:
practices in accepting and paying the checks presented to it. Thus, respondent the instant one including patent negligence on the part of the drawee SEC. 124. Alteration of instrument; effect of. ― Where a negotiable
cannot be faulted for the delay in clearing the checks considering the ingenuity in bank resulting in an unreasonable delay in detecting the alterations. instrument is materially altered without the assent of all parties liable
which the alterations were effected. The trial court observed that there was no While it is true that the pertinent proviso in C.B. Circular No. 580 thereon, it is avoided, except as against a party who has himself
attempt from petitioner to verify the status of the checks before petitioner paid the allows the drawee bank to return the altered check within the period made, authorized, or assented to the alteration and subsequent
value of the checks or allowed withdrawal of the deposits. According to the trial "provided by law for filing a legal action", this does not mean that this indorsers.
court, petitioner, as collecting bank, could have inquired by telephone from would entitle or allow the drawee bank to be grossly negligent and,

But when an instrument has been materially altered and is in the
hands of a holder in due course, not a party to the alteration, he may
enforce payment thereof according to its original tenor.
SEC. 125. What constitutes a material alteration. ― Any alteration
which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment;
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be
made;
or which adds a place of payment where no place of payment is
specified, or any other change or addition which alters the effect of
the instrument in any respect, is a material alteration.
The question on whether an alteration of the serial number of a check is a
material alteration under the Negotiable Instruments Law is already a settled
matter. In Philippine National Bank v. Court of Appeals, this Court ruled that the
alteration on the serial number of a check is not a material alteration. Thus:
An alteration is said to be material if it alters the effect of the
instrument. It means an unauthorized change in an instrument that
purports to modify in any respect the obligation of a party or an
unauthorized addition of words or numbers or other change to an
incomplete instrument relating to the obligation of a party. In other
words, a material alteration is one which changes the items which
are required to be stated under Section 1 of the Negotiable
Instrument[s] Law.
Section 1 of the Negotiable Instruments Law provides:
Section 1. ― Form of negotiable instruments. An instrument to be
negotiable must conform to the following requirements:
(a) It must be in writing and signed by the maker or
drawer;
(b) Must contain an unconditional promise or order to
pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or
determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he
must be named or otherwise indicated therein with
reasonable certainty.
In his book entitled "Pandect of Commercial Law and Jurisprudence,"
Justice Jose C. Vitug opines that "an innocent alteration (generally,
changes on items other than those required to be stated under Sec.
1, N.I.L.) and spoliation (alterations done by a stranger) will not avoid
the instrument, but the holder may enforce it only according to its
original tenor.
xxxx
The case at the bench is unique in the sense that what was altered is the serial
number of the check in question, an item which, it can readily be observed, is not
an essential requisite for negotiability under Section 1 of the Negotiable
Instruments Law. The aforementioned alteration did not change the relations
between the parties. The name of the drawer and the drawee were not altered.
The intended payee was the same. The sum of money due to the payee
remained the same. x x x
xxxx
The check’s serial number is not the sole indication of its origin. As succinctly
found by the Court of Appeals, the name of the government agency which issued
the subject check was prominently printed therein. The check’s issuer was
therefore sufficiently identified, rendering the referral to the serial number
redundant and inconsequential. x x x
xxxx
Petitioner, thus cannot refuse to accept the check in question on the ground that
the serial number was altered, the same being an immaterial or innocent one.17
Likewise, in the present case the alterations of the serial numbers do not
constitute material alterations on the checks.
Incidentally, we agree with the petitioner’s observation that the check in
the PNB case appears to belong to the same batch of checks as in the present
case. The check in the PNB case was also issued by the Ministry of Education
and Culture. It was also drawn against PNB, respondent in this case. The serial
number of the check in the PNB case is 7-3666-223-3 and it was issued on 7
August 1981.
Timeliness of Filing of Respondent’s Motion for Reconsideration
Respondent filed its motion for reconsideration of the 10 October 1991 Decision
on 6 November 1991. Respondent’s motion for reconsideration states that it
received a copy of the 10 October 1991 Decision on 22 October 1991.18 Thus, it
appears that the motion for reconsideration was filed on time. However, the
Registry Return Receipt shows that counsel for respondent or his agent received
a copy of the 10 October 1991 Decision on 16 October 1991,19 not on 22 October
1991 as respondent claimed. Hence, the Court of Appeals is correct when it
noted that the motion for reconsideration was filed late. Despite its late filing, the
Court of Appeals resolved to admit the motion for reconsideration "in the interest
of substantial justice."20
There are instances when rules of procedure are relaxed in the interest of justice.
However, in this case, respondent did not proffer any explanation for the late filing
of the motion for reconsideration. Instead, there was a deliberate attempt to
deceive the Court of Appeals by claiming that the copy of the 10 October 1991
Decision was received on 22 October 1991 instead of on 16 October 1991. We
find no justification for the posture taken by the Court of Appeals in admitting the
motion for reconsideration. Thus, the late filing of the motion for reconsideration
rendered the 10 October 1991 Decision final and executory.
The 24-Hour Clearing Time
The Court will not rule on the proper application of Central Bank Circular No. 580
in this case. Since there were no material alterations on the checks, respondent
as drawee bank has no right to dishonor them and return them to petitioner, the
collecting bank.21 Thus, respondent is liable to petitioner for the value of the
checks, with legal interest from the time of filing of the complaint on 16 March
1982 until full payment.22 Further, considering that respondent’s motion for
reconsideration was filed late, the 10 October 1991 Decision, which held
respondent liable for the value of the checks amounting to P1,447,920, had
become final and executory.
WHEREFORE, we SET ASIDE the 9 August 1994 Amended Decision and the 16
July 1997 Resolution of the Court of Appeals. We rule that respondent Philippine
National Bank is liable to petitioner International Corporate Bank, Inc. for the
value of the checks amounting to P1,447,920, with legal interest from 16 March
1982 until full payment. Costs against respondent.SO ORDERED.
G.R. No. 161756 December 16, 2005
VICTORIA J. ILANO represented by her Attorney-in-fact, MILO ANTONIO C.
ILANO, Petitioners, vs.
HON. DOLORES L. ESPAÑOL, in her capacity as Executive Judge, RTC of
Imus, Cavite, Br. 90, and, AMELIA ALONZO, EDITH CALILAP, DANILO
CAMACLANG, ESTELA CAMACLANG, ALLAN CAMACLANG, LENIZA
REYES, EDWIN REYES, JANE BACAREL, CHERRY CAMACLANG, FLORA
CABRERA, ESTELITA LEGASPI, CARMENCITA GONZALES, NEMIA
CASTRO, GLORIA DOMINGUEZ, ANNILYN C. SABALE and several JOHN
DOES, Respondents.
DECISION
CARPIO MORALES, J.:
The Court of Appeals having affirmed the dismissal by Branch 20 of the Regional
Trial Court (RTC) of Cavite at Imus, for lack of cause of action, Civil Case No.
2079-00, the complaint filed by herein petitioner Victoria J. Ilano
forRevocation/Cancellation of Promissory Notes and Bills of
Nego Instruments Set 1 (#s1-70) Page 52 of 112
Lumbas. Dadat
Exchange (Checks) with Damages and Prayer for Preliminary Injunction or
Temporary Restraining Order (TRO),1 against herein respondents 15 named
defendants (and several John Does), a recital of the pertinent allegations in the
complaint, quoted verbatim as follows, is in order:
xxx
3. That defendant AMELIA O. ALONZO, is a trusted employee of [petitioner]. She
has been with them for several years already, and through the years, defendant
ALONZO was able to gain the trust and confidence of [petitioner] and her family;
4. That due to these trust and confidence reposed upon defendant ALONZO by
[petitioner], there were occasions when defendant ALONZO was entrusted with
[petitioner’s] METROBANK Check Book containing either signed or unsigned
blank checks, especially in those times when [petitioner] left for the United States
for medical check-up;
5. Sometime during the second week of December 1999, or thereabouts,
defendant ALONZO by means of deceit and abuse of confidence succeeded
in procuring Promissory Notes and signed blank checks from [petitioner]
who was then recuperating from illness;
6. That as stated, aside from the said blank checks, defendant ALONZO
likewise succeeded in inducing[petitioner] to sign the Promissory Notes
antedated June 8, 1999 in the amount of PESOS: ONE MILLION FOUR
HUNDRED TWENTY EIGHT THOUSAND TWO HUNDRED SEVENTY TWO
(Php 1,428,272.00) payable to defendants EDITH CALILAP and DANILO
CALILAP, and another Promissory Noted dated March 1999 in the amount of
PESOS: ONE MILLION (Php 1,000,000.00) payable to the same defendants
EDITH CALILAP and DANILO CALILAP, copies of said Promissory Notes are
hereto attached as Annexes "A" and "A-1" hereof;
7. That another Promissory Note antedated October 1, 1999 thru the
machination of defendant ALONZO, was signed by [petitioner] in the amount
of PESOS: THREE MILLION FORTY SIX THOUSAND FOUR HUNDRED ONE
(Php 3,046,401.00) excluding interest, in favor of her co-defendants ESTELA
CAMACLANG, ALLAN CAMACLANG, LENIZA REYES, EDWIN REYES, JANE
BACAREL and CHERRY CAMACLANG, a copy of said Promissory Note is
hereto attached as Annex "B" hereof;
8. That the Promissory Notes and blank checks were procured thru fraud
and deceit. The consent of the [petitioner] in the issuance of the two (2)
aforementioned Promissory Notes was vitiated. Furthermore, the same were
issued for want of consideration, hence, the same should be cancelled, revoked
or declared null and void;
9. That as clearly shown heretofore, defendant ALONZO in collusion with her co-
defendants, ESTELA CAMACLANG, ALLAN CAMACLANG and ESTELITA
LEGASPI likewise was able to induce plaintiff to sign several undated blank
checks, among which are:
· Metrobank Check No. 0111544
· Metrobank Check No. 0111545
· Metrobank Check No. 0111546
· Metrobank Check No. 0111547
· Metrobank Check No. 0111515
all in the total amount of Php 3,031,600.00, copies of said checks are hereto
attached as Annexes "C", "C-1", "C-2", "C-3" and "C-4", respectively;
10. That aside from the checks mentioned heretofore, defendant
ALONZO, confederated and conspired with the following co-defendants,
FLORA CABRERA, NEMIA CASTRO, EDITH CALILAP, DANILO CALILAP,
GLORIA DOMINGUEZ, CARMENCITA GONZALES and ANNILYN C.
SABALE and took advantage of the signature of [petitioner] in said blank
checks which were later on completed by them indicated opposite their
respective names and the respective amount thereof, as follows:
NAME AMOUNT METRO
Flora Cabrera Php 337,584.58 011146
Flora Cabrera 98,000.00 011151
Nemia Castro 100,000.00 011154

Nemia Castro 150,000.00
Edith Calilap/Danilo Calilap 490,000.00
Edith Calilap/Danilo Calilap 790,272.00
Edith Calilap/Danilo Calilap 1,220,000.00
Gloria Dominguez/ 1,046,040.00
Carmencita Gonzales
Annilyn C. Sable 150,000.00
Annilyn C. Sable 250,000.00
Annilyn C. Sable 186,000.00
Copy attached as Annexes "D", "D-1", "D-2", "D-3", "D-4", "D-5", "D-6", "D-7", "D-
8", "D-9" and "D-10", respectively;
Furthermore, defendant ALONZO colluded and conspired with defendant
NEMIA CASTO in procuring the signature of [petitioner] in documents
denominated as "Malayang Salaysay" dated July 22, 1999 in the amount of
PESOS: ONE HUNDRED FIFTY THOUSAND (Php 150,000.00) and another
"Malayang Salaysay" dated November 22, 1999 in the amount of PESOS:
ONE HUNDRED THOUSAND (Php 100,000.00) Annexes "D-11" and "D-12"
hereof;
11. That said defendants took undue advantage of the signature of
[petitioner] in the said blank checks and furthermore forged and or falsified
the signature of [petitioner] in other unsigned checks and as it was made to
appear that said [petitioner] is under the obligation to pay them several
amounts of money, when in truth and in fact, said [petitioner] does not owe
any of said defendant any single amount;
12. That the issuance of the aforementioned checks or Promissory Notes or
the aforementioned "Malayang Salaysay" to herein defendants were tainted
with fraud and deceit, and defendants conspired with one another to
defraud herein [petitioner] as the aforementioned documents were issued
for want of consideration;
13. That the aforesaid defendants conspiring and confederating together and
helping one another committed acts of falsification and defraudation which
they should be held accountable under law;
14. The foregoing acts, and transactions, perpetrated by herein defendants
in all bad faith and malice, with malevolence and selfish intent are causing
anxiety, tension, sleepless nights, wounded feelings, and embarrassment to
[petitioner] entitling her to moral damages of at least in the amount of PESOS:
FIVE HUNDRED THOUSAND (Php 500,000.00);
15. That to avoid repetition of similar acts and as a correction for the public good,
the defendants should be held liable to [petitioner] for exemplary damages in the
sum of not less than the amount of PESOS: TWO HUNDRED THOUSAND (Php
200,000.00);
16. That to protect the rights and interest of the [petitioner] in the illegal actuations
of the defendants, she was forced to engage the services of counsel for which
she was obliged to pay the sum of PESOS: ONE HUNDRED THOUSAND (Php
100,000.00) by way of Attorney’s fees plus the amount of PESOS: THREE
THOUSAND (Php 3,000.00) per appearance in court;
x x x (Emphasis and underscoring supplied)
The named defendants-herein respondents filed their respective Answers
invoking, among other grounds for dismissal, lack of cause of action, for while the
checks subject of the complaint had been issued on account and for value, some
had been dishonored due to "ACCOUNT CLOSED;" and the allegations in the
complaint are bare and general.
By Order2 dated October 12, 2000, the trial court dismissed petitioner’s complaint
for failure "to allege the ultimate facts"-bases of petitioners claim that her right
was violated and that she suffered damages thereby.
On appeal to the Court of Appeals, petitioner contended that the trial court:
A. . . . FAILED TO STATE CLEARLY AND DISTINCTLY THE FACTS AND LAW
ON WHICH THE APPEALED ORDER WAS BASED, THEREBY RENDERING
SAID ORDER NULL AND VOID.
B. . . . ERRED IN HOLDING THAT THE COMPLAINT FAILED TO ALLEGE
0084078
ULTIMATE FACTS ON WHICH [PETITIONER] RELIES ON HER CLAIM
0111513
THEREBY DISMISSING THE CASE FOR LACK OF CAUSE OF ACTION.
0111512
C. . . . ERRED IN GIVING DUE COURSE TO THE MOTION TO DISMISS THAT
0111462
CONTAINED A FAULTY NOTICE OF HEARING AS THE SAME IS MERELY
ADDRESSED TO THE BRANCH CLERK OF COURT.3
0111543
In its Decision4 of March 21, 2003 affirming the dismissal order of the trial court,
the appellate court held that the elements of a cause of action are absent in the
0085134
case:
0085149
xxx
0085112
Such allegations in the complaint are only general averments of fraud, deceit and
bad faith. There were no allegations of facts showing that the acts complained of
were done in the manner alleged. The complaint did not clearly ascribe the extent
of the liability of each of [respondents]. Neither did it state any right or cause of
action on the part of [petitioner] to show that she is indeed entitled to the relief
prayed for. In the first place, the record shows that subject checks which she
sought to cancel or revoke had already been dishonored and stamped
"ACCOUNT CLOSED." In fact, there were already criminal charges for violation
of Batas Pambansa Blg. 22 filed against [petitioner] previous to the filing of the
civil case for revocation/cancellation. Such being the case, there was actually
nothing more to cancel or revoke. The subject checks could no longer be
negotiated. Thus, [petitioner’s] allegation that the [respondents] were secretly
negotiating with third persons for their delivery and/or assignment, is untenable.
In the second place, we find nothing on the face of the complaint to show that
[petitioner] denied the genuineness or authenticity of her signature on the subject
promissory notes and the allegedly signed blank checks. She merely alleged
abuse of trust and confidence on the part of [Alonzo]. Even assuming arguendo
that such allegations were true, then [petitioner] cannot be held totally blameless
for her predicament as it was by her own negligence that subject
instruments/signed blank checks fell into the hands of third persons. Contrary to
[petitioner’s] allegations, the promissory notes show that some of the
[respondents] were actually creditors of [petitioner] and who were issued the
subject checks as securities for the loan/obligation incurred. Having taken the
instrument in good faith and for value, the [respondents] are therefore considered
holders thereof in due course and entitled to payment.x x x (Underscoring
supplied)
Hence, the present petition for review on certiorari, petitioner faulting the
appellate court:
1. . . . in sustaining the dismissal of the complaint upon the ground of failure to
state a cause of action when there are other several causes of action which
ventilate such causes of action in the complaint;
2. . . . in finding that a requirement that a Decision which should express therein
clearly and distinctly the facts and the law on which it is based does not include
cases which had not reached pre-trial or trial stage;
3. . . . in not finding that a notice of hearing which was addressed to the Clerk of
Court is totally defective and that subsequent action of the court did not cure the
flaw.5
In issue then is whether petitioner’s complaint failed to state a cause of action.
A cause of action has three elements: (1) the legal right of the plaintiff, (2) the
correlative obligation of the defendant, and (3) the act or omission of the
defendant in violation of said legal right. In determining the presence of these
elements, inquiry is confined to the four corners of the complaint6 including its
annexes, they being parts thereof.7 If these elements are absent, the complaint
becomes vulnerable to a motion to dismiss on the ground of failure to state a
cause of action.8
As reflected in the above-quoted allegations in petitioner’s complaint, petitioner is
seeking twin reliefs, one for revocation/cancellation of promissory notes and
checks, and the other for damages.
Thus, petitioner alleged, among other things, that respondents, through "deceit,"
"abuse of confidence" "machination," "fraud," "falsification," "forgery,"
"defraudation," and "bad faith," and "with malice, malevolence and selfish intent,"
Nego Instruments Set 1 (#s1-70) Page 53 of 112
Lumbas. Dadat
succeeded in inducing her to sign antedated promissory notes and some blank
checks, and "[by taking] undue advantage" of her signature on some other blank
checks, succeeded in procuring them, even if there was no consideration for all of
these instruments on account of which she suffered "anxiety, tension, sleepless
nights, wounded feelings and embarrassment."
While some of the allegations may lack particulars, and are in the form of
conclusions of law, the elements of a cause of action are present. For even if
some are not stated with particularity, petitioner alleged 1) her legal right not to be
bound by the instruments which were bereft of consideration and to which her
consent was vitiated; 2) the correlative obligation on the part of the defendants-
respondents to respect said right; and 3) the act of the defendants-respondents in
procuring her signature on the instruments through "deceit," "abuse of
confidence" "machination," "fraud," "falsification," "forgery," "defraudation," and
"bad faith," and "with malice, malevolence and selfish intent."
Where the allegations of a complaint are vague, indefinite, or in the form of
conclusions, its dismissal is not proper for the defendant may ask for more
particulars.9
With respect to the checks subject of the complaint, it is gathered that, except for
Check No. 0084078,10 they were drawn all against petitioner’s Metrobank Account
No. 00703-955536-7.
Annex "D-8"11 of the complaint, a photocopy of Check No. 0085134, shows that it
was dishonored on January 12, 2000 due to "ACCOUNT CLOSED." When
petitioner then filed her complaint on March 28, 2000, all the checks subject
hereof which were drawn against the same closed account were already
rendered valueless or non-negotiable, hence, petitioner had, with respect to them,
no cause of action.
With respect to above-said Check No. 0084078, however, which was drawn
against another account of petitioner, albeit the date of issue bears only the year
− 1999, its validity and negotiable character at the time the complaint was filed on
March 28, 2000 was not affected. For Section 6 of the Negotiable Instruments
Law provides:
Section 6. Omission; seal; particular money. – The validity and negotiable
character of an instrument are not affected by the fact that –
(a) It is not dated; or
(b) Does not specify the value given, or that any value had been given therefor; or
(c) Does not specify the place where it is drawn or the place where it is payable;
or
(d) Bears a seal; or
(e) Designates a particular kind of current money in which payment is to be made.
x x x (Emphasis supplied)
However, even if the holder of Check No. 0084078 would have filled up
the month and day of issue thereon to be "December" and "31," respectively, it
would have, as it did, become stale six (6) months or 180 days thereafter,
following current banking practice.12
It is, however, with respect to the questioned promissory notes that the present
petition assumes merit. For, petitioner’s allegations in the complaint relative
thereto, even if lacking particularity, does not as priorly stated call for the
dismissal of the complaint.
WHEREFORE, the petition is PARTLY GRANTED.
The March 21, 2003 decision of the appellate court affirming the October 12,
2000 Order of the trial court, Branch 20 of the RTC of Imus, Cavite,
is AFFIRMED with MODIFICATION in light of the foregoing discussions.
The trial court is DIRECTED to REINSTATE Civil Case No. 2079-00 to its docket
and take further proceedings thereon only insofar as the complaint seeks the
revocation/cancellation of the subject promissory notes and damages.
Let the records of the case be then REMANDED to the trial court.SO ORDERED.
SECOND DIVISION G.R. No. 96405 June 26, 1996
BALDOMERO INCIONG, JR., petitioner, vs.COURT OF APPEALS and
PHILIPPINE BANK OF COMMUNICATIONS, respondents.

ROMERO, J.:p
This is a petition for review on certiorari of the decision of the Court of Appeals
affirming that of the Regional Trial Court of Misamis Oriental, Branch 18,1 which
disposed of Civil Case No. 10507 for collection of a sum of money and damages,
as follows:
WHEREFORE, defendant BALDOMERO L. INCIONG, JR. is
adjudged solidarily liable and ordered to pay to the plaintiff Philippine
Bank of Communications, Cagayan de Oro City, the amount of
FIFTY THOUSAND PESOS (P50,000.00), with interest thereon from
May 5, 1983 at 16% per annum until fully paid; and 6% per annum on
the total amount due, as liquidated damages or penalty from May 5,
1983 until fully paid; plus 10% of the total amount due for expenses
of litigation and attorney's fees; and to pay the costs.
The counterclaim, as well as the cross claim, are dismissed for lack
of merit.SO ORDERED.
Petitioner's liability resulted from the promissory note in the amount of P50,000.00
which he signed with Rene C. Naybe and Gregorio D. Pantanosas on February 3,
1983, holding themselves jointly and severally liable to private respondent
Philippine Bank of Communications, Cagayan de Oro City branch. The
promissory note was due on May 5, 1983.
Said due date expired without the promissors having paid their obligation.
Consequently, on November 14, 1983 and on June 8, 1984, private respondent
sent petitioner telegrams demanding payment thereof.2 On December 11, 1984
private respondent also sent by registered mail a final letter of demand to Rene
C. Naybe. Since both obligors did not respond to the demands made, private
respondent filed on January 24, 1986 a complaint for collection of the sum of
P50,000.00 against the three obligors.
On November 25, 1986, the complaint was dismissed for failure of the plaintiff to
prosecute the case. However, on January 9, 1987, the lower court reconsidered
the dismissal order and required the sheriff to serve the summonses. On January
27, 1987, the lower court dismissed the case against defendant Pantanosas as
prayed for by the private respondent herein. Meanwhile, only the summons
addressed to petitioner was served as the sheriff learned that defendant Naybe
had gone to Saudi Arabia.
In his answer, petitioner alleged that sometime in January 1983, he was
approached by his friend, Rudy Campos, who told him that he was a partner of
Pio Tio, the branch manager of private respondent in Cagayan de Oro City, in the
falcata logs operation business. Campos also intimated to him that Rene C.
Naybe was interested in the business and would contribute a chainsaw to the
venture. He added that, although Naybe had no money to buy the equipment, Pio
Tio had assured Naybe of the approval of a loan he would make with private
respondent. Campos then persuaded petitioner to act as a "co-maker" in the said
loan. Petitioner allegedly acceded but with the understanding that he would only
be a co-maker for the loan of P50,000.00.
Petitioner alleged further that five (5) copies of a blank promissory note were
brought to him by Campos at his office. He affixed his signature thereto but in one
copy, he indicated that he bound himself only for the amount of P5,000.00. Thus,
it was by trickery, fraud and misrepresentation that he was made liable for the
amount of P50,000.00.
In the aforementioned decision of the lower court, it noted that the typewritten
figure "-- 50,000 --" clearly appears directly below the admitted signature of the
petitioner in the promissory note. 3 Hence, the latter's uncorroborated testimony
on his limited liability cannot prevail over the presumed regularity and fairness of
the transaction, under Sec. 5 (q) of Rule 131. The lower court added that it was
"rather odd" for petitioner to have indicated in a copy and not in the original, of the
promissory note, his supposed obligation in the amount of P5,000.00 only.
Finally, the lower court held that, even granting that said limited amount had
actually been agreed upon, the same would have been merely collateral between
him and Naybe and, therefore, not binding upon the private respondent as
creditor-bank.
The lower court also noted that petitioner was a holder of a Bachelor of Laws
degree and a labor consultant who was supposed to take due care of his
concerns, and that, on the witness stand, Pio Tio denied having participated in
the alleged business venture although he knew for a fact that the falcata logs
operation was encouraged by the bank for its export potential.
Petitioner appealed the said decision to the Court of Appeals which, in its
decision of August 31, 1990, affirmed that of the lower court. His motion for
reconsideration of the said decision having been denied, he filed the instant
petition for review on certiorari.
On February 6, 1991, the Court denied the petition for failure of petitioner to
comply with the Rules of Court and paragraph 2 of Circular
No. 1-88, and to sufficiently show that respondent court had committed any
reversible error in its questioned decision.4 His motion for the reconsideration of
the denial of his petition was likewise denied with finality in the Resolution of April
24, 1991.5 Thereafter, petitioner filed a motion for leave to file a second motion for
reconsideration which, in the Resolution of May 27, 1991, the Court denied. In the
same Resolution, the Court ordered the entry of judgment in this case.6
Unfazed, petitioner filed a notion for leave to file a motion for clarification. In the
latter motion, he asserted that he had attached Registry Receipt No. 3268 to
page 14 of the petition in compliance with Circular No. 1-88. Thus, on August 7,
1991, the Court granted his prayer that his petition be given due course and
reinstated the same.7
Nonetheless, we find the petition unmeritorious.
Annexed to the petition is a copy of an affidavit executed on May 3, 1988, or after
the rendition of the decision of the lower court, by Gregorio Pantanosas, Jr., an
MTCC judge and petitioner's co-maker in the promissory note. It supports
petitioner's allegation that they were induced to sign the promissory note on the
belief that it was only for P5,000.00, adding that it was Campos who caused the
amount of the loan to be increased to P50,000.00.
The affidavit is clearly intended to buttress petitioner's contention in the instant
petition that the Court of Appeals should have declared the promissory note null
and void on the following grounds: (a) the promissory note was signed in the
office of Judge Pantanosas, outside the premises of the bank; (b) the loan was
incurred for the purpose of buying a second-hand chainsaw which cost only
P5,000.00; (c) even a new chainsaw would cost only P27,500.00; (d) the loan
was not approved by the board or credit committee which was the practice, as it
exceeded P5,000.00; (e) the loan had no collateral; (f) petitioner and Judge
Pantanosas were not present at the time the loan was released in contravention
of the bank practice, and (g) notices of default are sent simultaneously and
separately but no notice was validly sent to him.8 Finally, petitioner contends that
in signing the promissory note, his consent was vitiated by fraud as, contrary to
their agreement that the loan was only for the amount of P5,000.00, the
promissory note stated the amount of P50,000.00.
The above-stated points are clearly factual. Petitioner is to be reminded of the
basic rule that this Court is not a trier of facts. Having lost the chance to fully
ventilate his factual claims below, petitioner may no longer be accorded the same
opportunity in the absence of grave abuse of discretion on the part of the court
below. Had he presented Judge Pantanosas affidavit before the lower court, it
would have strengthened his claim that the promissory note did not reflect the
correct amount of the loan.
Nor is there merit in petitioner's assertion that since the promissory note "is not a
public deed with the formalities prescribed by law but . . . a mere commercial
paper which does not bear the signature of . . . attesting witnesses," parol
evidence may "overcome" the contents of the promissory note.9 The first
paragraph of the parol evidence rule10 states:
When the terms of an agreement have been reduced to writing, it is
considered as containing all the terms agreed upon and there can
be, between the parties and their successors in interest, no evidence
of such terms other than the contents of the written agreement.
Clearly, the rule does not specify that the written agreement be a
public document.
Nego Instruments Set 1 (#s1-70) Page 54 of 112
Lumbas. Dadat
What is required is that the agreement be in writing as the rule is in fact founded
on "long experience that written evidence is so much more certain and accurate
than that which rests in fleeting memory only, that it would be unsafe, when
parties have expressed the terms of their contract in writing, to admit weaker
evidence to control and vary the stronger and to show that the
parties intended a different contract from that expressed in the writing signed by
them." 11 Thus, for the parol evidence rule to apply, a written contract need not be
in any particular form, or be signed by both parties. 12 As a general rule, bills,
notes and other instruments of a similar nature are not subject to be varied or
contradicted by parol or extrinsic evidence. 13
By alleging fraud in his answer, 14 petitioner was actually in the right direction
towards proving that he and his co-makers agreed to a loan of P5,000.00 only
considering that, where a parol contemporaneous agreement was the inducing
and moving cause of the written contract, it may be shown by parol
evidence. 15 However, fraud must be established by clear and convincing
evidence, mere preponderance of evidence, not even being
adequate. 16Petitioner's attempt to prove fraud must, therefore, fail as it was
evidenced only by his own uncorroborated and, expectedly, self-serving
testimony.
Petitioner also argues that the dismissal of the complaint against Naybe, the
principal debtor, and against Pantanosas, his co-maker, constituted a release of
his obligation, especially because the dismissal of the case against Pantanosas
was upon the motion of private respondent itself. He cites as basis for his
argument, Article 2080 of the Civil Code which provides that:
The guarantors, even though they be solidary, are released from
their obligation whenever by some act of the creditor, they cannot be
subrogated to the rights, mortgages, and preferences of the latter.
It is to be noted, however, that petitioner signed the promissory note as a solidary
co-maker and not as a guarantor. This is patent even from the first sentence of
the promissory note which states as follows:
Ninety one (91) days after date, for value received, I/we, JOINTLY
and SEVERALLY promise to pay to the PHILIPPINE BANK OF
COMMUNICATIONS at its office in the City of Cagayan de Oro,
Philippines the sum of FIFTY THOUSAND ONLY (P50,000.00)
Pesos, Philippine Currency, together with interest . . . at the rate of
SIXTEEN (16) per cent per annum until fully paid.
A solidary or joint and several obligation is one in which each debtor is liable for
the entire obligation, and each creditor is entitled to demand the whole
obligation. 17 on the other hand, Article 2047 of the Civil Code states:
By guaranty a person, called the guarantor, binds himself to the
creditor to fulfill the obligation of the principal debtor in case the latter
should fail to do so.
If a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such a case the contract is called a suretyship.
(Emphasis supplied.)
While a guarantor may bind himself solidarily with the principal
debtor, the liability of a guarantor is different from that of a solidary
debtor. Thus, Tolentino explains:
A guarantor who binds himself in solidum with the principal debtor
under the provisions of the second paragraph does not become a
solidary co-debtor to all intents and purposes. There is a difference
between a solidary co-debtor and a fiador in solidum (surety). The
latter, outside of the liability he assumes to pay the debt before the
property of the principal debtor has been exhausted, retains all the
other rights, actions and benefits which pertain to him by reason of
the fiansa; while a solidary co-debtor has no other rights than those
bestowed upon him in Section 4, Chapter 3, Title I, Book IV of the
Civil Code. 18
Section 4, Chapter 3, Title I, Book IV of the Civil Code states the law on joint and
several obligations. Under Art. 1207 thereof, when there are two or more debtors

in one and the same obligation, the presumption is that the obligation is joint so
that each of the debtors is liable only for a proportionate part of the debt. There is
a solidary liability only when the obligation expressly so states, when the law so
provides or when the nature of the obligation so requires. 19
Because the promissory note involved in this case expressly states that the three
signatories therein are jointly and severally liable, any one, some or all of them
may be proceeded against for the entire obligation. 20 The choice is left to the
solidary creditor to determine against whom he will enforce
collection. 21 Consequently, the dismissal of the case against Judge Pontanosas
may not be deemed as having discharged petitioner from liability as well. As
regards Naybe, suffice it to say that the court never acquired jurisdiction over him.
Petitioner, therefore, may only have recourse against his co-makers, as provided
by law.
WHEREFORE, the instant petition for review on certiorari is hereby DENIED and
the questioned decision of the Court of Appeals is AFFIRMED. Costs against
petitioner.SO ORDERED.
EN BANCG.R. No. L-10221 February 28, 1958
Intestate of Luther Young and Pacita Young, spouses. PACIFICA
JIMENEZ, petitioner-appellee, vs.DR. JOSE BUCOY, administrator-appellant.
BENGZON, J.:
In this intestate of Luther Young and Pacita Young who died in 1954 and 1952
respectively, Pacifica Jimenez presented for payment four promissory notes
signed by Pacita for different amounts totalling twenty-one thousand pesos
(P21,000).
Acknowledging receipt by Pacita during the Japanese occupation, in the currency
then prevailing, the administrator manifested willingness to pay provided
adjustment of the sums be made in line with the Ballantyne schedule.
The claimant objected to the adjustment insisting on full payment in accordance
with the notes.
Applying doctrines of this Court on the matter, the Hon. Primitive L. Gonzales,
Judge, held that the notes should be paid in the currency prevailing after the war,
and that consequently plaintiff was entitled to recover P21,000 plus attorneys fees
for the sum of P2,000.
Hence this appeal.
Executed in the month of August 1944, the first promissory note read as follows:
Received from Miss Pacifica Jimenez the total amount of P10,000)
ten thousand pesos payable six months after the war, without
interest.
The other three notes were couched in the same terms, except as to amounts
and dates.
There can be no serious question that the notes were promises to pay "six
months after the war," the amounts mentioned.
But the important question, which obviously compelled the administrator to
appeal, is whether the amounts should be paid, peso for peso, or whether a
reduction should be made in accordance with the well-known Ballantyne
schedule.
This matter of payment of loans contracted during the Japanese occupation has
received our attention in many litigations after the liberation. The gist of our
adjudications, in so far as material here, is that if the loan should be paid during
the Japanese occupation, the Ballantyne schedule should apply with
corresponding reduction of the amount.1 However, if the loan was expressly
agreed to be payable only after the war or after liberation, or became payable
after those dates, no reduction could be effected, and peso-for-peso payment
shall be ordered in Philippine currency.2
The Ballantyne Conversion Table does not apply where the monetary
obligation, under the contract, was not payable during the Japanese
occupation but until after one year counted for the date of ratification
of the Treaty of Peace concluding the Greater East Asia War.
(Arellano vs. De Domingo, 101 Phil., 902.)
When a monetary obligation is contracted during the Japanese
occupation, to be discharged after the war, the payment should be
made in Philippine Currency. (Kare et al. vs. Imperial et al., 102 Phil.,
173.)
Now then, as in the case before us, the debtor undertook to pay "six months after
the war," peso for peso payment is indicated.
The Ang Lam3 case cited by appellant is not controlling, because the loan therein
given could have been repaid during the Japanese occupation. Dated December
26, 1944, it was payable within one year. Payment could therefore have been
made during January 1945. The notes here in question were payable only after
the war.
The appellant administrator calls attention to the fact that the notes contained no
express promise to pay a specified amount. We declare the point to be without
merit. In accordance with doctrines on the matter, the note herein-above quoted
amounted in effect to "a promise to pay ten thousand pesos six months after the
war, without interest." And so of the other notes.
"An acknowledgment may become a promise by the addition of words by which a
promise of payment is naturally implied, such as, "payable," "payable" on a given
day, "payable on demand," "paid . . . when called for," . . . (10 Corpus Juris
Secundum p. 523.)
"To constitute a good promissory note, no precise words of contract are
necessary, provided they amount, in legal effect, to a promise to pay. In other
words, if over and above the mere acknowledgment of the debt there may be
collected from the words used a promise to pay it, the instrument may be
regarded as a promissory note. 1 Daniel, Neg. Inst. sec. 36 et seq.; Byles, Bills,
10, 11, and cases cited . . . "Due A. B. $325, payable on demand," or, "I
acknowledge myself to be indebted to A in $109, to be paid on demand, for value
received," or, "I O. U. $85 to be paid on May 5th," are held to be promissory
notes, significance being given to words of payment as indicating a promise to
pay." 1 Daniel Neg. Inst. see. 39, and cases cited. (Cowan vs. Hallack, (Colo.) 13
Pacific Reporter 700, 703.)
Another argument of appellant is that as the deceased Luther Young did not sign
these notes, his estate is not liable for the same. This defense, however, was not
interposed in the lower court. There the only issue related to the amount to be
amount, considering that the money had been received in Japanese money. It is
now unfair to put up this new defense, because had it been raised in the court
below, appellees could have proved, what they now alleged that Pacita
contracted the obligation to support and maintain herself, her son and her
husband (then concentrated at Santo Tomas University) during the hard days of
the occupation.
It is now settled practice that on appeal a change of theory is not permitted.
In order that a question may be raised on appeal, it is essential that it
be within the issues made by the parties in their pleadings.
Consequently, when a party deliberately adopts a certain theory, and
the case is tried and decided upon that theory in the court below, he
will not be permitted to change his theory on appeal because, to
permit him to do so, would be unfair to the adverse party. (Rules of
Court by Moran-1957 Ed. Vol. I p. 715 citing Agoncillo vs. Javier, 38
Phil., 424; American Express Company vs. Natividad, 46 Phil., 207;
San Agustin vs. Barrios, 68 Phil., 475, 480; Toribio vs. Dacasa, 55
Phil., 461.)
Appellant's last assignment of error concerns attorneys fees. He says there was
no reason for making this and exception to the general rule that attorney's fees
are not recoverable in the absence of stipulation.
Under the new Civil Code, attorney's fees and expenses of litigation new be
awarded in this case if defendant acted in gross and evident bad faith in refusing
to satisfy plaintiff's plainly valid, just and demandable claim" or "where the court
deems it just and equitable that attorney's fees be recovered" (Article 2208 Civil
Code). These are — if applicable — some of the exceptions to the general rule
that in the absence of stipulation no attorney's fees shall be awarded.
Nego Instruments Set 1 (#s1-70) Page 55 of 112
Lumbas. Dadat
The trial court did not explain why it ordered payment of counsel fees. Needless
to say, it is desirable that the decision should state the reason why such award is
made bearing in mind that it must necessarily rest on an exceptional situation.
Unless of course the text of the decision plainly shows the case to fall into one of
the exceptions, for instance "in actions for legal support," when exemplary
damages are awarded," etc. In the case at bar, defendant could not obviously be
held to have acted in gross and evident bad faith." He did not deny the debt, and
merely pleaded for adjustment, invoking decisions he thought to be controlling. If
the trial judge considered it "just and equitable" to require payment of attorney's
fees because the defense — adjustment under Ballantyne schedule — proved to
be untenable in view of this Court's applicable rulings, it would be error to uphold
his view. Otherwise, every time a defendant loses, attorney's fees would follow as
a matter of course. Under the article above cited, even a clearly untenable
defense would be no ground for awarding attorney's fees unless it amounted to
"gross and evident bad faith."
Plaintiff's attorneys attempt to sustain the award on the ground of defendant's
refusal to accept her offer, before the suit, to take P5,000 in full settlement of her
claim. We do not think this is tenable, defendant's attitude being merely a
consequence of his line of defense, which though erroneous does not amount to
"gross and evident bad faith." For one thing, there is a point raised by defendant,
which so far as we are informed, has not been directly passed upon in this
jurisdiction: the notes contained no express promise to pay a definite amount.
There being no circumstance making it reasonable and just to require defendant
to pay attorney's fees, the last assignment of error must be upheld.
Wherefore, in view of the foregoing considerations, the appealed decision is
affirmed, except as to the attorney's fees which are hereby disapproved. So
ordered.
EN BANCG.R. No. 16454 September 29, 1921
GEORGE A. KAUFFMAN, plaintiff-appellee, vs.THE PHILIPPINE NATIONAL
BANK, defendant-appellant.
STREET, J.:
At the time of the transaction which gave rise to this litigation the plaintiff, George
A. Kauffman, was the president of a domestic corporation engaged chiefly in the
exportation of hemp from the Philippine Islands and known as the Philippine Fiber
and Produce Company, of which company the plaintiff apparently held in his own
right nearly the entire issue of capital stock. On February 5, 1918, the board of
directors of said company, declared a dividend of P100,000 from its surplus
earnings for the year 1917, of which the plaintiff was entitled to the sum of
P98,000. This amount was accordingly placed to his credit on the books of the
company, and so remained until in October of the same year when an
unsuccessful effort was made to transmit the whole, or a greater part thereof, to
the plaintiff in New York City.
In this connection it appears that on October 9, 1918, George B. Wicks, treasurer
of the Philippine Fiber and Produce Company, presented himself in the exchange
department of the Philippine National Bank in Manila and requested that a
telegraphic transfer of $45,000 should be made to the plaintiff in New York City,
upon account of the Philippine Fiber and Produce Company. He was informed
that the total cost of said transfer, including exchange and cost of message,
would be P90,355.50. Accordingly, Wicks, as treasurer of the Philippine Fiber and
Produce Company, thereupon drew and delivered a check for that amount on the
Philippine National Bank; and the same was accepted by the officer selling the
exchange in payment of the transfer in question. As evidence of this transaction a
document was made out and delivered to Wicks, which is referred to by the
bank's assistant cashier as its official receipt. This memorandum receipt is in the
following language:
October 9th, 1918.

CABLE TRANSFER BOUGHT FROM
PHILIPPINE NATIONAL BANK,
Manila, P.I. Stamp P18
Foreign Amount Rate
$45,000. 3/8 % P90,337.50
Payable through Philippine National Bank, New York. To G. A.
Kauffman, New York. Total P90,355.50. Account of Philippine Fiber
and Produce Company. Sold to Messrs. Philippine Fiber and
Produce Company, Manila.
(Sgd.) Y LERMA,
Manager, Foreign Department.
On the same day the Philippine National Bank dispatched to its New York agency
a cablegram to the following effect:
Pay George A. Kauffman, New York, account Philippine Fiber
Produce Co., $45,000. (Sgd.) PHILIPPINE NATIONAL
BANK, Manila.
Upon receiving this telegraphic message, the bank's representative in New York
sent a cable message in reply suggesting the advisability of withholding this
money from Kauffman, in view of his reluctance to accept certain bills of the
Philippine Fiber and Produce Company. The Philippine National Bank acquiesced
in this and on October 11 dispatched to its New York agency another message to
withhold the Kauffman payment as suggested.
Meanwhile Wicks, the treasurer of the Philippine Fiber and Produce Company,
cabled to Kauffman in New York, advising him that $45,000 had been placed to
his credit in the New York agency of the Philippine National Bank; and in
response to this advice Kauffman presented himself at the office of the Philippine
National Bank in New York City on October 15, 1918, and demanded the money.
By this time, however, the message from the Philippine National Bank of October
11, directing the withholding of payment had been received in New York, and
payment was therefore refused.
In view of these facts, the plaintiff Kauffman instituted the present action in the
Court of First Instance of the city of Manila to recover said sum, with interest and
costs; and judgment having been there entered favorably to the plaintiff, the
defendant appealed.
Among additional facts pertinent to the case we note the circumstance that at the
time of the transaction above-mentioned, the Philippines Fiber and Produce
Company did not have on deposit in the Philippine National Bank money
adequate to pay the check for P90,355.50, which was delivered in payment of the
telegraphic order; but the company did have credit to that extent, or more, for
overdraft in current account, and the check in question was charged as an
overdraft against the Philippine Fiber and Produce Company and has remained
on the books of the bank as an interest-bearing item in the account of said
company.
It is furthermore noteworthy that no evidence has been introduced tending to
show failure of consideration with respect to the amount paid for said telegraphic
order. It is true that in the defendant's answer it is suggested that the failure of the
bank to pay over the amount of this remittance to the plaintiff in New York City,
pursuant to its agreement, was due to a desire to protect the bank in its relations
with the Philippine Fiber and Produce Company, whose credit was secured at the
bank by warehouse receipts on Philippine products; and it is alleged that after the
exchange in question was sold the bank found that it did not have sufficient to
warrant payment of the remittance. In view, however, of the failure of the bank to
substantiate these allegations, or to offer any other proof showing failure of
consideration, it must be assumed that the obligation of the bank was supported
by adequate consideration.
In this court the defense is mainly, if not exclusively, based upon the proposition
that, inasmuch as the plaintiff Kauffman was not a party to the contract with the
bank for the transmission of this credit, no right of action can be vested in him for
the breach thereof. "In this situation," — we here quote the words of the
appellant's brief, — "if there exists a cause of action against the defendant, it
would not be in favor of the plaintiff who had taken no part at all in the transaction
nor had entered into any contract with the plaintiff, but in favor of the Philippine
Fiber and Produce Company, the party which contracted in its own name with the
defendant."
The question thus placed before us is one purely of law; and at the very threshold
of the discussion it can be stated that the provisions of the Negotiable
Instruments Law can come into operation there must be a document in existence
of the character described in section 1 of the Law; and no rights properly
speaking arise in respect to said instrument until it is delivered. In the case before
us there was an order, it is true, transmitted by the defendant bank to its New
York branch, for the payment of a specified sum of money to George A.
Kauffman. But this order was not made payable "to order or "to bearer," as
required in subsection (d) of that Act; and inasmuch as it never left the
possession of the bank, or its representative in New York City, there was no
delivery in the sense intended in section 16 of the same Law. In this connection it
is unnecessary to point out that the official receipt delivered by the bank to the
purchaser of the telegraphic order, and already set out above, cannot itself be
viewed in the light of a negotiable instrument, although it affords complete proof
of the obligation actually assumed by the bank.
Stated in bare simplicity the admitted facts show that the defendant bank for a
valuable consideration paid by the Philippine Fiber and Produce Company agreed
on October 9, 1918, to cause a sum of money to be paid to the plaintiff in New
York City; and the question is whether the plaintiff can maintain an action against
the bank for the nonperformance of said undertaking. In other words, is the lack
of privity with the contract on the part of the plaintiff fatal to the maintenance of an
action by him?
The only express provision of law that has been cited as bearing directly on this
question is the second paragraph of article 1257 of the Civil Code; and unless the
present action can be maintained under the provision, the plaintiff admittedly has
no case. This provision states an exception to the more general rule expressed in
the first paragraph of the same article to the effect that contracts are productive of
effects only between the parties who execute them; and in harmony with this
general rule are numerous decisions of this court (Wolfson vs. Estate of Martinez,
20 Phil., 340; Ibañez de Aldecoa vs. Hongkong and Shanghai Banking
Corporation, 22 Phil., 572, 584; Manila Railroad Co.vs. Compañia Trasatlantica
and Atlantic, Gulf and Pacific Co., 38 Phil., 873, 894.)
The paragraph introducing the exception which we are now to consider is in these
words:
Should the contract contain any stipulation in favor of a third person,
he may demand its fulfillment, provided he has given notice of his
acceptance to the person bound before the stipulation has been
revoked. (Art. 1257, par. 2, Civ. Code.)
In the case of Uy Tam and Uy Yet vs. Leonard (30 Phil., 471), is found an
elaborate dissertation upon the history and interpretation of the paragraph above
quoted and so complete is the discussion contained in that opinion that it would
be idle for us here to go over the same matter. Suffice it to say that Justice Trent,
speaking for the court in that case, sums up its conclusions upon the conditions
governing the right of the person for whose benefit a contract is made to maintain
an action for the breach thereof in the following words:
So, we believe the fairest test, in this jurisdiction at least, whereby to
determine whether the interest of a third person in a contract is a
stipulation pour autrui, or merely an incidental interest, is to rely upon
the intention of the parties as disclosed by their contract.
If a third person claims an enforcible interest in the contract, the
question must be settled by determining whether the contracting
parties desired to tender him such an interest. Did they deliberately
insert terms in their agreement with the avowed purpose of
conferring a favor upon such third person? In resolving this question,
of course, the ordinary rules of construction and interpretation of
writings must be observed. (Uy Tam and Uy Yet vs. Leonard, supra.)
Nego Instruments Set 1 (#s1-70) Page 56 of 112
Lumbas. Dadat
Further on in the same opinion he adds: "In applying this test to a stipulation pour
autrui, it matters not whether the stipulation is in the nature of a gift or whether
there is an obligation owing from the promise to the third person. That no such
obligation exists may in some degree assist in determining whether the parties
intended to benefit a third person, whether they stipulated for him." (Uy Tam and
Uy Yet vs. Leonard, supra.)
In the light of the conclusion thus stated, the right of the plaintiff to maintain the
present action is clear enough; for it is undeniable that the bank's promise to
cause a definite sum of money to be paid to the plaintiff in New York City is a
stipulation in his favor within the meaning of the paragraph above quoted; and the
circumstances under which that promise was given disclose an evident intention
on the part of the contracting parties that the plaintiff should have the money upon
demand in New York City. The recognition of this unqualified right in the plaintiff
to receive the money implies in our opinion the right in him to maintain an action
to recover it; and indeed if the provision in question were not applicable to the
facts now before us, it would be difficult to conceive of a case arising under it.
It will be noted that under the paragraph cited a third person seeking to enforce
compliance with a stipulation in his favor must signify his acceptance before it has
been revoked. In this case the plaintiff clearly signified his acceptance to the bank
by demanding payment; and although the Philippine National Bank had already
directed its New York agency to withhold payment when this demand was made,
the rights of the plaintiff cannot be considered to as there used, must be
understood to imply revocation by the mutual consent of the contracting parties,
or at least by direction of the party purchasing he exchange.
In the course of the argument attention was directed to the case of
Legniti vs. Mechanics, etc. Bank (130 N.E. Rep., 597), decided by the Court of
Appeals of the State of New York on March 1, 1921, wherein it is held that, by
selling a cable transfer of funds on a foreign country in ordinary course, a bank
incurs a simple contractual obligation, and cannot be considered as holding the
money which was paid for the transfer in the character of a specific trust. Thus, it
was said, "Cable transfers, therefore, mean a method of transmitting money by
cable wherein the seller engages that he has the balance at the point on which
the payment is ordered and that on receipt of the cable directing the transfer his
correspondent at such point will make payment to the beneficiary described in the
cable. All these transaction are matters of purchase and sale create no trust
relationship."
As we view it there is nothing in the decision referred to decisive of the question
now before us, wish is merely that of the right of the beneficiary to maintain an
action against the bank selling the transfer.
Upon the considerations already stated, we are of the opinion that the right of
action exists, and the judgment must be affirmed. It is so ordered, with costs
against the appellant. Interest will be computed as prescribed in section 510 of
the Code of Civil Procedure.
36. G.R. No. 88866 February 18, 1991
METROPOLITAN BANK & TRUST COMPANY vs. COURT OF APPEALS,
GOLDEN SAVINGS & LOAN ASSOCIATION, INC., LUCIA CASTILLO,
MAGNO CASTILLO and GLORIA CASTILLO
This case, for all its seeming complexity, turns on a simple question of
negligence. The facts, pruned of all non-essentials, are easily told.
The Metropolitan Bank and Trust Co. is a commercial bank with branches
throughout the Philippines and even abroad. Golden Savings and Loan
Association was, at the time these events happened, operating in Calapan,
Mindoro, with the other private respondents as its principal officers.
In January 1979, a certain Eduardo Gomez opened an account with Golden
Savings and deposited over a period of two months 38 treasury warrants with a
total value of P1,755,228.37. They were all drawn by the Philippine Fish
Marketing Authority and purportedly signed by its General Manager and
countersigned by its Auditor. Six of these were directly payable to Gomez while
the others appeared to have been indorsed by their respective payees, followed
by Gomez as second indorser.1

On various dates between June 25 and July 16, 1979, all these warrants were
subsequently indorsed by Gloria Castillo as Cashier of Golden Savings and
deposited to its Savings Account No. 2498 in the Metrobank branch in Calapan,
Mindoro. They were then sent for clearing by the branch office to the principal
office of Metrobank, which forwarded them to the Bureau of Treasury for special
clearing.2
More than two weeks after the deposits, Gloria Castillo went to the Calapan
branch several times to ask whether the warrants had been cleared. She was told
to wait. Accordingly, Gomez was meanwhile not allowed to withdraw from his
account. Later, however, "exasperated" over Gloria's repeated inquiries and also
as an accommodation for a "valued client," the petitioner says it finally decided to
allow Golden Savings to withdraw from the proceeds of the
warrants.3
The first withdrawal was made on July 9, 1979, in the amount of P508,000.00, the
second on July 13, 1979, in the amount of P310,000.00, and the third on July 16,
1979, in the amount of P150,000.00. The total withdrawal was P968.000.00.4
In turn, Golden Savings subsequently allowed Gomez to make withdrawals from
his own account, eventually collecting the total amount of P1,167,500.00 from the
proceeds of the apparently cleared warrants. The last withdrawal was made on
July 16, 1979.
On July 21, 1979, Metrobank informed Golden Savings that 32 of the warrants
had been dishonored by the Bureau of Treasury on July 19, 1979, and demanded
the refund by Golden Savings of the amount it had previously withdrawn, to make
up the deficit in its account.
The demand was rejected. Metrobank then sued Golden Savings in the Regional
Trial Court of Mindoro.5 After trial, judgment was rendered in favor of Golden
Savings, which, however, filed a motion for reconsideration even as Metrobank
filed its notice of appeal. On November 4, 1986, the lower court modified its
decision thus:
ACCORDINGLY, judgment is hereby rendered:
1. Dismissing the complaint with costs against the plaintiff;
2. Dissolving and lifting the writ of attachment of the properties of
defendant Golden Savings and Loan Association, Inc. and defendant
Spouses Magno Castillo and Lucia Castillo;
3. Directing the plaintiff to reverse its action of debiting Savings
Account No. 2498 of the sum of P1,754,089.00 and to reinstate and
credit to such account such amount existing before the debit was
made including the amount of P812,033.37 in favor of defendant
Golden Savings and Loan Association, Inc. and thereafter, to allow
defendant Golden Savings and Loan Association, Inc. to withdraw
the amount outstanding thereon before the debit;
4. Ordering the plaintiff to pay the defendant Golden Savings and
Loan Association, Inc. attorney's fees and expenses of litigation in
the amount of P200,000.00.
5. Ordering the plaintiff to pay the defendant Spouses Magno Castillo
and Lucia Castillo attorney's fees and expenses of litigation in the
amount of P100,000.00. SO ORDERED.
On appeal to the respondent court,6 the decision was affirmed, prompting
Metrobank to file this petition for review on the following grounds:
1. Respondent Court of Appeals erred in disregarding and failing to
apply the clear contractual terms and conditions on the deposit slips
allowing Metrobank to charge back any amount erroneously credited.
(a) Metrobank's right to charge back is not limited to
instances where the checks or treasury warrants are
forged or unauthorized.
(b) Until such time as Metrobank is actually paid, its
obligation is that of a mere collecting agent which cannot
be held liable for its failure to collect on the warrants.
2. Under the lower court's decision, affirmed by respondent Court of
Appeals, Metrobank is made to pay for warrants already dishonored,
thereby perpetuating the fraud committed by Eduardo Gomez.
3. Respondent Court of Appeals erred in not finding that as between
Metrobank and Golden Savings, the latter should bear the loss.
4. Respondent Court of Appeals erred in holding that the treasury
warrants involved in this case are not negotiable instruments.
The petition has no merit.
From the above undisputed facts, it would appear to the Court that Metrobank
was indeed negligent in giving Golden Savings the impression that the treasury
warrants had been cleared and that, consequently, it was safe to allow Gomez to
withdraw the proceeds thereof from his account with it. Without such assurance,
Golden Savings would not have allowed the withdrawals; with such assurance,
there was no reason not to allow the withdrawal. Indeed, Golden Savings might
even have incurred liability for its refusal to return the money that to all
appearances belonged to the depositor, who could therefore withdraw it any time
and for any reason he saw fit.
It was, in fact, to secure the clearance of the treasury warrants that Golden
Savings deposited them to its account with Metrobank. Golden Savings had no
clearing facilities of its own. It relied on Metrobank to determine the validity of the
warrants through its own services. The proceeds of the warrants were withheld
from Gomez until Metrobank allowed Golden Savings itself to withdraw them from
its own deposit.7 It was only when Metrobank gave the go-signal that Gomez was
finally allowed by Golden Savings to withdraw them from his own account.
The argument of Metrobank that Golden Savings should have exercised more
care in checking the personal circumstances of Gomez before accepting his
deposit does not hold water. It was Gomez who was entrusting the warrants, not
Golden Savings that was extending him a loan; and moreover, the treasury
warrants were subject to clearing, pending which the depositor could not withdraw
its proceeds. There was no question of Gomez's identity or of the genuineness of
his signature as checked by Golden Savings. In fact, the treasury warrants were
dishonored allegedly because of the forgery of the signatures of the drawers, not
of Gomez as payee or indorser. Under the circumstances, it is clear that Golden
Savings acted with due care and diligence and cannot be faulted for the
withdrawals it allowed Gomez to make.
By contrast, Metrobank exhibited extraordinary carelessness. The amount
involved was not trifling — more than one and a half million pesos (and this was
1979). There was no reason why it should not have waited until the treasury
warrants had been cleared; it would not have lost a single centavo by waiting.
Yet, despite the lack of such clearance — and notwithstanding that it had not
received a single centavo from the proceeds of the treasury warrants, as it now
repeatedly stresses — it allowed Golden Savings to withdraw — not once, not
twice, but thrice — from the uncleared treasury warrants in the total amount of
P968,000.00
Its reason? It was "exasperated" over the persistent inquiries of Gloria Castillo
about the clearance and it also wanted to "accommodate" a valued client. It
"presumed" that the warrants had been cleared simply because of "the lapse of
one week."8 For a bank with its long experience, this explanation is unbelievably
naive.
And now, to gloss over its carelessness, Metrobank would invoke the conditions
printed on the dorsal side of the deposit slips through which the treasury warrants
were deposited by Golden Savings with its Calapan branch. The conditions read
as follows:
Kindly note that in receiving items on deposit, the bank obligates
itself only as the depositor's collecting agent, assuming no
responsibility beyond care in selecting correspondents, and until
such time as actual payment shall have come into possession of this
bank, the right is reserved to charge back to the depositor's account
any amount previously credited, whether or not such item is returned.
This also applies to checks drawn on local banks and bankers and
their branches as well as on this bank, which are unpaid due
to insufficiency of funds, forgery, unauthorized overdraft or any other
reason. (Emphasis supplied.)
Nego Instruments Set 1 (#s1-70) Page 57 of 112
Lumbas. Dadat
According to Metrobank, the said conditions clearly show that it was acting only
as a collecting agent for Golden Savings and give it the right to "charge back to
the depositor's account any amount previously credited, whether or not such item
is returned. This also applies to checks ". . . which are unpaid due to insufficiency
of funds, forgery, unauthorized overdraft of any other reason." It is claimed that
the said conditions are in the nature of contractual stipulations and became
binding on Golden Savings when Gloria Castillo, as its Cashier, signed the
deposit slips.
Doubt may be expressed about the binding force of the conditions, considering
that they have apparently been imposed by the bank unilaterally, without the
consent of the depositor. Indeed, it could be argued that the depositor, in signing
the deposit slip, does so only to identify himself and not to agree to the conditions
set forth in the given permit at the back of the deposit slip. We do not have to rule
on this matter at this time. At any rate, the Court feels that even if the deposit slip
were considered a contract, the petitioner could still not validly disclaim
responsibility thereunder in the light of the circumstances of this case.
In stressing that it was acting only as a collecting agent for Golden Savings,
Metrobank seems to be suggesting that as a mere agent it cannot be liable to the
principal. This is not exactly true. On the contrary, Article 1909 of the Civil Code
clearly provides that —
Art. 1909. — The agent is responsible not only for fraud, but also for
negligence, which shall be judged 'with more or less rigor by the
courts, according to whether the agency was or was not for a
compensation.
The negligence of Metrobank has been sufficiently established. To repeat for
emphasis, it was the clearance given by it that assured Golden Savings it was
already safe to allow Gomez to withdraw the proceeds of the treasury warrants he
had deposited Metrobank misled Golden Savings. There may have been no
express clearance, as Metrobank insists (although this is refuted by Golden
Savings) but in any case that clearance could be implied from its allowing Golden
Savings to withdraw from its account not only once or even twice but three times.
The total withdrawal was in excess of its original balance before the treasury
warrants were deposited, which only added to its belief that the treasury warrants
had indeed been cleared.
Metrobank's argument that it may recover the disputed amount if the warrants are
not paid for any reason is not acceptable. Any reason does not mean no reason
at all. Otherwise, there would have been no need at all for Golden Savings to
deposit the treasury warrants with it for clearance. There would have been no
need for it to wait until the warrants had been cleared before paying the proceeds
thereof to Gomez. Such a condition, if interpreted in the way the petitioner
suggests, is not binding for being arbitrary and unconscionable. And it becomes
more so in the case at bar when it is considered that the supposed dishonor of
the warrants was not communicated to Golden Savings before it made its own
payment to Gomez.
The belated notification aggravated the petitioner's earlier negligence in giving
express or at least implied clearance to the treasury warrants and allowing
payments therefrom to Golden Savings. But that is not all. On top of this, the
supposed reason for the dishonor, to wit, the forgery of the signatures of the
general manager and the auditor of the drawer corporation, has not been
established.9 This was the finding of the lower courts which we see no reason to
disturb. And as we said in MWSS v. Court of Appeals:10
Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA
238). It must be established by clear, positive and convincing
evidence. This was not done in the present case.
A no less important consideration is the circumstance that the treasury warrants
in question are not negotiable instruments. Clearly stamped on their face is the
word "non-negotiable." Moreover, and this is of equal significance, it is indicated
that they are payable from a particular fund, to wit, Fund 501.
The following sections of the Negotiable Instruments Law, especially the
underscored parts, are pertinent:

Sec. 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.
xxx xxx xxx
Sec. 3. When promise is unconditional. — An unqualified order or
promise to pay is unconditional within the meaning of this Act though
coupled with —
(a) An indication of a particular fund out of which reimbursement is to
be made or a particular account to be debited with the amount; or
(b) A statement of the transaction which gives rise to the instrument
judgment.
But an order or promise to pay out of a particular fund is not
unconditional.
The indication of Fund 501 as the source of the payment to be made on the
treasury warrants makes the order or promise to pay "not unconditional" and the
warrants themselves non-negotiable. There should be no question that the
exception on Section 3 of the Negotiable Instruments Law is applicable in the
case at bar. This conclusion conforms to Abubakar vs. Auditor General 11 where
the Court held:
The petitioner argues that he is a holder in good faith and for value of
a negotiable instrument and is entitled to the rights and privileges of
a holder in due course, free from defenses. But this treasury warrant
is not within the scope of the negotiable instrument law. For one
thing, the document bearing on its face the words "payable from the
appropriation for food administration, is actually an Order for
payment out of "a particular fund," and is not unconditional and does
not fulfill one of the essential requirements of a negotiable instrument
(Sec. 3 last sentence and section [1(b)] of the Negotiable Instruments
Law).
Metrobank cannot contend that by indorsing the warrants in general, Golden
Savings assumed that they were "genuine and in all respects what they purport to
be," in accordance with Section 66 of the Negotiable Instruments Law. The simple
reason is that this law is not applicable to the non-negotiable treasury warrants.
The indorsement was made by Gloria Castillo not for the purpose of guaranteeing
the genuineness of the warrants but merely to deposit them with Metrobank for
clearing. It was in fact Metrobank that made the guarantee when it stamped on
the back of the warrants: "All prior indorsement and/or lack of endorsements
guaranteed, Metropolitan Bank & Trust Co., Calapan Branch."
The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the Philippine
Islands,12 but we feel this case is inapplicable to the present
controversy.1âwphi1 That case involved checks whereas this case involves
treasury warrants. Golden Savings never represented that the warrants were
negotiable but signed them only for the purpose of depositing them for clearance.
Also, the fact of forgery was proved in that case but not in the case before us.
Finally, the Court found the Jai Alai Corporation negligent in accepting the checks
without question from one Antonio Ramirez notwithstanding that the payee was
the Inter-Island Gas Services, Inc. and it did not appear that he was authorized to
indorse it. No similar negligence can be imputed to Golden Savings.
We find the challenged decision to be basically correct. However, we will have to
amend it insofar as it directs the petitioner to credit Golden Savings with the full
amount of the treasury checks deposited to its account.
The total value of the 32 treasury warrants dishonored was P1,754,089.00, from
which Gomez was allowed to withdraw P1,167,500.00 before Golden Savings
was notified of the dishonor. The amount he has withdrawn must be charged not
to Golden Savings but to Metrobank, which must bear the consequences of its
own negligence. But the balance of P586,589.00 should be debited to Golden
Savings, as obviously Gomez can no longer be permitted to withdraw this amount
from his deposit because of the dishonor of the warrants. Gomez has in fact
disappeared. To also credit the balance to Golden Savings would unduly enrich it
at the expense of Metrobank, let alone the fact that it has already been informed
of the dishonor of the treasury warrants.
WHEREFORE, the challenged decision is AFFIRMED, with the modification that
Paragraph 3 of the dispositive portion of the judgment of the lower court shall be
reworded as follows:
3. Debiting Savings Account No. 2498 in the sum of P586,589.00
only and thereafter allowing defendant Golden Savings & Loan
Association, Inc. to withdraw the amount outstanding thereon, if any,
after the debit. SO ORDERED.
37. G.R. No. 141408 October 18, 2007
METROPOLITAN BANK AND TRUST COMPANY vs. PHILIPPINE BANK OF
COMMUNICATIONS, FILIPINAS ORIENT FINANCE CORPORATION, PIPE
MASTER CORPORATION and TAN JUAN LIAN
x---------------------------------------------x
G.R. No. 141429 October 18, 2007
SOLID BANK CORPORATION vs. FILIPINAS ORIENT FINANCE
CORPORATION, PIPE MASTER CORPORATION, TAN JUAN LIAN and/or
PHILIPPINE BANK OF COMMUNICATIONS
Sometime in 1978, Pipe Master Corporation (Pipe Master) represented by Yu Kio,
its president, applied for check discounting with Filipinas Orient Finance
Corporation (Filipinas Orient). The latter approved and granted the same.
On July 1, 1978, the Board of Directors of Pipe Master issued a Board Resolution
authorizing Yu Kio, in his capacity as president, and/or Tan Juan Lian, in his
capacity as vice-president, to execute, indorse, make, sign, deliver or negotiate
instruments, documents and such other papers necessary in connection with any
transaction coursed through Filipinas Orient for and in behalf of the corporation.
Tan Juan Lian then executed in favor of Filipinas Orient a continuing guaranty
that he shall pay at maturity any and all promissory notes, drafts, checks, or other
instruments or evidence of indebtedness for which Pipe Master may become
liable; that the extent of his liability shall not at any one time exceed the sum of
₱1,000,000.00; and that in the event of default by Pipe Master, Filipinas Orient
may proceed directly against him.
On April 9, 1980, under the check discounting agreement between Pipe Master
and Filipinas Orient, Yu Kio sold to Filipinas Orient four Metropolitan Bank and
Trust Company (Metro Bank) checks amounting to ₱1,000,000.00. In exchange
for the four Metro Bank checks, Filipinas Orient issued to Yu Kio four Philippine
Bank of Communications (PBCom) crossed checks totaling ₱964,303.62,
payable to Pipe Master with the statement "for payee’s account only."
Upon his receipt of the four PBCom checks, Yu Kio indorsed and deposited in the
Metro Bank, in his personal account, three of the checks valued at ₱721,596.95.
As to the remaining check amounting to ₱242,706.67, he deposited it in the Solid
Bank Corporation (Solid Bank), also in his personal account. Eventually, PBCom
paid Metro Bank and Solid Bank the amounts of the checks. In turn, Metro Bank
and Solid Bank credited the value of the checks to the personal accounts of Yu
Kio.
Subsequently, when Filipinas Orient presented the four Metro Bank checks
equivalent to ₱1,000,000.00 it received from Yu Kio, they were dishonored by the
drawee bank. Pipe Master, the drawer, refused to pay the amounts of the checks,
claiming that it never received the proceeds of the PBCom checks as they were
delivered and paid to the wrong party, Yu Kio, who was not the named payee.
Filipinas Orient then demanded that PBCom restore to its (Filipinas Orient’s)
account the value of the PBCom checks. In turn, PBCom sought reimbursement
from Metro Bank and Solid Bank, being the collecting banks, but they refused.
Thus, Filipinas Orient filed with the Regional Trial Court (RTC), Branch 39, Manila
Nego Instruments Set 1 (#s1-70) Page 58 of 112
Lumbas. Dadat
a complaint for a sum of money against Pipe Master, Tan Juan Lian and/or
PBCom.
In their answer to the complaint, Pipe Master and Tan Juan Lian averred that they
did not authorize Yu Kio to negotiate and enter into discounting transaction with
Filipinas Orient, and even if Yu Kio was so authorized, Pipe Master never
received the proceeds of the checks. Consequently, they filed a cross-claim
against PBCom for gross negligence for having paid the wrong party. In turn,
PBCom, Pipe Master and Tan Juan Lian filed third-party complaints against Metro
Bank and Solid Bank.
On July 12, 1990, the RTC rendered a Decision against Metro Bank and Solid
Bank, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered:
1. Ordering third-party defendant Metro Bank to pay plaintiff the
amount of Seven Hundred Twenty One Thousand Five Hundred
Ninety Six Pesos and Ninety-Five Centavos (₱721,596.95) plus legal
interest;
2. Ordering third-party defendant Solid Bank to pay plaintiff the
amount of Two Hundred Forty-Two Thousand Seven Hundred Six
Pesos and Sixty-Seven Centavos (₱242,706.67) plus legal interest;
3. Ordering third-party defendants to pay the costs of suit. SO
ORDERED.
On appeal, the appellate court affirmed in toto the Decision of the trial court.
Metro Bank and Solid Bank filed their respective motions for reconsideration but
the same were denied.
Hence, the instant consolidated petitions for review on certiorari filed by Metro
Bank and Solid Bank.
The issue for our resolution is whether Metro Bank and Solid Bank, petitioners,
are liable to respondent Filipinas Orient for accepting the PBCom crossed checks
payable to Pipe Master.
Petitioner banks contend that respondents Pipe Master, Tan Juan Lian and/or
PBCom should be made liable to respondent Filipinas Orient for the value of the
checks.
Respondents Pipe Master and Tan Juan Lian counter that although Yu Kio was
expressly authorized to indorse Pipe Master’s checks, such authority extended
only to acts done in the ordinary course of business, not in his personal capacity.
For its part, respondent Filipinas Orient contends that petitioner banks were
negligent in allowing Yu Kio to deposit the PBCom checks in his account.
Respondent PBCom, as the drawee bank, maintains that it has no liability
because in clearing the checks, it relied on the express guarantee made by
petitioner banks that the checks were validly indorsed.
We find in favor of respondents.
A check is defined by law as a bill of exchange drawn on a bank payable on
demand.1 The Negotiable Instruments Law is silent with respect to crossed
checks. Nonetheless, this Court has taken judicial cognizance of the practice that
a check with two parallel lines on the upper left hand corner means that it could
only be deposited and not converted into cash.2 The crossing of a check with the
phrase "Payee’s Account Only" is a warning that the check should be deposited
in the account of the payee. It is the collecting bank which is bound to scrutinize
the check and to know its depositors before it can make the clearing indorsement,
"all prior indorsements and/or lack of indorsement guaranteed."3
Here, petitioner banks have the obligation to ensure that the PBCom checks were
deposited in accordance with the instructions stated in the checks.4 The four
PBCom checks in question had been crossed and issued "for payee’s account
only." This could only mean that the drawer, Filipinas Orient, intended the same
for deposit only by the payee, Pipe Master. The effect of crossing a check means
that the drawer had intended the check for deposit only by the rightful person, i.e.,
the payee named therein5 – Pipe Master.
As what transpired in this case, petitioner banks accommodated Yu Kio, being a
valued client and the president of Pipe Master, and accepted the crossed checks.
They stamped at the back thereof that "all prior indorsements and/or lack of
indorsements are guaranteed." In so doing, they became general endorsers.

Under Section 66 of the Negotiable Instruments Law, an endorser warrants "that
the instrument is genuine and in all respects what it purports to be; that he has 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."
Clearly, petitioner banks, being endorsers, cannot deny liability.
In Associated Bank v. Court of Appeals,6 we held that the collecting bank or last
endorser generally suffers the loss because it has the duty to ascertain the
genuineness of all prior indorsements and is privy to the depositor who negotiated
the check.
PBCom, as the drawee bank, cannot be held liable since it mainly relied on the
express guarantee made by petitioners, the collecting banks, of all prior
indorsements.
Evidently, petitioner banks disregarded established banking rules and
procedures. They were negligent in accepting the checks and allowing the
transaction to push through. In Jai-Alai Corp. of the Phil. v. Bank of the Phil.
Islands,7we ruled that one who accepts and encashes a check from an individual
knowing that the payee is a corporation does so at his peril. Therefore, petitioner
banks are liable to respondent Filipinas Orient.1âwphi1
In fine, it must be emphasized that the law imposes on the collecting bank the
duty to diligently scrutinize the checks deposited with it for the purpose of
determining their genuineness and regularity. The collecting bank, being primarily
engaged in banking, holds itself out to the public as the expert on this field, and
the law thus holds it to a high standard of conduct.8 Since petitioner banks’
negligence was the direct cause of the misappropriation of the checks, they
should bear and answer for respondent Filipinas Orient’s loss, without prejudice
to their filing of an appropriate action against Yu Kio.
WHEREFORE, we DENY the petitions. The challenged Decision 9 and Resolution
of the Court of Appeals in CA-G.R. CV No. 30702 are AFFIRMED. Costs against
petitioners. SO ORDERED.
38. G.R. No. 179952 December 4, 2009
METROPOLITAN BANK AND TRUST COMPANY (formerly ASIANBANK
CORPORATION) vs. BA FINANCE CORPORATION and MALAYAN
INSURANCE CO., INC.
Lamberto Bitanga (Bitanga) obtained from respondent BA Finance Corporation
(BA Finance) a ₱329,2801 loan to secure which, he mortgaged his car to
respondent BA Finance.2 The mortgage contained the following stipulation:
The MORTGAGOR covenants and agrees that he/it will cause the property(ies)
hereinabove mortgaged to be insured against loss or damage by accident, theft
and fire for a period of one year from date hereof with an insurance company or
companies acceptable to the MORTGAGEE in an amount not less than the
outstanding balance of mortgage obligations and that he/it will make all loss, if
any, under such policy or policies, payable to the MORTGAGEE or its assigns as
its interest may appear x x x.3 (emphasis and underscoring supplied)
Bitanga thus had the mortgaged car insured by respondent Malayan Insurance
Co., Inc. (Malayan Insurance)4which issued a policy stipulating that, inter alia,
Loss, if any shall be payable to BA FINANCE CORP. as its interest may appear.
It is hereby expressly understood that this policy or any renewal thereof, shall not
be cancelled without prior notification and conformity by BA FINANCE
CORPORATION.5 (emphasis and underscoring supplied)
The car was stolen. On Bitanga’s claim, Malayan Insurance issued a check
payable to the order of "B.A. Finance Corporation and Lamberto Bitanga" for
₱224,500, drawn against China Banking Corporation (China Bank). The check
was crossed with the notation "For Deposit Payees’ Account Only."6
Without the indorsement or authority of his co-payee BA Finance, Bitanga
deposited the check to his account with the Asianbank Corporation (Asianbank),
now merged with herein petitioner Metropolitan Bank and Trust Company
(Metrobank). Bitanga subsequently withdrew the entire proceeds of the check.
In the meantime, Bitanga’s loan became past due, but despite demands, he failed
to settle it.
BA Finance eventually learned of the loss of the car and of Malayan Insurance’s
issuance of a crossed check payable to it and Bitanga, and of Bitanga’s
depositing it in his account at Asianbank and withdrawing the entire proceeds
thereof.
BA Finance thereupon demanded the payment of the value of the check from
Asianbank7 but to no avail, prompting it to file a complaint before the Regional
Trial Court (RTC) of Makati for sum of money and damages against Asianbank
and Bitanga,8 alleging that, inter alia, it is entitled to the entire proceeds of the
check.
In its Answer with Counterclaim,9 Asianbank alleged that BA Finance "instituted
[the] complaint in bad faith to coerce [it] into paying the whole amount of the
CHECK knowing fully well that its rightful claim, if any, is against Malayan
[Insurance]."10
Asianbank thereafter filed a cross-claim against Bitanga,11 alleging that he
fraudulently induced its personnel to release to him the full amount of the check;
and that on being later informed that the entire amount of the check did not
belong to Bitanga, it took steps to get in touch with him but he had changed
residence without leaving any forwarding address.12
And Asianbank filed a third-party complaint against Malayan Insurance,13 alleging
that Malayan Insurance was grossly negligent in issuing the check payable to
both Bitanga and BA Finance and delivering it to Bitanga without the consent of
BA Finance.14
Bitanga was declared in default in Asianbank’s cross-claim.15
Branch 137 of the Makati RTC, finding that Malayan Insurance was not privy to
the contract between BA Finance and Bitanga, and noting the claim of Malayan
Insurance that it is its policy to issue checks to both the insured and the financing
company, held that Malayan Insurance cannot be faulted for negligence for
issuing the check payable to both BA Finance and Bitanga.
The trial court, holding that Asianbank was negligent in allowing Bitanga to
deposit the check to his account and to withdraw the proceeds thereof, without
his co-payee BA Finance having either indorsed it or authorized him to indorse it
in its behalf,16 found Asianbank and Bitanga jointly and severally liable to BA
Finance following Section 41 of the Negotiable Instruments Law and Associated
Bank v. Court of Appeals.17
Thus the trial court disposed:
WHEREFORE, premises considered, judgment is hereby rendered ordering
defendants Asian Bank Corporation and Lamberto Bitanga:
1) To pay plaintiff jointly and severally the sum of P224,500.00 with
interest thereon at the rate of 12% from September 25, 1992 until
fully paid;
2) To pay plaintiff the sum of P50,000.00 as exemplary damages;
P20,000.00 as actual damages; P30,000.00 as attorney’s fee; and
3) To pay the costs of suit.
Asianbank’s and Bitanga’s [sic] counterclaims are dismissed.
The third party complaint of defendant/third party plaintiff against third-party
defendant Malayan Insurance, Co., Inc. is hereby dismissed. Asianbank is
ordered to pay Malayan attorney’s fee of P50,000.00 and a per appearance fee of
P500.00.
On the cross-claim of defendant Asianbank, co-defendant Lamberto
Bitanga is ordered to pay the former the amounts the latter is ordered to
pay the plaintiff in Nos. 1, 2 and 3 above-mentioned.
SO ORDERED.18 (emphasis and underscoring supplied)
Before the Court of Appeals, Asianbank, in its Appellant’s Brief, submitted the
following issues for consideration:
3.01.1.1 Whether BA Finance has a cause of action against Asianbank.
3.01.1.2 Assuming that BA Finance has a valid cause of action, may it claim from
Asianbank more than one-half of the value of the check considering that it is a
mere co-payee or joint payee of the check?
3.01.1.3 Whether BA Finance is liable to Asianbank for actual and exemplary
damages for wrongfully bringing the case to court.
Nego Instruments Set 1 (#s1-70) Page 59 of 112
Lumbas. Dadat
3.01.1.4 Whether Malayan is liable to Asianbank for reimbursement of any sum of
money which this Honorable Court may award to BA Finance in this
case.19 (underscoring supplied)
And it proffered the following arguments:
A. BA Finance has no cause of action against Asianbank as it has no
legal right and title to the check considering that the check was not
delivered to BA Finance. Hence, BA Finance is not a holder thereof
under the Negotiable Instruments Law.
B. Asianbank, as collecting bank, is not liable to BA Finance as there
was no privity of contract between them.
C. Asianbank, as collecting bank, is not liable to BA Finance,
considering that, as the intermediary between the payee and the
drawee Chinabank, it merely acted on the instructions of drawee
Chinabank to pay the amount of the check to Bitanga, hence, the
consequent damage to BA Finance was due to the negligence of
Chinabank.
D. Malayan’s act of issuing and delivering the check solely to Bitanga
in violation of the "loss payee" clause in the Policy, is the proximate
cause of the alleged damage to BA Finance.
E. Assuming Asianbank is liable, BA Finance can claim only his
proportionate interest on the check as it is a joint payee thereof.
F. Bitanga alone is liable for the amount to BA Finance on the ground
of unjust enrichment or solutio indebiti.
G. BA Finance is liable to pay Asianbank actual and exemplary
damages.20 (underscoring supplied)
The appellate court, "summarizing" the errors attributed to the trial court by
Asianbank to be "whether…BA Finance has a cause of action against [it] even if
the subject check had not been delivered to…BA Finance by the issuer itself,"
held in the affirmative and accordingly affirmed the trial court’s decision but
deleted the award of ₱20,000 as actual damages.21
Hence, the present Petition for Review on Certiorari22 filed by Metrobank
(hereafter petitioner) to which Asianbank was, as earlier stated, merged, faulting
the appellate court
I. x x x in applying the case of Associated Bank v. Court of Appeals,
in the absence of factual similarity and of the legal relationships
necessary for the application of the desirable shortcut rule. x x x
II. x x x in not finding that x x x the general rule that the payee has no
cause of action against the collecting bank absent delivery to him
must be applied.
III. x x x in finding that all the elements of a cause of action by BA
Finance Corporation against Asianbank Corporation are present.
IV. x x x in finding that Article 1208 of the Civil Code is not applicable.
V. x x x in awarding of exemplary damages even in the absence of
moral, temperate, liquidated or compensatory damages and a finding
of fact that Asianbank acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner.
xxxx
VII. x x x in dismissing Asianbank’s counterclaim and Third Party
complaint [against Malayan Insurance].23(italics in the original;
underscoring supplied)
Petitioner proffers the following arguments against the application of Associated
Bank v. CA to the case:
x x x [T]he rule established in the Associated Bank case has provided a speedier
remedy for the payee to recover from erring collecting banks despite the absence
of delivery of the negotiable instrument. However, the application of the rule
demands careful consideration of the factual settings and issues raised in the
case x x x.
One of the relevant circumstances raised in Associated Bank is the existence of
forgery or unauthorized indorsement. x x x
xxxx

In the case at bar, Bitanga is authorized to indorse the check as the drawer
names him as one of the payees. Moreover, his signature is not a forgery nor has
he or anyone forged the signature of the representative of BA Finance
Corporation. No unauthorized indorsement appears on the check.
xxxx
Absent the indispensable fact of forgery or unauthorized indorsement, the
desirable shortcut rule cannot be applied,24 (underscoring supplied)
The petition fails.
Section 41 of the Negotiable Instruments Law provides:
Where an instrument is payable to the order of two or more payees or
indorsees who are not partners, all must indorse unless the one indorsing has
authority to indorse for the others. (emphasis and underscoring supplied)
Bitanga alone endorsed the crossed check, and petitioner allowed the deposit
and release of the proceeds thereof, despite the absence of authority of Bitanga’s
co-payee BA Finance to endorse it on its behalf.25
Denying any irregularity in accepting the check, petitioner maintains that it
followed normal banking procedure. The testimony of Imelda Cruz, Asianbank’s
then accounting head, shows otherwise, however, viz:
Q Now, could you be familiar with a particular policy of the bank with
respect to checks with joined (sic) payees?
A Yes, sir.
Q And what would be the particular policy of the bank regarding this
transaction?
A The bank policy and procedure regarding the joint checks.
Once it is deposited to a single account, we are not accepting
joint checks for single account, depositing to a single
account (sic).
Q What happened to the bank employee who allowed this particular
transaction to occur?
A Once the branch personnel, the bank personnel (sic) accepted it,
he is liable.
Q What do you mean by the branch personnel being held liable?
A Because since (sic) the bank policy, we are not supposed to
accept joint checks to a [single] account, so we mean that
personnel would be held liable in the sense that (sic) once it is
withdrawn or encashed, it will not be allowed.
Q In your experience, have you encountered any bank employee
who was subjected to disciplinary action by not following bank
policies?
A The one that happened in that case, since I really don’t know who
that personnel is, he is no longer connected with the bank.
Q What about in general, do you know of any disciplinary
action, Madam witness?
A Since there’s a negligence on the part of the bank personnel,
it will be a ground for his separation [from] the
bank.26 (emphasis, italics and underscoring supplied)
Admittedly, petitioner dismissed the employee who allowed the deposit of the
check in Bitanga’s account.
Petitioner’s argument that since there was neither forgery, nor unauthorized
indorsement because Bitanga was a co-payee in the subject check, the dictum in
Associated Bank v. CA does not apply in the present case fails. The payment of
an instrument over a missing indorsement is the equivalent of payment on a
forged indorsement27 or an unauthorized indorsement in itself in the case of joint
payees.28
Clearly, petitioner, through its employee, was negligent when it allowed the
deposit of the crossed check, despite the lone endorsement of Bitanga, ostensibly
ignoring the fact that the check did not, it bears repeating, carry the indorsement
of BA Finance.29
As has been repeatedly emphasized, the banking business is imbued with public
interest such that the highest degree of diligence and highest standards of
integrity and performance are expected of banks in order to maintain the trust and
confidence of the public in general in the banking sector.30 Undoubtedly, BA
Finance has a cause of action against petitioner.
Is petitioner liable to BA Finance for the full value of the check?
Petitioner, at all events, argue that its liability to BA Finance should only be one-
half of the amount covered by the check as there is no indication in the check that
Bitanga and BA Finance are solidary creditors to thus make them presumptively
joint creditors under Articles 1207 and 1208 of the Civil Code which respectively
provide:
Art. 1207. The concurrence of two or more creditors or of two or more debtors in
one and the same obligation does not imply that each one of the former has a
right to demand, or that each one of the latter is bound to render, entire
compliance with the prestations. There is a solidary liability only when the
obligation expressly so states, or when the law or the nature of the obligation
requires solidarity.
Art. 1208. If from the law, or the nature or wording of the obligations to which the
preceding article refers to the contrary does not appear, the credit or debt shall be
presumed to be divided into as many equal shares as there are creditors or
debtors, the debts or credits being considered distinct from one another, subject
to the Rules of Court governing the multiplicity of suits.
Petitioner’s argument is flawed.
The provisions of the Negotiable Instruments Law and underlying jurisprudential
teachings on the black-letter law provide definitive justification for petitioner’s full
liability on the value of the check.
To be sure, a collecting bank, Asianbank in this case, where a check is deposited
and which indorses the check upon presentment with the drawee bank, is an
indorser.[31] This is because in indorsing a check to the drawee bank, a collecting
bank stamps the back of the check with the phrase "all prior endorsements and/or
lack of endorsement guaranteed"32 and, for all intents and purposes, treats the
check as a negotiable instrument, hence, assumes the warranty of an
indorser.33 Without Asianbank’s warranty, the drawee bank (China Bank in this
case) would not have paid the value of the subject check.
Petitioner, as the collecting bank or last indorser, generally suffers the loss
because it has the duty to ascertain the genuineness of all prior indorsements
considering that the act of presenting the check for payment to the drawee is an
assertion that the party making the presentment has done its duty to ascertain the
genuineness of prior indorsements.34
Accordingly, one who credits the proceeds of a check to the account of the
indorsing payee is liable in conversion to the non-indorsing payee for the entire
amount of the check.35
It bears noting that in petitioner’s cross-claim against Bitanga, the trial court
ordered Bitanga to return to petitioner the entire value of the check ─
₱224,500.00 ─ with interest as well as damages and cost of suit. Petitioner never
questioned this aspect of the trial court’s disposition, yet it now prays for the
modification of its liability to BA Finance to only one-half of said amount. To
pander to petitioner’s supplication would certainly amount to unjust enrichment at
BA Finance’s expense. Petitioner’s remedy—which is the reimbursement for the
full amount of the check from the perpetrator of the irregularity — lies with
Bitanga.
Articles 1207 and 1208 of the Civil Code cannot be applied to the present case as
these are completely irrelevant. The drawer, Malayan Insurance in this case,
issued the check to answer for an underlying contractual obligation (payment of
insurance proceeds). The obligation is merely reflected in the instrument and
whether the payees would jointly share in the proceeds or not is beside the point.
Moreover, granting petitioner’s appeal for partial liability would run counter to the
existing principles on the liabilities of parties on negotiable instruments,
particularly on Section 68 of the Negotiable Instruments Law which instructs that
joint payees who indorse are deemed to indorse jointly and severally.36 Recall
that when the maker dishonors the instrument, the holder thereof can turn to
those secondarily liable — the indorser — for recovery.37 And since the law
explicitly mandates a solidary liability on the part of the joint payees who indorse
Nego Instruments Set 1 (#s1-70) Page 60 of 112
Lumbas. Dadat
the instrument, the holder thereof (assuming the check was further negotiated)
can turn to either Bitanga or BA Finance for full recompense.
Respecting petitioner’s challenge to the award by the appellate court of
exemplary damages to BA Finance, the same fails. Contrary to petitioner’s claim
that no moral, temperate, liquidated or compensatory damages were awarded by
the trial court,38 the RTC did in fact award compensatory or actual damages of
₱224,500, the value of the check, plus interest thereon.
Petitioner argues, however, that assuming arguendo that compensatory damages
had been awarded, the same contravened Article 2232 of the Civil Code which
provides that in contracts or quasi-contracts, the court may award exemplary
damages only if the defendant acted in a wanton, fraudulent, reckless,
oppressive, or malevolent manner. Since, so petitioner concludes, there was no
finding that it acted in a wanton, fraudulent, reckless, oppressive, or malevolent
manner,39 it is not liable for exemplary damages.
The argument fails. To reiterate, petitioner’s liability is based not on contract or
quasi-contract but on quasi-delictsince there is no pre-existing contractual relation
between the parties.40 Article 2231 of the Civil Code, which provides that in quasi-
delict, exemplary damages may be granted if the defendant acted with gross
negligence, thus applies. For "gross negligence" implies a want or absence of or
failure to exercise even slight care or diligence, or the entire absence of
care,41 evincing a thoughtless disregard of consequences without exerting any
effort to avoid them.42
x x x The law allows the grant of exemplary damages to set an example for the
public good. The business of a bank is affected with public interest; thus it makes
a sworn profession of diligence and meticulousness in giving irreproachable
service. For this reason, the bank should guard against in injury attributable to
negligence or bad faith on its part. The award of exemplary damages is proper as
a warning to [the petitioner] and all concerned not to recklessly disregard their
obligation to exercise the highest and strictest diligence in serving their
depositors.43(Italics and underscoring supplied)
As for the dismissal by the appellate court of petitioner’s third-party complaint
against Malayan Insurance, the same is well-taken. Petitioner based its third-
party complaint on Malayan Insurance’s alleged gross negligence in issuing the
check payable to both BA Finance and Bitanga, despite the stipulation in the
mortgage and in the insurance policy that liability for loss shall be payable to BA
Finance.44 Malayan Insurance countered, however, that it
x x x paid the amount of ₱224,500 to ‘BA Finance Corporation and Lamberto
Bitanga’ in compliance with the decision in the case of "Lamberto Bitanga versus
Malayan Insurance Co., Inc., Civil Case No. 88-2802, RTC-Makati Br. 132, and
affirmed on appeal by the Supreme Court [3rd Division], G.R. no. 101964, April 8,
1992 x x x.45(underscoring supplied)
It is noted that Malayan Insurance, which stated that it was a matter of company
policy to issue checks in the name of the insured and the financing company,
presented a witness to rebut its supposed negligence. 46 Perforce, it thus wrote
a crossed check with joint payees so as to serve warning that the check was
issued for a definite purpose.47Petitioner never ever disputed these assertions.
The Court takes exception, however, to the appellate court’s affirmance of the
trial court’s grant of legal interest of 12% per annum on the value of the check.
For the obligation in this case did not arise out of a loan or forbearance of money,
goods or credit. While Article 1980 of the Civil Code provides that:
Fixed savings, and current deposits of money in banks and similar institutions
shall be governed by the provisions concerning simple loan,
said provision does not find application in this case since the nature of the
relationship between BA Finance and petitioner is one of agency whereby
petitioner, as collecting bank, is to collect for BA Finance the corresponding
proceeds from the check.48 Not being a loan or forbearance of money, the interest
should be 6% per annum computed from the date of extrajudicial demand on
September 25, 1992 until finality of judgment; and 12% per annum from finality of
judgment until payment, conformably with Eastern Shipping Lines, Inc. v. Court of
Appeals.[49]

WHEREFORE, the Decision of the Court of Appeals dated May 18, 2007 is
AFFIRMED with MODIFICATION in that the rate of interest on the judgment
obligation of ₱224,500 should be 6% per annum, computed from the time of
extrajudicial demand on September 25, 1992 until its full payment before finality
of judgment; thereafter, if the amount adjudged remains unpaid, the interest rate
shall be 12% per annum computed from the time the judgment becomes final and
executory until fully satisfied. Costs against petitioner. SO ORDERED.
39. G.R. No. 126670 December 2, 1999
ERNESTO T. PACHECO and VIRGINIA O. PACHECO vs. HON. COURT OF
APPEALS and PEOPLE OF THE PHILIPPINES
Petitioner spouses are engaged in the construction business. Complainant
Romualdo Vicencio was a former Judge and his wife, Luz Vicencio, owns a
pawnshop in Samar. On May 17, 1989, due to financial difficulties arising from the
repeated delays in the payment of their receivables for the construction projects
from the DPWH, 1 petitioners were constrained to obtain a loan of P10,000.00
from Mrs. Vicencio. The latter acceded. Instead of merely requiring a note of
indebtedness, however, her husband Mr. Vicencio required petitioners to issue an
undated check as evidence of the loan which allegedly will not be presented to
the bank. Despite being informed by petitioners that their bank account no longer
had any funds, Mrs. Vicencio insisted that issue the check, which according to her
was only a formality. Thus, petitioner Virginia Pacheco issued on May 17, 1989
an undated RCBC 2 check with number CT 101756 for P10,000.00. However, she
only received the amount of P9,000.00 as the 10% interest on the loan was
already deducted. Mrs. Vicencio also required Virginia's husband, herein
petitioner Ernesto Pacheco, to sign the check on the same understanding that the
check is not to be encashed but merely intended as an evidence of indebtedness
which cannot be negotiated.
On June 14, 1989, Virginia obtained another loan of P50,000.00 from Mrs.
Vicencio. She received only P35,000.00 as the previous loan of P10,000.00 as
well as the 10% interest amounting to P5,000.00 on the new loan were deducted
by the latter. With the payment of the previous debt, Virginia asked for the return
of the first check (RCBC check no. 101756) but Mrs. Vicencio told her that her
filing clerk was absent. Despite several demands for the return of the first check,
Mrs. Vicencio told Virginia that they can no longer locate the folder containing that
check. For the new loan, she also required Virginia to issue three (3) more checks
in various amounts — two checks for P20,000.00 each and the third check for
P10,000.00. Petitioners were not amendable to these requirements, but Mrs.
Vicencio insisted that they issue the same assuring them that the checks will not
be presented to the banks but will merely serve as guarantee for the loan since
there was no promissory note required of them. Due to her dire financial needs,
Virginia issued three undated RCBC checks numbered 101783 and 101784 in the
sum of P20,000.00 each and 101785 for P10,000.00, and again informed Mrs.
Vicencio that the cheeks cannot be encashed as the same were not funded.
Petitioner Ernesto also signed the three checks as required by Mrs. Vicencio on
the same conditions as the first check.
On June 20 and July 21, 1989, petitioner Virginia obtained two more loans, one
for P10,000.00 and another for P15,000.00. Again she issued two more RCBC
checks (No. 101768 for P10,000.00 and No. 101774 for P15,000.00) as required
by Mrs. Vicencio with the same assurance that the checks shall not be presented
for payment but shall stand only as evidence of indebtedness in lieu of the usual
promissory note.
All the checks were undated at the time petitioners handed them to Mrs. Vicencio.
The six checks represent a total obligation of P85,000.00. However, since the
loan of P10,000.00 under the first check was already paid when the amount
thereof was deducted from the proceeds of the second loan, the remaining
account was only P75,000.00. Of this amount, petitioners were able to settle and
pay in cash P60,000.00 in July 1989. Petitioners never had any transaction nor
ever dealt with Mrs. Vicencio's husband, the complainant herein.
When the remaining balance of P15,000.00 on the loans became due and
demandable, petitioners were not able to pay despite demands to do so. On
August 3, 1992, Mrs. Vicencio together with her husband and their daughter
Lucille, went to petitioners' residence to persuade Virginia to place the date
"August 15, 1992" on checks nos. 101756 and 101774, although said checks
were respectively given undated to Mrs. Vicencio on May 17, 1989 and July 21,
1989. Check no. 101756 was required by Mrs. Vicencio to be dated as additional
guarantee for the P15,000.00 unpaid balance allegedly under check no. 101774.
Despite being informed by petitioner Virginia that their account with RCBC had
been closed as early as August 17, 1989, Mrs. Vicencio and her daughter insisted
that she place a date on the checks allegedly so that it will become evidence of
their indebtedness. The former reluctantly wrote the date on the checks for fear
that she might not be able to obtain future loans from Mrs. Vicencio.
Later, petitioners were surprised to receive on August 29, 1992 a demand letter
from Mrs. Vicencio's spouse informing them that the checks when presented for
payment on August 25, 1992 were dishonored due to "Account Closed".
Consequently, upon the complaint of Mrs., Vicencio's husband with whom
petitioners never had any transaction, two informations for estafa, defined in
Article 315 (2) (d) of the Revised Penal Code, were filed against them. The
informations which were amended on April 1, 1993 alleged that petitioners
"through fraud and false pretenses and in payment of a diamond ring (gold
necklace)" issued checks which when presented for payment were dishonored
due to account closed. 3 After entering a plea of not guilty during arraignment,
petitioners were tried and sentenced to suffer imprisonment and ordered to
indemnify the complainant in the total amount of P25,000.00. 4 On appeal, the
Court of Appeals (CA) affirmed the decision of the court a quo. 5 Hence this
petition.
Estafa may be committed in several ways. One of these is by postdating a check
or issuing a check in payment of an obligation, as provided in Article 315,
paragraph 2(d) of the RPC, viz:
Art. 315. Swindling (estafa). Any person who shall defraud another
by any of the means mentioned hereinbelow shall be punished by:
xxx xxx xxx
2. By means of any of the following false pretenses or fraudulent acts
executed prior to or simultaneously with the commission of the fraud:
xxx xxx xxx
(d) By postdating a check, or issuing a check in payment of an
obligation when the offender had no funds in the bank, or his funds
deposited therein were not sufficient to cover the amount of the
check. The failure of the drawer of the check to deposit the amount
necessary to cover his check within three (3) days from receipt of
notice from the bank and/or the payee or holder that said check has
been dishonored for lack or insufficiency of funds shall be prima
facie evidence of deceit constituting false pretense or fraudulent act.
The essential elements in order to sustain a conviction under the above
paragraph are:
1. that the offender postdated or issued a check in payment of an
payment obligation contracted at the time the check was issued;
2. that such postdating or issuing a check was done when the
offender had no funds in the bank, or his funds deposited therein
were not sufficient to cover the amount of the check;
3. deceit or damage to the payee thereof. 6
The first and third elements are not present in this case. A check has the
character of negotiability and at the same time it constitutes an evidence of
indebtedness. By mutual agreement of the parties, the negotiable character of a
check may be waived and the instrument may be treated simply as proof of an
obligation. There cannot be deceit on the part of the obligor, petitioners herein,
because they agreed with the obligee at the time of the issuance and postdating
of the checks that the same shall not be encashed or presented to the banks. As
per assurance of the lender, the checks are nothing but evidence of the loan or
security thereof in lieu of and for the same purpose as a promissory note. By their
own covenant, therefore, the checks became mere evidence of indebtedness. It
has been ruled that a drawer who issues a check as security or evidence of
Nego Instruments Set 1 (#s1-70) Page 61 of 112
Lumbas. Dadat
investment is not liable for estafa. 7 Mrs. Vicencio could not have been deceived
nor defrauded by petitioners in order to obtain the loans because she was
informed that they no longer have funds in their RCBC accounts. In 1992, when
the Vicencio family asked Virginia to place a date on the check, the latter again
informed Mrs. Vicencio that their account with RCBC was already closed as early
as August 1989. With the assurance, however, that the check will only stand as a
firm evidence of indebtedness, Virginia placed a date on the check. Under these
circumstances, Mrs. Vicencio cannot claim that she was deceived or defrauded
by petitioners in obtaining the loan. In the absence of the essential element of
deceit, 8 no estafa was committed by petitioners.
Both courts below relied so much on the fact that Mrs. Vicencio's husband is a
former Judge who knows the law. He should have known, then, that he need not
even ask the petitioners to place a date on the check, because as holder of the
check, he could have inserted the date pursuant to Section 13 of the Negotiable
Instruments Law (NIL). 9Moreover, as stated in Section 14 thereof, complainant,
as the person in possession of the check, has prima facie authority to complete it
by filling up the blanks therein. Besides, pursuant to Section 12 of the same law,
a negotiable instrument is not rendered invalid by reason only that it is antedated
or postdated. 10 Thus, the allegation of Mrs. Vicencio that the date to be placed by
Virginia was necessary so as to make the check evidence of indebtedness is
nothing but a ploy. Petitioners openly disclosed and never hid the fact that they
no longer have funds in the bank as their bank account was already closed.
Knowledge by the complainant that the drawer does not have sufficient funds in
the bank at the time it was issued to him does not give rise to a case for estafa
through bouncing
checks. 11
Moreover, a check must be presented within a reasonable time from
issue. 12 By current banking practice, a check becomes stale after more than six
(6) months. In fact a check long overdue for more than two and one-half years is
considered stale. 13 In this case, the checks were issued more than three years
prior to their presentment. In his complaint, complainant alleged that petitioners
bought jewelry from him and that he would not have parted with his jewelry had
not petitioners issued the checks. The evidence on record, however, does not
support the theory of the crime.
There were six checks given by petitioners to Mrs. Vicencio but only two were
presented for encashment. If all were issued in payment of the alleged jewelry,
why were not all the checks presented? There was a deliberate choice of these
two checks as the total amount reflected therein is equivalent to the amount due
under the unpaid obligation. The other checks, on the other hand, could not be
used as the amounts therein do not jibe with the amount of the unpaid balance.
Following complainant's theory that he would not have sold the jewelries had not
petitioners issued "postdated" checks, still no estafa can be imputed to
petitioners. It is clear that the checks were not intended for encashment with the
bank, but were delivered as mere security for the payment of the loan and under
an agreement that the checks would be redeemed with cash as they fell due.
Hence, the checks were not intended by the parties to be modes of payment but
only as promissory notes. Since complainant and his wife were well aware of that
fact, they cannot now complain there was deception on the part of petitioners.
Awareness by the complainant of the fictitious nature of the pretense cannot give
rise to estafa by means of deceit. 14 When the payee was informed by the by the
drawer that the checks are not covered by adequate funds it does not give rise to
bad faith or estafa. 15
Moreover, complainant's allegations that the two subject checks were issued in
1992 as payment for the jewelry he allegedly sold to petitioners is belied by the
evidence on record. First, complainant is not engaged in the sale of
jewelry. 16 Neither are petitioners. If the pieces of jewelry were important to
complainant considering that they were with him for more than twenty-five years
already, 17 he would not have easily parted with them in consideration for
unfunded personal checks in favor of persons whose means of living or source of
income were unknown to him. 18Applicable here is the legal precept that persons
are presumed to have taken care of their business. 19

Second, petitioners' bank account with RCBC was opened on March 26, 1987
and was closed on April 17, 1989, during the span of which they were issued 10
check booklets with the last booklet issued on April 6, 1984. This last booklet
contains 50 checks consecutively numbered from 101751 to 101800. The two
subject checks came from this booklet. All the checks in this booklet were issued
in the year 1989 including the two subject checks, so that the complainants'
theory that the jewelry were sold in 1992 cannot be believed.
The rule that factual findings of the trial court bind this court is not absolute but
admits of exceptions such as when the conclusion is a finding grounded on
speculation, surmise, and conjecture and when the findings of the lower court is
premised on the absence of evidence and is contradicted by the evidence on
record. 20 Based on the foregoing discussions, this Court is constrained to depart
from the general rule. Equally applicable is what Vice-Chancellor Van Fleet once
said: 21
Evidence to be believed must not only proceed from the mouth of a
credible witness but must be credible in itself — such as the common
experience and observation of mankind can approve as probable
under the circumstances. We have no test of the truth of human
testimony, except its conformity to our knowledge, observation and
experience. Whatever is repugnant to these belongs to the
miraculous, and is outside of judicial cognizance.
Petitioners, however, are not without liability. An accused acquitted of a criminal
charge may nevertheless be held civilly liable in the same case where the facts
established by the evidence so warrant. 22 Based on the records, they still have
an outstanding obligation of P15,000.00 in favor of Mrs. Vicencio. There was
mention that the loan shall earn interests. However, an agreement as to payment
of interest must be in writing, otherwise it cannot be valid, 23although there was
actual payment of interests by virtue of the advance deductions from the loan.
Once the judgment becomes final and executory, the amount due is deemed
equivalent to a forbearance of credit during the interim period from the finality of
judgment until full payment, in which case it shall earn legal interest at the rate of
twelve per cent (12%) per annum pursuant to Central Bank (CB) Circular No.
416. 24
WHEREFORE, the assailed Decision is REVERSED and SET ASIDE. Petitioners
are ACQUITTED of the charge of estafa but they are ORDERED to pay Mrs.
Vicencio the amount of P15,000.00 without interest. However, from the time this
judgment becomes final and executory, the amount due shall earn legal interest
of twelve percent (12%)per annum until full payment. SO ORDERED.
40. G.R. Nos. L-25836-37 January 31, 1981
THE PHILIPPINE BANK OF COMMERCE vs. JOSE M. ARUEGO
The defendant, Jose M. Aruego, appealed to the Court of Appeals from the order
of the Court of First Instance of Manila, Branch XIII, in Civil Case No. 42066
denying his motion to set aside the order declaring him in default, 1 and from the
order of said court in the same case denying his motion to set aside the judgment
rendered after he was declared in default. 2 These two appeals of the defendant
were docketed as CA-G.R. NO. 27734-R and CA-G.R. NO. 27940-R,
respectively.
Upon motion of the defendant on July 25, 1960, 3 he was allowed by the Court of
Appeals to file one consolidated record on appeal of CA-G.R. NO. 27734-R and
CA-G.R. NO. 27940-R. 4
In a resolution promulgated on March 1, 1966, the Court of Appeals, First
Division, certified the consolidated appeal to the Supreme Court on the ground
that only questions of law are involved. 5
On December 1, 1959, the Philippine Bank of Commerce instituted against Jose
M. Aruego Civil Case No. 42066 for the recovery of the total sum of about
P35,000.00 with daily interest thereon from November 17, 1959 until fully paid
and commission equivalent to 3/8% for every thirty (30) days or fraction thereof
plus attorney's fees equivalent to 10% of the total amount due and costs. 6 The
complaint filed by the Philippine Bank of Commerce contains twenty-two (22)
causes of action referring to twenty-two (22) transactions entered into by the said
Bank and Aruego on different dates covering the period from August 28, 1950 to
March 14, 1951. 7 The sum sought to be recovered represents the cost of the
printing of "World Current Events," a periodical published by the defendant. To
facilitate the payment of the printing the defendant obtained a credit
accommodation from the plaintiff. Thus, for every printing of the "World Current
Events," the printer, Encal Press and Photo Engraving, collected the cost of
printing by drawing a draft against the plaintiff, said draft being sent later to the
defendant for acceptance. As an added security for the payment of the amounts
advanced to Encal Press and Photo-Engraving, the plaintiff bank also required
defendant Aruego to execute a trust receipt in favor of said bank wherein said
defendant undertook to hold in trust for plaintiff the periodicals and to sell the
same with the promise to turn over to the plaintiff the proceeds of the sale of said
publication to answer for the payment of all obligations arising from the draft. 8
Aruego received a copy of the complaint together with the summons on
December 2, 1959. 9 On December 14, 1959 defendant filed an urgent motion for
extension of time to plead, and set the hearing on December 16, 1959. 10At the
hearing, the court denied defendant's motion for extension. Whereupon, the
defendant filed a motion to dismiss the complaint on December 17, 1959 on the
ground that the complaint states no cause of action because:
a) When the various bills of exchange were presented to the defendant as
drawee for acceptance, the amounts thereof had already been paid by the plaintiff
to the drawer (Encal Press and Photo Engraving), without knowledge or consent
of the defendant drawee.
b) In the case of a bill of exchange, like those involved in the case at bar, the
defendant drawee is an accommodating party only for the drawer (Encal Press
and Photo-Engraving) and win be liable in the event that the accommodating
party (drawer) fails to pay its obligation to the plaintiff. 11
The complaint was dismissed in an order dated December 22, 1959, copy of
which was received by the defendant on December 24, 1959. 12
On January 13, 1960, the plaintiff filed a motion for reconsideration. 13 On March
7, 1960, acting upon the motion for reconsideration filed by the plaintiff, the trial
court set aside its order dismissing the complaint and set the case for hearing on
March 15, 1960 at 8:00 in the morning. 14 A copy of the order setting aside the
order of dismissal was received by the defendant on March 11, 1960 at 5:00
o'clock in the afternoon according to the affidavit of the deputy sheriff of Manila,
Mamerto de la Cruz. On the following day, March 12, 1960, the defendant filed a
motion to postpone the trial of the case on the ground that there having been no
answer as yet, the issues had not yet been joined. 15 On the same date, the
defendant filed his answer to the complaint interposing the following defenses:
That he signed the document upon which the plaintiff sues in his capacity as
President of the Philippine Education Foundation; that his liability is only
secondary; and that he believed that he was signing only as an accommodation
party. 16
On March 15, 1960, the plaintiff filed an ex parte motion to declare the defendant
in default on the ground that the defendant should have filed his answer on March
11, 1960. He contends that by filing his answer on March 12, 1960, defendant
was one day late. 17 On March 19, 1960 the trial court declared the defendant in
default. 18 The defendant learned of the order declaring him in default on March
21, 1960. On March 22, 1960 the defendant filed a motion to set aside the order
of default alleging that although the order of the court dated March 7, 1960 was
received on March 11, 1960 at 5:00 in the afternoon, it could not have been
reasonably expected of the defendant to file his answer on the last day of the
reglementary period, March 11, 1960, within office hours, especially because the
order of the court dated March 7, 1960 was brought to the attention of counsel
only in the early hours of March 12, 1960. The defendant also alleged that he has
a good and substantial defense. Attached to the motion are the affidavits of
deputy sheriff Mamerto de la Cruz that he served the order of the court dated
March 7, 1960 on March 11, 1960, at 5:00 o'clock in the afternoon and the
affidavit of the defendant Aruego that he has a good and substantial
defense. 19 The trial court denied the defendant's motion on March 25,
1960. 20 On May 6, 1960, the trial court rendered judgment sentencing the
Nego Instruments Set 1 (#s1-70) Page 62 of 112
Lumbas. Dadat
defendant to pay to the plaintiff the sum of P35,444.35 representing the total
amount of his obligation to the said plaintiff under the twenty-two (22) causes of
action alleged in the complaint as of November 15, 1957 and the sum of
P10,000.00 as attorney's fees. 21
On May 9, 1960 the defendant filed a notice of appeal from the order dated March
25, 1961 denying his motion to set aside the order declaring him in default, an
appeal bond in the amount of P60.00, and his record on appeal. The plaintiff filed
his opposition to the approval of defendant's record on appeal on May 13, 1960.
The following day, May 14, 1960, the lower court dismissed defendant's appeal
from the order dated March 25, 1960 denying his motion to set aside the order of
default. 22 On May 19, 1960, the defendant filed a motion for reconsideration of
the trial court's order dismissing his appeal. 23 The plaintiff, on May 20, 1960,
opposed the defendant's motion for reconsideration of the order dismissing
appeal. 24 On May 21, 1960, the trial court reconsidered its previous order
dismissing the appeal and approved the defendant's record on appeal. 25 On May
30, 1960, the defendant received a copy of a notice from the Clerk of Court dated
May 26, 1960, informing the defendant that the record on appeal filed ed by the
defendant was forwarded to the Clerk of Court of Appeals. 26
On June 1, 1960 Aruego filed a motion to set aside the judgment rendered after
he was declared in default reiterating the same ground previously advanced by
him in his motion for relief from the order of default. 27 Upon opposition of the
plaintiff filed on June 3, 1960, 28 the trial court denied the defendant's motion to
set aside the judgment by default in an order of June 11, 1960. 29 On June 20,
1960, the defendant filed his notice of appeal from the order of the court denying
his motion to set aside the judgment by default, his appeal bond, and his record
on appeal. The defendant's record on appeal was approved by the trial court on
June 25, 1960. 30 Thus, the defendant had two appeals with the Court of Appeals:
(1) Appeal from the order of the lower court denying his motion to set aside the
order of default docketed as CA-G.R. NO. 27734-R; (2) Appeal from the order
denying his motion to set aside the judgment by default docketed as CA-G.R. NO.
27940-R.
In his brief, the defendant-appellant assigned the following errors:
I
THE LOWER COURT ERRED IN HOLDING THAT THE DEFENDANT WAS IN
DEFAULT.
II
THE LOWER COURT ERRED IN ENTERTAINING THE MOTION TO DECLARE
DEFENDANT IN DEFAULT ALTHOUGH AT THE TIME THERE WAS ALREADY
ON FILE AN ANSWER BY HIM WITHOUT FIRST DISPOSING OF SAID
ANSWER IN AN APPROPRIATE ACTION.
III
THE LOWER COURT ERRED IN DENYING DEFENDANT'S PETITION FOR
RELIEF OF ORDER OF DEFAULT AND FROM JUDGMENT BY DEFAULT
AGAINST DEFENDANT. 31
It has been held that to entitle a party to relief from a judgment taken against him
through his mistake, inadvertence, surprise or excusable neglect, he must show
to the court that he has a meritorious defense. 32 In other words, in order to set
aside the order of default, the defendant must not only show that his failure to
answer was due to fraud, accident, mistake or excusable negligence but also that
he has a meritorious defense.
The record discloses that Aruego received a copy of the complaint together with
the summons on December 2, 1960; that on December 17, 1960, the last day for
filing his answer, Aruego filed a motion to dismiss; that on December 22, 1960 the
lower court dismissed the complaint; that on January 23, 1960, the plaintiff filed a
motion for reconsideration and on March 7, 1960, acting upon the motion for
reconsideration, the trial court issued an order setting aside the order of
dismissal; that a copy of the order was received by the defendant on March 11,
1960 at 5:00 o'clock in the afternoon as shown in the affidavit of the deputy
sheriff; and that on the following day, March 12, 1960, the defendant filed his
answer to the complaint.

The failure then of the defendant to file his answer on the last day for pleading is
excusable. The order setting aside the dismissal of the complaint was received at
5:00 o'clock in the afternoon. It was therefore impossible for him to have filed his
answer on that same day because the courts then held office only up to 5:00
o'clock in the afternoon. Moreover, the defendant immediately filed his answer on
the following day.
However, while the defendant successfully proved that his failure to answer was
due to excusable negligence, he has failed to show that he has a meritorious
defense. The defendant does not have a good and substantial defense.
Defendant Aruego's defenses consist of the following:
a) The defendant signed the bills of exchange referred to in the plaintiff's
complaint in a representative capacity, as the then President of the Philippine
Education Foundation Company, publisher of "World Current Events and
Decision Law Journal," printed by Encal Press and Photo-Engraving, drawer of
the said bills of exchange in favor of the plaintiff bank;
b) The defendant signed these bills of exchange not as principal obligor, but as
accommodation or additional party obligor, to add to the security of said plaintiff
bank. The reason for this statement is that unlike real bills of exchange, where
payment of the face value is advanced to the drawer only upon acceptance of the
same by the drawee, in the case in question, payment for the supposed bills of
exchange were made before acceptance; so that in effect, although these
documents are labelled bills of exchange, legally they are not bills of exchange
but mere instruments evidencing indebtedness of the drawee who received the
face value thereof, with the defendant as only additional security of the same. 33
The first defense of the defendant is that he signed the supposed bills of
exchange as an agent of the Philippine Education Foundation Company where he
is president. Section 20 of the Negotiable Instruments Law provides that "Where
the instrument contains or a person adds to his signature words indicating that he
signs for or on behalf of a principal or in a representative capacity, he is not liable
on the instrument if he was duly authorized; but the mere addition of words
describing him as an agent or as filing a representative character, without
disclosing his principal, does not exempt him from personal liability."
An inspection of the drafts accepted by the defendant shows that nowhere has he
disclosed that he was signing as a representative of the Philippine Education
Foundation Company. 34 He merely signed as follows: "JOSE ARUEGO
(Acceptor) (SGD) JOSE ARGUEGO For failure to disclose his principal, Aruego is
personally liable for the drafts he accepted.
The defendant also contends that he signed the drafts only as an accommodation
party and as such, should be made liable only after a showing that the drawer is
incapable of paying. This contention is also without merit.
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.35 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. In
the instant case, the defendant signed as a drawee/acceptor. Under the
Negotiable Instrument Law, a drawee is primarily liable. Thus, if the defendant
who is a lawyer, he should not have signed as an acceptor/drawee. In doing so,
he became primarily and personally liable for the drafts.
The defendant also contends that the drafts signed by him were not really bills of
exchange but mere pieces of evidence of indebtedness because payments were
made before acceptance. This is also without merit. Under the Negotiable
Instruments Law, a bill of exchange is an unconditional order in writting
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. 36 As long as a
commercial paper conforms with the definition of a bill of exchange, that paper is
considered a bill of exchange. The nature of acceptance is important only in the
determination of the kind of liabilities of the parties involved, but not in the
determination of whether a commercial paper is a bill of exchange or not.
It is evident then that the defendant's appeal can not prosper. To grant the
defendant's prayer will result in a new trial which will serve no purpose and will
just waste the time of the courts as well as of the parties because the defense is
nil or ineffective. 37
WHEREFORE, the order appealed from in Civil Case No. 42066 of the Court of
First Instance of Manila denying the petition for relief from the judgment rendered
in said case is hereby affirmed, without pronouncement as to costs. SO
ORDERED.
41. G.R. No. 158143 September 21, 2011
PHILIPPINE COMMERCIAL INTERNATIONAL BANK vs. ANTONIO B.
BALMACEDA and ROLANDO N. RAMOS
Before us is a petition for review on certiorari,1 filed by the Philippine Commercial
International Bank2 (Bank or PCIB), to reverse and set aside the decision3 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 ₱895,000.00.
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 Manager’s checks in the total amount of
Ten Million Seven Hundred Eighty Two Thousand One Hundred Fifty Pesos
(₱10,782,150.00).
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 Balmaceda’s alleged fraud. PCIB also increased the number of fraudulently
obtained and encashed Manager’s checks to 34, in the total amount of Eleven
Million Nine Hundred Thirty Seven Thousand One Hundred Fifty Pesos
(₱11,937,150.00). 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 Balmaceda’s 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
Balmaceda’s 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
₱11,042,150.00 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
₱895,000.00 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 ₱500,000.00 and attorney’s 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,
Nego Instruments Set 1 (#s1-70) Page 63 of 112
Lumbas. Dadat
Manila branch of PCIB, successfully obtained and misappropriated the bank’s
funds by falsifying several commercial documents. He accomplished this by
claiming that he had been instructed by one of the Bank’s corporate clients to
purchase Manager’s checks on its behalf, with the value of the checks to be
debited from the client’s corporate bank account. First, he would instruct the Bank
staff to prepare the application forms for the purchase of Manager’s checks,
payable to several persons. Then, he would forge the signature of the client’s
authorized representative on these forms and sign the forms as PCIB’s approving
officer. Finally, he would have an authorized officer of PCIB issue the Manager’s
checks. Balmaceda would subsequently ask his subordinates to release the
Manager’s checks to him, claiming that the client had requested that he deliver
the checks.5 After receiving the Manager’s 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 Manager’s checks payable to Ramos were crossed checks,
Balmaceda was still able to encash the checks.6 After Balmaceda encashed three
of these Manager’s checks, he deposited most of the money into Ramos’
account.7 The RTC concluded that from the ₱11,937,150.00 that Balmaceda
misappropriated from PCIB, ₱895,000.00 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 ₱895,000.00.
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
latter’s fraudulent manipulations.8
According to the CA, the mere fact that Balmaceda made Ramos the payee in
some of the Manager’s checks does not suffice to prove that Ramos was
complicit in Balmaceda’s 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 PCIB’s failure to prove Ramos’
actual participation in Balmaceda’s fraud, no legal and factual basis exists to hold
him liable.
The CA also found that PCIB acted illegally in freezing and debiting ₱251,910.96
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 ₱251,910.96 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) ₱50,000.00 as moral damages
b) ₱50,000.00 as exemplary damages, and
c) ₱20,000.00 as attorney’s 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 ₱251,910.96 TO RESPONDENT RAMOS AND TO
PAY THE LATTER MORAL AND EXEMPLARY DAMAGES AND ATTORNEY’S
FEES10
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
Manager’s 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 Manager’s checks were made payable to him in the first place.
PCIB maintains that it had the right to freeze and debit the amount of
₱251,910.96 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 Manager’s 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 Balmaceda’s 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 PCIB’s Sta. Cruz, Manila branch, was able to apply for and obtain Manager’s
checks drawn against the bank account of one of PCIB’s 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 Manager’s checks and to
misappropriate their proceeds. Since Ramos’ defense – anchored on mere denial
of any participation in Balmaceda’s 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 latter’s
scheme to defraud the Bank. In PCIB’s 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 PCIB’s evidence proves is that Balmaceda used Ramos’
name as a payee when he filled up the application forms for the Manager’s
checks. But, as the CA correctly observed, the mere fact that Balmaceda made
Ramos the payee on some of the Manager’s checks is not enough basis to
conclude that Ramos was complicit in Balmaceda’s fraud; a number of other
people were made payees on the other Manager’s 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 Balmaceda’s 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 Manager’s checks against the bank account of one
of PCIB’s clients, as well as when he encashed the fraudulently acquired
Manager’s 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 Manager’s checks – from filling up the application form by forging
the signature of the client’s 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
Manager’s check which [has] been debited to a client’s account. This particular
Manager’s 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 Manager’s 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 Manager’s 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 ₱150,000.00, where is the corresponding
check?
A: Rolando Ramos dated December 26, 1991 and one of the signatories with
higher authority, this is Mr. Balmaceda’s signature.
Q: In other words he is likewise approving signatory to the Manager’s 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?
Nego Instruments Set 1 (#s1-70) Page 64 of 112
Lumbas. Dadat
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
₱125,000.00 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 ₱125,000.00 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 PCIB’s 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
Manager’s checks where Ramos was the payee, so as to encash the amounts
indicated on the checks.19Mrs. 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. Laforteza’s 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 Manager’s check for ₱480,000.00, could only testify that the
money was deposited into Ramos’ PCIB bank account. She could not attest that
Ramos himself presented the Manager’s check for deposit in his bank
account.21 These testimonies clearly dispute PCIB’s theory that Ramos was
instrumental in the encashment of the Manager’s 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
₱100,000.00, for the sale of approximately 45 fighting cocks.22 In PCIB’s view,
this testimony directly contradicts Ramos’ assertion that he received
approximately ₱400,000.00 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 Cosculluela’s 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 ₱100,000.00,24 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 ₱400,000.00 that Balmaceda deposited into Ramos’ bank account.
Given that PCIB failed to establish Ramos’ participation in Balmaceda’s 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 plaintiff’s 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 Bank’s protocol when he ordered the Bank’s
employees to fill up the application forms for the Manager’s checks, to be debited
from the bank account of one of the bank’s clients, without providing the
necessary Authority to Debit from the client.26 PCIB also admitted that these
Manager’s checks were subsequently released to Balmaceda, and not to the
client’s representative, based solely on Balmaceda’s word that the client had
tasked him to deliver these checks.27
Despite Balmaceda’s gross violations of bank procedures – mainly in the
processing of the applications for Manager’s checks and in the releasing of the
Manager’s checks – Balmaceda’s co-employees not only turned a blind eye to his
actions, but actually complied with his instructions. In this way, PCIB’s own
employees were unwitting accomplices in Balmaceda’s fraud.
Another telling indicator of PCIB’s negligence is the fact that it allowed
Balmaceda to encash the Manager’s 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 payee’s account.30 In complete disregard of this duty, PCIB’s systems allowed
Balmaceda to encash 26 Manager’s checks which were all crossed checks, or
checks payable to the "payee’s account only."
The General Banking Law of 200031 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
manager’s mere order. This lapse is made all the more glaring by Balmaceda’s
repetition of his modus operandi 33 more times in a period of over one year by
the Bank’s 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 entitled and 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 Balmaceda’s
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:
Nego Instruments Set 1 (#s1-70) Page 65 of 112
Lumbas. Dadat
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 PCIB’s 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
PCIB’s 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 PCIB’s 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
₱251,910.96 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.1âwphi1 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 attorney’s fees in
Ramos’ favor. Taking into consideration the time and efforts involved that went
into this case, we increase the award of attorney’s fees from ₱20,000.00 to
₱75,000.00.
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 attorney’s fees
is INCREASED to ₱75,000.00. Costs against the Philippine Commercial
International Bank. SO ORDERED.
42. G.R. No. 121413 January 29, 2001
PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly INSULAR
BANK OF ASIA AND AMERICA) vs. COURT OF APPEALS and FORD
PHILIPPINES, INC. and CITIBANK, N.A.
G.R. No. 121479 January 29, 2001
FORD PHILIPPINES, INC. vs. COURT OF APPEALS and CITIBANK, N.A. and
PHILIPPINE COMMERCIAL INTERNATIONAL BANK
G.R. No 128604 January 29, 2001

FORD PHILIPPINES, INC. vs. CITIBANK, N.A., PHILIPPINE COMMERCIAL
INTERNATIONAL BANK and COURT OF APPEALS
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.1âwphi1.nêt
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 Resolution 4 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:
Nego Instruments Set 1 (#s1-70) Page 66 of 112
Lumbas. Dadat
"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
Nego Instruments Set 1 (#s1-70) Page 67 of 112
Lumbas. Dadat
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
Nego Instruments Set 1 (#s1-70) Page 68 of 112
Lumbas. Dadat
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. Costs against Philippine Commercial International Bank and Citibank
N.A. SO ORDERED.
43. G.R. No. 171736 July 5, 2010
PENTACAPITAL INVESTMENT CORPORATION vs. MAKILITO B. MAHINAY
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 181482
PENTACAPITAL INVESTMENT CORPORATION vs. MAKILITO B. MAHINAY
Before us are two consolidated petitions for review on certiorari under Rule 45 of
the Rules of Court filed by petitioner Pentacapital Investment Corporation. In G.R.
No. 171736, petitioner assails the Court of Appeals (CA) Decision 1 dated
December 20, 2005 and Resolution2 dated March 1, 2006 in CA-G.R. SP No.
74851; while in G.R. No. 181482, it assails the CA Decision 3 dated October 4,
2007 and Resolution4 dated January 21, 2008 in CA-G.R. CV No. 86939.
The Facts
Petitioner filed a complaint for a sum of money against respondent Makilito
Mahinay based on two separate loans obtained by the latter, amounting to
₱1,520,000.00 and ₱416,800.00, or a total amount of ₱1,936,800.00. These
Nego Instruments Set 1 (#s1-70) Page 69 of 112
Lumbas. Dadat
loans were evidenced by two promissory notes5 dated February 23, 1996.
Despite repeated demands, respondent failed to pay the loans, hence, the
complaint.6
In his Answer with Compulsory Counterclaim,7 respondent claimed that petitioner
had no cause of action because the promissory notes on which its complaint was
based were subject to a condition that did not occur.8 While admitting that he
indeed signed the promissory notes, he insisted that he never took out a loan and
that the notes were not intended to be evidences of indebtedness.9 By way of
counterclaim, respondent prayed for the payment of moral and exemplary
damages plus attorney’s fees.10
Respondent explained that he was the counsel of Ciudad Real Development Inc.
(CRDI). In 1994, Pentacapital Realty Corporation (Pentacapital Realty) offered to
buy parcels of land known as the Molino Properties, owned by CRDI, located in
Molino, Bacoor, Cavite. The Molino Properties, with a total area of 127,708
square meters, were sold at ₱400.00 per sq m. As the Molino Properties were
the subject of a pending case, Pentacapital Realty paid only the down payment
amounting to ₱12,000,000.00. CRDI allegedly instructed Pentacapital Realty to
pay the former’s creditors, including respondent who thus received a check worth
₱1,715,156.90.11 It was further agreed that the balance would be payable upon
the submission of an Entry of Judgment showing that the case involving the
Molino Properties had been decided in favor of CRDI.12
Respondent, Pentacapital Realty and CRDI allegedly agreed that respondent had
a charging lien equivalent to 20% of the total consideration of the sale in the
amount of ₱10,277,040.00. Pending the submission of the Entry of Judgment
and as a sign of good faith, respondent purportedly returned the ₱1,715,156.90
check to Pentacapital Realty. However, the Molino Properties continued to be
haunted by the seemingly interminable court actions initiated by different parties
which thus prevented respondent from collecting his commission.
On motion13 of respondent, the Regional Trial Court (RTC) allowed him to file a
Third Party Complaint14 against CRDI, subject to the payment of docket fees.15
Admittedly, respondent earlier instituted an action for Specific Performance
against Pentacapital Realty before the RTC of Cebu City, Branch 57, praying for
the payment of his commission on the sale of the Molino Properties.16 In an
Amended Complaint,17 respondent referred to the action he instituted as one of
Preliminary Mandatory Injunction instead of Specific Performance. Acting on
Pentacapital Realty’s Motion to Dismiss, the RTC dismissed the case for lack of
cause of action.18 The dismissal became final and executory.
With the dismissal of the aforesaid case, respondent filed a Motion to Permit
Supplemental Compulsory Counterclaim.19 In addition to the damages that
respondent prayed for in his compulsory counterclaim, he sought the payment of
his commission amounting to ₱10,316,640.00, plus interest at the rate of 16%
per annum, as well as attorney’s fees equivalent to 12% of his principal
claim.20 Respondent claimed that Pentacapital Realty is a 100% subsidiary of
petitioner. Thus, although petitioner did not directly participate in the transaction
between Pentacapital Realty, CRDI and respondent, the latter’s claim against
petitioner was based on the doctrine of piercing the veil of corporate fiction.
Simply stated, respondent alleged that petitioner and Pentacapital Realty are one
and the same entity belonging to the Pentacapital Group of Companies.21
Over the opposition of petitioner, the RTC, in an Order22 dated August 22, 2002,
allowed the filing of the supplemental counterclaim. Aggrieved, petitioner sought
recourse in the CA through a special civil action for certiorari, seeking to reverse
and set aside the RTC Order. The case was docketed as CA-G.R. SP No. 74851.
On December 20, 2005, the CA rendered the assailed Decision dismissing the
petition.23 The appellate court sustained the allowance of the supplemental
compulsory counterclaim based on the allegations in respondent’s pleading. The
CA further concluded that there was a logical relationship between the claims of
petitioner in its complaint and those of respondent in his supplemental
compulsory counterclaim. The CA declared that it was inconsequential that
respondent did not clearly allege the facts required to pierce the corporate
separateness of petitioner and its subsidiary, the Pentacapital Realty.241avvphi1
Petitioner now comes before us in G.R. No. 171736, raising the following issues:

A.
WHETHER RESPONDENT MAHINAY IS BARRED FROM ASSERTING THE
CLAIM CONTAINED IN HIS "SUPPLEMENTAL COMPULSORY
COUNTERCLAIM" ON THE GROUNDS OF (1) RES JUDICATA, (2) WILLFUL
AND DELIBERATE FORUM SHOPPING, AND (3) FAILURE TO INTERPOSE
SUCH CLAIM ON TIME PURSUANT TO SECTION 2 OF RULE 9 OF THE
RULES OF COURT;
B.
WHETHER RESPONDENT MAHINAY’S SUPPLEMENTAL COMPULSORY
COUNTERCLAIM IS ACTUALLY A THIRD-PARTY COMPLAINT AGAINST
PENTACAPITAL REALTY, THE INTRODUCTION OF WHICH REQUIRES THE
PAYMENT OF THE NECESSARY DOCKET FEES;
C.
ASSUMING FOR THE SAKE OF PURE ARGUMENT THAT IT IS PROPER TO
PIERCE THE CORPORATE VEIL AND TO ALLOW RESPONDENT MAHINAY
TO LODGE A "SUPPLEMENTAL COMPULSORY COUNTERCLAIM" AGAINST
HEREIN PETITIONER PENTACAPITAL INVESTMENT FOR AN ALLEGED
OBLIGATION OF ITS SUBSIDIARY, PENTACAPITAL REALTY, ON THE
THEORY THAT THEY ARE "ONE AND THE SAME COMPANY," WHETHER
PENTACAPITAL REALTY SHOULD HAVE AT LEAST BEEN MADE A PARTY
TO THE CASE AS RULED BY THIS HONORABLE COURT IN FILMERCO
COMMERCIAL CO., INC. VS. INTERMEDIATE APPELLATE COURT;
D.
WHETHER RESPONDENT MAHINAY SHOULD BE ALLOWED TO PRESENT
EVIDENCE ON HIS SO-CALLED "SUPPLEMENTAL COMPULSORY
COUNTERCLAIM" INASMUCH AS (1) RESPONDENT MAHINAY’S PLEADINGS
ARE BEREFT OF ANY ALLEGATIONS TO BUTTRESS THE MERGING OF
PENTACAPITAL REALTY AND PENTACAPITAL INVESTMENT INTO ONE
ENTITY AND THE CONSEQUENT IMPUTATION ON THE LATTER OF THE
FORMER’S SUPPOSED LIABILITY ON RESPONDENT MAHINAY’S
SUPPLEMENTAL COMPULSORY COUNTERCLAIM, AND (2) THE INCIDENTS
ALLEGEDLY PERTAINING TO, AND WHICH WOULD THEREBY SUPPORT,
THE PIERCING OF CORPORATE VEIL ARE NOT EVIDENTIARY MATTERS
MATERIAL TO THE PROCEEDINGS BEFORE THE COURT A QUO
CONSIDERING THAT THE SAME ARE BEYOND THE SCOPE OF THE
PLEADINGS;
E.
WHETHER THE DOCTRINE OF PIERCING THE CORPORATE VEIL MAY BE
INVOKED AND APPLIED IN ORDER TO EVADE AN OBLIGATION AND
FACILITATE PROCEDURAL WRONGDOING; AND
F.
WHETHER PETITIONER PENTACAPITAL INVESTMENT COMMITTED FORUM
SHOPPING WHEN IT FILED THE PRESENT PETITION DURING THE
PENDENCY OF THE MOTION FOR RECONSIDERATION IT FILED BEFORE
THE COURT A QUO AND, SUBSEQUENTLY, OF THE APPEAL BEFORE THE
COURT OF APPEALS TO QUESTION THE JUDGMENT OF THE COURT A
QUO.25
There being no writ of injunction or Temporary Restraining Order (TRO), the
proceedings before the RTC continued and respondent was allowed to present
his evidence on his supplemental compulsory counterclaim. After trial on the
merits, the RTC rendered a decision26 dated March 20, 2006, the dispositive
portion of which reads:
WHEREFORE, PREMISES CONSIDERED, plaintiff’s complaint is hereby
ordered dismissed for lack of merit. This court, instead, finds that defendant was
able to prove by a clear preponderance of evidence his cause of action against
plaintiff as to defendant’s compulsory and supplemental counterclaims. That,
therefore, this court hereby orders the plaintiff to pay unto defendant the following
sums, to wit:
1. ₱1,715,156.90 representing the amount plaintiff is obligated to pay
defendant as provided for in the deed of sale and the supplemental
agreement, plus interest at the rate of 16% per annum, to be
computed from September 23, 1998 until the said amount shall have
been fully paid;
2. Php 10,316,640.00 representing defendant’s share of the
proceeds of the sale of the Molino property (defendant’s charging
lien) plus interest at the rate of 16% per annum, to be computed from
September 23, 1998 until the said amount shall have been fully paid;
3. Php 50,000.00 as attorney’s fees based on quantum meruit;
4. Php 50,000.00 litigation expenses, plus costs of suit.
This court finds it unnecessary to rule on the third party complaint, the relief
prayed for therein being dependent on the possible award by this court of the
relief of plaintiff’s complaint.27
On appeal, the CA, in CA-G.R. CV No. 86939, affirmed in toto the above
decision. The CA found no basis for petitioner to collect the amount demanded,
there being no perfected contract of loan for lack of consideration.28 As to
respondent’s supplemental compulsory counterclaim, quoting the findings of the
RTC, the appellate court held that respondent was able to prove by
preponderance of evidence that it was the intent of Pentacapital Group of
Companies and CRDI to give him ₱10,316,640.00 and ₱1,715,156.90.29 The CA
likewise affirmed the award of interest at the rate of 16% per annum, plus
damages.30
Unsatisfied, petitioner moved for reconsideration of the aforesaid Decision, but it
was denied in a Resolution31 dated January 21, 2008. Hence, the present petition
in G.R. No. 181482, anchored on the following arguments:
A.
Considering that the inferences made in the present case are manifestly absurd,
mistaken or impossible, and are even contrary to the admissions of respondent
Mahinay, and inasmuch as the judgment is premised on a misapprehension of
facts, this Honorable Court may validly take cognizance of the errors relative to
the findings of fact of both the Honorable Court of Appeals and the court a quo.
B.
Respondent Mahinay is liable to petitioner PentaCapital Investment for the
PhP1,936,800.00 loaned to him as well as for damages and attorney’s fees.
1.
The Honorable Court of Appeals erred in concluding that respondent Mahinay
failed to receive the money he borrowed when there is not even any dispute as to
the fact that respondent Mahinay did indeed receive the PhP1,936,800.00 from
petitioner PentaCapital Investment.
2.
The Promissory Notes executed by respondent Mahinay are valid instruments
and are binding upon him.
C.
Petitioner PentaCapital Investment cannot be held liable on the supposed
"supplemental compulsory counterclaim" of respondent Mahinay.
1.
The findings of fact as well as the conclusions arrived at by the Court of Appeals
in its decision were based on mistaken assumptions and on erroneous
appreciation of the evidence on record.
2.
There is no evidence on record to support the merging of PentaCapital Realty
and petitioner PentaCapital Investment into one entity and the consequent
imputation on the latter of the former’s supposed liability on respondent Mahinay’s
supplemental compulsory counterclaim.
3.
Inasmuch as the claim of respondent Mahinay is supposedly against
PentaCapital Realty, and considering that petitioner PentaCapital Investment is a
separate, distinct entity from PentaCapital Realty, the latter should have been
impleaded as it is an indispensable party.
D.
Assuming for the sake of pure argument that it is proper to disregard the
corporate fiction and to consider herein petitioner PentaCapital Investment and its
Nego Instruments Set 1 (#s1-70) Page 70 of 112
Lumbas. Dadat
subsidiary, PentaCapital Realty, as one and the same entity, respondent
Mahinay’s "supplemental compulsory counterclaim" must still necessarily fail.
1.
The cause of action of respondent Mahinay, as contained in his "supplemental
compulsory counterclaim," is already barred by a prior judgment (res judicata).
2.
Considering that the dismissal on the merits by the RTC Cebu of respondent
Mahinay’s complaint against PentaCapital Realty for attorney’s fees has attained
finality, respondent Mahinay committed a willful act of forum shopping when he
interposed the exact same claim in the proceedings a quo as a supposed
supplemental compulsory counterclaim against what he claims to be "one and the
same" company.
3.
Respondent Mahinay’s supplemental compulsory counterclaim is actually a third
party complaint against PentaCapital Realty; the filing thereof therefore requires
the payment of the necessary docket fees.
E.
The doctrine of piercing the corporate veil is an equitable remedy which cannot
and should not be invoked, much less applied, in order to evade an obligation and
facilitate procedural wrongdoing.32
Simply put, the issues for resolution are: 1) whether the admission of
respondent’s supplemental compulsory counterclaim is proper; 2) whether
respondent’s counterclaim is barred by res judicata; and (3) whether petitioner is
guilty of forum-shopping.
The Court’s Ruling
Admission of Respondent’s
Supplemental Compulsory Counterclaim
The pertinent provision of the Rules of Court is Section 6 of Rule 10, which reads:
Sec. 6. Supplemental pleadings. – Upon motion of a party, the court may, upon
reasonable notice and upon such terms as are just, permit him to serve a
supplemental pleading setting forth transactions, occurrences or events which
have happened since the date of the pleading sought to be supplemented. The
adverse party may plead thereto within ten (10) days from notice of the order
admitting the supplemental pleading.
As a general rule, leave will be granted to a party who desires to file a
supplemental pleading that alleges any material fact which happened or came
within the party’s knowledge after the original pleading was filed, such being the
office of a supplemental pleading. The application of the rule would ensure that
the entire controversy might be settled in one action, avoid unnecessary repetition
of effort and unwarranted expense of litigants, broaden the scope of the issues in
an action owing to the light thrown on it by facts, events and occurrences which
have accrued after the filing of the original pleading, and bring into record the
facts enlarging or charging the kind of relief to which plaintiff is entitled. It is the
policy of the law to grant relief as far as possible for wrongs complained of,
growing out of the same transaction and thus put an end to litigation.33
In his Motion to Permit Supplemental Compulsory Counterclaim, respondent
admitted that, in his Answer with Compulsory Counterclaim, he claimed that, as
one of the corporations composing the Pentacapital Group of Companies,
petitioner is liable to him for ₱10,316,640.00, representing 20% attorney’s fees
and share in the proceeds of the sale transaction between Pentacapital Realty
and CRDI. In the same pleading, he further admitted that he did not include this
amount in his compulsory counterclaim because he had earlier commenced
another action for the collection of the same amount against Pentacapital Realty
before the RTC of Cebu. With the dismissal of the RTC-Cebu case, there was no
more legal impediment for respondent to file the supplemental counterclaim.
Moreover, in his Answer with Compulsory Counterclaim, respondent already
alleged that he demanded from Pentacapital Group of Companies to which
petitioner supposedly belongs, the payment of his 20% commission. This, in fact,
was what prompted respondent to file a complaint before the RTC-Cebu for
preliminary mandatory injunction for the release of the said amount.

Given these premises, it is obvious that the alleged obligation of petitioner already
existed and was known to respondent at the time of the filing of his Answer with
Counterclaim. He should have demanded payment of his commission and share
in the proceeds of the sale in that Answer with Compulsory Counterclaim, but he
did not. He is, therefore, proscribed from incorporating the same and making such
demand via a supplemental pleading. The supplemental pleading must be based
on matters arising subsequent to the filing of the original pleading related to the
claim or defense presented therein, and founded on the same cause of
action.34 Supplemental pleadings must state transactions, occurrences or events
which took place since the time the pleading sought to be supplemented was
filed.35
Even on the merits of the case, for reasons that will be discussed below,
respondent’s counterclaim is doomed to fail.
Petitioner’s Complaint
In its complaint for sum of money, petitioner prayed that respondent be ordered to
pay his obligation amounting to ₱1,936,800.00 plus interest and penalty charges,
and attorney’s fees. This obligation was evidenced by two promissory notes
executed by respondent. Respondent, however, denied liability on the ground that
his obligation was subject to a condition that did not occur. He explained that the
promissory notes were dependent upon the happening of a remote event that the
parties tried to anticipate at the time they transacted with each other, and the
event did not happen.36 He further insisted that he did not receive the proceeds of
the loan.
To ascertain whether or not respondent is bound by the promissory notes, it must
be established that all the elements of a contract of loan are present. Like any
other contract, a contract of loan is subject to the rules governing the requisites
and validity of contracts in general. It is elementary in this jurisdiction that what
determines the validity of a contract, in general, is the presence of the following
elements: (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.37
In this case, respondent denied liability on the ground that the promissory notes
lacked consideration as he did not receive the proceeds of the loan.
We cannot sustain his contention.
Under Article 1354 of the Civil Code, it is presumed that consideration exists and
is lawful unless the debtor proves the contrary.38 Moreover, under Section 3, Rule
131 of the Rules of Court, the following are disputable presumptions: (1) private
transactions have been fair and regular; (2) the ordinary course of business has
been followed; and (3) there was sufficient consideration for a contract.39 A
presumption may operate against an adversary who has not introduced proof to
rebut it. The effect of a legal presumption upon a burden of proof is to create the
necessity of presenting evidence to meet the legal presumption or the prima facie
case created thereby, and which, if no proof to the contrary is presented and
offered, will prevail. The burden of proof remains where it is, but by the
presumption, the one who has that burden is relieved for the time being from
introducing evidence in support of the averment, because the presumption stands
in the place of evidence unless rebutted.40
In the present case, as proof of his claim of lack of consideration, respondent
denied under oath that he owed petitioner a single centavo. He added that he did
not apply for a loan and that when he signed the promissory notes, they were all
blank forms and all the blank spaces were to be filled up only if the sale
transaction over the subject properties would not push through because of a
possible adverse decision in the civil cases involving them (the properties). He
thus posits that since the sale pushed through, the promissory notes did not
become effective.
Contrary to the conclusions of the RTC and the CA, we find such proof insufficient
to overcome the presumption of consideration. The presumption that a contract
has sufficient consideration cannot be overthrown by the bare, uncorroborated
and self-serving assertion of respondent that it has no consideration.41 The
alleged lack of consideration must be shown by preponderance of evidence.42
As it now appears, the promissory notes clearly stated that respondent promised
to pay petitioner ₱1,520,000.00 and ₱416,800.00, plus interests and penalty
charges, a year after their execution. Nowhere in the notes was it stated that they
were subject to a condition. As correctly observed by petitioner, respondent is not
only a lawyer but a law professor as well. He is, therefore, legally presumed not
only to exercise vigilance over his concerns but, more importantly, to know the
legal and binding effects of promissory notes and the intricacies involving the
execution of negotiable instruments including the need to execute an agreement
to document extraneous collateral conditions and/or agreements, if truly there
were such.43 This militates against respondent’s claim that there was indeed such
an agreement. Thus, the promissory notes should be accepted as they appear on
their face.
Respondent’s liability is not negated by the fact that he has uncollected
commissions from the sale of the Molino properties. As the records of the case
show, at the time of the execution of the promissory notes, the Molino properties
were subject of various court actions commenced by different parties. Thus, the
sale of the properties and, consequently, the payment of respondent’s
commissions were put on hold. The non-payment of his commissions could very
well be the reason why he obtained a loan from petitioner.
In Sierra v. Court of Appeals,44 we held that:
A promissory note is a solemn acknowledgment of a debt and a formal
commitment to repay it on the date and under the conditions agreed upon by the
borrower and the lender. A person who signs such an instrument is bound to
honor it as a legitimate obligation duly assumed by him through the signature he
affixes thereto as a token of his good faith. If he reneges on his promise without
cause, he forfeits the sympathy and assistance of this Court and deserves
instead its sharp repudiation.
Aside from the payment of the principal obligation of ₱1,936,800.00, the parties
agreed that respondent pay interest at the rate of 25% from February 17, 1997
until fully paid. Such rate, however, is excessive and thus, void. Since the
stipulation on the interest rate is void, it is as if there was no express contract
thereon. To be sure, courts may reduce the interest rate as reason and equity
demand.45 In this case, 12% interest is reasonable.
The promissory notes likewise required the payment of a penalty charge of 3%
per month or 36% per annum. We find such rates unconscionable. This Court has
recognized a penalty clause as an accessory obligation which the parties attach
to a principal obligation for the purpose of ensuring the performance thereof by
imposing on the debtor a special prestation (generally consisting of the payment
of a sum of money) in case the obligation is not fulfilled or is irregularly or
inadequately fulfilled.46 However, a penalty charge of 3% per month is
unconscionable;47hence, we reduce it to 1% per month or 12% per annum,
pursuant to Article 1229 of the Civil Code which states:
Art. 1229. The judge shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor. Even if there
has been no performance, the penalty may also be reduced by the courts if it is
iniquitous or unconscionable.48
Lastly, respondent promised to pay 25% of his outstanding obligations as
attorney’s fees in case of non-payment thereof. Attorney’s fees here are in the
nature of liquidated damages. As long as said stipulation does not contravene
law, morals, or public order, it is strictly binding upon respondent. Nonetheless,
courts are empowered to reduce such rate if the same is iniquitous or
unconscionable pursuant to the above-quoted provision.49 This sentiment is
echoed in Article 2227 of the Civil Code, to wit:
Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty,
shall be equitably reduced if they are iniquitous or unconscionable.
Hence, we reduce the stipulated attorney’s fees from 25% to 10%.50
Respondent’s Counterclaim and Supplemental Counterclaim
The RTC, affirmed by the CA, granted respondent’s counterclaims as it applied
the doctrine of piercing the veil of corporate fiction. It is undisputed that the
parties to the contract of sale of the subject properties are Pentacapital Realty as
the buyer, CRDI as the seller, and respondent as the agent of CRDI. Respondent
Nego Instruments Set 1 (#s1-70) Page 71 of 112
Lumbas. Dadat
insisted, and the RTC and the CA agreed, that petitioner, as the parent company
of Pentacapital Realty, was aware of the sale transaction, and that it was the
former who paid the consideration of the sale. Hence, they concluded that the two
corporations should be treated as one entity.
Petitioner assails the CA Decision sustaining the grant of respondent’s
counterclaim and supplemental counterclaim on the following grounds: first,
respondent’s claims are barred by res judicata, the same having been
adjudicated with finality by the RTC-Cebu in Civil Case No. CEB-25032; second,
piercing the veil of corporate fiction is without basis; third, the case is dismissible
for failure to implead Pentacapital Realty as indispensable party; and last,
respondent’s supplemental counterclaim is actually a third party complaint against
Pentacapital Realty, the filing thereof requires the payment of the necessary
docket fees.
Petitioner’s contentions are meritorious.
Res judicata means "a matter adjudged; a thing judicially acted upon or decided;
a thing or matter settled by judgment." It lays the rule that an existing final
judgment or decree rendered on the merits, without fraud or collusion, by a court
of competent jurisdiction, upon any matter within its jurisdiction, is conclusive of
the rights of the parties or their privies, in all other actions or suits in the same or
any other judicial tribunal of concurrent jurisdiction on the points and matters in
issue in the first suit.51
The requisites of res judicata are:
(1) The former judgment or order must be final;
(2) It must be a judgment on the merits;
(3) It must have been rendered by a court having jurisdiction over the
subject matter and the parties; and
(4) There must be between the first and second actions, identity of
parties, subject matter, and cause of action.52
These requisites are present in the instant case. It is undisputed that respondent
instituted an action for Preliminary Mandatory Injunction against Pentacapital
Realty, before the RTC of Cebu City, docketed as Civil Case No. CEB-25032. On
motion of Pentacapital Realty, in an Order dated August 15, 2001, the court
dismissed the complaint on two grounds: 1) non-payment of the correct filing fee
considering that the complaint was actually a collection of sum of money although
denominated as Preliminary Mandatory Injunction; and 2) lack of cause of action.
The court treated the complaint as a collection suit because respondent was
seeking the payment of his unpaid commission or share in the proceeds of the
sale of the Molino Properties. Additionally, the RTC found that respondent had no
cause of action against Pentacapital Realty, there being no privity of contract
between them. Lastly, the court held that it was CRDI which agreed that 20% of
the total consideration of the sale be paid and delivered to respondent.53Instead
of assailing the said Order, respondent filed his supplemental compulsory
counterclaim, demanding again the payment of his commission, this time, against
petitioner in the instant case. The Order, therefore, became final and executory.
Respondent’s supplemental counterclaim against petitioner is anchored on the
doctrine of piercing the veil of corporate fiction. Obviously, after the dismissal of
his complaint before the RTC-Cebu, he now proceeds
against petitioner, through a counterclaim, on the basis of the same cause of
action. Thus, if we follow respondent’s contention that petitioner and Pentacapital
Realty are one and the same entity, the latter being a subsidiary of the former,
respondent is barred from instituting the present case based on the principle of
bar by prior judgment. The RTC-Cebu already made a definitive conclusion that
Pentacapital Realty is not a privy to the contract between respondent and CRDI.
It also categorically stated that it was CRDI which agreed to pay respondent’s
commission equivalent to 20% of the proceeds of the sale. With these findings,
and considering that petitioner’s alleged liability stems from its supposed relation
with Pentacapital Realty, logic dictates that the findings of the RTC-Cebu, which
had become final and executory, should bind petitioner.
It is well-settled that when material facts or questions in issue in a former action
were conclusively settled by a judgment rendered therein, such facts or questions
constitute res judicata and may not again be litigated in a subsequent action

between the same parties or their privies regardless of the form of the
latter.54 Absolute identity of parties is not required, and where a shared identity of
interest is shown by the identity of the relief sought by one person in a prior case
and the second person in a subsequent case, such was deemed
sufficient.55 There is identity of parties not only when the parties in the cases are
the same, but also between those in privity with them.
No other procedural law principle is indeed more settled than that once a
judgment becomes final, it is no longer subject to change, revision, amendment,
or reversal, except only for correction of clerical errors, or the making of nunc pro
tunc entries which cause no prejudice to any party, or where the judgment itself is
void. The underlying reason for the rule is two-fold: (1) to avoid delay in the
administration of justice and thus make orderly the discharge of judicial business;
and (2) to put judicial controversies to an end, at the risk of occasional errors,
inasmuch as controversies cannot be allowed to drag on indefinitely and the
rights and obligations of every litigant must not hang in suspense for an indefinite
period of time.56
In view of the foregoing disquisitions, we find no necessity to discuss the other
issues raised by petitioner.
Forum Shopping
For his part, respondent adopts the conclusions made by the RTC and the CA in
granting his counterclaims. He adds that the petition should be dismissed on the
ground of forum-shopping. He argues that petitioner is guilty of forum-shopping
by filing the petition for review (G.R. No. 181482), assailing the CA Decision
dated October 4, 2007, despite the pendency of G.R. No. 171736 assailing the
CA Decision dated December 20, 2005.
We do not agree with respondent.
Forum-shopping is the act of a litigant who repetitively availed of several judicial
remedies in different courts, simultaneously or successively, all substantially
founded on the same transactions and the same essential facts and
circumstances, and all raising substantially the same issues, either pending in or
already resolved adversely by some other court, to increase his chances of
obtaining a favorable decision if not in one court, then in another.57
What is important in determining whether forum-shopping exists is the vexation
caused the courts and parties-litigants by a party who asks different courts and/or
administrative agencies to rule on the same or related causes and/or grant the
same or substantially the same reliefs, in the process creating the possibility of
conflicting decisions being rendered by the different fora upon the same issues.58
Forum-shopping can be committed in three ways: (1) by filing multiple cases
based on the same cause of action and with the same prayer, the previous case
not having been resolved yet (where the ground for dismissal is litis pendentia);
(2) by filing multiple cases based on the same cause of action and with the same
prayer, the previous case having been finally resolved (where the ground for
dismissal is res judicata); and (3) by filing multiple cases based on the same
cause of action but with different prayers (splitting of causes of action, where the
ground for dismissal is also either litis pendentia or res judicata).591avvphi1
More particularly, the elements of forum-shopping are: (a) identity of parties or at
least such parties that represent the same interests in both actions; (b) identity of
rights asserted and reliefs prayed for, the relief being founded on the same facts;
(c) identity of the two preceding particulars, such that any judgment rendered in
the other action will, regardless of which party is successful, amount to res
judicata in the action under consideration.60
These elements are not present in this case. In G.R. No. 171736, petitioner
assails the propriety of the admission of respondent’s supplemental compulsory
counterclaim; while in G.R. No. 181482, petitioner assails the grant of
respondent’s supplemental compulsory counterclaim. In other words, the first
case originated from an interlocutory order of the RTC, while the second case is
an appeal from the decision of the court on the merits of the case. There is,
therefore, no forum-shopping for the simple reason that the petition and the
appeal involve two different and distinct issues.
WHEREFORE, premises considered, the petitions are hereby GRANTED. The
Decisions and Resolutions of the Court of Appeals dated December 20, 2005 and
March 1, 2006, in CA-G.R. SP No. 74851, and October 4, 2007 and January 21,
2008, in CA-G.R. CV No. 86939, are REVERSED and SET ASIDE.
Respondent Makilito B. Mahinay is ordered to pay petitioner Pentacapital
Investment Corporation ₱1,936,800.00 plus 12% interest per annum, and 12%
per annum penalty charge, starting February 17, 1997. He
is likewise ordered to pay 10% of his outstanding obligation as attorney’s fees. No
pronouncement as to costs. SO ORDERED.
44. G.R. No. 157943 September 4, 2013
PEOPLE OF THE PHILIPPINES vs. GILBERT REYES WAGAS
The Bill of Rights guarantees the right of an accused to be presumed innocent
until the contrary is proved. In order to overcome the presumption of innocence,
the Prosecution is required to adduce against him nothing less than proof beyond
reasonable doubt. Such proof is not only in relation to the elements of the
offense, but also in relation to the identity of the offender. If the Prosecution fails
to discharge its heavy burden, then it is not only the right of the accused to be
freed, it becomes the Court’s constitutional duty to acquit him.
The Case
Gilbert R. Wagas appeals his conviction for estafa under the decision rendered
on July 11, 2002 by the Regional Trial Court, Branch 58, in Cebu City (RTC),
meting on him the indeterminate penalty of 12 years of prision mayor, as
minimum, to 30 years of reclusion perpetua, as maximum.
Antecedents
Wagas was charged with estafa under the information that reads:
That on or about the 30th day of April, 1997, and for sometime prior and
subsequent thereto, in the City of Cebu, Philippines, and within the jurisdiction of
this Honorable Court, the said accused, with deliberate intent, with intent to gain
and by means of false pretenses or fraudulent acts executed prior to or
simultaneously with the commission of the fraud, to wit: knowing that he did not
have sufficient funds deposited with the Bank of Philippine Islands, and without
informing Alberto Ligaray of that circumstance, with intent to defraud the latter,
did then and there issue Bank of the Philippine Islands Check No. 0011003,
dated May 08, 1997 in the amount of ₱200,000.00, which check was issued in
payment of an obligation, but which check when presented for encashment with
the bank, was dishonored for the reason "drawn against insufficient funds" and
inspite of notice and several demands made upon said accused to make good
said check or replace the same with cash, he had failed and refused and up to
the present time still fails and refuses to do so, to the damage and prejudice of
Alberto Ligaray in the amount aforestated.
CONTRARY TO LAW.1
After Wagas entered a plea of not guilty,2 the pre-trial was held, during which the
Defense admitted that the check alleged in the information had been dishonored
due to insufficient funds.3 On its part, the Prosecution made no admission.4
At the trial, the Prosecution presented complainant Alberto Ligaray as its lone
witness. Ligaray testified that on April 30, 1997, Wagas placed an order for 200
bags of rice over the telephone; that he and his wife would not agree at first to the
proposed payment of the order by postdated check, but because of Wagas’
assurance that he would not disappoint them and that he had the means to pay
them because he had a lending business and money in the bank, they relented
and accepted the order; that he released the goods to Wagas on April 30, 1997
and at the same time received Bank of the Philippine Islands (BPI) Check No.
0011003 for ₱200,000.00 payable to cash and postdated May 8, 1997; that he
later deposited the check with Solid Bank, his depository bank, but the check was
dishonored due to insufficiency of funds;5 that he called Wagas about the matter,
and the latter told him that he would pay upon his return to Cebu; and that despite
repeated demands, Wagas did not pay him.6
On cross-examination, Ligaray admitted that he did not personally meet Wagas
because they transacted through telephone only; that he released the 200 bags
of rice directly to Robert Cañada, the brother-in-law of Wagas, who signed the
delivery receipt upon receiving the rice.7
Nego Instruments Set 1 (#s1-70) Page 72 of 112
Lumbas. Dadat
After Ligaray testified, the Prosecution formally offered the following: (a) BPI
Check No. 0011003 in the amount of ₱200,000.00 payable to "cash;" (b) the
return slip dated May 13, 1997 issued by Solid Bank; (c) Ligaray’s affidavit; and
(d) the delivery receipt signed by Cañada. After the RTC admitted the exhibits,
the Prosecution then rested its case.8
In his defense, Wagas himself testified. He admitted having issued BPI Check
No. 0011003 to Cañada, his brother-in-law, not to Ligaray. He denied having any
telephone conversation or any dealings with Ligaray. He explained that the check
was intended as payment for a portion of Cañada’s property that he wanted to
buy, but when the sale did not push through, he did not anymore fund the check.9
On cross-examination, the Prosecution confronted Wagas with a letter dated July
3, 1997 apparently signed by him and addressed to Ligaray’s counsel, wherein he
admitted owing Ligaray ₱200,000.00 for goods received, to wit:
This is to acknowledge receipt of your letter dated June 23, 1997 which is self-
explanatory. It is worthy also to discuss with you the environmental facts of the
case for your consideration, to wit:
It is true that I obtained goods from your client worth ₱200,000.00 and I promised
to settle the same last May 10, 1997, but to no avail. On this point, let me inform
you that I sold my real property to a buyer in Manila, and promised to pay the
consideration on the same date as I promised with your client. Unfortunately, said
buyer likewise failed to make good with such obligation. Hence, I failed to fulfill
my promise resultant thereof. (sic)
Again, I made another promise to settle said obligation on or before June 15,
1997, but still to no avail attributable to the same reason as aforementioned. (sic)
To arrest this problem, we decided to source some funds using the subject
property as collateral. This other means is resorted to for the purpose of settling
the herein obligation. And as to its status, said funds will be rele[a]sed within thirty
(30) days from today.
In view of the foregoing, it is my sincere request and promise to settle said
obligation on or before August 15, 1997.
Lastly, I would like to manifest that it is not my intention to shy away from any
financial obligation.
xxxx
Respectfully yours,
(SGD.)
GILBERT R. WAGAS10
Wagas admitted the letter, but insisted that it was Cañada who had transacted
with Ligaray, and that he had signed the letter only because his sister and her
husband (Cañada) had begged him to assume the responsibility.11 On redirect
examination, Wagas declared that Cañada, a seafarer, was then out of the
country; that he signed the letter only to accommodate the pleas of his sister and
Cañada, and to avoid jeopardizing Cañada’s application for overseas
employment.12 The Prosecution subsequently offered and the RTC admitted the
letter as rebuttal evidence.13
Decision of the RTC
As stated, the RTC convicted Wagas of estafa on July 11, 2002, viz:
WHEREFORE, premises considered, the Court finds the accused GUILTY
beyond reasonable doubt as charged and he is hereby sentenced as follows:
To suffer an indeterminate penalty of from twelve (12) years of pris[i]on mayor, as
minimum, to thirty (30) years of reclusion perpetua as maximum;
To indemnify the complainant, Albert[o] Ligaray in the sum of ₱200,000.00;
To pay said complainant the sum of ₱30,000.00 by way of attorney’s fees; and
the costs of suit. SO ORDERED.14
The RTC held that the Prosecution had proved beyond reasonable doubt all the
elements constituting the crime of estafa, namely: (a) that Wagas issued the
postdated check as payment for an obligation contracted at the time the check
was issued; (b) that he failed to deposit an amount sufficient to cover the check
despite having been informed that the check had been dishonored; and (c) that
Ligaray released the goods upon receipt of the postdated check and upon
Wagas’ assurance that the check would be funded on its date.

Wagas filed a motion for new trial and/or reconsideration,15 arguing that the
Prosecution did not establish that it was he who had transacted with Ligaray and
who had negotiated the check to the latter; that the records showed that Ligaray
did not meet him at any time; and that Ligaray’s testimony on their alleged
telephone conversation was not reliable because it was not shown that Ligaray
had been familiar with his voice. Wagas also sought the reopening of the case
based on newly discovered evidence, specifically: (a) the testimony of Cañada
who could not testify during the trial because he was then out of the country, and
(b) Ligaray’s testimony given against Wagas in another criminal case for violation
of Batas Pambansa Blg. 22.
On October 21, 2002, the RTC denied the motion for new trial and/or
reconsideration, opining that the evidence Wagas desired to present at a new trial
did not qualify as newly discovered, and that there was no compelling ground to
reverse its decision.16
Wagas appealed directly to this Court by notice of appeal.17
Prior to the elevation of the records to the Court, Wagas filed a petition for
admission to bail pending appeal. The RTC granted the petition and fixed Wagas’
bond at ₱40,000.00.18 Wagas then posted bail for his provisional liberty pending
appeal.19
The resolution of this appeal was delayed by incidents bearing on the grant of
Wagas’ application for bail. On November 17, 2003, the Court required the RTC
Judge to explain why Wagas was out on bail.20 On January 15, 2004, the RTC
Judge submitted to the Court a so-called manifestation and compliance which the
Court referred to the Office of the Court Administrator (OCA) for evaluation,
report, and recommendation.21 On July 5, 2005, the Court, upon the OCA’s
recommendation, directed the filing of an administrative complaint for simple
ignorance of the law against the RTC Judge.22 On September 12, 2006, the Court
directed the OCA to comply with its July 5, 2005 directive, and to cause the filing
of the administrative complaint against the RTC Judge. The Court also directed
Wagas to explain why his bail should not be cancelled for having been
erroneously granted.23 Finally, in its memorandum dated September 27, 2006, the
OCA manifested to the Court that it had meanwhile filed the administrative
complaint against the RTC Judge.24
Issues
In this appeal, Wagas insists that he and Ligaray were neither friends nor
personally known to one other; that it was highly incredible that Ligaray, a
businessman, would have entered into a transaction with him involving a huge
amount of money only over the telephone; that on the contrary, the evidence
pointed to Cañada as the person with whom Ligaray had transacted, considering
that the delivery receipt, which had been signed by Cañada, indicated that the
goods had been "Ordered by ROBERT CAÑADA," that the goods had been
received by Cañada in good order and condition, and that there was no showing
that Cañada had been acting on behalf of Wagas; that he had issued the check to
Cañada upon a different transaction; that Cañada had negotiated the check to
Ligaray; and that the element of deceit had not been established because it had
not been proved with certainty that it was him who had transacted with Ligaray
over the telephone.
The circumstances beg the question: did the Prosecution establish beyond
reasonable doubt the existence of all the elements of the crime of estafa as
charged, as well as the identity of the perpetrator of the crime?
Ruling
The appeal is meritorious.
Article 315, paragraph 2(d) of the Revised Penal Code, as amended, provides:
Article 315. Swindling (estafa). — Any person who shall defraud another by any
of the means mentioned hereinbelow shall be punished by:
xxxx
2. By means of any of the following false pretenses or fraudulent acts executed
prior to or simultaneously with the commission of the fraud:
xxxx
(d) By postdating a check, or issuing a check in payment of an obligation when
the offender had no funds in the bank, or his funds deposited therein were not
sufficient to cover the amount of the check. The failure of the drawer of the check
to deposit the amount necessary to cover his check within three (3) days from
receipt of notice from the bank and/or the payee or holder that said check has
been dishonored for lack or insufficiency of funds shall be prima facie evidence of
deceit constituting false pretense or fraudulent act.
In order to constitute estafa under this statutory provision, the act of postdating or
issuing a check in payment of an obligation must be the efficient cause of the
defraudation. This means that the offender must be able to obtain money or
property from the offended party by reason of the issuance of the check, whether
dated or postdated. In other words, the Prosecution must show that the person to
whom the check was delivered would not have parted with his money or property
were it not for the issuance of the check by the offender.25
The essential elements of the crime charged are that: (a) a check is postdated or
issued in payment of an obligation contracted at the time the check is issued; (b)
lack or insufficiency of funds to cover the check; and (c) damage to the payee
thereof.26 It is the criminal fraud or deceit in the issuance of a check that is
punishable, not the non-payment of a debt.27 Prima facie evidence of deceit exists
by law upon proof that the drawer of the check failed to deposit the amount
necessary to cover his check within three days from receipt of the notice of
dishonor.
The Prosecution established that Ligaray had released the goods to Cañada
because of the postdated check the latter had given to him; and that the check
was dishonored when presented for payment because of the insufficiency of
funds.
In every criminal prosecution, however, the identity of the offender, like the crime
itself, must be established by proof beyond reasonable doubt.28 In that regard, the
Prosecution did not establish beyond reasonable doubt that it was Wagas who
had defrauded Ligaray by issuing the check.
Firstly, Ligaray expressly admitted that he did not personally meet the person with
whom he was transacting over the telephone, thus:
Q:
On April 30, 1997, do you remember having a transaction with the accused in this
case?
A:
Yes, sir. He purchased two hundred bags of rice from me.
Q:
How did this purchase of rice transaction started? (sic)
A:
He talked with me over the phone and told me that he would like to purchase two
hundred bags of rice and he will just issue a check.29
Even after the dishonor of the check, Ligaray did not personally see and meet
whoever he had dealt with and to whom he had made the demand for payment,
and that he had talked with him only over the telephone, to wit:
Q:
After the check was (sic) bounced, what did you do next?
A:
I made a demand on them.
Q:
How did you make a demand?
A:
I called him over the phone.
Q:
Who is that "him" that you are referring to?
A:
Gilbert Wagas.30
Secondly, the check delivered to Ligaray was made payable to cash. Under the
Negotiable Instruments Law, this type of check was payable to the bearer and
could be negotiated by mere delivery without the need of an indorsement.31 This
rendered it highly probable that Wagas had issued the check not to Ligaray, but
to somebody else like Cañada, his brother-in-law, who then negotiated it to
Ligaray.1âwphi1 Relevantly, Ligaray confirmed that he did not himself see or
Nego Instruments Set 1 (#s1-70) Page 73 of 112
Lumbas. Dadat
meet Wagas at the time of the transaction and thereafter, and expressly stated
that the person who signed for and received the stocks of rice was Cañada.
It bears stressing that the accused, to be guilty of estafa as charged, must have
used the check in order to defraud the complainant. What the law punishes is the
fraud or deceit, not the mere issuance of the worthless check. Wagas could not
be held guilty of estafa simply because he had issued the check used to defraud
Ligaray. The proof of guilt must still clearly show that it had been Wagas as the
drawer who had defrauded Ligaray by means of the check.
Thirdly, Ligaray admitted that it was Cañada who received the rice from him and
who delivered the check to him. Considering that the records are bereft of any
showing that Cañada was then acting on behalf of Wagas, the RTC had no
factual and legal bases to conclude and find that Cañada had been acting for
Wagas. This lack of factual and legal bases for the RTC to infer so obtained
despite Wagas being Cañada’s brother-in-law.
Finally, Ligaray’s declaration that it was Wagas who had transacted with him over
the telephone was not reliable because he did not explain how he determined that
the person with whom he had the telephone conversation was really Wagas
whom he had not yet met or known before then. We deem it essential for
purposes of reliability and trustworthiness that a telephone conversation like that
one Ligaray supposedly had with the buyer of rice to be first authenticated before
it could be received in evidence. Among others, the person with whom the
witness conversed by telephone should be first satisfactorily identified by voice
recognition or any other means.32 Without the authentication, incriminating
another person just by adverting to the telephone conversation with him would be
all too easy. In this respect, an identification based on familiarity with the voice of
the caller, or because of clearly recognizable peculiarities of the caller would have
sufficed.33 The identity of the caller could also be established by the caller’s self-
identification, coupled with additional evidence, like the context and timing of the
telephone call, the contents of the statement challenged, internal patterns, and
other distinctive characteristics, and disclosure of knowledge of facts known
peculiarly to the caller.34
Verily, it is only fair that the caller be reliably identified first before a telephone
communication is accorded probative weight. The identity of the caller may be
established by direct or circumstantial evidence. According to one ruling of the
Kansas Supreme Court:
Communications by telephone are admissible in evidence where they are
relevant to the fact or facts in issue, and admissibility is governed by the same
rules of evidence concerning face-to-face conversations except the party against
whom the conversations are sought to be used must ordinarily be identified. It is
not necessary that the witness be able, at the time of the conversation, to identify
the person with whom the conversation was had, provided subsequent
identification is proved by direct or circumstantial evidence somewhere in the
development of the case. The mere statement of his identity by the party calling is
not in itself sufficient proof of such identity, in the absence of corroborating
circumstances so as to render the conversation admissible. However,
circumstances preceding or following the conversation may serve to sufficiently
identify the caller. The completeness of the identification goes to the weight of the
evidence rather than its admissibility, and the responsibility lies in the first
instance with the district court to determine within its sound discretion whether the
threshold of admissibility has been met.35 (Bold emphasis supplied)
Yet, the Prosecution did not tender any plausible explanation or offer any proof to
definitely establish that it had been Wagas whom Ligaray had conversed with on
the telephone. The Prosecution did not show through Ligaray during the trial as to
how he had determined that his caller was Wagas. All that the Prosecution sought
to elicit from him was whether he had known and why he had known Wagas, and
he answered as follows:
Q:
Do you know the accused in this case?
A:
Yes, sir.
Q:
 Nego Instruments Set 1 (#s1-70) Page 74 of 112
Lumbas. Dadat
If he is present inside the courtroom […] the law of evidence, the court shall consider evidence solely for the purpose for The petition involving the alias writ of execution had its beginnings on November
A: which it is offered,38 not for any other purpose.39 Fairness to the adverse party 8, 1967, when respondent Amelia Tan, under the name and style of Able Printing
No, sir. He is not around. demands such exclusivity. Moreover, the high plausibility of the explanation of Press commenced a complaint for damages before the Court of First Instance of
Q: Wagas that he had signed the letter only because his sister and her husband had Manila. The case was docketed as Civil Case No. 71307, entitled Amelia Tan, et
Why do you know him? pleaded with him to do so could not be taken for granted. al. v. Philippine Airlines, Inc.
A: It is a fundamental rule in criminal procedure that the State carries the onus After trial, the Court of First Instance of Manila, Branch 13, then presided over by
I know him as a resident of Compostela because he is an ex-mayor of probandi in establishing the guilt of the accused beyond a reasonable doubt, as a the late Judge Jesus P. Morfe rendered judgment on June 29, 1972, in favor of
Compostela.36 consequence of the tenet ei incumbit probation, qui dicit, non qui negat, which private respondent Amelia Tan and against petitioner Philippine Airlines, Inc.
During cross-examination, Ligaray was allowed another opportunity to show how means that he who asserts, not he who denies, must prove,40 and as a means of (PAL) as follows:
he had determined that his caller was Wagas, but he still failed to provide a respecting the presumption of innocence in favor of the man or woman on the WHEREFORE, judgment is hereby rendered, ordering the defendant
satisfactory showing, to wit: dock for a crime. Accordingly, the State has the burden of proof to show: (1) the Philippine Air Lines:
Q: correct identification of the author of a crime, and (2) the actuality of the 1. On the first cause of action, to pay to the plaintiff the amount of
Mr. Witness, you mentioned that you and the accused entered into [a] transaction commission of the offense with the participation of the accused. All these facts P75,000.00 as actual damages, with legal interest thereon from
of rice selling, particularly with these 200 sacks of rice subject of this case, must be proved by the State beyond reasonable doubt on the strength of its plaintiffs extra-judicial demand made by the letter of July 20, 1967;
through telephone conversation? evidence and without solace from the weakness of the defense. That the defense 2. On the third cause of action, to pay to the plaintiff the amount of
A: the accused puts up may be weak is inconsequential if, in the first place, the P18,200.00, representing the unrealized profit of 10% included in the
Yes, sir. State has failed to discharge the onus of his identity and culpability. The contract price of P200,000.00 plus legal interest thereon from July
Q: presumption of innocence dictates that it is for the Prosecution to demonstrate the 20,1967;
But you cannot really ascertain that it was the accused whom you are talking guilt and not for the accused to establish innocence.41 Indeed, the accused, being 3. On the fourth cause of action, to pay to the plaintiff the amount of
with? presumed innocent, carries no burden of proof on his or her shoulders. For this P20,000.00 as and for moral damages, with legal interest thereon
A: reason, the first duty of the Prosecution is not to prove the crime but to prove the from July 20, 1 967;
I know it was him because I know him. identity of the criminal. For even if the commission of the crime can be 4. On the sixth cause of action, to pay to the plaintiff the amount of
Q: established, without competent proof of the identity of the accused beyond P5,000.00 damages as and for attorney's fee.
Am I right to say [that] that was the first time that you had a transaction with the reasonable doubt, there can be no conviction.42 Plaintiffs second and fifth causes of action, and defendant's
accused through telephone conversation, and as a consequence of that alleged There is no question that an identification that does not preclude a reasonable counterclaim, are dismissed.
conversation with the accused through telephone he issued a check in your possibility of mistake cannot be accorded any evidentiary force.43 Thus, With costs against the defendant. (CA Rollo, p. 18)
favor? considering that the circumstances of the identification of Wagas as the person On July 28, 1972, the petitioner filed its appeal with the Court of Appeals. The
A: who transacted on the rice did not preclude a reasonable possibility of mistake, case was docketed as CA-G.R. No. 51079-R.
No. Before that call I had a talk[ ] with the accused. the proof of guilt did not measure up to the standard of proof beyond reasonable On February 3, 1977, the appellate court rendered its decision, the dispositive
Q: doubt demanded in criminal cases. Perforce, the accused’s constitutional right of portion of which reads:
But still through the telephone? presumption of innocence until the contrary is proved is not overcome, and he is IN VIEW WHEREOF, with the modification that PAL is condemned to
A: entitled to an acquittal,44 even though his innocence may be doubted.45 pay plaintiff the sum of P25,000.00 as damages and P5,000.00 as
Yes, sir. Nevertheless, an accused, though acquitted of estafa, may still be held civilly attorney's fee, judgment is affirmed, with costs. (CA Rollo, p. 29)
Q: liable where the preponderance of the established facts so warrants.46 Wagas as Notice of judgment was sent by the Court of Appeals to the trial court and on
There was no instant (sic) that the accused went to see you personally regarding the admitted drawer of the check was legally liable to pay the amount of it to dates subsequent thereto, a motion for reconsideration was filed by respondent
the 200 bags rice transaction? Ligaray, a holder in due course.47 Consequently, we pronounce and hold him fully Amelia Tan, duly opposed by petitioner PAL.
A: liable to pay the amount of the dishonored check, plus legal interest of 6% per On May 23,1977, the Court of Appeals rendered its resolution denying the
No. It was through telephone only. annum from the finality of this decision. respondent's motion for reconsideration for lack of merit.
Q: WHEREFORE, the Court REVERSES and SETS ASIDE the decision rendered No further appeal having been taken by the parties, the judgment became final
In fact[,] you did not cause the delivery of these 200 bags of rice through the on July 11, 2002 by the Regional Trial Court, Branch 58, in Cebu City; and and executory and on May 31, 1977, judgment was correspondingly entered in
accused himself? ACQUITS Gilbert R. Wagas of the crime of estafa on the ground of reasonable the case.
A: doubt, but ORDERS him to pay Alberto Ligaray the amount of ₱200,000.00 as The case was remanded to the trial court for execution and on September
Yes. It was through Robert. actual damages, plus interest of 6% per annum from the finality of this decision. 2,1977, respondent Amelia Tan filed a motion praying for the issuance of a writ of
Q: No pronouncement on costs of suit. SO ORDERED. execution of the judgment rendered by the Court of Appeals. On October 11,
So, after that phone call[,] you deliver[ed] th[ose] 200 sacks of rice through 1977, the trial court, presided over by Judge Galano, issued its order of execution
somebody other than the accused? 45. G.R. No. L-49188 January 30, 1990 with the corresponding writ in favor of the respondent. The writ was duly referred
A: PHILIPPINE AIRLINES, INC. vs. HON. COURT OF APPEALS, HON. JUDGE to Deputy Sheriff Emilio Z. Reyes of Branch 13 of the Court of First Instance of
Yes, sir.37 RICARDO D. GALANO, Court of First Instance of Manila, Branch XIII, JAIME Manila for enforcement.
Ligaray’s statement that he could tell that it was Wagas who had ordered the rice K. DEL ROSARIO, Deputy Sheriff, Court of First Instance, Manila, and Four months later, on February 11, 1978, respondent Amelia Tan moved for the
because he "know[s]" him was still vague and unreliable for not assuring the AMELIA TAN issuance of an alias writ of execution stating that the judgment rendered by the
certainty of the identification, and should not support a finding of Ligaray’s Behind the simple issue of validity of an alias writ of execution in this case is a lower court, and affirmed with modification by the Court of Appeals, remained
familiarity with Wagas as the caller by his voice. It was evident from Ligaray’s more fundamental question. Should the Court allow a too literal interpretation of unsatisfied.
answers that Wagas was not even an acquaintance of Ligaray’s prior to the the Rules with an open invitation to knavery to prevail over a more discerning and On March 1, 1978, the petitioner filed an opposition to the motion for the issuance
transaction. Thus, the RTC’s conclusion that Ligaray had transacted with Wagas just approach? Should we not apply the ancient rule of statutory construction that of an alias writ of execution stating that it had already fully paid its obligation to
had no factual basis. Without that factual basis, the RTC was speculating on a laws are to be interpreted by the spirit which vivifies and not by the letter which plaintiff through the deputy sheriff of the respondent court, Emilio Z. Reyes, as
matter as decisive as the identification of the buyer to be Wagas. killeth? evidenced by cash vouchers properly signed and receipted by said Emilio Z.
The letter of Wagas did not competently establish that he was the person who This is a petition to review on certiorari the decision of the Court of Appeals in Reyes.
had conversed with Ligaray by telephone to place the order for the rice. The letter CA-G.R. No. 07695 entitled "Philippine Airlines, Inc. v. Hon. Judge Ricardo D. On March 3,1978, the Court of Appeals denied the issuance of the alias writ for
was admitted exclusively as the State’s rebuttal evidence to controvert or Galano, et al.", dismissing the petition for certiorari against the order of the Court being premature, ordering the executing sheriff Emilio Z. Reyes to appear with his
impeach the denial of Wagas of entering into any transaction with Ligaray on the of First Instance of Manila which issued an alias writ of execution against the return and explain the reason for his failure to surrender the amounts paid to him
rice; hence, it could be considered and appreciated only for that purpose. Under petitioner.

by petitioner PAL. However, the order could not be served upon Deputy Sheriff
Reyes who had absconded or disappeared.
On March 28, 1978, motion for the issuance of a partial alias writ of execution
was filed by respondent Amelia Tan.
On April 19, 1978, respondent Amelia Tan filed a motion to withdraw "Motion for
Partial Alias Writ of Execution" with Substitute Motion for Alias Writ of Execution.
On May 1, 1978, the respondent Judge issued an order which reads:
As prayed for by counsel for the plaintiff, the Motion to Withdraw
'Motion for Partial Alias Writ of Execution with Substitute Motion for
Alias Writ of Execution is hereby granted, and the motion for partial
alias writ of execution is considered withdrawn.
Let an Alias Writ of Execution issue against the defendant for the fall
satisfaction of the judgment rendered. Deputy Sheriff Jaime K. del
Rosario is hereby appointed Special Sheriff for the enforcement
thereof. (CA Rollo, p. 34)
On May 18, 1978, the petitioner received a copy of the first alias writ of execution
issued on the same day directing Special Sheriff Jaime K. del Rosario to levy on
execution in the sum of P25,000.00 with legal interest thereon from July 20,1967
when respondent Amelia Tan made an extra-judicial demand through a letter.
Levy was also ordered for the further sum of P5,000.00 awarded as attorney's
fees.
On May 23, 1978, the petitioner filed an urgent motion to quash the alias writ of
execution stating that no return of the writ had as yet been made by Deputy
Sheriff Emilio Z. Reyes and that the judgment debt had already been fully
satisfied by the petitioner as evidenced by the cash vouchers signed and
receipted by the server of the writ of execution, Deputy Sheriff Emilio Z. Reyes.
On May 26,1978, the respondent Jaime K. del Rosario served a notice of
garnishment on the depository bank of petitioner, Far East Bank and Trust
Company, Rosario Branch, Binondo, Manila, through its manager and garnished
the petitioner's deposit in the said bank in the total amount of P64,408.00 as of
May 16, 1978. Hence, this petition for certiorari filed by the Philippine Airlines,
Inc., on the grounds that:
I the absconding sheriff by check in his name operate to satisfy the judgment debt?
AN ALIAS WRIT OF EXECUTION CANNOT BE ISSUED WITHOUT PRIOR
RETURN OF THE ORIGINAL WRIT BY THE IMPLEMENTING OFFICER.
II
PAYMENT OF JUDGMENT TO THE IMPLEMENTING OFFICER AS DIRECTED
IN THE WRIT OF EXECUTION CONSTITUTES SATISFACTION OF
JUDGMENT.
III
INTEREST IS NOT PAYABLE WHEN THE DECISION IS SILENT AS TO THE
PAYMENT THEREOF.
IV
SECTION 5, RULE 39, PARTICULARLY REFERS TO LEVY OF PROPERTY OF
JUDGMENT DEBTOR AND DISPOSAL OR SALE THEREOF TO SATISFY
JUDGMENT.
Can an alias writ of execution be issued without a prior return of the original writ
by the implementing officer?
We rule in the affirmative and we quote the respondent court's decision with
approval:
The issuance of the questioned alias writ of execution under the
circumstances here obtaining is justified because even with the
absence of a Sheriffs return on the original writ, the unalterable fact
remains that such a return is incapable of being obtained (sic)
because the officer who is to make the said return has absconded
and cannot be brought to the Court despite the earlier order of the
court for him to appear for this purpose. (Order of Feb. 21, 1978,
Annex C, Petition). Obviously, taking cognizance of this
circumstance, the order of May 11, 1978 directing the issuance of an
alias writ was therefore issued. (Annex D. Petition). The need for
such a return as a condition precedent for the issuance of an alias
writ was justifiably dispensed with by the court below and its action in
this regard meets with our concurrence. A contrary view will produce
an abhorent situation whereby the mischief of an erring officer of the
court could be utilized to impede indefinitely the undisputed and
awarded rights which a prevailing party rightfully deserves to obtain
and with dispatch. The final judgment in this case should not indeed
be permitted to become illusory or incapable of execution for an
indefinite and over extended period, as had already transpired.
(Rollo, pp. 35-36)
Judicium non debet esse illusorium; suum effectum habere debet (A judgment
ought not to be illusory it ought to have its proper effect).
Indeed, technicality cannot be countenanced to defeat the execution of a
judgment for execution is the fruit and end of the suit and is very aptly called the
life of the law (Ipekdjian Merchandising Co. v. Court of Tax Appeals, 8 SCRA 59
[1963]; Commissioner of Internal Revenue v. Visayan Electric Co., 19 SCRA 697,
698 [1967]). A judgment cannot be rendered nugatory by the unreasonable
application of a strict rule of procedure. Vested rights were never intended to rest
on the requirement of a return, the office of which is merely to inform the court
and the parties, of any and all actions taken under the writ of execution. Where
such information can be established in some other manner, the absence of an
executing officer's return will not preclude a judgment from being treated as
discharged or being executed through an alias writ of execution as the case may
be. More so, as in the case at bar. Where the return cannot be expected to be
forthcoming, to require the same would be to compel the enforcement of rights
under a judgment to rest on an impossibility, thereby allowing the total avoidance
of judgment debts. So long as a judgment is not satisfied, a plaintiff is entitled to
other writs of execution (Government of the Philippines v. Echaus and Gonzales,
71 Phil. 318). It is a well known legal maxim that he who cannot prosecute his
judgment with effect, sues his case vainly.
More important in the determination of the propriety of the trial court's issuance of
an alias writ of execution is the issue of satisfaction of judgment.
Under the peculiar circumstances surrounding this case, did the payment made to
The Court rules that the plaintiff who has won her case should not be adjudged as
having sued in vain. To decide otherwise would not only give her an empty but a
pyrrhic victory.
It should be emphasized that under the initial judgment, Amelia Tan was found to
have been wronged by PAL.
She filed her complaint in 1967.
After ten (10) years of protracted litigation in the Court of First Instance and the
Court of Appeals, Ms. Tan won her case.
It is now 1990.
Almost twenty-two (22) years later, Ms. Tan has not seen a centavo of what the
courts have solemnly declared as rightfully hers. Through absolutely no fault of
her own, Ms. Tan has been deprived of what, technically, she should have been
paid from the start, before 1967, without need of her going to court to enforce her
rights. And all because PAL did not issue the checks intended for her, in her
name.
Under the peculiar circumstances of this case, the payment to the absconding
sheriff by check in his name did not operate as a satisfaction of the judgment
debt.
In general, a payment, in order to be effective to discharge an obligation, must be
made to the proper person. Article 1240 of the Civil Code provides:
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. (Emphasis supplied)
Thus, payment must be made to the obligee himself or to an agent having
authority, express or implied, to receive the particular payment (Ulen v. Knecttle
50 Wyo 94, 58 [2d] 446, 111 ALR 65). Payment made to one having apparent
authority to receive the money will, as a rule, be treated as though actual
authority had been given for its receipt. Likewise, if payment is made to one who
Nego Instruments Set 1 (#s1-70) Page 75 of 112
Lumbas. Dadat
by law is authorized to act for the creditor, it will work a discharge (Hendry v.
Benlisa 37 Fla. 609, 20 SO 800,34 LRA 283). The receipt of money due on
ajudgment by an officer authorized by law to accept it will, therefore, satisfy the
debt (See 40 Am Jm 729, 25; Hendry v. Benlisa supra; Seattle v. Stirrat 55 Wash.
104 p. 834,24 LRA [NS] 1275).
The theory is where payment is made to a person authorized and recognized by
the creditor, the payment to such a person so authorized is deemed payment to
the creditor. Under ordinary circumstances, payment by the judgment debtor in
the case at bar, to the sheriff should be valid payment to extinguish the judgment
debt.
There are circumstances in this case, however, which compel a different
conclusion.
The payment made by the petitioner to the absconding sheriff was not in cash or
legal tender but in checks. The checks were not payable to Amelia Tan or Able
Printing Press but to the absconding sheriff.
Did such payments extinguish the judgment debt?
Article 1249 of the Civil Code provides:
The payment of debts in money shall be made in the currency
stipulated, and if it is not possible to deliver such currency, then in
the currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of
exchange or other mercantile documents shall produce the effect of
payment only when they have been cashed, or when through the
fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall
be held in abeyance.
In the absence of an agreement, either express or implied, payment means the
discharge of a debt or obligation in money (US v. Robertson, 5 Pet. [US] 641, 8 L.
ed. 257) and unless the parties so agree, a debtor has no rights, except at his
own peril, to substitute something in lieu of cash as medium of payment of his
debt (Anderson v. Gill, 79 Md.. 312, 29 A 527, 25 LRA 200,47 Am. St. Rep. 402).
Consequently, unless authorized to do so by law or by consent of the obligee a
public officer has no authority to accept anything other than money in payment of
an obligation under a judgment being executed. Strictly speaking, the acceptance
by the sheriff of the petitioner's checks, in the case at bar, does not, per se,
operate as a discharge of the judgment debt.
Since a negotiable instrument is only a substitute for money and not money, the
delivery of such an instrument does not, by itself, operate as payment (See. 189,
Act 2031 on Negs. Insts.; Art. 1249, Civil Code; Bryan Landon Co. v. American
Bank, 7 Phil. 255; Tan Sunco v. Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check,
whether a manager's check or ordinary cheek, is not legal tender, and an offer of
a check in payment of a debt is not a valid tender of payment and may be refused
receipt by the obligee or creditor. Mere delivery of checks does not discharge the
obligation under a judgment. The obligation is not extinguished and remains
suspended until the payment by commercial document is actually realized (Art.
1249, Civil Code, par. 3).
If bouncing checks had been issued in the name of Amelia Tan and not the
Sheriff's, there would have been no payment. After dishonor of the checks, Ms.
Tan could have run after other properties of PAL. The theory is that she has
received no value for what had been awarded her. Because the checks were
drawn in the name of Emilio Z. Reyes, neither has she received anything. The
same rule should apply.
It is argued that if PAL had paid in cash to Sheriff Reyes, there would have been
payment in full legal contemplation. The reasoning is logical but is it valid and
proper? Logic has its limits in decision making. We should not follow rulings to
their logical extremes if in doing so we arrive at unjust or absurd results.
In the first place, PAL did not pay in cash. It paid in cheeks.
And second, payment in cash always carries with it certain cautions. Nobody
hands over big amounts of cash in a careless and inane manner. Mature thought
is given to the possibility of the cash being lost, of the bearer being waylaid or
running off with what he is carrying for another. Payment in checks is precisely

intended to avoid the possibility of the money going to the wrong party. The
situation is entirely different where a Sheriff seizes a car, a tractor, or a piece of
land. Logic often has to give way to experience and to reality. Having paid with
checks, PAL should have done so properly.
Payment in money or cash to the implementing officer may be deemed absolute
payment of the judgment debt but the Court has never, in the least bit, suggested
that judgment debtors should settle their obligations by turning over huge
amounts of cash or legal tender to sheriffs and other executing officers. Payment
in cash would result in damage or interminable litigations each time a sheriff with
huge amounts of cash in his hands decides to abscond.
As a protective measure, therefore, the courts encourage the practice of
payments by cheek provided adequate controls are instituted to prevent wrongful
payment and illegal withdrawal or disbursement of funds. If particularly big
amounts are involved, escrow arrangements with a bank and carefully supervised
by the court would be the safer procedure. Actual transfer of funds takes place
within the safety of bank premises. These practices are perfectly legal. The object
is always the safe and incorrupt execution of the judgment.
It is, indeed, out of the ordinary that checks intended for a particular payee are
made out in the name of another. Making the checks payable to the judgment
creditor would have prevented the encashment or the taking of undue advantage
by the sheriff, or any person into whose hands the checks may have fallen,
whether wrongfully or in behalf of the creditor. The issuance of the checks in the
name of the sheriff clearly made possible the misappropriation of the funds that
were withdrawn.
As explained and held by the respondent court:
... [K]nowing as it does that the intended payment was for the private
party respondent Amelia Tan, the petitioner corporation, utilizing the
services of its personnel who are or should be knowledgeable about
the accepted procedures and resulting consequences of the checks
drawn, nevertheless, in this instance, without prudence, departed
from what is generally observed and done, and placed as payee in
the checks the name of the errant Sheriff and not the name of the
rightful payee. Petitioner thereby created a situation which permitted
the said Sheriff to personally encash said checks and misappropriate
the proceeds thereof to his exclusive personal benefit. For the
prejudice that resulted, the petitioner himself must bear the fault. The
judicial guideline which we take note of states as follows:
As between two innocent persons, one of whom must suffer the
consequence of a breach of trust, the one who made it possible by
his act of confidence must bear the loss. (Blondeau, et al. v. Nano, et
al., L-41377, July 26, 1935, 61 Phil. 625)
Having failed to employ the proper safeguards to protect itself, the judgment
debtor whose act made possible the loss had but itself to blame.
The attention of this Court has been called to the bad practice of a number of
executing officers, of requiring checks in satisfaction of judgment debts to be
made out in their own names. If a sheriff directs a judgment debtor to issue the
checks in the sheriff's name, claiming he must get his commission or fees, the
debtor must report the sheriff immediately to the court which ordered the
execution or to the Supreme Court for appropriate disciplinary action. Fees,
commissions, and salaries are paid through regular channels. This improper
procedure also allows such officers, who have sixty (60) days within which to
make a return, to treat the moneys as their personal finds and to deposit the
same in their private accounts to earn sixty (60) days interest, before said finds
are turned over to the court or judgment creditor (See Balgos v. Velasco, 108
SCRA 525 [1981]). Quite as easily, such officers could put up the defense that
said checks had been issued to them in their private or personal capacity. Without
a receipt evidencing payment of the judgment debt, the misappropriation of finds
by such officers becomes clean and complete. The practice is ingenious but evil
as it unjustly enriches court personnel at the expense of litigants and the proper
administration of justice. The temptation could be far greater, as proved to be in
this case of the absconding sheriff. The correct and prudent thing for the
petitioner was to have issued the checks in the intended payee's name.
The pernicious effects of issuing checks in the name of a person other than the
intended payee, without the latter's agreement or consent, are as many as the
ways that an artful mind could concoct to get around the safeguards provided by
the law on negotiable instruments. An angry litigant who loses a case, as a rule,
would not want the winning party to get what he won in the judgment. He would
think of ways to delay the winning party's getting what has been adjudged in his
favor. We cannot condone that practice especially in cases where the courts and
their officers are involved.1âwphi1 We rule against the petitioner.
Anent the applicability of Section 15, Rule 39, as follows:
Section 15. Execution of money judgments. — The officer must
enforce an execution of a money judgment by levying on all the
property, real and personal of every name and nature whatsoever,
and which may be disposed of for value, of the judgment debtor not
exempt from execution, or on a sufficient amount of such property, if
they be sufficient, and selling the same, and paying to the judgment
creditor, or his attorney, so much of the proceeds as will satisfy the
judgment. ...
the respondent court held:
We are obliged to rule that the judgment debt cannot be considered
satisfied and therefore the orders of the respondent judge granting
the alias writ of execution may not be pronounced as a nullity.
xxx xxx xxx
It is clear and manifest that after levy or garnishment, for a judgment
to be executed there is the requisite of payment by the officer to the
judgment creditor, or his attorney, so much of the proceeds as will
satisfy the judgment and none such payment had been concededly
made yet by the absconding Sheriff to the private respondent Amelia
Tan. The ultimate and essential step to complete the execution of the
judgment not having been performed by the City Sheriff, the
judgment debt legally and factually remains unsatisfied.
Strictly speaking execution cannot be equated with satisfaction of a judgment.
Under unusual circumstances as those obtaining in this petition, the distinction
comes out clearly.
Execution is the process which carries into effect a decree or judgment (Painter v.
Berglund, 31 Cal. App. 2d. 63, 87 P 2d 360, 363; Miller v. London, 294 Mass 300,
1 NE 2d 198, 200; Black's Law Dictionary), whereas the satisfaction of a
judgment is the payment of the amount of the writ, or a lawful tender thereof, or
the conversion by sale of the debtor's property into an amount equal to that due,
and, it may be done otherwise than upon an execution (Section 47, Rule 39).
Levy and delivery by an execution officer are not prerequisites to the satisfaction
of a judgment when the same has already been realized in fact (Section 47, Rule
39). Execution is for the sheriff to accomplish while satisfaction of the judgment is
for the creditor to achieve. Section 15, Rule 39 merely provides the sheriff with his
duties as executing officer including delivery of the proceeds of his levy on the
debtor's property to satisfy the judgment debt. It is but to stress that the
implementing officer's duty should not stop at his receipt of payments but must
continue until payment is delivered to the obligor or creditor.
Finally, we find no error in the respondent court's pronouncement on the inclusion
of interests to be recovered under the alias writ of execution. This logically follows
from our ruling that PAL is liable for both the lost checks and interest. The
respondent court's decision in CA-G.R. No. 51079-R does not totally supersede
the trial court's judgment in Civil Case No. 71307. It merely modified the same as
to the principal amount awarded as actual damages.
WHEREFORE, IN VIEW OF THE FOREGOING, the petition is hereby
DISMISSED. The judgment of the respondent Court of Appeals is AFFIRMED
and the trial court's issuance of the alias writ of execution against the petitioner is
upheld without prejudice to any action it should take against the errant sheriff
Emilio Z. Reyes. The Court Administrator is ordered to follow up the actions taken
against Emilio Z. Reyes. SO ORDERED.
Nego Instruments Set 1 (#s1-70) Page 76 of 112
Lumbas. Dadat
46. G.R. No. L-22405 June 30, 1971
PHILIPPINE EDUCATION CO., INC. vs. MAURICIO A. SORIANO, ET AL.
An appeal from a decision of the Court of First Instance of Manila dismissing the
complaint filed by the Philippine Education Co., Inc. against Mauricio A. Soriano,
Enrico Palomar and Rafael Contreras.
On April 18, 1958 Enrique Montinola sought to purchase from the Manila Post
Office ten (10) money orders of P200.00 each payable to E.P. Montinola
withaddress at Lucena, Quezon. After the postal teller had made out money
ordersnumbered 124685, 124687-124695, Montinola offered to pay for them with
a private checks were not generally accepted in payment of money orders, the
teller advised him to see the Chief of the Money Order Division, but instead of
doing so, Montinola managed to leave building with his own check and the
ten(10) money orders without the knowledge of the teller.
On the same date, April 18, 1958, upon discovery of the disappearance of the
unpaid money orders, an urgent message was sent to all postmasters, and the
following day notice was likewise served upon all banks, instructing them not to
pay anyone of the money orders aforesaid if presented for payment. The Bank of
America received a copy of said notice three days later.
On April 23, 1958 one of the above-mentioned money orders numbered 124688
was received by appellant as part of its sales receipts. The following day it
deposited the same with the Bank of America, and one day thereafter the latter
cleared it with the Bureau of Posts and received from the latter its face value of
P200.00.
On September 27, 1961, appellee Mauricio A. Soriano, Chief of the Money Order
Division of the Manila Post Office, acting for and in behalf of his co-appellee,
Postmaster Enrico Palomar, notified the Bank of America that money order No.
124688 attached to his letter had been found to have been irregularly issued and
that, in view thereof, the amount it represented had been deducted from the
bank's clearing account. For its part, on August 2 of the same year, the Bank of
America debited appellant's account with the same amount and gave it advice
thereof by means of a debit memo.
On October 12, 1961 appellant requested the Postmaster General to reconsider
the action taken by his office deducting the sum of P200.00 from the clearing
account of the Bank of America, but his request was denied. So was appellant's
subsequent request that the matter be referred to the Secretary of Justice for
advice. Thereafter, appellant elevated the matter to the Secretary of Public Works
and Communications, but the latter sustained the actions taken by the postal
officers.
In connection with the events set forth above, Montinola was charged with theft in
the Court of First Instance of Manila (Criminal Case No. 43866) but after trial he
was acquitted on the ground of reasonable doubt.
On January 8, 1962 appellant filed an action against appellees in the Municipal
Court of Manila praying for judgment as follows:
WHEREFORE, plaintiff prays that after hearing defendants be
ordered:
(a) To countermand the notice given to the Bank of America on
September 27, 1961, deducting from the said Bank's clearing
account the sum of P200.00 represented by postal money order No.
124688, or in the alternative indemnify the plaintiff in the same
amount with interest at 8-½% per annum from September 27, 1961,
which is the rate of interest being paid by plaintiff on its overdraft
account;
(b) To pay to the plaintiff out of their own personal funds, jointly and
severally, actual and moral damages in the amount of P1,000.00 or
in such amount as will be proved and/or determined by this
Honorable Court: exemplary damages in the amount of P1,000.00,
attorney's fees of P1,000.00, and the costs of action.
Plaintiff also prays for such other and further relief as may be
deemed just and equitable.

On November 17, 1962, after the parties had submitted the stipulation of facts
reproduced at pages 12 to 15 of the Record on Appeal, the above-named court
rendered judgment as follows:
WHEREFORE, judgment is hereby rendered, ordering the
defendants to countermand the notice given to the Bank of America
on September 27, 1961, deducting from said Bank's clearing account
the sum of P200.00 representing the amount of postal money order
No. 124688, or in the alternative, to indemnify the plaintiff in the said
sum of P200.00 with interest thereon at the rate of 8-½% per annum
from September 27, 1961 until fully paid; without any pronouncement
as to cost and attorney's fees.
The case was appealed to the Court of First Instance of Manila where, after the
parties had resubmitted the same stipulation of facts, the appealed decision
dismissing the complaint, with costs, was rendered.
The first, second and fifth assignments of error discussed in appellant's brief are
related to the other and will therefore be discussed jointly. They raise this main
issue: that the postal money order in question is a negotiable instrument; that its
nature as such is not in anyway affected by the letter dated October 26, 1948
signed by the Director of Posts and addressed to all banks with a clearing
account with the Post Office, and that money orders, once issued, create a
contractual relationship of debtor and creditor, respectively, between the
government, on the one hand, and the remitters payees or endorses, on the
other.
It is not disputed that our postal statutes were patterned after statutes in force in
the United States. For this reason, ours are generally construed in accordance
with the construction given in the United States to their own postal statutes, in the
absence of any special reason justifying a departure from this policy or practice.
The weight of authority in the United States is that postal money orders are not
negotiable instruments (Bolognesi vs. U.S. 189 Fed. 395; U.S. vs. Stock Drawers
National Bank, 30 Fed. 912), the reason behind this rule being that, in
establishing and operating a postal money order system, the government is not
engaging in commercial transactions but merely exercises a governmental power
for the public benefit.
It is to be noted in this connection that some of the restrictions imposed upon
money orders by postal laws and regulations are inconsistent with the character
of negotiable instruments. For instance, such laws and regulations usually
provide for not more than one endorsement; payment of money orders may be
withheld under a variety of circumstances (49 C.J. 1153).
Of particular application to the postal money order in question are the conditions
laid down in the letter of the Director of Posts of October 26, 1948 (Exhibit 3) to
the Bank of America for the redemption of postal money orders received by it
from its depositors. Among others, the condition is imposed that "in cases of
adverse claim, the money order or money orders involved will be returned to you
(the bank) and the, corresponding amount will have to be refunded to the
Postmaster, Manila, who reserves the right to deduct the value thereof from any
amount due you if such step is deemed necessary." The conditions thus imposed
in order to enable the bank to continue enjoying the facilities theretofore enjoyed
by its depositors, were accepted by the Bank of America. The latter is therefore
bound by them. That it is so is clearly referred from the fact that, upon receiving
advice that the amount represented by the money order in question had been
deducted from its clearing account with the Manila Post Office, it did not file any
protest against such action.
Moreover, not being a party to the understanding existing between the postal
officers, on the one hand, and the Bank of America, on the other, appellant has
no right to assail the terms and conditions thereof on the ground that the letter
setting forth the terms and conditions aforesaid is void because it was not issued
by a Department Head in accordance with Sec. 79 (B) of the Revised
Administrative Code. In reality, however, said legal provision does not apply to
the letter in question because it does not provide for a department regulation but
merely sets down certain conditions upon the privilege granted to the Bank of
Amrica to accept and pay postal money orders presented for payment at the
Manila Post Office. Such being the case, it is clear that the Director of Posts had
ample authority to issue it pursuant to Sec. 1190 of the Revised Administrative
Code.
In view of the foregoing, We do not find it necessary to resolve the issues raised
in the third and fourth assignments of error.
WHEREFORE, the appealed decision being in accordance with law, the same is
hereby affirmed with costs.
47. G.R. No. L-31831 April 28, 1983
JESUS PINEDA vs. JOSE V. DELA RAMA and COURT OF APPEALS
This is a petition to review on certiorari a decision of the Court of Appeals which
declared petitioner Jesus Pineda liable on his promissory note for P9,300.00 and
directed him to pay attorney's fees of P400.00 to private respondent, Jose V. dela
Rama.
Dela Rama is a practising lawyer whose services were retained by Pineda for the
purpose of making representations with the chairman and general manager of the
National Rice and Corn Administration (NARIC) to stop or delay the institution of
criminal charges against Pineda who allegedly misappropriated 11,000 cavans of
palay deposited at his ricemill in Concepcion, Tarlac. The NARIC general
manager was allegedly an intimate friend of Dela Rama.
According to Dela Rama, petitioner Pineda has used up all his funds to buy a big
hacienda in Mindoro and, therefore, borrowed the P9,300.00 subject of his
complaint for collection. In addition to filling the suit to collect the loan evidenced
by the matured promissory note, Dela Rama also sued to collect P5,000.00
attorney's fees for legal services rendered as Pineda's counsel in the case being
investigated by NARIC.
The Court of First Instance of Manila decided Civil Case No. 45762 in favor of
petitioner Pineda. The court believed the evidence of Pineda that he signed the
promissory note for P9,300.00 only because Dela Rama had told him that this
amount had already been advanced to grease the palms of the 'Chairman and
General Manager of NARIC in order to save Pineda from criminal prosecution.
The court stated:
xxx xxx xxx
... The Court, after hearing the testimonies of the witness and
examining the exhibits in question, finds that Exhibit A proves that
the defendant himself did not receive the amount stated therein,
because according to said exhibit that amount was advanced by the
plaintiff in connection with the defendant's case, entirely contradicting
the testimony of the plaintiff himself, who stated in open Court that he
gave the amount in cash in two installments to the defendant. The
Court is more inclined to believe the contents of Exhibit A, than the
testimony of the plaintiff. On this particular matter, the defendant has
established that the plaintiff made him believe that he was giving
money to the authorities of the NARIC to grease their palms to
suspend the prosecution of the defendant, but the defendant, upon
inquiry, found out that none of the authorities has received that
amount, and there was no case that was ever contemplated to be
filed against him. It clearly follows, therefore, that the amount
involved in this Exhibit A was imaginary. It was given to the
defendant, not to somebody else. The purpose for which the amount
was intended was illegal.
However, the Court believes that plaintiff was able to get from the
defendant the amount of P3,000.00 on October 7, as shown by the
check issued by the defendant, Exhibit 2, and the letter, Exhibit 7,
was antedated October 6, as per plaintiff's wishes to show that
defendant was indebted for P3,000.00 when, as a matter of fact,
such amount was produced in order to grease the palms of the
NARIC officials for withholding an imaginary criminal case. Such
amount was never given to such officials nor was there any
Nego Instruments Set 1 (#s1-70) Page 77 of 112
Lumbas. Dadat
contemplated case against the defendant. The purpose for which
such amount was intended was indeed illegal.
The trial court rendered judgment as follows:
WHEREFORE, the Court finds by a preponderance of evidence that
the amount of P9,300.00 evidenced by Exhibit A was not received by
the defendant, nor given to any party for the defendant's
benefit.Consequently, the plaintiff has no right to recover said
amount. The amount of P3,000.00 was given by the defendant to
grease the palms of the NARIC officials. The purpose was illegal, null
and void. Besides, it was not given at all, nor was it true that there
was a contemplated case against the defendant. Such amount
should be returned to the defendant. The services rendered by the
plaintiff to the defendant is worth only P400.00, taking into
consideration that the plaintiff received an air-conditioner and six
sacks of rice. The court orders that the plaintiff should return to the
defendant the amount of P3,000.00, minus P400.00 plus costs.
The Court of Appeals reversed the decision of the trial court on a finding that
Pineda, being a person of more than average intelligence, astute in business, and
wise in the ways of men would not "sign any document or paper with his name
unless he was fully aware of the contents and important thereof, knowing as he
must have known that the language and practices of business and of trade and
commerce call to account every careless or thoughtless word or deed."
The appellate court stated:
No rule is more fundamental and by men of honor and goodwill more
dearly cherished, than that which declares that obligations arising
from contracts have the force of law between the contracting parties
and should be complied with in good faith. Corollary to and in
furtherance of this principle, Section 24 of the Negotiable instruments
Law (Act No. 2031) explicitly provides that every negotiable
instrument is deemed prima facie to have been issued for a valuable
consideration, and every person whose signature appears thereon to
have become a party thereto for value.
We find this petition meritorious.
The Court of Appeals relied on the efficacy of the promissory note for its decision,
citing Section 24 of the Negotiable Instruments Law which reads:
SECTION 24. Presumption of consideration.—Every negotiable
instrument is deemed prima facie to have been issued for a valuable
consideration; and every person whose signature appears thereon to
have become a party thereto for value.
The Court of Appeals' reliance on the above provision is misplaced. The
presumption that a negotiable instrument is issued for a valuable consideration is
only puma facie. It can be rebutted by proof to the contrary. (Bank of the
Philippine Islands v. Laguna Coconut Oil Co. et al., 48 Phil. 5).
According to Dela Rama, he loaned the P9,300.00 to Pineda in two installments
on two occasions five days apart - first loan for P5,000.00 and second loan for
P4,300.00, both given in cash. He also alleged that previously he loaned
P3,000.00 but Pineda paid this other loan two days afterward.
These allegations of Dela Rama are belied by the promissory note itself. The
second sentence of the note reads - "This represents the cash advances made by
him in connection with my case for which he is my attorney-in- law."
The terms of the note sustain the version of Pineda that he signed the P9,300.00
promissory note because he believed Dela Rama's story that these amounts had
already been advanced by Dela Rama and given as gifts for NARIC officials.
Dela Rama himself admits that Pineda engaged his services to delay by one
month the filing of the NARIC case against Pineda while the latter was trying to
work out an amicable settlement. There is no question that Dela Rama was
indeed a close friend of then NARIC Administrator Jose Rodriquez having worked
with him in the Philippine consulate at Hongkong and that Dela Rama made what
he calls "proper representations" with Rodriguez and with other NARIC officials in
connection with the investigation of the criminal charges against Pineda.

We agree with the trial court which believed Pineda. It is indeed unusual for a
lawyer to lend money to his client whom he had known for only three months, with
no security for the loan and on interest. Dela Rama testified that he did not even
know what Pineda was going to do with the money he borrowed from him. The
petitioner had just purchased a hacienda in Mindoro for P210,000.00, owned
sugar and rice lands in Tarlac of around 800 hectares, and had P60,000.00
deposits in three banks when he executed the note. It is more logical to believe
that Pineda would not borrow P5,000.00 and P4,300.00 five days apart from a
man whom he calls a "fixer" and whom he had known for only three months.
There is no dispute that an air-conditioning unit valued at P1,250.00 was
purchased by Pineda's son and given to Dela Rama although the latter claims he
paid P1,250.00 for the unit when he received it. Pineda, however, alleged that he
gave the air-conditioning unit because Dela Rama told him that Dr. Rodriguez
was asking for one air-conditioning machine of 1.5 horsepower for the latter's
NARIC office. Pineda further testified that six cavans of first class rice also
intended for the NARIC Chairman and General Manager, together with the
airconditioning unit, never reached Dr. Rodriguez but were kept by the lawyer.
Considering the foregoing, we agree with the trial court that the promissory note
was executed for an illegal consideration. Articles 1409 and 1412 of the Civil
Code in part, provide:
Art. 1409. The following contracts are inexistent and void from the
beginning:
(1) Those whose cause, object or purpose is contrary to law, morals,
good customs, public order and public policy;
xxx xxx xxx
Art. 1412. If the act in which the unlawful or forbidden cause consists
does not constitute a criminal offense, the following rules shall be
observed:
(1) When the fault is on the part of both contracting parties, neither
may recover what he has given by virtue of the contract, or demand
the performance of the other's undertaking.
xxx xxx xxx
Whether or not the supposed cash advances reached their destination is of no
moment. The consideration for the promissory note - to influence public officers in
the performance of their duties - is contrary to law and public policy. The
promissory note is void ab initio and no cause of action for the collection cases
can arise from it.
WHEREFORE, the decision of the Court of Appeals is SET ASIDE. The
complaint and the counterclaim in Civil Case No. 45762 are both DISMISSED.
SO ORDERED.
48. G.R. No. L-26001 October 29, 1968
PHILIPPINE NATIONAL BANK vs. THE COURT OF APPEALS and
PHILIPPINE COMMERCIAL AND INDUSTRIAL BANK
The Philippine National Bank — hereinafter referred to as the PNB — seeks the
review by certiorari of a decision of the Court of Appeals, which affirmed that of
the Court of First Instance of Manila, dismissing plaintiff's complaint against the
Philippine Commercial and Industrial Bank — hereinafter referred to as the PCIB
— for the recovery of P57,415.00.
A partial stipulation of facts entered into by the parties and the decision of the
Court of Appeals show that, on about January 15, 1962, one Augusto Lim
deposited in his current account with the PCIB branch at Padre Faura, Manila,
GSIS Check No. 645915- B, in the sum of P57,415.00, drawn against the PNB;
that, following an established banking practice in the Philippines, the check was,
on the same date, forwarded, for clearing, through the Central Bank, to the PNB,
which did not return said check the next day, or at any other time, but retained it
and paid its amount to the PCIB, as well as debited it against the account of the
GSIS in the PNB; that, subsequently, or on January 31, 1962, upon demand from
the GSIS, said sum of P57,415.00 was re-credited to the latter's account, for the
reason that the signatures of its officers on the check were forged; and that,
thereupon, or on February 2, 1962, the PNB demanded from the PCIB the refund
of said sum, which the PCIB refused to do. Hence, the present action against the
PCIB, which was dismissed by the Court of First Instance of Manila, whose
decision was, in turn, affirmed by the Court of Appeals.
It is not disputed that the signatures of the General Manager and the Auditor of
the GSIS on the check, as drawer thereof, are forged; that the person named in
the check as its payee was one Mariano D. Pulido, who purportedly indorsed it to
one Manuel Go; that the check purports to have been indorsed by Manuel Go to
Augusto Lim, who, in turn, deposited it with the PCIB, on January 15, 1962; that,
thereupon, the PCIB stamped the following on the back of the check: "All prior
indorsements and/or Lack of Endorsement Guaranteed, Philippine Commercial
and Industrial Bank," Padre Faura Branch, Manila; that, on the same date, the
PCIB sent the check to the PNB, for clearance, through the Central Bank; and
that, over two (2) months before, or on November 13, 1961, the GSIS had notified
the PNB, which acknowledged receipt of the notice, that said check had been
lost, and, accordingly, requested that its payment be stopped.
In its brief, the PNB maintains that the lower court erred: (1) in not finding the
PCIB guilty of negligence; (2) in not finding that the indorsements at the back of
the check are forged; (3) in not finding the PCIB liable to the PNB by virtue of the
former's warranty on the back of the check; (4) in not holding that "clearing" is not
"acceptance", in contemplation of the Negotiable Instruments law; (5) in not
finding that, since the check had not been accepted by the PNB, the latter is
entitled to reimbursement therefor; and (6) in denying the PNB's right to recover
from the PCIB.
The first assignment of error will be discussed later, together with the last,with
which it is interrelated.
As regards the second assignment of error, the PNB argues that, since the
signatures of the drawer are forged, so must the signatures of the supposed
indorsers be; but this conclusion does not necessarily follow from said premise.
Besides, there is absolutely no evidence, and the PNB has not even tried to prove
that the aforementioned indorsements are spurious. Again, the PNB refunded the
amount of the check to the GSIS, on account of the forgery in the
signatures, not of the indorsers or supposed indorsers, but of the officers of the
GSIS as drawer of the instrument. In other words, the question whether or not the
indorsements have been falsified is immaterial to the PNB's liability as a drawee,
or to its right to recover from the PCIB,1 for, as against the drawee, the
indorsement of an intermediate bank does not guarantee the signature of the
drawer,2 since the forgery of the indorsement is notthe cause of the loss.3
With respect to the warranty on the back of the check, to which the third
assignment of error refers, it should be noted that the PCIB thereby guaranteed
"all prior indorsements," not the authenticity of the signatures of the officers of the
GSIS who signed on its behalf, because the GSIS is not an indorser of the check,
but its drawer.4 Said warranty is irrelevant, therefore, to the PNB's alleged right to
recover from the PCIB. It could have been availed of by a subsequent
indorsee5 or a holder in due course6 subsequent to the PCIB, but, the PNB is
neither.7 Indeed, upon payment by the PNB, as drawee, the check ceased to be a
negotiable instrument, and became a mere voucher or proof of payment.8
Referring to the fourth and fifth assignments of error, we must bear in mind that,
in general, "acceptance", in the sense in which this term is used in the Negotiable
Instruments Law9 is not required for checks, for the same are payable on
demand.10 Indeed, "acceptance" and "payment" are, within the purview of said
Law, essentially different things, for the former is "a promise to perform an act,"
whereas the latter is the "actual performance" thereof.11 In the words of the
Law,12 "the acceptance of a bill is the signification by the drawee of his assent to
the order of the drawer," which, in the case of checks, is the payment, on
demand, of a given sum of money. Upon the other hand, actual payment of the
amount of a check implies not only an assent to said order of the drawer and a
recognition of the drawer's obligation to pay the aforementioned sum, but, also,
a compliance with such obligation.
Let us now consider the first and the last assignments of error. The PNB
maintains that the lower court erred in not finding that the PCIB had been guilty of
negligence in not discovering that the check was forged. Assuming that there had
Nego Instruments Set 1 (#s1-70) Page 78 of 112
Lumbas. Dadat
been such negligence on the part of the PCIB, it is undeniable, however, that the
PNB has, also, been negligent, with the particularity that the PNB had been guilty
of a greater degree of negligence, because it had a previous and formal notice
from the GSIS that the check had been lost, with the request that payment thereof
be stopped. Just as important, if not more important and decisive, is the fact that
the PNB's negligence was the main or proximate cause for the corresponding
loss.
In this connection, it will be recalled that the PCIB did not cash the check upon its
presentation by Augusto Lim; that the latter had merely deposited it in his current
account with the PCIB; that, on the same day, the PCIB sent it, through the
Central Bank, to the PNB, for clearing; that the PNB did not return the check to
the PCIB the next day or at any other time; that said failure to return the check to
the PCIB implied, under the current banking practice, that the PNB considered
the check good and would honor it; that, in fact, the PNB honored the check and
paid its amount to the PCIB; and that only then did the PCIB allow Augusto Lim to
draw said amount from his aforementioned current account.
Thus, by not returning the check to the PCIB, by thereby indicating that the PNB
had found nothing wrong with the check and would honor the same, and by
actually paying its amount to the PCIB, the PNB induced the latter, not only to
believe that the check was genuine and good in every respect, but, also, to pay
its amount to Augusto Lim. In other words, the PNB was the primary or proximate
cause of the loss, and, hence, may not recover from the PCIB.13
It is a well-settled maxim of law and equity that when one of two (2) innocent
persons must suffer by the wrongful act of a third person, the loss must be borne
by the one whose negligence was the proximate cause of the loss or who put it
into the power of the third person to perpetrate the wrong.14
Then, again, it has, likewise, been held that, where the collecting (PCIB) and the
drawee (PNB) banks are equally at fault, the court will leave the parties where it
finds them.15
Lastly, Section 62 of Act No. 2031 provides:
The acceptor by accepting the instrument engages that he will pay it
according to the tenor of his acceptance; and admits:
(a) The existence of the drawer, the genuineness of his signature,
and his capacity and authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
The prevailing view is that the same rule applies in the case of a drawee who
pays a bill without having previously accepted it.16
WHEREFORE, the decision appealed from is hereby affirmed, with costs against
the Philippine National Bank. It is so ordered.
49. G.R. No. L-16968 July 31, 1962
PHILIPPINE NATIONAL BANK vs. CONCEPCION MINING COMPANY, INC.,
ET AL.
Appeal from a judgment or decision of the Court of First Instance of Manila, Hon.
Gustavo Victoriano, presiding, sentencing defendants Concepcion Mining
Company and Jose Sarte to pay jointly and severally to the plaintiff the amount of
P7,197.26 with interest up to September 29, 1959, plus a daily interest of
P1.3698 thereafter up to the time the amount is fully paid, plus 10% of the amount
as attorney's fees, and costs of this suit.
The present action was instituted by the plaintiff to recover from the defendants
the face of a promissory note the pertinent part of which reads as follows:
Manila, March 12, 1954
NINETY DAYS after date, for value received, I promise to pay to the order of the
Philippine National Bank . . . .
In case it is necessary to collect this note by or through an attorney-at-law, the
makers and indorsers shall pay ten percent (10%) of the amount due on the note
as attorney's fees, which in no case shall be less than P100.00 exclusive of all
costs and fees allowed by law as stipulated in the contract of real estate
mortgage. Demand and Dishonor Waived. Holder may accept partial payment
reserving his right of recourse again each and all indorsers.

(Purpose — mining industry)
CONCEPCION MINING COMPANY, INC., 50. G.R. No. L-18103 June 8, 1922
By: PHILIPPINE NATIONAL BANK vs. MANILA OIL REFINING & BY-PRODUCTS
(Sgd.) VICENTE LEGARDA COMPANY, INC.
President The question of first impression raised in this case concerns the validity in this
(Sgd.) VICENTE LEGARDA jurisdiction of a provision in a promissory note whereby in case the same is not
(Sgd.) JOSE S SARTE paid at maturity, the maker authorizes any attorney to appear and confess
"Please issue check to — judgment thereon for the principal amount, with interest, costs, and attorney's
Mr. Jose S. Sarte" fees, and waives all errors, rights to inquisition, and appeal, and all property
Upon the filing of the complaint the defendants presented their answer in which exceptions.
they allege that the co-maker the promissory note Don Vicente L. Legarda died On May 8, 1920, the manager and the treasurer of the Manila Oil Refining & By-
on February 24, 1946 and his estate is in the process of judicial determination in Products Company, Inc., executed and delivered to the Philippine National Bank,
Special Proceedings No. 29060 of the Court of First Instance of Manila. On the a written instrument reading as follows:
basis of this allegation it is prayed, as a special defense, that the estate of said RENEWAL.
deceased Vicente L. Legarda be included as party-defendant. The court in its P61,000.00
decision ruled that the inclusion of said defendant is unnecessary and immaterial, MANILA, P.I., May 8, 1920.
in accordance with the provisions of Article 1216 of the Deny Civil Code and On demand after date we promise to pay to the order of the
section 17 (g) of the Negotiable Instruments Law. Philippine National Bank sixty-one thousand only pesos at Philippine
A motion to reconsider this decision was denied and thereupon defendants National Bank, Manila, P.I.
presented a petition for relief, asking that the effects of the judgment be Without defalcation, value received; and to hereby authorize any
suspended for the reason that the deceased Vicente L. Legarda should have attorney in the Philippine Islands, in case this note be not paid at
been included as a party-defendant and his liability should be determined in maturity, to appear in my name and confess judgment for the above
pursuance of the provisions of the promissory note. This motion for relief was also sum with interest, cost of suit and attorney's fees of ten (10) per cent
denied, hence defendant appealed to this Court. for collection, a release of all errors and waiver of all rights to
Section 17 (g) of the Negotiable Instruments Law provides as follows: inquisition and appeal, and to the benefit of all laws exempting
SEC. 17. Construction where instrument is ambiguous. — Where the property, real or personal, from levy or sale. Value received. No.
language of the instrument is ambiguous or there are omissions ____ Due ____
therein, the following rules of construction apply: MANILA OIL REFINING & BY-PRODUCTS CO., INC.,
xxx xxx xxx (Sgd.) VICENTE SOTELO,
(g) Where an instrument containing the word "I promise to pay" is Manager.
signed by two or more persons, they are deemed to be jointly and MANILA OIL REFINING & BY-PRODUCTS CO., INC.,
severally liable thereon. (Sgd.) RAFAEL LOPEZ,
And Article 1216 of the Civil Code of the Philippines also provides as follows: Treasurer
ART. 1216. The creditor may proceed against any one of the solidary The Manila Oil Refining and By-Products Company, Inc. failed to pay the
debtors or some of them simultaneously. The demand made against promissory note on demand. The Philippine National Bank brought action in the
one of them shall not be an obstacle to those which may Court of First Instance of Manila, to recover P61,000, the amount of the note,
subsequently be directed against the others so long as the debt has together with interest and costs. Mr. Elias N. Rector, an attorney associated with
not been fully collected. the Philippine National Bank, entered his appearance in representation of the
In view of the above quoted provisions, and as the promissory note was executed defendant, and filed a motion confessing judgment. The defendant, however, in a
jointly and severally by the same parties, namely, Concepcion Mining Company, sworn declaration, objected strongly to the unsolicited representation of attorney
Inc. and Vicente L. Legarda and Jose S. Sarte, the payee of the promissory note Recto. Later, attorney Antonio Gonzalez appeared for the defendant and filed a
had the right to hold any one or any two of the signers of the promissory note demurrer, and when this was overruled, presented an answer. The trial judge
responsible for the payment of the amount of the note. This judgment of the lower rendered judgment on the motion of attorney Recto in the terms of the complaint.
court should be affirmed. The foregoing facts, and appellant's three assignments of error, raise squarely the
Our attention has been attracted to the discrepancies in the printed record on question which was suggested in the beginning of this opinion. In view of the
appeal. We note, first, that the names of the defendants, who are evidently the importance of the subject to the business community, the advice of prominent
Concepcion Mining Co., Inc. and Jose S. Sarte, do not appear in the printed attorneys-at-law with banking connections, was solicited. These members of the
record on appeal. The title of the complaint set forth in the record on appeal does bar responded promptly to the request of the court, and their memoranda have
not contain the name of Jose Sarte, when it should, as two defendants are named proved highly useful in the solution of the question. It is to the credit of the bar
in the complaint and the only defense of the defendants is the non-inclusion of the that although the sanction of judgement notes in the Philippines might prove of
deceased Vicente L. Legarda as a defendant in the action. We also note that the immediate value to clients, every one of the attorneys has looked upon the matter
copy of the promissory note which is set forth in the record on appeal does not in a big way, with the result that out of their independent investigations has come
contain the name of the third maker Jose S. Sarte. Fortunately, the brief of a practically unanimous protest against the recognition in this jurisdiction of
appellee on page 4 sets forth said name of Jose S. Sarte as one of the co-maker judgment notes.1
of the promissory note. Evidently, there is an attempt to mislead the court into Neither the Code of Civil Procedure nor any other remedial statute expressly or
believing that Jose S. Sarte is no one of the co-makers. The attorney for the tacitly recognizes a confession of judgment commonly called a judgment note. On
defendants Atty. Jose S. Sarte himself and he should be held primarily the contrary, the provisions of the Code of Civil Procedure, in relation to
responsible for the correctness of the record on appeal. We, therefore, order the constitutional safeguards relating to the right to take a man's property only after a
said Atty. Jose S. Sarte to explain why in his record on appeal his own name as day in court and after due process of law, contemplate that all defendants shall
one of the defendants does not appear and neither does his name appear as one have an opportunity to be heard. Further, the provisions of the Code of Civil
of the co-signers of the promissory note in question. So ordered. Procedure pertaining to counter claims argue against judgment notes, especially
Nego Instruments Set 1 (#s1-70) Page 79 of 112
Lumbas. Dadat
as the Code provides that in case the defendant or his assignee omits to set up a
counterclaim, he cannot afterwards maintain an action against the plaintiff
therefor. (Secs. 95, 96, 97.) At least one provision of the substantive law, namely,
that the validity and fulfillment of contracts cannot be left to the will of one of the
contracting parties (Civil Code, art. 1356), constitutes another indication of
fundamental legal purposes.
The attorney for the appellee contends that the Negotiable Instruments Law (Act
No. 2031) expressly recognizes judgment notes, and that they are enforcible
under the regular procedure. The Negotiable Instruments Law, in section 5,
provides that "The negotiable character of an instrument otherwise negotiable is
not affected by a provision which ". . . (b) Authorizes a confession of judgment if
the instrument be not paid at maturity." We do not believe, however, that this
provision of law can be taken to sanction judgments by confession, because it is
a portion of a uniform law which merely provides that, in jurisdiction where
judgment notes are recognized, such clauses shall not affect the negotiable
character of the instrument. Moreover, the same section of the Negotiable
Instruments. Law concludes with these words: "But nothing in this section shall
validate any provision or stipulation otherwise illegal."
The court is thus put in the position of having to determine the validity in the
absence of statute of a provision in a note authorizing an attorney to appear and
confess judgment against the maker. This situation, in reality, has its advantages
for it permits us to reach that solution which is best grounded in the solid
principles of the law, and which will best advance the public interest.
The practice of entering judgments in debt on warrants of attorney is of ancient
origin. In the course of time a warrant of attorney to confess judgement became a
familiar common law security. At common law, there were two kinds of judgments
by confession; the one a judgment by cognovit actionem, and the other by
confession relicta verificatione. A number of jurisdictions in the United States
have accepted the common law view of judgments by confession, while still other
jurisdictions have refused to sanction them. In some States, statutes have been
passed which have either expressly authorized confession of judgment on
warrant of attorney, without antecedent process, or have forbidden judgments of
this character. In the absence of statute, there is a conflict of authority as to the
validity of a warrant of attorney for the confession of judgement. The weight of
opinion is that, unless authorized by statute, warrants of attorney to confess
judgment are void, as against public policy.
Possibly the leading case on the subject is First National Bank of Kansas City vs.
White ([1909], 220 Mo., 717; 16 Ann. Cas., 889; 120 S. W., 36; 132 Am. St. Rep.,
612). The record in this case discloses that on October 4, 1990, the defendant
executed and delivered to the plaintiff an obligation in which the defendant
authorized any attorney-at-law to appear for him in an action on the note at any
time after the note became due in any court of record in the State of Missouri, or
elsewhere, to waive the issuing and service of process, and to confess judgement
in favor of the First National Bank of Kansas City for the amount that might then
be due thereon, with interest at the rate therein mentioned and the costs of suit,
together with an attorney's fee of 10 per cent and also to waive and release all
errors in said proceedings and judgment, and all proceedings, appeals, or writs of
error thereon. Plaintiff filed a petition in the Circuit Court to which was attached
the above-mentioned instrument. An attorney named Denham appeared pursuant
to the authority given by the note sued on, entered the appearance of the
defendant, and consented that judgement be rendered in favor of the plaintiff as
prayed in the petition. After the Circuit Court had entered a judgement, the
defendants, through counsel, appeared specially and filed a motion to set it aside.
The Supreme Court of Missouri, speaking through Mr. Justice Graves, in part
said:
But going beyond the mere technical question in our preceding
paragraph discussed, we come to a question urged which goes to
the very root of this case, and whilst new and novel in this state, we
do not feel that the case should be disposed of without discussing
and passing upon that question.
xxx xxx xxx

And if this instrument be considered as security for a debt, as it was
by the common law, it has never so found recognition in this state.
The policy of our law has been against such hidden securities for
debt. Our Recorder's Act is such that instruments intended as
security for debt should find a place in the public records, and if not,
they have often been viewed with suspicion, and their bona fides
often questioned.
Nor do we thing that the policy of our law is such as to thus place a
debtor in the absolute power of his creditor. The field for fraud is too
far enlarged by such an instrument. Oppression and tyranny would
follow the footsteps of such a diversion in the way of security for
debt. Such instruments procured by duress could shortly be placed in
judgment in a foreign court and much distress result therefrom.
Again, under the law the right to appeal to this court or some other
appellate court is granted to all persons against whom an adverse
judgment is rendered, and this statutory right is by the instrument
stricken down. True it is that such right is not claimed in this case, but
it is a part of the bond and we hardly know why this pound of flesh
has not been demanded. Courts guard with jealous eye any contract
innovations upon their jurisdiction. The instrument before us,
considered in the light of a contract, actually reduces the courts to
mere clerks to enter and record the judgment called for therein. By
our statute (Rev. St. 1899, sec. 645) a party to a written instrument of
this character has the right to show a failure of consideration, but this
right is brushed to the wind by this instrument and the jurisdiction of
the court to hear that controversy is by the whose object is to oust
the jurisdiction of the courts are contrary to public policy and will not
be enforced. Thus it is held that any stipulation between parties to a
contract distinguishing between the different courts of the country is
contrary to public policy. The principle has also been applied to a
stipulation in a contract that a party who breaks it may not be sued,
to an agreement designating a person to be sued for its breach who
is nowise liable and prohibiting action against any but him, to a
provision in a lease that the landlord shall have the right to take
immediate judgment against the tenant in case of a default on his
part, without giving the notice and demand for possession and filing
the complaint required by statute, to a by-law of a benefit association
that the decisions of its officers on claim shall be final and conclusive,
and to many other agreements of a similar tendency. In some courts,
any agreement as to the time for suing different from time allowed by
the statute of limitations within which suit shall be brought or the right
to sue be barred is held void.
xxx xxx xxx
We shall not pursue this question further. This contract, in so far as it
goes beyond the usual provisions of a note, is void as against the
public policy of the state, as such public policy is found expressed in
our laws and decisions. Such agreements are iniquitous to the
uttermost and should be promptly condemned by the courts, until
such time as they may receive express statutory recognition, as they
have in some states.
xxx xxx xxx
From what has been said, it follows that the Circuit Court never had
jurisdiction of the defendant, and the judgement is reversed.
The case of Farquhar and Co. vs. Dehaven ([1912], 70 W. Va., 738; 40 L.R.A. [N.
S.], 956; 75 S.E., 65; Ann. Cas. [1914-A], 640), is another well-considered
authority. The notes referred to in the record contained waiver of presentment
and protest, homestead and exemption rights real and personal, and other rights,
and also the following material provision: "And we do hereby empower and
authorize the said A. B. Farquhar Co. Limited, or agent, or any prothonotary or
attorney of any Court of Record to appear for us and in our name to confess
judgement against us and in favor of said A. B. Farquhar Co., Limited, for the
above named sum with costs of suit and release of all errors and without stay of
execution after the maturity of this note." The Supreme Court of West Virginia, on
consideration of the validity of the judgment note above described, speaking
through Mr. Justice Miller, in part said:
As both sides agree the question presented is one of first impression
in this State. We have no statutes, as has Pennsylvania and many
other states, regulating the subject. In the decision we are called
upon to render, we must have recourse to the rules and principles of
the common law, in force here, and to our statute law, applicable,
and to such judicial decisions and practices in Virginia, in force at the
time of the separation, as are properly binding on us. It is pertinent to
remark in this connection, that after nearly fifty years of judicial
history this question, strong evidence, we think, that such notes, if at
all, have never been in very general use in this commonwealth. And
in most states where they are current the use of them has grown up
under statutes authorizing them, and regulating the practice of
employing them in commercial transactions.
xxx xxx xxx
It is contended, however, that the old legal maxim, qui facit per alium,
facit per se, is as applicable here as in other cases. We do not think
so. Strong reasons exist, as we have shown, for denying its
application, when holders of contracts of this character seek the aid
of the courts and of their execution process to enforce them,
defendant having had no day in court or opportunity to be heard. We
need not say in this case that a debtor may not, by proper power of
attorney duly executed, authorize another to appear in court, and by
proper endorsement upon the writ waive service of process, and
confess judgement. But we do not wish to be understood as
approving or intending to countenance the practice employing in this
state commercial paper of the character here involved. Such paper
has heretofore had little if any currency here. If the practice is
adopted into this state it ought to be, we think, by act of the
Legislature, with all proper safeguards thrown around it, to prevent
fraud and imposition. The policy of our law is, that no man shall suffer
judgment at the hands of our courts without proper process and a
day to be heard. To give currency to such paper by judicial
pronouncement would be to open the door to fraud and imposition,
and to subject the people to wrongs and injuries not heretofore
contemplated. This we are unwilling to do.
A case typical of those authorities which lend support to judgment notes is First
National Bank of Las Cruces vs. Baker ([1919], 180 Pac., 291). The Supreme
Court of New Mexico, in a per curiam decision, in part, said:
In some of the states the judgments upon warrants of attorney are
condemned as being against public policy. (Farquhar and Co. vs.
Dahaven, 70 W. Va., 738; 75 S.E., 65; 40 L.R.A. [N. S.], 956; Ann.
Cas. [1914 A]. 640, and First National Bank of Kansas City vs. White,
220 Mo., 717; 120 S. W., 36; 132 Am. St. Rep., 612; 16 Ann. Cas.,
889, are examples of such holding.) By just what course of reasoning
it can be said by the courts that such judgments are against public
policy we are unable to understand. It was a practice from time
immemorial at common law, and the common law comes down to us
sanctioned as justified by the reason and experience of English-
speaking peoples. If conditions have arisen in this country which
make the application of the common law undesirable, it is for the
Legislature to so announce, and to prohibit the taking of judgments
can be declared as against the public policy of the state. We are
aware that the argument against them is that they enable the
unconscionable creditor to take advantage of the necessities of the
poor debtor and cut him off from his ordinary day in court. On the
other hand, it may be said in their favor that it frequently enables a
debtor to obtain money which he could by no possibility otherwise
Nego Instruments Set 1 (#s1-70) Page 80 of 112
Lumbas. Dadat
obtain. It strengthens his credit, and may be most highly beneficial to
him at times. In some of the states there judgments have been
condemned by statute and of course in that case are not allowed.
Our conclusion in this case is that a warrant of attorney given as
security to a creditor accompanying a promissory note confers a valid
power, and authorizes a confession of judgment in any court of
competent jurisdiction in an action to be brought upon said note; that
our cognovit statute does not cover the same field as that occupied
by the common-law practice of taking judgments upon warrant of
attorney, and does not impliedly or otherwise abrogate such practice;
and that the practice of taking judgments upon warrants of attorney
as it was pursued in this case is not against any public policy of the
state, as declared by its laws.
With reference to the conclusiveness of the decisions here mentioned, it may be
said that they are based on the practice of the English-American common law,
and that the doctrines of the common law are binding upon Philippine courts only
in so far as they are founded on sound principles applicable to local conditions.
Judgments by confession as appeared at common law were considered an
amicable, easy, and cheap way to settle and secure debts. They are a quick
remedy and serve to save the court's time. They also save the time and money of
the litigants and the government the expenses that a long litigation entails. In one
sense, instruments of this character may be considered as special agreements,
with power to enter up judgments on them, binding the parties to the result as
they themselves viewed it.
On the other hand, are disadvantages to the commercial world which outweigh
the considerations just mentioned. Such warrants of attorney are void as against
public policy, because they enlarge the field for fraud, because under these
instruments the promissor bargains away his right to a day in court, and because
the effect of the instrument is to strike down the right of appeal accorded by
statute. The recognition of such a form of obligation would bring about a complete
reorganization of commercial customs and practices, with reference to short-term
obligations. It can readily be seen that judgement notes, instead of resulting to the
advantage of commercial life in the Philippines might be the source of abuse and
oppression, and make the courts involuntary parties thereto. If the bank has a
meritorious case, the judgement is ultimately certain in the courts.
We are of the opinion that warrants of attorney to confess judgment are not
authorized nor contemplated by our law. We are further of the opinion that
provisions in notes authorizing attorneys to appear and confess judgments
against makers should not be recognized in this jurisdiction by implication and
should only be considered as valid when given express legislative sanction.
The judgment appealed from is set aside, and the case is remanded to the lower
court for further proceedings in accordance with this decision. Without special
finding as to costs in this instance, it is so ordered.
51. G.R. No. L-53194 March 14, 1988
PHILIPPINE NATIONAL BANK vs.HON. ROMULO S. QUIMPO, Presiding
Judge, Court of First Instance of Rizal, Branch XIV, and FRANCISCO S.
GOZON II
On July 3, 1973, Francisco S. Gozon II, who was a depositor of the Caloocan City
Branch of the Philippine National Bank, went to the bank in his car accompanied
by his friend Ernesto Santos whom he left in the car while he transacted business
in the bank. When Santos saw that Gozon left his check book he took a check
therefrom, filled it up for the amount of P5,000.00, forged the signature of Gozon,
and thereafter he encashed the check in the bank on the same day. The account
of Gozon was debited the said amount. Upon receipt of the statement of account
from the bank, Gozon asked that the said amount of P5,000.00 should be
returned to his account as his signature on the check was forged but the bank
refused.
Upon complaint of private respondent on February 1, 1974 Ernesto Santos was
apprehended by the police authorities and upon investigation he admitted that he

stole the check of Gozon, forged his signature and encashed the same with the
Bank.
Hence Gozon filed the complaint for recovery of the amount of P5,000.00, plus
interest, damages, attorney's fees and costs against the bank in the Court of First
Instance of Rizal. After the issues were joined and the trial on the merits ensued,
a decision was rendered on February 4, 1980, the dispositive part of which reads
as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff.
The defendant is hereby condemned to return to plaintiff the amount
of P5,000.00 which it had unlawfully withheld from the latter, with
interest at the legal rate from September 22, 1972 until the amount is
fully delivered. The defendant is further condemned to pay plaintiff
the sum of P2,000.00 as attorney's fees and to pay the costs of this
suit.
Not satisfied therewith, the bank now filed this petition for review on certiorari in
this Court raising the sole legal issue that —
THE ACT OF RESPONDENT FRANCISCO GOZON, II IN PUTTING
HIS CHECK BOOK CONTAINING THE CHECK IN QUESTION INTO
THE HANDS OF ERNESTO SANTOS WAS INDEED THE
PROXIMATE CAUSE OF THE LOSS, THEREBY PRECLUDING HIM
FROM SETTING UP THE DEFENSE OF FORGERY OR WANT 0F
AUTHORITY UNDER SECTION 23 OF THE NEGOTIABLE
INSTRUMENTS LAW, ACT NO. 3201
The petition is devoid of merit.
This Court reproduces with approval the disquisition of the court a quo as follows:
A bank is bound to know the signatures of its customers; and if it
pays a forged check, it must be considered as making the payment
out of its own funds, and cannot ordinarily change the amount so
paid to the account of the depositor whose name was forged' (San
Carlos Milling Co. vs. Bank of the P.I., 59 Phil. 59).
This rule is absolutely necessary to the circulation of drafts and
checks, and is based upon the presumed negligence of the drawee
in failing to meet its obligation to know the signature of its
correspondent. ... There is nothing inequitable in such a rule. If the
paper comes to the drawee in the regular course of business, and
he, having the opportunity ascertaining its character, pronounces it to
be valid and pays it, it is not only a question of payment under
mistake, but payment in neglect of duty which the commercial law
places upon him, and the result of his negligence must rest upon him
(12 ALR 1901, citing many cases found in I Agbayani, supra).
Defendant, however, interposed the defense that it exercised
diligence in accordance with the accepted norms of banking practice
when it accepted and paid Exhibit "A". It presented evidence that the
check had to pass scrutiny by a signature verifier as well as an officer
of the bank.
A comparison of the signature (Exhibit "A-l") on the forged check
(Exhibit "A") with plaintiffs exemplar signatures (Exhibits "5-N" and
"5-B") found in the PNB Form 35-A would immediately show the
negligence of the employees of the defendant bank. Even a not too
careful comparison would immediately arrest one's attention and
direct it to the graceful lines of plaintiffs exemplar signatures found in
Exhibits "5-A" and "5-B". The formation of the first letter "F" in the
exemplars, which could be regarded as artistic, is completely
different from the way the same letter is formed in Exhibit "A-l". That
alone should have alerted a more careful and prudent signature
verifier.
The prime duty of a bank is to ascertain the genuineness of the signature of the
drawer or the depositor on the check being encashed. 1 It is expected to use
reasonable business prudence in accepting and cashing a check presented to it.
In this case the findings of facts of the court a quo are conclusive. The trial court
found that a comparison of the signature on the forged check and the sample
signatures of private respondent show marked differences as the graceful lines in
the sample signature which is completely different from those of the signature on
the forged check. Indeed the NBI handwriting expert Estelita Santiago Agnes
whom the trial court considered to be an "unbiased scientific expert" indicated the
marked differences between the signature of private respondent on the sample
signatures and the questioned signature. Notwithstanding the testimony of Col.
Fernandez, witness for petitioner, advancing the opinion that the questioned
signature appears to be genuine, the trial court by merely examining the pictorial
report presented by said witness, found a marked difference in the second "c" in
Francisco as written on the questioned signature as compared to the sample
signatures, and the separation between the "s" and the "c" in the questioned
signature while they are connected in the sample signatures.2
Obviously, petitioner was negligent in encashing said forged check without
carefully examining the signature which shows marked variation from the genuine
signature of private respondent.
In reference to the allegation of the petitioner that it is the negligence of private
respondent that is the cause of the loss which he suffered, the trial court held:
The act of plaintiff in leaving his checkbook in the car while he went
out for a short while can not be considered negligence sufficient to
excuse the defendant bank from its own negligence. It should be
home in mind that when defendant left his car, Ernesto Santos, a
long time classmate and friend remained in the same. Defendant
could not have been expected to know that the said Ernesto Santos
would remove a check from his checkbook. Defendant had trust in
his classmate and friend. He had no reason to suspect that the latter
would breach that trust .
We agree.
Private respondent trustee Ernesto Santos as a classmate and a friend. He
brought him along in his car to the bank and he left his personal belongings in the
car. Santos however removed and stole a check from his cheek book without the
knowledge and consent of private respondent. No doubt private respondent
cannot be considered negligent under the circumstances of the case.
WHEREFORE, the petition is DISMISSED for lack of merit with costs against
petitioner. SO ORDERED.
52. G.R. No. 170325 September 26, 2008
PHILIPPINE NATIONAL BANK vs. ERLANDO T. RODRIGUEZ and NORMA
RODRIGUEZ
WHEN the payee of the check is not intended to be the true recipient of its
proceeds, is it payable to order or bearer? What is the fictitious-payee rule and
who is liable under it? Is there any exception?
These questions seek answers in this petition for review on certiorari of the
Amended Decision1 of the Court of Appeals (CA) which affirmed with modification
that of the Regional Trial Court (RTC).2
The Facts
The facts as borne by the records are as follows:
Respondents-Spouses Erlando and Norma Rodriguez were clients of petitioner
Philippine National Bank (PNB), Amelia Avenue Branch, Cebu City. They
maintained savings and demand/checking accounts, namely, PNBig Demand
Deposits (Checking/Current Account No. 810624-6 under the account name
Erlando and/or Norma Rodriguez), and PNBig Demand Deposit
(Checking/Current Account No. 810480-4 under the account name Erlando T.
Rodriguez).
The spouses were engaged in the informal lending business. In line with their
business, they had a discounting3 arrangement with the Philnabank Employees
Savings and Loan Association (PEMSLA), an association of PNB employees.
Naturally, PEMSLA was likewise a client of PNB Amelia Avenue Branch. The
association maintained current and savings accounts with petitioner bank.
PEMSLA regularly granted loans to its members. Spouses Rodriguez would
rediscount the postdated checks issued to members whenever the association
Nego Instruments Set 1 (#s1-70) Page 81 of 112
Lumbas. Dadat
was short of funds. As was customary, the spouses would replace the postdated
checks with their own checks issued in the name of the members.
It was PEMSLA’s policy not to approve applications for loans of members with
outstanding debts. To subvert this policy, some PEMSLA officers devised a
scheme to obtain additional loans despite their outstanding loan accounts. They
took out loans in the names of unknowing members, without the knowledge or
consent of the latter. The PEMSLA checks issued for these loans were then given
to the spouses for rediscounting. The officers carried this out by forging the
indorsement of the named payees in the checks.
In return, the spouses issued their personal checks (Rodriguez checks) in the
name of the members and delivered the checks to an officer of PEMSLA. The
PEMSLA checks, on the other hand, were deposited by the spouses to their
account.
Meanwhile, the Rodriguez checks were deposited directly by PEMSLA to its
savings account without any indorsement from the named payees. This was an
irregular procedure made possible through the facilitation of Edmundo Palermo,
Jr., treasurer of PEMSLA and bank teller in the PNB Branch. It appears that this
became the usual practice for the parties.
For the period November 1998 to February 1999, the spouses issued sixty nine
(69) checks, in the total amount of P2,345,804.00. These were payable to forty
seven (47) individual payees who were all members of PEMSLA.4
Petitioner PNB eventually found out about these fraudulent acts. To put a stop to
this scheme, PNB closed the current account of PEMSLA. As a result, the
PEMSLA checks deposited by the spouses were returned or dishonored for the
reason "Account Closed." The corresponding Rodriguez checks, however, were
deposited as usual to the PEMSLA savings account. The amounts were duly
debited from the Rodriguez account. Thus, because the PEMSLA checks given
as payment were returned, spouses Rodriguez incurred losses from the
rediscounting transactions.
RTC Disposition
Alarmed over the unexpected turn of events, the spouses Rodriguez filed a civil
complaint for damages against PEMSLA, the Multi-Purpose Cooperative of
Philnabankers (MCP), and petitioner PNB. They sought to recover the value of
their checks that were deposited to the PEMSLA savings account amounting
to P2,345,804.00. The spouses contended that because PNB credited the checks
to the PEMSLA account even without indorsements, PNB violated its contractual
obligation to them as depositors. PNB paid the wrong payees, hence, it should
bear the loss.
PNB moved to dismiss the complaint on the ground of lack of cause of action.
PNB argued that the claim for damages should come from the payees of the
checks, and not from spouses Rodriguez. Since there was no demand from the
said payees, the obligation should be considered as discharged.
In an Order dated January 12, 2000, the RTC denied PNB’s motion to dismiss.
In its Answer,5 PNB claimed it is not liable for the checks which it paid to the
PEMSLA account without any indorsement from the payees. The bank contended
that spouses Rodriguez, the makers, actually did not intend for the named payees
to receive the proceeds of the checks. Consequently, the payees were
considered as "fictitious payees" as defined under the Negotiable Instruments
Law (NIL). Being checks made to fictitious payees which are bearer instruments,
the checks were negotiable by mere delivery. PNB’s Answer included its cross-
claim against its co-defendants PEMSLA and the MCP, praying that in the event
that judgment is rendered against the bank, the cross-defendants should be
ordered to reimburse PNB the amount it shall pay.
After trial, the RTC rendered judgment in favor of spouses Rodriguez (plaintiffs). It
ruled that PNB (defendant) is liable to return the value of the checks. All
counterclaims and cross-claims were dismissed. The dispositive portion of the
RTC decision reads:
WHEREFORE, in view of the foregoing, the Court hereby renders judgment, as
follows:
1. Defendant is hereby ordered to pay the plaintiffs the total amount
of P2,345,804.00 or reinstate or restore the amount of P775,337.00

in the PNBig Demand Deposit Checking/Current Account No.
810480-4 of Erlando T. Rodriguez, and the amount of P1,570,467.00
in the PNBig Demand Deposit, Checking/Current Account No.
810624-6 of Erlando T. Rodriguez and/or Norma Rodriguez, plus
legal rate of interest thereon to be computed from the filing of this
complaint until fully paid;
2. The defendant PNB is hereby ordered to pay the plaintiffs the
following reasonable amount of damages suffered by them taking
into consideration the standing of the plaintiffs being sugarcane
planters, realtors, residential subdivision owners, and other
businesses:
(a) Consequential damages, unearned income in the amount
of P4,000,000.00, as a result of their having incurred great dificulty
(sic) especially in the residential subdivision business, which was not
pushed through and the contractor even threatened to file a case
against the plaintiffs;
(b) Moral damages in the amount of P1,000,000.00;
(c) Exemplary damages in the amount of P500,000.00;
(d) Attorney’s fees in the amount of P150,000.00 considering that this
case does not involve very complicated issues; and for the
(e) Costs of suit.
3. Other claims and counterclaims are hereby dismissed.6
CA Disposition
PNB appealed the decision of the trial court to the CA on the principal ground that
the disputed checks should be considered as payable to bearer and not to order.
In a Decision7 dated July 22, 2004, the CA reversed and set aside the RTC
disposition. The CA concluded that the checks were obviously meant by the
spouses to be really paid to PEMSLA. The court a quo declared:
We are not swayed by the contention of the plaintiffs-appellees (Spouses
Rodriguez) that their cause of action arose from the alleged breach of contract by
the defendant-appellant (PNB) when it paid the value of the checks to PEMSLA
despite the checks being payable to order. Rather, we are more convinced by the
strong and credible evidence for the defendant-appellant with regard to the
plaintiffs-appellees’ and PEMSLA’s business arrangement – that the value of the
rediscounted checks of the plaintiffs-appellees would be deposited in PEMSLA’s
account for payment of the loans it has approved in exchange for PEMSLA’s
checks with the full value of the said loans. This is the only obvious explanation
as to why all the disputed sixty-nine (69) checks were in the possession of
PEMSLA’s errand boy for presentment to the defendant-appellant that led to this
present controversy. It also appears that the teller who accepted the said checks
was PEMSLA’s officer, and that such was a regular practice by the parties until
the defendant-appellant discovered the scam. The logical conclusion, therefore, is
that the checks were never meant to be paid to order, but instead, to PEMSLA.
We thus find no breach of contract on the part of the defendant-appellant.
According to plaintiff-appellee Erlando Rodriguez’ testimony, PEMSLA allegedly
issued post-dated checks to its qualified members who had applied for loans.
However, because of PEMSLA’s insufficiency of funds, PEMSLA approached the
plaintiffs-appellees for the latter to issue rediscounted checks in favor of said
applicant members. Based on the investigation of the defendant-appellant,
meanwhile, this arrangement allowed the plaintiffs-appellees to make a profit by
issuing rediscounted checks, while the officers of PEMSLA and other members
would be able to claim their loans, despite the fact that they were disqualified for
one reason or another. They were able to achieve this conspiracy by using other
members who had loaned lesser amounts of money or had not applied at all. x x
x.8 (Emphasis added)
The CA found that the checks were bearer instruments, thus they do not require
indorsement for negotiation; and that spouses Rodriguez and PEMSLA conspired
with each other to accomplish this money-making scheme. The payees in the
checks were "fictitious payees" because they were not the intended payees at all.
The spouses Rodriguez moved for reconsideration. They argued, inter alia, that
the checks on their faces were unquestionably payable to order; and that PNB
committed a breach of contract when it paid the value of the checks to PEMSLA
without indorsement from the payees. They also argued that their cause of action
is not only against PEMSLA but also against PNB to recover the value of the
checks.
On October 11, 2005, the CA reversed itself via an Amended Decision, the last
paragraph and fallo of which read:
In sum, we rule that the defendant-appellant PNB is liable to the plaintiffs-
appellees Sps. Rodriguez for the following:
1. Actual damages in the amount of P2,345,804 with interest at 6%
per annum from 14 May 1999 until fully paid;
2. Moral damages in the amount of P200,000;
3. Attorney’s fees in the amount of P100,000; and
4. Costs of suit.
WHEREFORE, in view of the foregoing premises, judgment is hereby rendered
by Us AFFIRMING WITH MODIFICATION the assailed decision rendered in Civil
Case No. 99-10892, as set forth in the immediately next preceding paragraph
hereof, and SETTING ASIDE Our original decision promulgated in this case on
22 July 2004. SO ORDERED.9
The CA ruled that the checks were payable to order. According to the appellate
court, PNB failed to present sufficient proof to defeat the claim of the spouses
Rodriguez that they really intended the checks to be received by the specified
payees. Thus, PNB is liable for the value of the checks which it paid to PEMSLA
without indorsements from the named payees. The award for damages was
deemed appropriate in view of the failure of PNB to treat the Rodriguez account
with the highest degree of care considering the fiduciary nature of their
relationship, which constrained respondents to seek legal action.
Hence, the present recourse under Rule 45.
Issues
The issues may be compressed to whether the subject checks are payable to
order or to bearer and who bears the loss?
PNB argues anew that when the spouses Rodriguez issued the disputed checks,
they did not intend for the named payees to receive the proceeds. Thus, they are
bearer instruments that could be validly negotiated by mere delivery. Further,
testimonial and documentary evidence presented during trial amply proved that
spouses Rodriguez and the officers of PEMSLA conspired with each other to
defraud the bank.
Our Ruling
Prefatorily, amendment of decisions is more acceptable than an erroneous
judgment attaining finality to the prejudice of innocent parties. A court discovering
an erroneous judgment before it becomes final may, motu proprio or upon motion
of the parties, correct its judgment with the singular objective of achieving justice
for the litigants.10
However, a word of caution to lower courts, the CA in Cebu in this particular case,
is in order. The Court does not sanction careless disposition of cases by courts of
justice. The highest degree of diligence must go into the study of every
controversy submitted for decision by litigants. Every issue and factual detail must
be closely scrutinized and analyzed, and all the applicable laws judiciously
studied, before the promulgation of every judgment by the court. Only in this
manner will errors in judgments be avoided.
Now to the core of the petition.
As a rule, when the payee is fictitious or not intended to be the true recipient of
the proceeds, the check is considered as a bearer instrument. A check is "a bill of
exchange drawn on a bank payable on demand."11 It is either an order or a bearer
instrument. Sections 8 and 9 of the NIL states:
SEC. 8. When payable to order. – The instrument is payable to order where it is
drawn payable to the order of a specified person or to him or his order. It may be
drawn payable to the order of –
(a) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
Nego Instruments Set 1 (#s1-70) Page 82 of 112
Lumbas. Dadat
(e) One or some of several payees; or
(f) The holder of an office for the time being.
Where the instrument is payable to order, the payee must be named or otherwise
indicated therein with reasonable certainty.
SEC. 9. When payable to bearer. – The instrument is payable to bearer –
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or bearer; or
(c) When it is payable to the order of a fictitious or non-existing
person, and such fact is known to the person making it so payable; or
(d) When the name of the payee does not purport to be the name of
any person; or
(e) Where the only or last indorsement is an indorsement in
blank.12 (Underscoring supplied)
The distinction between bearer and order instruments lies in their manner of
negotiation. Under Section 30 of the NIL, an order instrument requires an
indorsement from the payee or holder before it may be validly negotiated. A
bearer instrument, on the other hand, does not require an indorsement to be
validly negotiated. It is negotiable by mere delivery. The provision reads:
SEC. 30. What constitutes negotiation. – An instrument is negotiated when it is
transferred from one person to another in such manner as to constitute the
transferee the holder thereof. If payable to bearer, it is negotiated by delivery; if
payable to order, it is negotiated by the indorsement of the holder completed by
delivery.
A check that is payable to a specified payee is an order instrument. However,
under Section 9(c) of the NIL, a check payable to a specified payee may
nevertheless be considered as a bearer instrument if it is payable to the order of a
fictitious or non-existing person, and such fact is known to the person making it so
payable. Thus, checks issued to "Prinsipe Abante" or "Si Malakas at si Maganda,"
who are well-known characters in Philippine mythology, are bearer instruments
because the named payees are fictitious and non-existent.
We have yet to discuss a broader meaning of the term "fictitious" as used in the
NIL. It is for this reason that We look elsewhere for guidance. Court rulings in the
United States are a logical starting point since our law on negotiable instruments
was directly lifted from the Uniform Negotiable Instruments Law of the United
States.13
A review of US jurisprudence yields that an actual, existing, and living payee may
also be "fictitious" if the maker of the check did not intend for the payee to in fact
receive the proceeds of the check. This usually occurs when the maker places a
name of an existing payee on the check for convenience or to cover up an illegal
activity.14 Thus, a check made expressly payable to a non-fictitious and existing
person is not necessarily an order instrument. If the payee is not the intended
recipient of the proceeds of the check, the payee is considered a "fictitious" payee
and the check is a bearer instrument.
In a fictitious-payee situation, the drawee bank is absolved from liability and the
drawer bears the loss. When faced with a check payable to a fictitious payee, it is
treated as a bearer instrument that can be negotiated by delivery. The underlying
theory is that one cannot expect a fictitious payee to negotiate the check by
placing his indorsement thereon. And since the maker knew this limitation, he
must have intended for the instrument to be negotiated by mere delivery. Thus, in
case of controversy, the drawer of the check will bear the loss. This rule is
justified for otherwise, it will be most convenient for the maker who desires to
escape payment of the check to always deny the validity of the indorsement. This
despite the fact that the fictitious payee was purposely named without any
intention that the payee should receive the proceeds of the check.15
The fictitious-payee rule is best illustrated in Mueller & Martin v. Liberty Insurance
Bank.16 In the said case, the corporation Mueller & Martin was defrauded by
George L. Martin, one of its authorized signatories. Martin drew seven checks
payable to the German Savings Fund Company Building Association (GSFCBA)
amounting to $2,972.50 against the account of the corporation without authority
from the latter. Martin was also an officer of the GSFCBA but did not have signing
authority. At the back of the checks, Martin placed the rubber stamp of the

GSFCBA and signed his own name as indorsement. He then successfully drew
the funds from Liberty Insurance Bank for his own personal profit. When the
corporation filed an action against the bank to recover the amount of the checks,
the claim was denied.
The US Supreme Court held in Mueller that when the person making the check
so payable did not intend for the specified payee to have any part in the
transactions, the payee is considered as a fictitious payee. The check is then
considered as a bearer instrument to be validly negotiated by mere delivery.
Thus, the US Supreme Court held that Liberty Insurance Bank, as drawee, was
authorized to make payment to the bearer of the check, regardless of whether
prior indorsements were genuine or not.17
The more recent Getty Petroleum Corp. v. American Express Travel Related
Services Company, Inc.18 upheld the fictitious-payee rule. The rule protects the
depositary bank and assigns the loss to the drawer of the check who was in a
better position to prevent the loss in the first place. Due care is not even required
from the drawee or depositary bank in accepting and paying the checks. The
effect is that a showing of negligence on the part of the depositary bank will not
defeat the protection that is derived from this rule.
However, there is a commercial bad faith exception to the fictitious-payee rule. A
showing of commercial bad faith on the part of the drawee bank, or any
transferee of the check for that matter, will work to strip it of this defense. The
exception will cause it to bear the loss. Commercial bad faith is present if the
transferee of the check acts dishonestly, and is a party to the fraudulent scheme.
Said the US Supreme Court in Getty:
Consequently, a transferee’s lapse of wary vigilance, disregard of suspicious
circumstances which might have well induced a prudent banker to investigate and
other permutations of negligence are not relevant considerations under Section 3-
405 x x x. Rather, there is a "commercial bad faith" exception to UCC 3-405,
applicable when the transferee "acts dishonestly – where it has actual knowledge
of facts and circumstances that amount to bad faith, thus itself becoming a
participant in a fraudulent scheme. x x x Such a test finds support in the text of
the Code, which omits a standard of care requirement from UCC 3-405 but
imposes on all parties an obligation to act with "honesty in fact." x x x19 (Emphasis
added)
Getty also laid the principle that the fictitious-payee rule extends protection even
to non-bank transferees of the checks.
In the case under review, the Rodriguez checks were payable to specified
payees. It is unrefuted that the 69 checks were payable to specific persons.
Likewise, it is uncontroverted that the payees were actual, existing, and living
persons who were members of PEMSLA that had a rediscounting arrangement
with spouses Rodriguez.
What remains to be determined is if the payees, though existing persons, were
"fictitious" in its broader context.
For the fictitious-payee rule to be available as a defense, PNB must show that the
makers did not intend for the named payees to be part of the transaction involving
the checks. At most, the bank’s thesis shows that the payees did not have
knowledge of the existence of the checks. This lack of knowledge on the part of
the payees, however, was not tantamount to a lack of intention on the part of
respondents-spouses that the payees would not receive the checks’ proceeds.
Considering that respondents-spouses were transacting with PEMSLA and not
the individual payees, it is understandable that they relied on the information
given by the officers of PEMSLA that the payees would be receiving the checks.
Verily, the subject checks are presumed order instruments. This is because, as
found by both lower courts, PNB failed to present sufficient evidence to defeat the
claim of respondents-spouses that the named payees were the intended
recipients of the checks’ proceeds. The bank failed to satisfy a requisite condition
of a fictitious-payee situation – that the maker of the check intended for the payee
to have no interest in the transaction.
Because of a failure to show that the payees were "fictitious" in its broader sense,
the fictitious-payee rule does not apply. Thus, the checks are to be deemed
payable to order. Consequently, the drawee bank bears the loss.20
PNB was remiss in its duty as the drawee bank. It does not dispute the fact that
its teller or tellers accepted the 69 checks for deposit to the PEMSLA account
even without any indorsement from the named payees. It bears stressing that
order instruments can only be negotiated with a valid indorsement.
A bank that regularly processes checks that are neither payable to the customer
nor duly indorsed by the payee is apparently grossly negligent in its
operations.21 This Court has recognized the unique public interest possessed by
the banking industry and the need for the people to have full trust and confidence
in their banks.22 For this reason, banks are minded to treat their customer’s
accounts with utmost care, confidence, and honesty.23
In a checking transaction, the drawee bank has the duty to verify the genuineness
of the signature of the drawer and to pay the check strictly in accordance with the
drawer’s instructions, i.e., to the named payee in the check. It should charge to
the drawer’s accounts only the payables authorized by the latter. Otherwise, the
drawee will be violating the instructions of the drawer and it shall be liable for the
amount charged to the drawer’s account.24
In the case at bar, respondents-spouses were the bank’s depositors. The checks
were drawn against respondents-spouses’ accounts. PNB, as the drawee bank,
had the responsibility to ascertain the regularity of the indorsements, and the
genuineness of the signatures on the checks before accepting them for deposit.
Lastly, PNB was obligated to pay the checks in strict accordance with the
instructions of the drawers. Petitioner miserably failed to discharge this burden.
The checks were presented to PNB for deposit by a representative of PEMSLA
absent any type of indorsement, forged or otherwise. The facts clearly show that
the bank did not pay the checks in strict accordance with the instructions of the
drawers, respondents-spouses. Instead, it paid the values of the checks not to the
named payees or their order, but to PEMSLA, a third party to the transaction
between the drawers and the payees.alf-ITC
Moreover, PNB was negligent in the selection and supervision of its employees.
The trustworthiness of bank employees is indispensable to maintain the stability
of the banking industry. Thus, banks are enjoined to be extra vigilant in the
management and supervision of their employees. In Bank of the Philippine
Islands v. Court of Appeals,25 this Court cautioned thus:
Banks handle daily transactions involving millions of pesos. By the very nature of
their work the degree of responsibility, care and trustworthiness expected of their
employees and officials is far greater than those of ordinary clerks and
employees. For obvious reasons, the banks are expected to exercise the highest
degree of diligence in the selection and supervision of their employees.26
PNB’s tellers and officers, in violation of banking rules of procedure, permitted the
invalid deposits of checks to the PEMSLA account. Indeed, when it is the gross
negligence of the bank employees that caused the loss, the bank should be held
liable.27
PNB’s argument that there is no loss to compensate since no demand for
payment has been made by the payees must also fail. Damage was caused to
respondents-spouses when the PEMSLA checks they deposited were returned
for the reason "Account Closed." These PEMSLA checks were the corresponding
payments to the Rodriguez checks. Since they could not encash the PEMSLA
checks, respondents-spouses were unable to collect payments for the amounts
they had advanced.
A bank that has been remiss in its duty must suffer the consequences of its
negligence. Being issued to named payees, PNB was duty-bound by law and by
banking rules and procedure to require that the checks be properly indorsed
before accepting them for deposit and payment. In fine, PNB should be held liable
for the amounts of the checks.
One Last Note
We note that the RTC failed to thresh out the merits of PNB’s cross-claim against
its co-defendants PEMSLA and MPC. The records are bereft of any pleading filed
by these two defendants in answer to the complaint of respondents-spouses and
cross-claim of PNB. The Rules expressly provide that failure to file an answer is a
ground for a declaration that defendant is in default.28 Yet, the RTC failed to
sanction the failure of both PEMSLA and MPC to file responsive pleadings. Verily,
Nego Instruments Set 1 (#s1-70) Page 83 of 112
Lumbas. Dadat
the RTC dismissal of PNB’s cross-claim has no basis. Thus, this judgment shall
be without prejudice to whatever action the bank might take against its co-
defendants in the trial court.
To PNB’s credit, it became involved in the controversial transaction not of its own
volition but due to the actions of some of its employees. Considering that moral
damages must be understood to be in concept of grants, not punitive or corrective
in nature, We resolve to reduce the award of moral damages to P50,000.00.29
WHEREFORE, the appealed Amended Decision is AFFIRMED with the
MODIFICATION that the award for moral damages is reduced to P50,000.00, and
that this is without prejudice to whatever civil, criminal, or administrative action
PNB might take against PEMSLA, MPC, and the employees involved. SO
ORDERED.
53. G.R. No. 126568 April 30, 2003
QUIRINO GONZALES LOGGING CONCESSIONAIRE, QUIRINO GONZALES
and EUFEMIA GONZALES vs. THE COURT OF APPEALS (CA) and
REPUBLIC PLANTERS BANK
In the expansion of its logging business, petitioner Quirino Gonzales Logging
Concessionaire (QGLC), through its proprietor, general manager — co-petitioner
Quirino Gonzales, applied on October 15, 1962 for credit accommodations1 with
respondent Republic Bank (the Bank), later known as Republic Planters Bank.
The Bank approved QGLC's application on December 21, 1962, granting it a
credit line of P900,000.002 broken into an overdraft line of P500,000.00 which
was later reduced to P450,000.00 and a Letter of Credit (LC) line of
P400,000.00.3
Pursuant to the grant, the Bank and petitioners QGLC and the spouses Quirino
and Eufemia Gonzales executed ten documents: two denominated "Agreement
for Credit in Current Account,"4 four denominated "Application and Agreement for
Commercial Letter of Credit,"5 and four denominated "Trust Receipt."6
Petitioners' obligations under the credit line were secured by a real estate
mortgage on four parcels of land: two in Pandacan, Manila, one in Makati (then
part of Rizal), and another in Diliman, Quezon City.7
In separate transactions, petitioners, to secure certain advances from the Bank in
connection with QGLC's exportation of logs, executed a promissory note in 1964
in favor of the Bank. They were to execute three more promissory notes in 1967.
In 1965, petitioners having long defaulted in the payment of their obligations
under the credit line, the Bank foreclosed the mortgage and bought the properties
covered thereby, it being the highest bidder in the auction sale held in the same
year. Ownership over the properties was later consolidated in the Bank on
account of which new titles thereto were issued to it.8
On January 27, 1977, alleging non-payment of the balance of QGLC's obligation
after the proceeds of the foreclosure sale were applied thereto, and non-payment
of the promissory notes despite repeated demands, the Bank filed a complaint for
"sum of money" (Civil Case No. 106635) against petitioners before the Regional
Trial Court (RTC) of Manila.
The complaint listed ten causes of action. The first concerns the overdraft line
under which the Bank claimed that petitioners withdrew amounts (unspecified) at
twelve percent per annum which were unpaid at maturity and that after it applied
the proceeds of the foreclosure sale to the overdraft debt, there remained an
unpaid balance of P1,224,301.56.
The Bank's second to fifth causes of action pertain to the LC line under which it
averred that on the strength of the LCs it issued, the beneficiaries thereof drew
and presented sight drafts to it which it all paid after petitioners' acceptance; and
that it delivered the tractors and equipment subject of the LCs to petitioners who
have not paid either the full or part of the face value of the drafts.
Specifically with respect to its second cause of action, the Bank alleged that it
issued LC No. 63-0055D on January 15, 1963 in favor of Monark International
Incorporated9 covering the purchase of a tractor10 on which the latter allegedly
drew a sight draft with a face value of P71,500.00,11 which amount petitioners
have not, however, paid in full.

Under its third cause of action, the Bank charged that it issued LC No. 61-1110D
on December 27, 1962 also in favor of Monark International covering the
purchase of another tractor and other equipment;12 and that Monark International
drew a sight draft with a face value of P80,350.00,13 and while payments for the
value thereof had been made by petitioners, a balance of P68,064.97 remained.
Under the fourth cause of action, the Bank maintained that it issued LC No. 63-
0182D on February 11, 1963 in favor of J.B.L. Enterprises, Inc.14 covering the
purchase of two tractors,15 and J.B.L. Enterprises drew on February 13, 1963 a
sight draft on said LC in the amount of P155,000.00 but petitioners have not paid
said amount.
On its fifth cause of action, the Bank alleged that it issued LC No. 63-0284D on
March 14, 1963 in favor of Super Master Auto Supply (SMAS) covering the
purchase of "Eight Units GMC (G.I.) Trucks"; that on March 14, 1963, SMAS drew
a sight draft with a face value of P64,000.0016 on the basis of said LC; and that
the payments made by petitioners for the value of said draft were deficient by
P45,504.74.
The Bank thus prayed for the settlement of the above-stated obligations at an
interest rate of eleven percent per annum, and for the award of trust receipt
commissions, attorney's fees and other fees and costs of collection.
The sixth to ninth causes of action are anchored on the promissory notes issued
by petitioners allegedly to secure certain advances from the Bank in connection
with the exportation of logs as reflected above.17 The notes were payable 30 days
after date and provided for the solidary liability of petitioners as well as attorney's
fees at ten percent of the total amount due18 in the event of their non-payment at
maturity.
The note dated June 18, 1964, subject of the sixth cause of action, has a face
value of P55,000.00 with interest rate of twelve percent per annum;19 that dated
July 7, 1967 subject of the seventh has a face value of P20,000.00;20that dated
July 18, 1967 subject of the eighth has a face value of P38,000.00;21 and that
dated August 23, 1967 subject of the ninth has a face value of P11,000.00. 22 The
interest rate of the last three notes is pegged at thirteen percent per annum.23
On its tenth and final cause of action, the Bank claimed that it has accounts
receivable from petitioners in the amount of P120.48.
In their Answer24 of March 3, 1977, petitioners admit the following: having applied
for credit accommodations totaling P900,000.00 to secure which they mortgaged
real properties; opening of the LC/Trust Receipt Line; the issuance by the Bank of
the various LCs; and the foreclosure of the real estate mortgage and the
consolidation of ownership over the mortgaged properties in favor of the Bank.
They deny, however, having availed of the credit accommodations and having
received the value of the promissory notes, as they do deny having physically
received the tractors and equipment subject of the LCs.
As affirmative defenses, petitioners assert that the complaint states no cause of
action, and assuming that it does, the same is/are barred by prescription or null
and void for want of consideration.
By Order of March 10, 1977, Branch 36 of the Manila RTC attached the preferred
shares of stocks of the spouses Quirino and Eufemia Gonzales with the Bank
with a total par value of P414,000.00.
Finding for petitioners, the trial court rendered its Decision of April 22, 1992 the
dispositive portion of which reads:
WHEREFORE, judgment is rendered as follows:
1. All the claims of plaintiff particularly those described in the first to
the tenth causes of action of its complaint are denied for the reasons
earlier mentioned in the body of this decision;
2. As regards the claims of defendants pertaining to their
counterclaim (Exhibits "1", "2" and "3"), they are hereby given ten
(10) years from the date of issuance of the torrens title to plaintiff and
before the transfer thereof in good faith to a third party buyer within
which to ask for the reconveyance of the real properties foreclosed
by plaintiff,
3. The order of attachment which was issued against the preferred
shares of stocks of defendants-spouses Quirino Gonzales and
Eufemia Gonzales with the Republic Bank now known as Republic
Planters Bank dated March 21, 1977 is hereby dissolved and/or
lifted, and
4. Plaintiff is likewise ordered to pay the sum of P20,000.00, as and
for attorney's fees, with costs against plaintiff. SO ORDERED.
In finding for petitioners, the trial court ratiocinated:25
Art. 1144 of the Civil Code states that an action upon a written
contract prescribes in ten (10) years from the time the right of action
accrues. Art. 1150 states that prescription starts to run from the day
the action may be brought. The obligations allegedly created by the
written contracts or documents supporting plaintiff's first to the sixth
causes of action were demandable at the latest in 1964. Thus when
the complaint was filed on January 27, 1977 more than ten (10)
years from 1964 [when the causes of action accrued] had already
lapsed. The first to the sixth causes of action are thus barred by
prescription. . . .
As regards the seventh and eight causes of action, the authenticity of
which documents were partly in doubt in the light of the categorical
and uncontradicted statements that in 1965, defendant Quirino
Gonzales logging concession was terminated based on the policy of
the government to terminate logging concessions covering less than
20,000 hectares. If this is the case, the Court is in a quandary why
there were log exports in 1967? Because of the foregoing, the Court
does not find any valid ground to sustain the seventh and eight
causes of action of plaintiff's complaint.
As regards the ninth cause of action, the Court is baffled why plaintiff
extended to defendants another loan when defendants according to
plaintiff's records were defaulting creditors? The above facts and
circumstances has (sic) convinced this Court to give credit to the
testimony of defendants' witnesses that the Gonzales spouses
signed the documents in question in blank and that the promised
loan was never released to them. There is therefore a total absence
of consent since defendants did not give their consent to loans
allegedly procured, the proceeds of which were never received by
the alleged debtors, defendants herein. . . .
Plaintiff did not present evidence to support its tenth cause of action.
For this reason, it must consequently be denied for lack of evidence.
On the matter of [the] counterclaims of defendants, they seek the
return of the real and personal properties which they have given in
good faith to plaintiff. Again, prescription may apply. The real
properties of defendants acquired by plaintiff were foreclosed in 1965
and consequently, defendants had one (1) year to redeem the
property or ten (10) years from issuance of title on the ground that
the obligation foreclosed was fictitious.
xxx xxx xxx
On appeal,26 the Court of Appeals (CA) reversed the decision of the trial court by
Decision27 of June 28, 1996 which disposed as follows:28
WHEREFORE, premises considered, the appealed decision (dated
April 22, 1992) of the Regional Trial Court (Branch 36) in Manila in
Civil Case No. 82-4141 is hereby REVERSED — and let the case be
remanded back to the court a quo for the determination of the
amount(s) to be awarded to the [the Bank]-appellant relative to its
claims against the appellees. SO ORDERED.
With regard to the first to sixth causes of action, the CA upheld the contention of
the Bank that the notices of foreclosure sale were "tantamount" to demand letters
upon the petitioners which interrupted the running of the prescriptive period.29
As regards the seventh to ninth causes of action, the CA also upheld the
contention of the Bank that the written agreements-promissory notes prevail over
the oral testimony of petitioner Quirino Gonzales that the cancellation of their
logging concession in 1967 made it unbelievable for them to secure in 1967 the
advances reflected in the promissory notes.30
Nego Instruments Set 1 (#s1-70) Page 84 of 112
Lumbas. Dadat
With respect to petitioners' counterclaim, the CA agreed with the Bank that:31
Certainly, failure on the part of the trial court to pass upon and
determine the authenticity and genuineness of [the Bank's]
documentary evidence [the trial court having ruled on the basis of
prescription of the Bank's first to sixth causes of action] makes it
impossible for the trial court' to eventually conclude that
the obligation foreclosed (sic) was fictitious. Needless to say, the trial
court's ruling averses (sic) the well-entrenched rule that 'courts must
render verdict on their findings of facts." (China Banking Co. vs. CA,
70 SCRA 398)
Furthermore, the defendants-appellees' [herein petitioners']
counterclaim is basically an action for the reconveyance of their
properties, thus, the trial court's earlier ruling that the defendants-
appellees' counterclaim has prescribed is itself a ruling that the
defendants-appellees' separate action for reconveyance has also
prescribed.
The CA struck down the trial court's award of attorney's fees for lack of legal
basis.32
Hence, petitioners now press the following issues before this Court by the present
petition for review on certiorari:
1. WHETHER OR NOT RESPONDENT COURT ERRED IN SO HOLDING THAT
RESPONDENT-APPELLEES (SIC.) REPUBLIC PLANTERS BANK['S] FIRST,
SECOND, THIRD, FOURTH, FIFTH AND SIXTH CAUSES OF ACTION HAVE
NOT PRESCRIBED CONTRARY TO THE FINDINGS OF THE LOWER COURT,
RTC BRANCH 36 THAT THE SAID CAUSES OF ACTION HAVE ALREADY
PRESCRIBED.
2. WHETHER OR NOT RESPONDENT COURT ERRED IN SO HOLDING THAT
RESPODNENT-APPELLEES (SIC.) REPUBLIC PLANTERS BANK['S]
SEVENTH, EIGHT AND NINTH CAUSES OF ACTION APPEARS (SIC.) TO BE
IMPRESSED WITH MERIT CONTRARY TO THE FINDINGS OF THE LOWER
COURT RTC BRANCH 36 THAT THE SAID CAUSES HAVE NO VALID
GROUND TO SUSTAIN [THEM] AND FOR LACK OF EVIDENCE.
3. WHETHER OR NOT RESPONDENT COURT [ERRED] IN REVERSING THE
FINDINGS OF THE REGIONAL TRIAL COURT BRANCH 36 OF MANILA THAT
PETITIONERS-APPELLANT (SIC.) MAY SEEK THE RETURN OF THE REAL
AND PERSONAL PROPERTIES WHICH THEY MAY HAVE GIVEN IN GOOD
FAITH AS THE SAME IS BARRED BY PRESCRIPTION AND THAT
PETITIONERS-APPELLANT (SIC.) HAD ONE (1) YEAR TO REDEEM THE
PROPERTY OR TEN (10) YEARS FROM ISSUANCE OF THE TITLE ON THE
GROUND THAT THE OBLIGATION FORECLOSED WAS FICTITIOUS.
4. WHETHER OR NOT RESPONDENT COURT ERRED IN SO HOLDING THAT
PEITIONERS-APPELLANTS [SIC] ARE NOT ENTITLED TO AN AWARD OF
ATTORNEY'S FEES.
The petition is partly meritorious.
On the first issue. The Civil Code provides that an action upon written contract, an
obligation created by law, and a judgment must be brought within ten years from
the time the right of action accrues.33
The finding of the trial court that more than ten years had elapsed since the right
to bring an action on the Bank's first to sixth causes had arisen 34 is not disputed.
The Bank contends, however, that "the notices of foreclosure sale in the
foreclosure proceedings of 1965 are tantamount to formal demands upon
petitioners for the payment of their past due loan obligations with the Bank,
hence, said notices of foreclosure sale interrupted/forestalled the running of the
prescriptive period."35
The Bank's contention does not impress. Prescription of actions is interrupted
when they are filed before the court, when there is a written extrajudicial demand
by the creditors, and when there is any written acknowledgment of the debt by the
debtor.36
The law specifically requires a written extrajudicial demand by the creditors which
is absent in the case at bar. The contention that the notices of foreclosure are

"tantamount" to a written extrajudicial demand cannot be appreciated, the
contents of said notices not having been brought to light.
But even assuming arguendo that the notices interrupted the running of the
prescriptive period, the argument would still not lie for the following reasons:
With respect to the first to the fifth causes of action, as gleaned from the
complaint, the Bank seeks the recovery of the deficient amount of the obligation
after the foreclosure of the mortgage. Such suit is in the nature of a mortgage
action because its purpose is precisely to enforce the mortgage contract.37 A
mortgage action prescribes after ten years from the time the right of action
accrued.38
The law gives the mortgagee the right to claim for the deficiency resulting from
the price obtained in the sale of the property at public auction and the outstanding
obligation at the time of the foreclosure proceedings.39 In the present case, the
Bank, as mortgagee, had the right to claim payment of the deficiency after it had
foreclosed the mortgage in 1965.40 In other words, the prescriptive period started
to run against the Bank in 1965. As it filed the complaint only on January 27,
1977, more than ten years had already elapsed, hence, the action on its first to
fifth causes had by then prescribed. No other conclusion can be reached even if
the suit is considered as one upon a written contract or upon an obligation to pay
the deficiency which is created by law,41 the prescriptive period of both being also
ten years.42
As regards the promissory note subject of the sixth cause of action, its period of
prescription could not have been interrupted by the notices of foreclosure sale not
only because, as earlier discussed, petitioners' contention that the notices of
foreclosure are tantamount to written extra-judicial demand cannot be considered
absent any showing of the contents thereof, but also because it does not appear
from the records that the said note is covered by the mortgage contract.
Coming now to the second issue, petitioners seek to evade liability under the
Bank's seventh to ninth causes of action by claiming that petitioners Quirino and
Eufemia Gonzales signed the promissory notes in blank; that they had not
received the value of said notes, and that the credit line thereon was unnecessary
in view of their money deposits, they citing "Exhibits 2 to 2-B,"43 in, and
unremitted proceeds on log exports from, the Bank. In support of their claim, they
also urge this Court to look at Exhibits "B" (the Bank's recommendation for
approval of petitioners' application for credit accommodations), "P" (the
"Application and Agreement for Commercial Letter of Credit" dated January 16,
1963) and "T" (the "Application and Agreement for Commercial Letter of Credit"
dated February 14, 1963).
The genuineness and due execution of the notes had, however, been deemed
admitted by petitioners, they having failed to deny the same under oath. 44 Their
claim that they signed the notes in blank does not thus lie.
Petitioners' admission of the genuineness and due execution of the promissory
notes notwithstanding, they raise want of consideration45 thereof. The promissory
notes, however, appear to be negotiable as they meet the requirements of
Section 146 of the Negotiable Instruments Law. Such being the case, the notes
are prima faciedeemed to have been issued for consideration.47 It bears noting
that no sufficient evidence was adduced by petitioners to show otherwise.
Exhibits "2" to "2-B" to which petitioners advert in support of their claim that the
credit line on the notes was unnecessary because they had deposits in, and
remittances due from, the Bank deserve scant consideration. Said exhibits are
merely claims by petitioners under their then proposals for a possible settlement
of the case dated February 3, 1978. Parenthetically, the proposals were not even
signed by petitioners but by certain Attorneys Osmundo R. Victoriano and Rogelio
P. Madriaga.
In any case, it is no defense that the promissory notes were signed in blank as
Section 1448 of the Negotiable Instruments Law concedes the prima
facie authority of the person in possession of negotiable instruments, such as the
notes herein, to fill in the blanks.
As for petitioners' reliance on Exhibits "B", "P" and "T," they have failed to show
the relevance thereof to the seventh up to the ninth causes of action of the Bank.
On the third issue, petitioners asseverate that with the trial court's dismissal of the
Bank's complaint and the denial of its first to sixth causes of action, it is but fair
and just that the real properties which were mortgaged and foreclosed be
returned to them.49 Such, however, does not lie. It is not disputed that the
properties were foreclosed under Act No. 3135 (An Act to Regulate the Sale of
Property under Special Powers Inserted in or Annexed to Real Estate
Mortgages), as amended. Though the Bank's action for deficiency is barred by
prescription, nothing irregular attended the foreclosure proceedings to warrant the
reconveyance of the properties covered thereby.
As for petitioners' prayer for moral and exemplary damages, it not having been
raised as issue before the courts below, it can not now be considered. Neither
can the award of attorney's fees for lack of legal basis.
WHEREFORE, the CA Decision is hereby AFFIRMED with MODIFICATION.
Republic Bank's Complaint with respect to its first to sixth causes of action is
hereby DISMISSED. Its complaint with respect to its seventh to ninth causes of
action is REMANDED to the court of origin, the Manila Regional Trial Court,
Branch 36, for it to determine the amounts due the Bank thereunder. SO
ORDERED.
54. G.R. No. 93073 December 21, 1992
REPUBLIC PLANTERS BANK vs. COURT OF APPEALS and FERMIN
CANLAS
This is an appeal by way of a Petition for Review on Certiorari from the
decision * of the Court of Appeals in CA G.R. CV No. 07302, entitled "Republic
Planters Bank.Plaintiff-Appellee vs. Pinch Manufacturing Corporation, et al.,
Defendants, and Fermin Canlas, Defendant-Appellant", which affirmed the
decision ** in Civil Case No. 82-5448 except that it completely absolved Fermin
Canlas from liability under the promissory notes and reduced the award for
damages and attorney's fees. The RTC decision, rendered on June 20, 1985, is
quoted hereunder:
WHEREFORE, premises considered, judgment is hereby rendered in
favor of the plaintiff Republic Planters Bank, ordering defendant
Pinch Manufacturing Corporation (formerly Worldwide Garment
Manufacturing, Inc.) and defendants Shozo Yamaguchi and Fermin
Canlas to pay, jointly and severally, the plaintiff bank the following
sums with interest thereon at 16% per annum from the dates
indicated, to wit:
Under the promissory note (Exhibit "A"), the sum of P300,000.00 with
interest from January 29, 1981 until fully paid; under promissory note
(Exhibit "B"), the sum of P40,000.00 with interest from November 27,
1980; under the promissory note (Exhibit "C"), the sum of
P166,466.00 which interest from January 29, 1981; under the
promissory note (Exhibit "E"), the sum of P86,130.31 with interest
from January 29, 1981; under the promissory note (Exhibit "G"), the
sum of P12,703.70 with interest from November 27, 1980; under the
promissory note (Exhibit "H"), the sum of P281,875.91 with interest
from January 29, 1981; and under the promissory note (Exhibit "I"),
the sum of P200,000.00 with interest from January 29, 1981.
Under the promissory note (Exhibit "D") defendants Pinch
Manufacturing Corporation (formerly named Worldwide Garment
Manufacturing, Inc.), and Shozo Yamaguchi are ordered to pay
jointly and severally, the plaintiff bank the sum of P367,000.00 with
interest of 16% per annum from January 29, 1980 until fully paid
Under the promissory note (Exhibit "F") defendant corporation Pinch
(formerly Worldwide) is ordered to pay the plaintiff bank the sum of
P140,000.00 with interest at 16% per annum from November 27,
1980 until fully paid.
Defendant Pinch (formely Worldwide) is hereby ordered to pay the
plaintiff the sum of P231,120.81 with interest at 12% per annum from
July 1, 1981, until fully paid and the sum of P331,870.97 with interest
from March 28, 1981, until fully paid.
Nego Instruments Set 1 (#s1-70) Page 85 of 112
Lumbas. Dadat
All the defendants are also ordered to pay, jointly and severally, the
plaintiff the sum of P100,000.00 as and for reasonable attorney's fee
and the further sum equivalent to 3% per annum of the respective
principal sums from the dates above stated as penalty charge until
fully paid, plus one percent (1%) of the principal sums as service
charge.
With costs against the defendants. SO ORDERED. 1
From the above decision only defendant Fermin Canlas appealed to the then
Intermediate Court (now the Court Appeals). His contention was that inasmuch as
he signed the promissory notes in his capacity as officer of the defunct Worldwide
Garment Manufacturing, Inc, he should not be held personally liable for such
authorized corporate acts that he performed. It is now the contention of the
petitioner Republic Planters Bank that having unconditionally signed the nine (9)
promissory notes with Shozo Yamaguchi, jointly and severally, defendant Fermin
Canlas is solidarity liable with Shozo Yamaguchi on each of the nine notes.
We find merit in this appeal.
From the records, these facts are established: Defendant Shozo Yamaguchi and
private respondent Fermin Canlas were President/Chief Operating Officer and
Treasurer respectively, of Worldwide Garment Manufacturing, Inc.. By virtue of
Board Resolution No.1 dated August 1, 1979, defendant Shozo Yamaguchi and
private respondent Fermin Canlas were authorized to apply for credit facilities
with the petitioner Republic Planters Bank in the forms of export advances and
letters of credit/trust receipts accommodations. Petitioner bank issued nine
promissory notes, marked as Exhibits A to I inclusive, each of which were
uniformly worded in the following manner:
___________, after date, for value received, I/we, jointly and
severaIly promise to pay to the ORDER of the REPUBLIC
PLANTERS BANK, at its office in Manila, Philippines, the sum of
___________ PESOS(....) Philippine Currency...
On the right bottom margin of the promissory notes appeared the signatures of
Shozo Yamaguchi and Fermin Canlas above their printed names with the phrase
"and (in) his personal capacity" typewritten below. At the bottom of the promissory
notes appeared: "Please credit proceeds of this note to:
________ Savings Account ______XX Current Account
No. 1372-00257-6
of WORLDWIDE GARMENT MFG. CORP.
These entries were separated from the text of the notes with a bold line which ran
horizontally across the pages.
In the promissory notes marked as Exhibits C, D and F, the name Worldwide
Garment Manufacturing, Inc. was apparently rubber stamped above the
signatures of defendant and private respondent.
On December 20, 1982, Worldwide Garment Manufacturing, Inc. noted to change
its corporate name to Pinch Manufacturing Corporation.
On February 5, 1982, petitioner bank filed a complaint for the recovery of sums of
money covered among others, by the nine promissory notes with interest thereon,
plus attorney's fees and penalty charges. The complainant was originally brought
against Worldwide Garment Manufacturing, Inc. inter alia, but it was later
amended to drop Worldwide Manufacturing, Inc. as defendant and substitute
Pinch Manufacturing Corporation it its place. Defendants Pinch Manufacturing
Corporation and Shozo Yamaguchi did not file an Amended Answer and failed to
appear at the scheduled pre-trial conference despite due notice. Only private
respondent Fermin Canlas filed an Amended Answer wherein he, denied having
issued the promissory notes in question since according to him, he was not an
officer of Pinch Manufacturing Corporation, but instead of Worldwide Garment
Manufacturing, Inc., and that when he issued said promissory notes in behalf of
Worldwide Garment Manufacturing, Inc., the same were in blank, the typewritten
entries not appearing therein prior to the time he affixed his signature.
In the mind of this Court, the only issue material to the resolution of this appeal is
whether private respondent Fermin Canlas is solidarily liable with the other
defendants, namely Pinch Manufacturing Corporation and Shozo Yamaguchi, on
the nine promissory notes.

We hold that private respondent Fermin Canlas is solidarily liable on each of the
promissory notes bearing his signature for the following reasons:
The promissory motes are negotiable instruments and must be governed by the
Negotiable Instruments Law. 2
Under the Negotiable lnstruments Law, persons who write their names on the
face of promissory notes are makers and are liable as such.3 By signing the
notes, the maker promises to pay to the order of the payee or any
holder 4according to the tenor thereof.5 Based on the above provisions of law,
there is no denying that private respondent Fermin Canlas is one of the co-
makers of the promissory notes. As such, he cannot escape liability arising
therefrom.
Where an instrument containing the words "I promise to pay" is signed by two or
more persons, they are deemed to be jointly and severally liable thereon.6 An
instrument which begins" with "I" ,We" , or "Either of us" promise to, pay, when
signed by two or more persons, makes them solidarily liable. 7 The fact that the
singular pronoun is used indicates that the promise is individual as to each other;
meaning that each of the co-signers is deemed to have made an independent
singular promise to pay the notes in full.
In the case at bar, the solidary liability of private respondent Fermin Canlas is
made clearer and certain, without reason for ambiguity, by the presence of the
phrase "joint and several" as describing the unconditional promise to pay to the
order of Republic Planters Bank. A joint and several note is one in which the
makers bind themselves both jointly and individually to the payee so that all may
be sued together for its enforcement, or the creditor may select one or more as
the object of the suit. 8 A joint and several obligation in common law corresponds
to a civil law solidary obligation; that is, one of several debtors bound in such wise
that each is liable for the entire amount, and not merely for his proportionate
share. 9 By making a joint and several promise to pay to the order of Republic
Planters Bank, private respondent Fermin Canlas assumed the solidary liability of
a debtor and the payee may choose to enforce the notes against him alone or
jointly with Yamaguchi and Pinch Manufacturing Corporation as solidary debtors.
As to whether the interpolation of the phrase "and (in) his personal capacity"
below the signatures of the makers in the notes will affect the liability of the
makers, We do not find it necessary to resolve and decide, because it is
immaterial and will not affect to the liability of private respondent Fermin Canlas
as a joint and several debtor of the notes. With or without the presence of said
phrase, private respondent Fermin Canlas is primarily liable as a co-maker of
each of the notes and his liability is that of a solidary debtor.
Finally, the respondent Court made a grave error in holding that an amendment in
a corporation's Articles of Incorporation effecting a change of corporate name, in
this case from Worldwide Garment manufacturing Inc to Pinch Manufacturing
Corporation extinguished the personality of the original corporation.
The corporation, upon such change in its name, is in no sense a new corporation,
nor the successor of the original corporation. It is the same corporation with a
different name, and its character is in no respect changed.10
A change in the corporate name does not make a new corporation, and whether
effected by special act or under a general law, has no affect on the identity of the
corporation, or on its property, rights, or liabilities. 11
The corporation continues, as before, responsible in its new name for all debts or
other liabilities which it had previously contracted or incurred.12
As a general rule, officers or directors under the old corporate name bear no
personal liability for acts done or contracts entered into by officers of the
corporation, if duly authorized. Inasmuch as such officers acted in their capacity
as agent of the old corporation and the change of name meant only the
continuation of the old juridical entity, the corporation bearing the same name is
still bound by the acts of its agents if authorized by the Board. Under the
Negotiable Instruments Law, the liability of a person signing as an agent is
specifically provided for as follows:
Sec. 20. Liability of a person signing as agent and so forth. Where
the instrument contains or a person adds to his signature words
indicating that he signs for or on behalf of a principal , or in a
representative capacity, he is not liable on the instrument if he was
duly authorized; but the mere addition of words describing him as an
agent, or as filling a representative character, without disclosing his
principal, does not exempt him from personal liability.
Where the agent signs his name but nowhere in the instrument has he disclosed
the fact that he is acting in a representative capacity or the name of the third party
for whom he might have acted as agent, the agent is personally liable to take
holder of the instrument and cannot be permitted to prove that he was merely
acting as agent of another and parol or extrinsic evidence is not admissible to
avoid the agent's personal liability. 13
On the private respondent's contention that the promissory notes were delivered
to him in blank for his signature, we rule otherwise. A careful examination of the
notes in question shows that they are the stereotype printed form of promissory
notes generally used by commercial banking institutions to be signed by their
clients in obtaining loans. Such printed notes are incomplete because there are
blank spaces to be filled up on material particulars such as payee's name,
amount of the loan, rate of interest, date of issue and the maturity date. The terms
and conditions of the loan are printed on the note for the borrower-debtor 's
perusal. An incomplete instrument which has been delivered to the borrower for
his signature is governed by Section 14 of the Negotiable Instruments Law which
provides, in so far as relevant to this case, thus:
Sec. 14. Blanks: when may be filled. — Where the instrument is
wanting in any material particular, the person in possesion thereof
has a prima facie authority to complete it by filling up the blanks
therein. ... In order, however, that any such instrument when
completed may be enforced against any person who became a party
thereto prior to its completion, it must be filled up strictly in
accordance with the authority given and within a reasonable time...
Proof that the notes were signed in blank was only the self-serving testimony of
private respondent Fermin Canlas, as determined by the trial court, so that the
trial court ''doubts the defendant (Canlas) signed in blank the promissory notes".
We chose to believe the bank's testimony that the notes were filled up before they
were given to private respondent Fermin Canlas and defendant Shozo
Yamaguchi for their signatures as joint and several promissors. For signing the
notes above their typewritten names, they bound themselves as unconditional
makers. We take judicial notice of the customary procedure of commercial banks
of requiring their clientele to sign promissory notes prepared by the banks in
printed form with blank spaces already filled up as per agreed terms of the loan,
leaving the borrowers-debtors to do nothing but read the terms and conditions
therein printed and to sign as makers or co-makers. When the notes were given
to private respondent Fermin Canlas for his signature, the notes were complete in
the sense that the spaces for the material particular had been filled up by the
bank as per agreement. The notes were not incomplete instruments; neither were
they given to private respondent Fermin Canlas in blank as he claims. Thus,
Section 14 of the NegotiabIe Instruments Law is not applicable.
The ruling in case of Reformina vs. Tomol relied upon by the appellate court in
reducing the interest rate on the promissory notes from 16% to 12% per annum
does not squarely apply to the instant petition. In the abovecited case, the rate of
12% was applied to forebearances of money, goods or credit and court
judgemets thereon, only in the absence of any stipulation between the parties.
In the case at bar however , it was found by the trial court that the rate of interest
is 9% per annum, which interest rate the plaintiff may at any time without notice,
raise within the limits allowed law. And so, as of February 16, 1984 , the plaintiff
had fixed the interest at 16% per annum.
This Court has held that the rates under the Usury Law, as amended by
Presidential Decree No. 116, are applicable only to interests by way of
compensation for the use or forebearance of money. Article 2209 of the Civil
Code, on the other hand, governs interests by way of damages.15 This fine
distinction was not taken into consideration by the appellate court, which instead
made a general statement that the interest rate be at 12% per annum.
Nego Instruments Set 1 (#s1-70) Page 86 of 112
Lumbas. Dadat
Inasmuch as this Court had declared that increases in interest rates are not
subject to any ceiling prescribed by the Usury Law, the appellate court erred in
limiting the interest rates at 12% per annum. Central Bank Circular No. 905,
Series of 1982 removed the Usury Law ceiling on interest rates. 16
In the 1ight of the foregoing analysis and under the plain language of the statute
and jurisprudence on the matter, the decision of the respondent: Court of Appeals
absolving private respondent Fermin Canlas is REVERSED and SET ASIDE.
Judgement is hereby rendered declaring private respondent Fermin Canlas jointly
and severally liable on all the nine promissory notes with the following sums and
at 16% interest per annum from the dates indicated, to wit:
Under the promissory note marked as exhibit A, the sum of P300,000.00 with
interest from January 29, 1981 until fully paid; under promissory note marked as
Exhibit B, the sum of P40,000.00 with interest from November 27, 1980: under
the promissory note denominated as Exhibit C, the amount of P166,466.00 with
interest from January 29, 1981; under the promissory note denominated as
Exhibit D, the amount of P367,000.00 with interest from January 29, 1981 until
fully paid; under the promissory note marked as Exhibit E, the amount of
P86,130.31 with interest from January 29, 1981; under the promissory note
marked as Exhibit F, the sum of P140,000.00 with interest from November 27,
1980 until fully paid; under the promissory note marked as Exhibit G, the amount
of P12,703.70 with interest from November 27, 1980; the promissory note marked
as Exhibit H, the sum of P281,875.91 with interest from January 29, 1981; and
the promissory note marked as Exhibit I, the sum of P200,000.00 with interest on
January 29, 1981.
The liabilities of defendants Pinch Manufacturing Corporation (formerly Worldwide
Garment Manufacturing, Inc.) and Shozo Yamaguchi, for not having appealed
from the decision of the trial court, shall be adjudged in accordance with the
judgment rendered by the Court a quo.
With respect to attorney's fees, and penalty and service charges, the private
respondent Fermin Canlas is hereby held jointly and solidarity liable with
defendants for the amounts found, by the Court a quo. With costs against private
respondent. SO ORDERED.
55. G.R. No. L-40796 July 31, 1975
REPUBLIC BANK vs. MAURICIA T. EBRADA
Appeal on a question of law of the decision of the Court of First Instance of
Manila, Branch XXIII in Civil Case No. 69288, entitled "Republic Bank vs.
Mauricia T. Ebrada."
On or about February 27, 1963 defendant Mauricia T. Ebrada, encashed Back
Pay Check No. 508060 dated January 15, 1963 for P1,246.08 at the main office
of the plaintiff Republic Bank at Escolta, Manila. The check was issued by the
Bureau of Treasury.1 Plaintiff Bank was later advised by the said bureau that the
alleged indorsement on the reverse side of the aforesaid check by the payee,
"Martin Lorenzo" was a forgery2 since the latter had allegedly died as of July 14,
1952.3 Plaintiff Bank was then requested by the Bureau of Treasury to refund the
amount of P1,246.08.4 To recover what it had refunded to the Bureau of Treasury,
plaintiff Bank made verbal and formal demands upon defendant Ebrada to
account for the sum of P1,246.08, but said defendant refused to do so. So plaintiff
Bank sued defendant Ebrada before the City Court of Manila.
On July 11, 1966, defendant Ebrada filed her answer denying the material
allegations of the complaint and as affirmative defenses alleged that she was a
holder in due course of the check in question, or at the very least, has acquired
her rights from a holder in due course and therefore entitled to the proceeds
thereof. She also alleged that the plaintiff Bank has no cause of action against
her; that it is in estoppel, or so negligent as not to be entitled to recover anything
from her.5
About the same day, July 11, 1966 defendant Ebrada filed a Third-Party
complaint against Adelaida Dominguez who, in turn, filed on September 14, 1966
a Fourth-Party complaint against Justina Tinio.
On March 21, 1967, the City Court of Manila rendered judgment for the plaintiff
Bank against defendant Ebrada; for Third-Party plaintiff against Third-Party

defendant, Adelaida Dominguez, and for Fourth-Party plaintiff against Fourth-
Party defendant, Justina Tinio.
From the judgment of the City Court, defendant Ebrada took an appeal to the
Court of First Instance of Manila where the parties submitted a partial stipulation
of facts as follows:
COME NOW the undersigned counsel for the plaintiff, defendant,
Third-Party defendant and Fourth-Party plaintiff and unto this
Honorable Court most respectfully submit the following:
PARTIAL STIPULATION OF FACTS
1. That they admit their respective capacities to sue and be sued;
2. That on January 15, 1963 the Treasury of the Philippines issued its Check No.
BP-508060, payable to the order of one MARTIN LORENZO, in the sum of
P1,246.08, and drawn on the Republic Bank, plaintiff herein, which check will be
marked as Exhibit "A" for the plaintiff;
3. That the back side of aforementioned check bears the following signatures, in
this order:
1) MARTIN LORENZO;
2) RAMON R. LORENZO;
3) DELIA DOMINGUEZ; and
4) MAURICIA T. EBRADA;
4. That the aforementioned check was delivered to the defendant MAURICIA T.
EBRADA by the Third-Party defendant and Fourth-Party plaintiff ADELAIDA
DOMINGUEZ, for the purpose of encashment;
5. That the signature of defendant MAURICIA T. EBRADA was affixed on said
check on February 27, 1963 when she encashed it with the plaintiff Bank;
6. That immediately after defendant MAURICIA T. EBRADA received the cash
proceeds of said check in the sum of P1,246.08 from the plaintiff Bank, she
immediately turned over the said amount to the third-party defendant and fourth-
party plaintiff ADELAIDA DOMINGUEZ, who in turn handed the said amount to
the fourth-party defendant JUSTINA TINIO on the same date, as evidenced by
the receipt signed by her which will be marked as Exhibit "1-Dominguez"; and
7. That the parties hereto reserve the right to present evidence on any other fact
not covered by the foregoing stipulations,
Manila, Philippines, June 6, 1969.
Based on the foregoing stipulation of facts and the documentary evidence
presented, the trial court rendered a decision, the dispositive portion of which
reads as follows:
WHEREFORE, the Court renders judgment ordering the defendant
Mauricia T. Ebrada to pay the plaintiff the amount of ONE
THOUSAND TWO FORTY-SIX 08/100 (P1,246.08), with interest at
the legal rate from the filing of the complaint on June 16, 1966, until
fully paid, plus the costs in both instances against Mauricia T.
Ebrada.
The right of Mauricia T. Ebrada to file whatever claim she may have
against Adelaida Dominguez in connection with this case is hereby
reserved. The right of the estate of Dominguez to file the fourth-party
complaint against Justina Tinio is also reserved. SO ORDERED.
In her appeal, defendant-appellant presses that the lower court erred:
IN ORDERING THE APPELLANT TO PAY THE APPELLEE THE
FACE VALUE OF THE SUBJECT CHECK AFTER FINDING THAT
THE DRAWER ISSUED THE SUBJECT CHECK TO A PERSON
ALREADY DECEASED FOR 11-½ YEARS AND THAT THE
APPELLANT DID NOT BENEFIT FROM ENCASHING SAID
CHECK.
From the stipulation of facts it is admitted that the check in question was delivered
to defendant-appellant by Adelaida Dominguez for the purpose of encashment
and that her signature was affixed on said check when she cashed it with the
plaintiff Bank. Likewise it is admitted that defendant-appellant was the last
indorser of the said check. As such indorser, she was supposed to have
warranted that she has good title to said check; for under Section 65 of the
Negotiable Instruments Law:6
Every person negotiating an instrument by delivery or by qualified
indorsement, warrants:
(a) That the instrument is genuine and in all respects what it purports
to be.
(b) That she has good title to it.
xxx xxx xxx
and under Section 65 of the same Act:
Every indorser who indorses without qualification warrants to all
subsequent holders in due course:
(a) The matters and things mentioned in subdivisions (a), (b), and (c)
of the next preceding sections;
(b) That the instrument is at the time of his indorsement valid and
subsisting.
It turned out, however, that the signature of the original payee of the check,
Martin Lorenzo was a forgery because he was already dead 7 almost 11 years
before the check in question was issued by the Bureau of Treasury. Under action
23 of the Negotiable Instruments Law (Act 2031):
When a signature is forged or made without the authority of the
person whose signature it purports to be, it is wholly inoperative, and
no right to retain the instruments, or to give a discharge thereof
against any party thereto, can be acquired through or under such
signature unless the party against whom it is sought to enforce such
right is precluded from setting up the forgery or want of authority.
It is clear from the provision that where the signature on a negotiable instrument if
forged, the negotiation of the check is without force or effect. But does this mean
that the existence of one forged signature therein will render void all the other
negotiations of the check with respect to the other parties whose signature are
genuine?
In the case of Beam vs. Farrel, 135 Iowa 670, 113 N.W. 590, where a check has
several indorsements on it, it was held that it is only the negotiation based on the
forged or unauthorized signature which is inoperative. Applying this principle to
the case before Us, it can be safely concluded that it is only the negotiation
predicated on the forged indorsement that should be declared inoperative. This
means that the negotiation of the check in question from Martin Lorenzo, the
original payee, to Ramon R. Lorenzo, the second indorser, should be declared of
no affect, but the negotiation of the aforesaid check from Ramon R. Lorenzo to
Adelaida Dominguez, the third indorser, and from Adelaida Dominguez to the
defendant-appellant who did not know of the forgery, should be considered valid
and enforceable, barring any claim of forgery.
What happens then, if, after the drawee bank has paid the amount of the check to
the holder thereof, it was discovered that the signature of the payee was forged?
Can the drawee bank recover from the one who encashed the check?
In the case of State v. Broadway Mut. Bank, 282 S.W. 196, 197, it was held that
the drawee of a check can recover from the holder the money paid to him on a
forged instrument. It is not supposed to be its duty to ascertain whether the
signatures of the payee or indorsers are genuine or not. This is because the
indorser is supposed to warrant to the drawee that the signatures of the payee
and previous indorsers are genuine, warranty not extending only to holders in due
course. One who purchases a check or draft is bound to satisfy himself that the
paper is genuine and that by indorsing it or presenting it for payment or putting it
into circulation before presentation he impliedly asserts that he has performed his
duty and the drawee who has paid the forged check, without actual negligence on
his part, may recover the money paid from such negligent purchasers. In such
cases the recovery is permitted because although the drawee was in a way
negligent in failing to detect the forgery, yet if the encasher of the check had
performed his duty, the forgery would in all probability, have been detected and
the fraud defeated. The reason for allowing the drawee bank to recover from the
encasher is:
Every one with even the least experience in business knows that no
business man would accept a check in exchange for money or goods
unless he is satisfied that the check is genuine. He accepts it only
Nego Instruments Set 1 (#s1-70) Page 87 of 112
Lumbas. Dadat
because he has proof that it is genuine, or because he has sufficient
confidence in the honesty and financial responsibility of the person
who vouches for it. If he is deceived he has suffered a loss of his
cash or goods through his own mistake. His own credulity or
recklessness, or misplaced confidence was the sole cause of the
loss. Why should he be permitted to shift the loss due to his own fault
in assuming the risk, upon the drawee, simply because of the
accidental circumstance that the drawee afterwards failed to detect
the forgery when the check was presented?8
Similarly, in the case before Us, the defendant-appellant, upon receiving the
check in question from Adelaida Dominguez, was duty-bound to ascertain
whether the check in question was genuine before presenting it to plaintiff Bank
for payment. Her failure to do so makes her liable for the loss and the plaintiff
Bank may recover from her the money she received for the check. As reasoned
out above, had she performed the duty of ascertaining the genuineness of the
check, in all probability the forgery would have been detected and the fraud
defeated.
In our jurisdiction We have a case of similar import. 9 The Great Eastern Life
Insurance Company drew its check for P2000.00 on the Hongkong and Shanghai
Banking Corporation payable to the order of Lazaro Melicor. A certain E. M.
Maasin fraudulently obtained the check and forged the signature of Melicor, as an
indorser, and then personally indorsed and presented the check to the Philippine
National Bank where the amount of the check was placed to his (Maasin's) credit.
On the next day, the Philippine National Bank indorsed the cheek to the
Hongkong and Shanghai Banking Corporation which paid it and charged the
amount of the check to the insurance company. The Court held that the
Hongkong and Shanghai Banking Corporation was liable to the insurance
company for the amount of the check and that the Philippine National Bank was
in turn liable to the Hongkong and Shanghai Banking Corporation. Said the Court:
Where a check is drawn payable to the order of one person and is
presented to a bank by another and purports upon its face to have
been duly indorsed by the payee of the check, it is the duty of the
bank to know that the check was duly indorsed by the original payee,
and where the bank pays the amount of the check to a third person,
who has forged the signature of the payee, the loss falls upon the
bank who cashed the check, and its only remedy is against the
person to whom it paid the money.
With the foregoing doctrine We are to concede that the plaintiff Bank should
suffer the loss when it paid the amount of the check in question to defendant-
appellant, but it has the remedy to recover from the latter the amount it paid to
her. Although the defendant-appellant to whom the plaintiff Bank paid the check
was not proven to be the author of the supposed forgery, yet as last indorser of
the check, she has warranted that she has good title to it 10 even if in fact she did
not have it because the payee of the check was already dead 11 years before the
check was issued. The fact that immediately after receiving title cash proceeds of
the check in question in the amount of P1,246.08 from the plaintiff Bank,
defendant-appellant immediately turned over said amount to Adelaida Dominguez
(Third-Party defendant and the Fourth-Party plaintiff) who in turn handed the
amount to Justina Tinio on the same date would not exempt her from liability
because by doing so, she acted as an accommodation party in the check for
which she is also liable under Section 29 of the Negotiable Instruments Law (Act
2031), thus: .An accommodation party is one who has signed the instrument as
maker, drawer, acceptor, or indorser, without receiving value therefor, and for the
purpose of lending his name to some other person. Such a person is liable on the
instrument to a holder for value, notwithstanding such holder at the time of taking
the instrument knew him to be only an accommodation party.
IN VIEW OF THE FOREGOING, the judgment appealed from is hereby affirmed
in toto with costs against defendant-appellant. SO ORDERED.
56. G.R. No. 192413 June 13, 2012

Rizal Commercial Banking Corporation vs. Hi-Tri Development Corporation
and Luz R. Bakunawa
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 CA4 as follows:
x x x Luz [R.] Bakunawa and her husband Manuel, now deceased ("Spouses
Bakunawa") are registered owners of six (6) parcels of land covered by TCT Nos.
324985 and 324986 of the Quezon City Register of Deeds, and TCT Nos.
103724, 98827, 98828 and 98829 of the Marikina Register of Deeds. These lots
were sequestered by the Presidential Commission on Good Government
[(PCGG)].
Sometime in 1990, a certain Teresita Millan ("Millan"), through her representative,
Jerry Montemayor, offered to buy said lots for "₱ 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
Owner’s 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
Manager’s Check from RCBC-Ermita in the amount of ₱ 1,019,514.29, payable
to Millan’s 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 attorney’s 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 Manager’s
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
Manager’s 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
RCBC’s 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 Manager’s
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 Manager’s 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-
Tri’s] RCBC bank account once an order to debit is issued upon the payee’s
presentation of the Manager’s Check. Since the payee rejected the negotiated
Manager’s Check, presentation of the Manager’s Check was never made.
Consequently, the deposit that was supposed to be allocated for the payment of
the Manager’s 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 Corporation’s
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 Manager’s Check separate from the Corporation’s 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 Bank’s Ermita BC informed Hi-Tri and/or its principals regarding the
inclusion of Manager’s 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 Manager’s Check No.
ER034469 does not form part of the Bank’s own account. By simple operation of
law, the funds covered by the manager’s 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
Bank’s obligation to do so prescribed as early as October 2001."
(Emphases, citations, and annotations were omitted.)
The RTC Ruling
Nego Instruments Set 1 (#s1-70) Page 88 of 112
Lumbas. Dadat
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
Manager’s 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 Manager’s 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 Manager’s 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 bank’s failure to
notify respondents deprived them of an opportunity to intervene in the escheat
proceedings and to present evidence to substantiate their claim, in violation of
their right to due process. Furthermore, the CA pronounced that the Makati City
RTC Clerk of Court failed to issue individual notices directed to all persons
claiming interest in the unclaimed balances, as well as to require them to appear
after publication and show cause why the unclaimed balances should not be
deposited with the Treasurer of the Philippines. It explained that the jurisdictional
requirement of individual notice by personal service was distinct from the
requirement of notice by publication. Consequently, the CA held that the Decision
and Order of the RTC were void for want of jurisdiction.
Issue
After a perusal of the arguments presented by the parties, we cull the main issues
as follows:
I. Whether the Decision and Order of the RTC were void for failure to
send separate notices to respondents by personal service
II. Whether petitioner had the obligation to notify respondents
immediately before it filed its Sworn Statement with the Treasurer
III. Whether or not the allocated funds may be escheated in favor of
the Republic
Discussion
Petitioner bank assails7 the CA judgments insofar as they ruled that notice by
personal service upon respondents is a jurisdictional requirement in escheat
proceedings. Petitioner contends that respondents were not the owners of the
unclaimed balances and were thus not entitled to notice from the RTC Clerk of
Court. It hinges its claim on the theory that the funds represented by the
Manager’s Check were deemed transferred to the credit of the payee or holder
upon its issuance.

We quote the pertinent provision of Act No. 3936, as amended, on the rule on
service of processes, to wit:
Sec. 3. Whenever the Solicitor General shall be informed of such unclaimed
balances, he shall commence an action or actions in the name of the People of
the Republic of the Philippines in the Court of First Instance of the province or city
where the bank, building and loan association or trust corporation is located, in
which shall be joined as parties the bank, building and loan association or trust
corporation and all such creditors or depositors. All or any of such creditors or
depositors or banks, building and loan association or trust corporations may be
included in one action. Service of process in such action or actions shall be made
by delivery of a copy of the complaint and summons to the president, cashier, or
managing officer of each defendant bank, building and loan association or trust
corporation and by publication of a copy of such summons in a newspaper of
general circulation, either in English, in Filipino, or in a local dialect, published in
the locality where the bank, building and loan association or trust corporation is
situated, if there be any, and in case there is none, in the City of Manila, at such
time as the court may order. Upon the trial, the court must hear all parties who
have appeared therein, and if it be determined that such unclaimed balances in
any defendant bank, building and loan association or trust corporation are
unclaimed as hereinbefore stated, then the court shall render judgment in favor of
the Government of the Republic of the Philippines, declaring that said unclaimed
balances have escheated to the Government of the Republic of the Philippines
and commanding said bank, building and loan association or trust corporation to
forthwith deposit the same with the Treasurer of the Philippines to credit of the
Government of the Republic of the Philippines to be used as the National
Assembly may direct.
At the time of issuing summons in the action above provided for, the clerk of court
shall also issue a notice signed by him, giving the title and number of said action,
and referring to the complaint therein, and directed to all persons, other than
those named as defendants therein, claiming any interest in any unclaimed
balance mentioned in said complaint, and requiring them to appear within sixty
days after the publication or first publication, if there are several, of such
summons, and show cause, if they have any, why the unclaimed balances
involved in said action should not be deposited with the Treasurer of the
Philippines as in this Act provided and notifying them that if they do not appear
and show cause, the Government of the Republic of the Philippines will apply to
the court for the relief demanded in the complaint. A copy of said notice shall be
attached to, and published with the copy of, said summons required to be
published as above, and at the end of the copy of such notice so published, there
shall be a statement of the date of publication, or first publication, if there are
several, of said summons and notice. Any person interested may appear in said
action and become a party thereto. Upon the publication or the completion of the
publication, if there are several, of the summons and notice, and the service of
the summons on the defendant banks, building and loan associations or trust
corporations, the court shall have full and complete jurisdiction in the Republic of
the Philippines over the said unclaimed balances and over the persons having or
claiming any interest in the said unclaimed balances, or any of them, and shall
have full and complete jurisdiction to hear and determine the issues herein, and
render the appropriate judgment thereon. (Emphasis supplied.)
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 Manager’s 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
Nego Instruments Set 1 (#s1-70) Page 89 of 112
Lumbas. Dadat
sworn statement, banks and other similar institutions are under obligation to
communicate with owners of dormant accounts. The purpose of this initial notice
is for a bank to determine whether an inactive account has indeed been
unclaimed, abandoned, forgotten, or left without an owner. If the depositor simply
does not wish to touch the funds in the meantime, but still asserts ownership and
dominion over the dormant account, then the bank is no longer obligated to
include the account in its sworn statement.20 It is not the intent of the law to force
depositors into unnecessary litigation and defense of their rights, as the state is
only interested in escheating balances that have been abandoned and left without
an owner.
In case the bank complies with the provisions of the law and the unclaimed
balances are eventually escheated to the Republic, the bank "shall not thereafter
be liable to any person for the same and any action which may be brought by any
person against in any bank xxx for unclaimed balances so deposited xxx shall be
defended by the Solicitor General without cost to such bank." 21 Otherwise, should
it fail to comply with the legally outlined procedure to the prejudice of the
depositor, the bank may not raise the defense provided under Section 5 of Act
No. 3936, as amended.
Petitioner asserts22 that the CA committed a reversible error when it required
RCBC to send prior notices to respondents about the forthcoming escheat
proceedings involving the funds allocated for the payment of the Manager’s
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 Manager’s 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 Manager’s Check.
In contrast, respondents Hi-Tri and Bakunawa allege23 that they have a legal
interest in the fund allocated for the payment of the Manager’s 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 Manager’s Check.
An ordinary check refers to a bill of exchange drawn by a depositor (drawer) on a
bank (drawee),24 requesting the latter to pay a person named therein (payee) or to
the order of the payee or to the bearer, a named sum of money.25The issuance of
the check does not of itself operate as an assignment of any part of the funds in
the bank to the credit of the drawer.26 Here, the bank becomes liable only after it
accepts or certifies the check.27 After the check is accepted for payment, the bank
would then debit the amount to be paid to the holder of the check from the
account of the depositor-drawer.
There are checks of a special type called manager’s or cashier’s checks. These
are bills of exchange drawn by the bank’s manager or cashier, in the name of the
bank, against the bank itself.28 Typically, a manager’s or a cashier’s check is
procured from the bank by allocating a particular amount of funds to be debited
from the depositor’s 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 manager’s check does not ipso facto work
as an automatic transfer of funds to the account of the payee. In case the
procurer of the manager’s or cashier’s 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 Manager’s 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 Manager’s Check offered by
respondents, the latter retained custody of the instrument instead of cancelling it.
As the Manager’s 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 Manager’s 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 Manager’s Check. The doctrine that the
deposit represented by a manager’s 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.1âwphi1
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 Manager’s
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 Manager’s Check, should be excluded from the
escheat proceedings. We reiterate our pronouncement that the objective of
escheat proceedings is state forfeiture of unclaimed balances. We further note
that there is nothing in the records that would show that the OSG appealed the
assailed CA judgments. We take this failure to appeal as an indication of
disinterest in pursuing the escheat proceedings in favor of the Republic.
WHEREFORE the Petition is DENIED. The 26 November 2009 Decision and 27
May 2010 Resolution of the Court of Appeals in CA-G.R. SP No. 107261 are
hereby AFFIRMED. SO ORDERED.
57. G.R. No. 76788 January 22, 1990
JUANITA SALAS vs. HON. COURT OF APPEALS and FIRST FINANCE &
LEASING CORPORATION
Assailed in this petition for review on certiorari is the decision of the Court of
Appeals in C.A.-G.R. CV No. 00757 entitled "Filinvest Finance & Leasing
Corporation v. Salas", which modified the decision of the Regional Trial Court of
San Fernando, Pampanga in Civil Case No. 5915, a collection suit between the
same parties.
Records disclose that on February 6, 1980, Juanita Salas (hereinafter referred to
as petitioner) bought a motor vehicle from the Violago Motor Sales Corporation
(VMS for brevity) for P58,138.20 as evidenced by a promissory note. This note
was subsequently endorsed to Filinvest Finance & Leasing Corporation
(hereinafter referred to as private respondent) which financed the purchase.
Petitioner defaulted in her installments beginning May 21, 1980 allegedly due to a
discrepancy in the engine and chassis numbers of the vehicle delivered to her
and those indicated in the sales invoice, certificate of registration and deed of
chattel mortgage, which fact she discovered when the vehicle figured in an
accident on 9 May 1980.
This failure to pay prompted private respondent to initiate Civil Case No. 5915 for
a sum of money against petitioner before the Regional Trial Court of San
Fernando, Pampanga.
In its decision dated September 10, 1982, the trial court held, thus:
WHEREFORE, and in view of all the foregoing, judgment is hereby
rendered ordering the defendant to pay the plaintiff the sum of
P28,414.40 with interest thereon at the rate of 14% from October 2,
1980 until the said sum is fully paid; and the further amount of
P1,000.00 as attorney's fees. The counterclaim of defendant is
dismissed. With costs against defendant. 1
Both petitioner and private respondent appealed the aforesaid decision to the
Court of Appeals.
Imputing fraud, bad faith and misrepresentation against VMS for having delivered
a different vehicle to petitioner, the latter prayed for a reversal of the trial court's
decision so that she may be absolved from the obligation under the contract.
On October 27, 1986, the Court of Appeals rendered its assailed decision, the
pertinent portion of which is quoted hereunder:
The allegations, statements, or admissions contained in a pleading
are conclusive as against the pleader. A party cannot subsequently
take a position contradictory of, or inconsistent with his pleadings
(Cunanan vs. Amparo, 80 Phil. 227). Admissions made by the parties
in the pleadings, or in the course of the trial or other proceedings, do
not require proof and cannot be contradicted unless previously
shown to have been made through palpable mistake (Sec. 2, Rule
129, Revised Rules of Court; Sta. Ana vs. Maliwat, L-23023, Aug. 31,
1968, 24 SCRA 1018).
When an action or defense is founded upon a written instrument,
copied in or attached to the corresponding pleading as provided in
the preceding section, the genuineness and due execution of the
instrument shall be deemed admitted unless the adverse party, under
oath, specifically denied them, and sets forth what he claims to be
the facts (Sec. 8, Rule 8, Revised Rules of Court; Hibbered vs.
Rohde and McMillian, 32 Phil. 476).
A perusal of the evidence shows that the amount of P58,138.20
stated in the promissory note is the amount assumed by the plaintiff
in financing the purchase of defendant's motor vehicle from the
Violago Motor Sales Corp., the monthly amortization of winch is
Pl,614.95 for 36 months. Considering that the defendant was able to
pay twice (as admitted by the plaintiff, defendant's account became
delinquent only beginning May, 1980) or in the total sum of
P3,229.90, she is therefore liable to pay the remaining balance of
P54,908.30 at l4% per annum from October 2, 1980 until full
payment.
WHEREFORE, considering the foregoing, the appealed decision is
hereby modified ordering the defendant to pay the plaintiff the sum of
P54,908.30 at 14% per annum from October 2, 1980 until full
payment. The decision is AFFIRMED in all other respects. With costs
to defendant. 2
Petitioner's motion for reconsideration was denied; hence, the present recourse.
In the petition before us, petitioner assigns twelve (12) errors which focus on the
alleged fraud, bad faith and misrepresentation of Violago Motor Sales Corporation
in the conduct of its business and which fraud, bad faith and misrepresentation
supposedly released petitioner from any liability to private respondent who should
instead proceed against VMS. 3
Petitioner argues that in the light of the provision of the law on sales by
description 4 which she alleges is applicable here, no contract ever existed
between her and VMS and therefore none had been assigned in favor of private
respondent.
Nego Instruments Set 1 (#s1-70) Page 90 of 112
Lumbas. Dadat
She contends that it is not necessary, as opined by the appellate court, to
implead VMS as a party to the case before it can be made to answer for damages
because VMS was earlier sued by her for "breach of contract with damages"
before the Regional Trial Court of Olongapo City, Branch LXXII, docketed as Civil
Case No. 2916-0. She cites as authority the decision therein where the court
originally ordered petitioner to pay the remaining balance of the motor vehicle
installments in the amount of P31,644.30 representing the difference between the
agreed consideration of P49,000.00 as shown in the sales invoice and petitioner's
initial downpayment of P17,855.70 allegedly evidenced by a receipt. Said
decision was however reversed later on, with the same court ordering defendant
VMS instead to return to petitioner the sum of P17,855.70. Parenthetically, said
decision is still pending consideration by the First Civil Case Division of the Court
of Appeals, upon an appeal by VMS, docketed as AC-G.R. No. 02922. 5
Private respondent in its comment, prays for the dismissal of the petition and
counters that the issues raised and the allegations adduced therein are a mere
rehash of those presented and already passed upon in the court below, and that
the judgment in the "breach of contract" suit cannot be invoked as an authority as
the same is still pending determination in the appellate court.
We see no cogent reason to disturb the challenged decision.
The pivotal issue in this case is whether the promissory note in question is a
negotiable instrument which will bar completely all the available defenses of the
petitioner against private respondent.
Petitioner's liability on the promissory note, the due execution and genuineness of
which she never denied under oath is, under the foregoing factual milieu, as
inevitable as it is clearly established.
The records reveal that involved herein is not a simple case of assignment of
credit as petitioner would have it appear, where the assignee merely steps into
the shoes of, is open to all defenses available against and can enforce payment
only to the same extent as, the assignor-vendor.
Recently, in the case of Consolidated Plywood Industries Inc. v. IFC Leasing and
Acceptance Corp., 6 this Court had the occasion to clearly distinguish between a
negotiable and a non-negotiable instrument.
Among others, the instrument in order to be considered negotiable must contain
the so-called "words of negotiability — i.e., must be payable to "order" or
"bearer"". Under Section 8 of the Negotiable Instruments Law, there are only two
ways by which an instrument may be made payable to order. There must always
be a specified person named in the instrument and the bill or note is to be paid to
the person designated in the instrument or to any person to whom he has
indorsed and delivered the same. Without the words "or order or "to the order of",
the instrument is payable only to the person designated therein and is therefore
non-negotiable. Any subsequent purchaser thereof will not enjoy the advantages
of being a holder of a negotiable instrument, but will merely "step into the shoes"
of the person designated in the instrument and will thus be open to all defenses
available against the latter. Such being the situation in the above-cited case, it
was held that therein private respondent is not a holder in due course but a mere
assignee against whom all defenses available to the assignor may be raised. 7
In the case at bar, however, the situation is different. Indubitably, the basis of
private respondent's claim against petitioner is a promissory note which bears all
the earmarks of negotiability.
The pertinent portion of the note reads:
PROMISSORY NOTE
(MONTHLY)
P58,138.20
San Fernando, Pampanga, Philippines
Feb. 11, 1980
For value received, I/We jointly and severally, promise to pay Violago
Motor Sales Corporation or order, at its office in San
Fernando, Pampanga, the sum of FIFTY EIGHT THOUSAND ONE
HUNDRED THIRTY EIGHT & 201/100 ONLY
(P58,138.20) Philippine currency, which amount includes interest at
14% per annum based on the diminishing balance, the said principal

sum, to be payable, without need of notice or demand, in installments
of the amounts following and at the dates hereinafter set forth, to
wit: P1,614.95 monthly for "36" months due and payable on the 21st
day of each month starting March 21, 1980 thru and inclusive of
February 21, 1983. P_________ monthly for ______ months due and
payable on the ______ day of each month starting _____198__ thru
and inclusive of _____, 198________ provided that interest at
14% per annum shall be added on each unpaid installment from
maturity hereof until fully paid.
xxx xxx xxx
Maker; Co-Maker:
(SIGNED) JUANITA SALAS _________________
Address:
____________________ ____________________
WITNESSES
SIGNED: ILLEGIBLE SIGNED: ILLEGIBLE
TAN # TAN #
PAY TO THE ORDER OF
FILINVEST FINANCE AND LEASING CORPORATION
VIOLAGO MOTOR SALES CORPORATION
BY: (SIGNED) GENEVEVA V. BALTAZAR
Cash Manager 8
A careful study of the questioned promissory note shows that it is a negotiable
instrument, having complied with the requisites under the law as follows: [a] it is in
writing and signed by the maker Juanita Salas; [b] it contains an unconditional
promise to pay the amount of P58,138.20; [c] it is payable at a fixed or
determinable future time which is "P1,614.95 monthly for 36 months due and
payable on the 21 st day of each month starting March 21, 1980 thru and
inclusive of Feb. 21, 1983;" [d] it is payable to Violago Motor Sales
Corporation, or order and as such, [e] the drawee is named or indicated with
certainty. 9
It was negotiated by indorsement in writing on the instrument itself payable to the
Order of Filinvest Finance and Leasing Corporation 10 and it is an indorsement of
the entire instrument. 11
Under the circumstances, there appears to be no question that Filinvest is a
holder in due course, having taken the instrument under the following conditions:
[a] it is complete and regular upon its face; [b] it became the holder thereof before
it was overdue, and without notice that it had previously been dishonored; [c] it
took the same in good faith and for value; and [d] when it was negotiated to
Filinvest, the latter had no notice of any infirmity in the instrument or defect in the
title of VMS Corporation. 12
Accordingly, respondent corporation holds the instrument free from any defect of
title of prior parties, and free from defenses available to prior parties among
themselves, and may enforce payment of the instrument for the full amount
thereof. 13 This being so, petitioner cannot set up against respondent the defense
of nullity of the contract of sale between her and VMS.
Even assuming for the sake of argument that there is an iota of truth in
petitioner's allegation that there was in fact deception made upon her in that the
vehicle she purchased was different from that actually delivered to her, this matter
cannot be passed upon in the case before us, where the VMS was never
impleaded as a party.
Whatever issue is raised or claim presented against VMS must be resolved in the
"breach of contract" case.
Hence, we reach a similar opinion as did respondent court when it held:
We can only extend our sympathies to the defendant (herein
petitioner) in this unfortunate incident. Indeed, there is nothing We
can do as far as the Violago Motor Sales Corporation is concerned
since it is not a party in this case. To even discuss the issue as to
whether or not the Violago Motor Sales Corporation is liable in the
transaction in question would amount, to denial of due process,
hence, improper and unconstitutional. She should have impleaded
Violago Motor Sales.14
IN VIEW OF THE FOREGOING, the assailed decision is hereby AFFIRMED.
With costs against petitioner. SO ORDERED.
58. G.R. No. 129015 August 13, 2004
SAMSUNG CONSTRUCTION COMPANY PHILIPPINES, INC. vs. FAR EAST
BANK AND TRUST COMPANY AND COURT OF APPEALS
Called to fore in the present petition is a classic textbook question – if a bank
pays out on a forged check, is it liable to reimburse the drawer from whose
account the funds were paid out? The Court of Appeals, in reversing a trial court
decision adverse to the bank, invoked tenuous reasoning to acquit the bank of
liability. We reverse, applying time-honored principles of law.
The salient facts follow.
Plaintiff Samsung Construction Company Philippines, Inc. ("Samsung
Construction"), while based in Biñan, Laguna, maintained a current account with
defendant Far East Bank and Trust Company1 ("FEBTC") at the latter’s Bel-Air,
Makati branch.2 The sole signatory to Samsung Construction’s account was Jong
Kyu Lee ("Jong"), its Project Manager,3 while the checks remained in the custody
of the company’s accountant, Kyu Yong Lee ("Kyu").4
On 19 March 1992, a certain Roberto Gonzaga presented for payment FEBTC
Check No. 432100 to the bank’s branch in Bel-Air, Makati. The check, payable to
cash and drawn against Samsung Construction’s current account, was in the
amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos
(P999,500.00). The bank teller, Cleofe Justiani, first checked the balance of
Samsung Construction’s account. After ascertaining there were enough funds to
cover the check,5 she compared the signature appearing on the check with the
specimen signature of Jong as contained in the specimen signature card with the
bank. After comparing the two signatures, Justiani was satisfied as to the
authenticity of the signature appearing on the check. She then asked Gonzaga to
submit proof of his identity, and the latter presented three (3) identification cards.6
At the same time, Justiani forwarded the check to the branch Senior Assistant
Cashier Gemma Velez, as it was bank policy that two bank branch officers
approve checks exceeding One Hundred Thousand Pesos, for payment or
encashment. Velez likewise counterchecked the signature on the check as
against that on the signature card. He too concluded that the check was indeed
signed by Jong. Velez then forwarded the check and signature card to Shirley
Syfu, another bank officer, for approval. Syfu then noticed that Jose Sempio III
("Sempio"), the assistant accountant of Samsung Construction, was also in the
bank. Sempio was well-known to Syfu and the other bank officers, he being the
assistant accountant of Samsung Construction. Syfu showed the check to
Sempio, who vouched for the genuineness of Jong’s signature. Confirming the
identity of Gonzaga, Sempio said that the check was for the purchase of
equipment for Samsung Construction. Satisfied with the genuineness of the
signature of Jong, Syfu authorized the bank’s encashment of the check to
Gonzaga.
The following day, the accountant of Samsung Construction, Kyu, examined the
balance of the bank account and discovered that a check in the amount of Nine
Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00) had been
encashed. Aware that he had not prepared such a check for Jong’s signature,
Kyu perused the checkbook and found that the last blank check was missing.7 He
reported the matter to Jong, who then proceeded to the bank. Jong learned of the
encashment of the check, and realized that his signature had been forged. The
Bank Manager reputedly told Jong that he would be reimbursed for the amount of
the check.8 Jong proceeded to the police station and consulted with his
lawyers.9 Subsequently, a criminal case for qualified theft was filed against
Sempio before the Laguna court.10
In a letter dated 6 May 1992, Samsung Construction, through counsel, demanded
that FEBTC credit to it the amount of Nine Hundred Ninety Nine Thousand Five
Hundred Pesos (P999,500.00), with interest.11 In response, FEBTC said that it
was still conducting an investigation on the matter. Unsatisfied, Samsung
Nego Instruments Set 1 (#s1-70) Page 91 of 112
Lumbas. Dadat
Construction filed a Complaint on 10 June 1992 for violation of Section 23 of the
Negotiable Instruments Law, and prayed for the payment of the amount debited
as a result of the questioned check plus interest, and attorney’s fees.12 The case
was docketed as Civil Case No. 92-61506 before the Regional Trial Court
("RTC") of Manila, Branch 9.13
During the trial, both sides presented their respective expert witnesses to testify
on the claim that Jong’s signature was forged. Samsung Corporation, which had
referred the check for investigation to the NBI, presented Senior NBI Document
Examiner Roda B. Flores. She testified that based on her examination, she
concluded that Jong’s signature had been forged on the check. On the other
hand, FEBTC, which had sought the assistance of the Philippine National Police
(PNP),14 presented Rosario C. Perez, a document examiner from the PNP Crime
Laboratory. She testified that her findings showed that Jong’s signature on the
check was genuine.15
Confronted with conflicting expert testimony, the RTC chose to believe the
findings of the NBI expert. In a Decisiondated 25 April 1994, the RTC held that
Jong’s signature on the check was forged and accordingly directed the bank to
pay or credit back to Samsung Construction’s account the amount of Nine
Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00), together
with interest tolled from the time the complaint was filed, and attorney’s fees in
the amount of Fifteen Thousand Pesos (P15,000.00).
FEBTC timely appealed to the Court of Appeals. On 28 November 1996, the
Special Fourteenth Division of the Court of Appeals rendered
a Decision,16 reversing the RTC Decision and absolving FEBTC from any liability.
The Court of Appeals held that the contradictory findings of the NBI and the PNP
created doubt as to whether there was forgery.17 Moreover, the appellate court
also held that assuming there was forgery, it occurred due to the negligence of
Samsung Construction, imputing blame on the accountant Kyu for lack of care
and prudence in keeping the checks, which if observed would have prevented
Sempio from gaining access thereto.18 The Court of Appeals invoked the ruling
in PNB v. National City Bank of New York19 that, if a loss, which must be borne by
one or two innocent persons, can be traced to the neglect or fault of either, such
loss would be borne by the negligent party, even if innocent of intentional fraud.20
Samsung Construction now argues that the Court of Appeals had seriously
misapprehended the facts when it overturned the RTC’s finding of forgery. It also
contends that the appellate court erred in finding that it had been negligent in
safekeeping the check, and in applying the equity principle enunciated in PNB v.
National City Bank of New York.
Since the trial court and the Court of Appeals arrived at contrary findings on
questions of fact, the Court is obliged to examine the record to draw out the
correct conclusions. Upon examination of the record, and based on the applicable
laws and jurisprudence, we reverse the Court of Appeals.
Section 23 of the Negotiable Instruments Law states:
When a signature is forged or made without the authority of the
person whose signature it purports to be, it is wholly inoperative,
and no right to retain the instrument, or to give a discharge therefor,
or to enforce payment thereof against any party thereto, can be
acquired through or under such signature, unless the party
against whom it is sought to enforce such right is precluded from
setting up the forgery or want of authority. (Emphasis supplied)
The general rule is to the effect that a forged signature is "wholly inoperative,"
and payment made "through or under such signature" is ineffectual or does not
discharge the instrument.21 If payment is made, the drawee cannot charge it to
the drawer’s account. The traditional justification for the result is that the drawee
is in a superior position to detect a forgery because he has the maker’s signature
and is expected to know and compare it.22 The rule has a healthy cautionary
effect on banks by encouraging care in the comparison of the signatures against
those on the signature cards they have on file. Moreover, the very opportunity of
the drawee to insure and to distribute the cost among its customers who use
checks makes the drawee an ideal party to spread the risk to insurance.23
Brady, in his treatise The Law of Forged and Altered Checks, elucidates:

When a person deposits money in a general account in a bank,
against which he has the privilege of drawing checks in the ordinary
course of business, the relationship between the bank and the
depositor is that of debtor and creditor. So far as the legal
relationship between the two is concerned, the situation is the same
as though the bank had borrowed money from the depositor,
agreeing to repay it on demand, or had bought goods from the
depositor, agreeing to pay for them on demand. The bank owes the
depositor money in the same sense that any debtor owes money to
his creditor. Added to this, in the case of bank and depositor, there is,
of course, the bank’s obligation to pay checks drawn by the depositor
in proper form and presented in due course. When the bank receives
the deposit, it impliedly agrees to pay only upon the depositor’s
order. When the bank pays a check, on which the depositor’s
signature is a forgery, it has failed to comply with its contract in this
respect. Therefore, the bank is held liable.
The fact that the forgery is a clever one is immaterial. The forged
signature may so closely resemble the genuine as to defy detection
by the depositor himself. And yet, if a bank pays the check, it is
paying out its own money and not the depositor’s.
The forgery may be committed by a trusted employee or confidential
agent. The bank still must bear the loss. Even in a case where the
forged check was drawn by the depositor’s partner, the loss was
placed upon the bank. The case referred to is Robinson v. Security
Bank, Ark., 216 S. W. Rep. 717. In this case, the plaintiff brought suit
against the defendant bank for money which had been deposited to
the plaintiff’s credit and which the bank had paid out on checks
bearing forgeries of the plaintiff’s signature.
xxx
It was held that the bank was liable. It was further held that the fact
that the plaintiff waited eight or nine months after discovering the
forgery, before notifying the bank, did not, as a matter of law,
constitute a ratification of the payment, so as to preclude the plaintiff
from holding the bank liable. xxx
This rule of liability can be stated briefly in these words: "A bank is
bound to know its depositors’ signature." The rule is variously
expressed in the many decisions in which the question has been
considered. But they all sum up to the proposition that a bank must
know the signatures of those whose general deposits it carries.24
By no means is the principle rendered obsolete with the advent of modern
commercial transactions. Contemporary texts still affirm this well-entrenched
standard. Nickles, in his book Negotiable Instruments and Other Related
Commercial Paper wrote, thus:
The deposit contract between a payor bank and its customer
determines who can draw against the customer’s account by
specifying whose signature is necessary on checks that are
chargeable against the customer’s account. Therefore, a check
drawn against the account of an individual customer that is signed by
someone other than the customer, and without authority from her, is
not properly payable and is not chargeable to the customer’s
account, inasmuch as any "unauthorized signature on an instrument
is ineffective" as the signature of the person whose name is signed.25
Under Section 23 of the Negotiable Instruments Law, forgery is a real or absolute
defense by the party whose signature is forged.26 On the premise that Jong’s
signature was indeed forged, FEBTC is liable for the loss since it authorized the
discharge of the forged check. Such liability attaches even if the bank exerts due
diligence and care in preventing such faulty discharge. Forgeries often deceive
the eye of the most cautious experts; and when a bank has been so deceived, it
is a harsh rule which compels it to suffer although no one has suffered by its
being deceived.27 The forgery may be so near like the genuine as to defy
detection by the depositor himself, and yet the bank is liable to the depositor if it
pays the check.28
Thus, the first matter of inquiry is into whether the check was indeed forged. A
document formally presented is presumed to be genuine until it is proved to be
fraudulent. In a forgery trial, this presumption must be overcome but this can only
be done by convincing testimony and effective illustrations.29
In ruling that forgery was not duly proven, the Court of Appeals held:
[There] is ground to doubt the findings of the trial court sustaining the
alleged forgery in view of the conflicting conclusions made by
handwriting experts from the NBI and the PNP, both agencies of the
government.
xxx
These contradictory findings create doubt on whether there was
indeed a forgery. In the case of Tenio-Obsequio v. Court of Appeals,
230 SCRA 550, the Supreme Court held that forgery cannot be
presumed; it must be proved by clear, positive and convincing
evidence.
This reasoning is pure sophistry. Any litigator worth his or her salt would never
allow an opponent’s expert witness to stand uncontradicted, thus the spectacle of
competing expert witnesses is not unusual. The trier of fact will have to decide
which version to believe, and explain why or why not such version is more
credible than the other. Reliance therefore cannot be placed merely on the fact
that there are colliding opinions of two experts, both clothed with the presumption
of official duty, in order to draw a conclusion, especially one which is extremely
crucial. Doing so is tantamount to a jurisprudential cop-out.
Much is expected from the Court of Appeals as it occupies the penultimate tier in
the judicial hierarchy. This Court has long deferred to the appellate court as to its
findings of fact in the understanding that it has the appropriate skill and
competence to plough through the minutiae that scatters the factual field. In
failing to thoroughly evaluate the evidence before it, and relying instead on
presumptions haphazardly drawn, the Court of Appeals was sadly remiss. Of
course, courts, like humans, are fallible, and not every error deserves a stern
rebuke. Yet, the appellate court’s error in this case warrants special attention, as
it is absurd and even dangerous as a precedent. If this rationale were adopted as
a governing standard by every court in the land, barely any actionable claim
would prosper, defeated as it would be by the mere invocation of the existence of
a contrary "expert" opinion.
On the other hand, the RTC did adjudge the testimony of the NBI expert as more
credible than that of the PNP, and explained its reason behind the conclusion:
After subjecting the evidence of both parties to a crucible of analysis,
the court arrived at the conclusion that the testimony of the NBI
document examiner is more credible because the testimony of the
PNP Crime Laboratory Services document examiner reveals that
there are a lot of differences in the questioned signature as
compared to the standard specimen signature. Furthermore, as
testified to by Ms. Rhoda Flores, NBI expert, the manner of execution
of the standard signatures used reveals that it is a free rapid
continuous execution or stroke as shown by the tampering terminal
stroke of the signatures whereas the questioned signature is a
hesitating slow drawn execution stroke. Clearly, the person who
executed the questioned signature was hesitant when the signature
was made.30
During the testimony of PNP expert Rosario Perez, the RTC bluntly noted that
"apparently, there [are] differences on that questioned signature and the standard
signatures."31 This Court, in examining the signatures, makes a similar finding.
The PNP expert excused the noted "differences" by asserting that they were
mere "variations," which are normal deviations found in writing.32 Yet the RTC,
which had the opportunity to examine the relevant documents and to personally
observe the expert witness, clearly disbelieved the PNP expert. The Court
similarly finds the testimony of the PNP expert as unconvincing. During the trial,
she was confronted several times with apparent differences between strokes in
Nego Instruments Set 1 (#s1-70) Page 92 of 112
Lumbas. Dadat
the questioned signature and the genuine samples. Each time, she would just
blandly assert that these differences were just "variations,"33 as if the mere
conjuration of the word would sufficiently disquiet whatever doubts about the
deviations. Such conclusion, standing alone, would be of little or no value unless
supported by sufficiently cogent reasons which might amount almost to a
demonstration.34
The most telling difference between the questioned and genuine signatures
examined by the PNP is in the final upward stroke in the signature, or "the point to
the short stroke of the terminal in the capital letter ‘L,’" as referred to by the PNP
examiner who had marked it in her comparison chart as "point no. 6." To the plain
eye, such upward final stroke consists of a vertical line which forms a ninety
degree (90º) angle with the previous stroke. Of the twenty one (21) other genuine
samples examined by the PNP, at least nine (9) ended with an upward
stroke.35 However, unlike the questioned signature, the upward strokes of eight
(8) of these signatures are looped, while the upward stroke of the seventh36 forms
a severe forty-five degree (45º) with the previous stroke. The difference is glaring,
and indeed, the PNP examiner was confronted with the inconsistency in point no.
6.
Q: Now, in this questioned document point no. 6, the "s" stroke is
directly upwards.
A: Yes, sir.
Q: Now, can you look at all these standard signature (sic) were (sic)
point 6 is repeated or the last stroke "s" is pointing directly upwards?
A: There is none in the standard signature, sir.37
Again, the PNP examiner downplayed the uniqueness of the final stroke in the
questioned signature as a mere variation,38 the same excuse she proffered for the
other marked differences noted by the Court and the counsel for petitioner.39
There is no reason to doubt why the RTC gave credence to the testimony of the
NBI examiner, and not the PNP expert’s. The NBI expert, Rhoda Flores, clearly
qualifies as an expert witness. A document examiner for fifteen years, she had
been promoted to the rank of Senior Document Examiner with the NBI, and had
held that rank for twelve years prior to her testimony. She had placed among the
top five examinees in the Competitive Seminar in Question Document
Examination, conducted by the NBI Academy, which qualified her as a document
examiner.40She had trained with the Royal Hongkong Police Laboratory and is a
member of the International Association for Identification.41 As of the time she
testified, she had examined more than fifty to fifty-five thousand questioned
documents, on an average of fifteen to twenty documents a day.42 In comparison,
PNP document examiner Perez admitted to having examined only around five
hundred documents as of her testimony.43
In analyzing the signatures, NBI Examiner Flores utilized the scientific
comparative examination method consisting of analysis, recognition, comparison
and evaluation of the writing habits with the use of instruments such as a
magnifying lense, a stereoscopic microscope, and varied lighting substances.
She also prepared enlarged photographs of the signatures in order to facilitate
the necessary comparisons.44 She compared the questioned signature as against
ten (10) other sample signatures of Jong. Five of these signatures were executed
on checks previously issued by Jong, while the other five contained in business
letters Jong had signed.45 The NBI found that there were significant differences in
the handwriting characteristics existing between the questioned and the sample
signatures, as to manner of execution, link/connecting strokes, proportion
characteristics, and other identifying details.46
The RTC was sufficiently convinced by the NBI examiner’s testimony, and
explained her reasons in its Decisions. While the Court of Appeals disagreed and
upheld the findings of the PNP, it failed to convincingly demonstrate why such
findings were more credible than those of the NBI expert. As a throwaway, the
assailed Decision noted that the PNP, not the NBI, had the opportunity to
examine the specimen signature card signed by Jong, which was relied upon by
the employees of FEBTC in authenticating Jong’s signature. The distinction is
irrelevant in establishing forgery. Forgery can be established comparing the

contested signatures as against those of any sample signature duly established
as that of the persons whose signature was forged.
FEBTC lays undue emphasis on the fact that the PNP examiner did compare the
questioned signature against the bank signature cards. The crucial fact in
question is whether or not the check was forged, not whether the bank
could have detected the forgery. The latter issue becomes relevant only if
there is need to weigh the comparative negligence between the bank and
the party whose signature was forged.
At the same time, the Court of Appeals failed to assess the effect of Jong’s
testimony that the signature on the check was not his.47 The assertion may seem
self-serving at first blush, yet it cannot be ignored that Jong was in the best
position to know whether or not the signature on the check was his. While his
claim should not be taken at face value, any averments he would have on the
matter, if adjudged as truthful, deserve primacy in consideration. Jong’s testimony
is supported by the findings of the NBI examiner. They are also backed by factual
circumstances that support the conclusion that the assailed check was indeed
forged. Judicial notice can be taken that is highly unusual in practice for a
business establishment to draw a check for close to a million pesos and make it
payable to cash or bearer, and not to order. Jong immediately reported the
forgery upon its discovery. He filed the appropriate criminal charges against
Sempio, the putative forger.48
Now for determination is whether Samsung Construction was precluded from
setting up the defense of forgery under Section 23 of the Negotiable Instruments
Law. The Court of Appeals concluded that Samsung Construction was negligent,
and invoked the doctrines that "where a loss must be borne by one of two
innocent person, can be traced to the neglect or fault of either, it is reasonable
that it would be borne by him, even if innocent of any intentional fraud, through
whose means it has succeeded49 or who put into the power of the third person to
perpetuate the wrong."50 Applying these rules, the Court of Appeals determined
that it was the negligence of Samsung Construction that allowed the encashment
of the forged check.
In the case at bar, the forgery appears to have been made possible
through the acts of one Jose Sempio III, an assistant accountant
employed by the plaintiff Samsung [Construction] Co. Philippines,
Inc. who supposedly stole the blank check and who presumably is
responsible for its encashment through a forged signature of Jong
Kyu Lee. Sempio was assistant to the Korean accountant who was in
possession of the blank checks and who through negligence,
enabled Sempio to have access to the same. Had the Korean
accountant been more careful and prudent in keeping the blank
checks Sempio would not have had the chance to steal a page
thereof and to effect the forgery. Besides, Sempio was an employee
who appears to have had dealings with the defendant Bank in behalf
of the plaintiff corporation and on the date the check was encashed,
he was there to certify that it was a genuine check issued to
purchase equipment for the company.51
We recognize that Section 23 of the Negotiable Instruments Law bars a party
from setting up the defense of forgery if it is guilty of negligence.52 Yet, we are
unable to conclude that Samsung Construction was guilty of negligence in this
case. The appellate court failed to explain precisely how the Korean accountant
was negligent or how more care and prudence on his part would have prevented
the forgery. We cannot sustain this "tar and feathering" resorted to without any
basis.
The bare fact that the forgery was committed by an employee of the party whose
signature was forged cannot necessarily imply that such party’s negligence was
the cause for the forgery. Employers do not possess the preternatural gift of
cognition as to the evil that may lurk within the hearts and minds of their
employees. The Court’s pronouncement in PCI Bank v. Court of Appeals53 applies
in this case, to wit:
[T]he mere fact that the forgery was committed by a drawer-payor’s
confidential employee or agent, who by virtue of his position had
unusual facilities for perpetrating the fraud and imposing the forged
paper upon the bank, does not entitle the bank to shift the loss to the
drawer-payor, in the absence of some circumstance raising estoppel
against the drawer.54
Admittedly, the record does not clearly establish what measures Samsung
Construction employed to safeguard its blank checks. Jong did testify that his
accountant, Kyu, kept the checks inside a "safety box,"55 and no contrary version
was presented by FEBTC. However, such testimony cannot prove that the checks
were indeed kept in a safety box, as Jong’s testimony on that point is hearsay,
since Kyu, and not Jong, would have the personal knowledge as to how the
checks were kept.
Still, in the absence of evidence to the contrary, we can conclude that there was
no negligence on Samsung Construction’s part. The presumption remains that
every person takes ordinary care of his concerns,56 and that the ordinary course
of business has been followed.57 Negligence is not presumed, but must be proven
by him who alleges it.58 While the complaint was lodged at the instance of
Samsung Construction, the matter it had to prove was the claim it had alleged -
whether the check was forged. It cannot be required as well to prove that it was
not negligent, because the legal presumption remains that ordinary care was
employed.
Thus, it was incumbent upon FEBTC, in defense, to prove the negative fact that
Samsung Construction was negligent. While the payee, as in this case, may not
have the personal knowledge as to the standard procedures observed by the
drawer, it well has the means of disputing the presumption of regularity. Proving a
negative fact may be "a difficult office,"59 but necessarily so, as it seeks to
overcome a presumption in law. FEBTC was unable to dispute the presumption of
ordinary care exercised by Samsung Construction, hence we cannot agree with
the Court of Appeals’ finding of negligence.
The assailed Decision replicated the extensive efforts which FEBTC devoted to
establish that there was no negligence on the part of the bank in its acceptance
and payment of the forged check. However, the degree of diligence exercised by
the bank would be irrelevant if the drawer is not precluded from setting up the
defense of forgery under Section 23 by his own negligence. The rule of equity
enunciated in PNB v. National City Bank of New York, 60 as relied upon by the
Court of Appeals, deserves careful examination.
The point in issue has sometimes been said to be that of
negligence. The drawee who has paid upon the forged signature
is held to bear the loss, because he has been negligent in failing
to recognize that the handwriting is not that of his customer. But
it follows obviously that if the payee, holder, or presenter of the
forged paper has himself been in default, if he has himself been
guilty of a negligence prior to that of the banker, or if by any act of his
own he has at all contributed to induce the banker's negligence, then
he may lose his right to cast the loss upon the banker.61 (Emphasis
supplied)
Quite palpably, the general rule remains that the drawee who has paid upon the
forged signature bears the loss. The exception to this rule arises only when
negligence can be traced on the part of the drawer whose signature was forged,
and the need arises to weigh the comparative negligence between the drawer
and the drawee to determine who should bear the burden of loss. The Court finds
no basis to conclude that Samsung Construction was negligent in the
safekeeping of its checks. For one, the settled rule is that the mere fact that the
depositor leaves his check book lying around does not constitute such negligence
as will free the bank from liability to him, where a clerk of the depositor or other
persons, taking advantage of the opportunity, abstract some of the check blanks,
forges the depositor’s signature and collect on the checks from the bank.62 And
for another, in point of fact Samsung Construction was not negligent at all since it
reported the forgery almost immediately upon discovery.63
It is also worth noting that the forged signatures in PNB v. National City Bank of
New York were not of the drawer, but of indorsers. The same circumstance
attends PNB v. Court of Appeals,64 which was also cited by the Court of Appeals.
Nego Instruments Set 1 (#s1-70) Page 93 of 112
Lumbas. Dadat
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 drawer’s signature by comparison with one in
his hands, but has ordinarily no opportunity to verify an
indorsement.65
Thus, a drawee bank is generally liable to its depositor in paying a
check which bears either a forgery of the drawer’s signature or a
forged indorsement. But the bank may, as a general rule, recover
back the money which it has paid on a check bearing a forged
indorsement, whereas it has not this right to the same extent with
reference to a check bearing a forgery of the drawer’s signature.66
The general rule imputing liability on the drawee who paid out on the forgery
holds in this case.
Since FEBTC puts into issue the degree of care it exercised before paying out on
the forged check, we might as well comment on the bank’s performance of its
duty. It might be so that the bank complied with its own internal rules prior to
paying out on the questionable check. Yet, there are several troubling
circumstances that lead us to believe that the bank itself was remiss in its duty.
The fact that the check was made out in the amount of nearly one million pesos is
unusual enough to require a higher degree of caution on the part of the bank.
Indeed, FEBTC confirms this through its own internal procedures. Checks below
twenty-five thousand pesos require only the approval of the teller; those between
twenty-five thousand to one hundred thousand pesos necessitate the approval of
one bank officer; and should the amount exceed one hundred thousand pesos,
the concurrence of two bank officers is required.67
In this case, not only did the amount in the check nearly total one million pesos, it
was also payable to cash. That latter circumstance should have aroused the
suspicion of the bank, as it is not ordinary business practice for a check for such
large amount to be made payable to cash or to bearer, instead of to the order of a
specified person.68Moreover, the check was presented for payment by one
Roberto Gonzaga, who was not designated as the payee of the check, and who
did not carry with him any written proof that he was authorized by Samsung
Construction to encash the check. Gonzaga, a stranger to FEBTC, was not even
an employee of Samsung Construction.69 These circumstances are already
suspicious if taken independently, much more so if they are evaluated in
concurrence. Given the shadiness attending Gonzaga’s presentment of the
check, it was not sufficient for FEBTC to have merely complied with its internal
procedures, but mandatory that all earnest efforts be undertaken to ensure the
validity of the check, and of the authority of Gonzaga to collect payment therefor.
According to FEBTC Senior Assistant Cashier Gemma Velez, the bank tried, but
failed, to contact Jong over the phone to verify the check.70 She added that calling
the issuer or drawer of the check to verify the same was not part of the standard
procedure of the bank, but an "extra effort."71 Even assuming that such personal
verification is tantamount to extraordinary diligence, it cannot be denied that
FEBTC still paid out the check despite the absence of any proof of verification
from the drawer. Instead, the bank seems to have relied heavily on the say-so of
Sempio, who was present at the bank at the time the check was presented.
FEBTC alleges that Sempio was well-known to the bank officers, as he had
regularly transacted with the bank in behalf of Samsung Construction. It was even
claimed that everytime FEBTC would contact Jong about problems with his
account, Jong would hand the phone over to Sempio.72 However, the only proof of
such allegations is the testimony of Gemma Velez, who also testified that she did
not know Sempio personally,73 and had met Sempio for the first time only on the
day the check was encashed.74 In fact, Velez had to inquire with the other officers
of the bank as to whether Sempio was actually known to the employees of the
bank.75 Obviously, Velez had no personal knowledge as to the past relationship
between FEBTC and Sempio, and any averments of her to that effect should be
deemed hearsay evidence. Interestingly, FEBTC did not present as a witness any

other employee of their Bel-Air branch, including those who supposedly had
transacted with Sempio before.
Even assuming that FEBTC had a standing habit of dealing with Sempio, acting
in behalf of Samsung Construction, the irregular circumstances attending the
presentment of the forged check should have put the bank on the highest degree
of alert. The Court recently emphasized that the highest degree of care and
diligence is required of banks.
Banks are engaged in a business impressed with public interest, and
it is their duty to protect in return their many clients and depositors
who transact business with them. They have the obligation to treat
their client’s account meticulously and with the highest degree of
care, considering the fiduciary nature of their relationship. The
diligence required of banks, therefore, is more than that of a good
father of a family.76
Given the circumstances, extraordinary diligence dictates that FEBTC should
have ascertained from Jong personally that the signature in the questionable
check was his.
Still, even if the bank performed with utmost diligence, the drawer whose
signature was forged may still recover from the bank as long as he or she is not
precluded from setting up the defense of forgery. After all, Section 23 of the
Negotiable Instruments Law plainly states that no right to enforce the payment of
a check can arise out of a forged signature. Since the drawer, Samsung
Construction, is not precluded by negligence from setting up the forgery, the
general rule should apply. Consequently, if a bank pays a forged check, it must
be considered as paying out of its funds and cannot charge the amount so paid to
the account of the depositor.77 A bank is liable, irrespective of its good faith, in
paying a forged check.78
WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals
dated 28 November 1996 is REVERSED, and the Decision of the Regional Trial
Court of Manila, Branch 9, dated 25 April 1994 is REINSTATED. Costs against
respondent. SO ORDERED.
59. G.R. No. L-37467 December 11, 1933
SAN CARLOS MILLING CO., LTD. vs. BANK OF THE PHILIPPINE ISLANDS
and CHINA BANKING CORPORATION
Plaintiff corporation, organized under the laws of the Territory of Hawaii, is
authorized to engaged in business in the Philippine Islands, and maintains its
main office in these Islands in the City of Manila.
The business in the Philippine Islands was in the hands of Alfred D. Cooper, its
agent under general power of attorney with authority of substitution. The principal
employee in the Manila office was one Joseph L. Wilson, to whom had been
given a general power of attorney but without power of substitution. In 1926
Cooper, desiring to go on vacation, gave a general power of attorney to Newland
Baldwin and at the same time revoked the power of Wilson relative to the
dealings with the Bank of the Philippine Islands, one of the banks in Manila in
which plaintiff maintained a deposit.
About a year thereafter Wilson, conspiring together with one Alfredo Dolores, a
messenger-clerk in plaintiff's Manila office, sent a cable gram in code to the
company in Honolulu requesting a telegraphic transfer to the China Banking
Corporation of Manila of $100,00. The money was transferred by cable, and upon
its receipt the China Banking Corporation, likewise a bank in which plaintiff
maintained a deposit, sent an exchange contract to plaintiff corporation offering
the sum of P201,000, which was then the current rate of exchange. On this
contract was forged the name of Newland Baldwin and typed on the body of the
contract was a note:lawphil.net
Please send us certified check in our favor when transfer is received.
A manager's check on the China Banking Corporation for P201,000 payable to
San Carlos Milling Company or order was receipted for by Dolores. On the same
date, September 28, 1927, the manger's check was deposited with the Bank of
the Philippine Islands by the following endorsement:
For deposit only with Bank of the Philippine Islands, to credit of
account of San Carlos Milling Co., Ltd.
By (Sgd.) NEWLAND BALDWIN
For Agent
The endorsement to which the name of Newland Baldwin was affixed was
spurious.
The Bank of the Philippine Islands thereupon credited the current account of
plaintiff in the sum of P201,000 and passed the cashier's check in the ordinary
course of business through the clearing house, where it was paid by the China
Banking Corporation.
On the same day the cashier of the Bank of the Philippine Islands received a
letter, purporting to be signed by Newland Baldwin, directing that P200,000 in bills
of various denominations, named in the letter, be packed for shipment and
delivery the next day. The next day, Dolores witnessed the counting and packing
of the money, and shortly afterwards returned with the check for the sum of
P200,000, purporting to be signed by Newland Baldwin as agent.
Plaintiff had frequently withdrawn currency for shipment to its mill from the Bank
of the Philippine Islands but never in so large an amount, and according to the
record, never under the sole supervision of Dolores as the representative of
plaintiff.
Before delivering the money, the bank asked Dolores for P1 to cover the cost of
packing the money, and he left the bank and shortly afterwards returned with
another check for P1, purporting to be signed by Newland Baldwin. Whereupon
the money was turned over to Dolores, who took it to plaintiff's office, where he
turned the money over to Wilson and received as his share, P10,000.
Shortly thereafter the crime was discovered, and upon the defendant bank
refusing to credit plaintiff with the amount withdrawn by the two forged checks of
P200,000 and P1, suit was brought against the Bank of the Philippine Islands,
and finally on the suggestion of the defendant bank, an amended complaint was
filed by plaintiff against both the Bank of the Philippine Islands and the China
Banking Corporation.
At the trial the China Banking Corporation contended that they had drawn a check
to the credit of the plaintiff company, that the check had been endorsed for
deposit, and that as the prior endorsement had in law been guaranteed by the
Bank of the Philippine Islands, when they presented the cashier's check to it for
payment, the China Banking Corporation was absolved even if the endorsement
of Newland Baldwin on the check was a forgery.
The Bank of the Philippine Islands presented many special defenses, but in the
main their contentions were that they had been guilty of no negligence, that they
had dealt with the accredited representatives of the company in the due course of
business, and that the loss was due to the dishonesty of plaintiff's employees and
the negligence of plaintiff's general agent.
In plaintiff's Manila office, besides the general agent, Wilson, and Dolores, most
of the time there was employed a woman stenographer and cashier. The agent
did not keep in his personal possession either the code-book or the blank checks
of either the Bank of the Philippine Islands or the China Banking Corporation.
Baldwin was authorized to draw checks on either of the depositaries. Wilson
could draw checks in the name of the plaintiff on the China Banking Corporation.
After trial in which much testimony was taken, the trial court held that the deposit
of P201,000 in the Bank of the Philippine Islands being the result of a forged
endorsement, the relation of depositor and banker did not exist, but the bank was
only a gratuitous bailee; that the Bank of the Philippine Islands acted in good faith
in the ordinary course of its business, was not guilty of negligence, and therefore
under article 1902 of the Civil Code which should control the case, plaintiff could
not recover; and that as the cause of loss was the criminal actions of Wilson and
Dolores, employees of plaintiff, and as Newland Baldwin, the agent, had not
exercised adequate supervision over plaintiff's Manila office, therefore plaintiff
was guilty of negligence, which ground would likewise defeat recovery.
From the decision of the trial court absolving the defendants, plaintiff brings this
appeal and makes nine assignments of error which we do not deem it necessary
to discuss in detail.
Nego Instruments Set 1 (#s1-70) Page 94 of 112
Lumbas. Dadat
There is a mild assertion on the part of the defendant bank that the disputed
signatures of Newland Baldwin were genuine and that he had been in the habit of
signing checks in blank and turning the checks so signed over to Wilson.
The proof as to the falsity of the questioned signatures of Baldwin places the
matter beyond reasonable doubt, nor is it believed that Baldwin signed checks in
blank and turned them over to Wilson.
As to the China Banking Corporation, it will be seen that it drew its check payable
to the order of plaintiff and delivered it to plaintiff's agent who was authorized to
receive it. A bank that cashes a check must know to whom it pays. In connection
with the cashier's check, this duty was therefore upon the Bank of the Philippine
Islands, and the China Banking Corporation was not bound to inspect and verify
all endorsements of the check, even if some of them were also those of
depositors in that bank. It had a right to rely upon the endorsement of the Bank of
the Philippine Islands when it gave the latter bank credit for its own cashier's
check. Even if we would treat the China Banking Corporation's cashier's check
the same as the check of a depositor and attempt to apply the doctrines of
the Great Eastern Life Insurance Co. vs. Hongkong & Shanghai Banking
Corporation and National Bank (43 Phil., 678), and hold the China Banking
Corporation indebted to plaintiff, we would at the same time have to hold that the
Bank of the Philippine Islands was indebted to the China Banking Corporation in
the same amount. As, however, the money was in fact paid to plaintiff
corporation, we must hold that the China Banking Corporation is indebted neither
to plaintiff nor to the Bank of the Philippine Islands, and the judgment of the lower
court far as it absolves the China Banking Corporation from responsibility is
affirmed.
Returning to the relation between plaintiff and the Bank of the Philippine Islands,
we will now consider the effect of the deposit of P201,000. It must be noted that
this was not a presenting of the check for cash payment but for deposit only. It is
a matter of general knowledge that most endorsements for deposit only, are
informal. Most are by means of a rubber stamp. The bank would have been
justified in accepting the check for deposit even with only a typed endorsement. It
accepted the check and duly credited plaintiff's account with the amount on the
face of the check. Plaintiff was not harmed by the transaction as the only result
was the removal of that sum of money from a bank from which Wilson could have
drawn it out in his own name to a bank where Wilson would not have authority to
draw checks and where funds could only be drawn out by the check of Baldwin.
Plaintiff in its letter of December 23, 1928, to the Bank of the Philippine Islands
said in part:
". . . we now leave to demand that you pay over to us the entire
amount of said manager's check of two hundred one thousand
(P201,000) pesos, together with interest thereon at the agreed rate of
3 ½ per cent per annum on daily balances of our credit in account
current with your bank to this date. In the event of your refusal to pay,
we shall claim interest at the legal rate of 6 per cent from and after
the date of this demand inasmuch as we desire to withdraw and
make use of the money." Such language might well be treated as a
ratification of the deposit.
The contention of the bank that it was a gratuitous bailee is without merit. In the
first place, it is absolutely contrary to what the bank did. It did not take it up as a
separate account but it transferred the credit to plaintiff's current account as a
depositor of that bank. Furthermore, banks are not gratuitous bailees of the funds
deposited with them by their customers. Banks are run for gain, and they solicit
deposits in order that they can use the money for that very purpose. In this case
the action was neither gratuitous nor was it a bailment.
On the other hand, we cannot agree with the theory of plaintiff that the Bank of
the Philippine Islands was an intermeddling bank. In the many cases cited by
plaintiff where the bank that cashed the forged endorsement was held as an
intermeddler, in none was the claimant a regular depositor of the bank, nor in any
of the cases cited, was the endorsement for deposit only. It is therefore clear that
the relation of plaintiff with the Bank of the Philippine Islands in regard to this item
of P201,000 was that of depositor and banker, creditor and debtor.

We now come to consider the legal effect of payment by the bank to Dolores of
the sum of P201,000, on two checks on which the name of Baldwin was forged as
drawer. As above stated, the fact that these signatures were forged is beyond
question. It is an elementary principle both of banking and of the Negotiable
Instruments Law that —
A bank is bound to know the signatures of its customers; and if it
pays a forged check, it must be considered as making the payment
out of its own funds, and cannot ordinarily charge the amount so paid
to the account of the depositor whose name was forged. (7 C.J.,
683.)
There is no act of the plaintiff that led the Bank of the Philippine Islands astray. If
it was in fact lulled into a false sense of security, it was by the effrontery of
Dolores, the messenger to whom it entrusted this large sum of money.
The bank paid out its money because it relied upon the genuineness of the
purported signatures of Baldwin. These, they never questioned at the time its
employees should have used care. In fact, even today the bank represents that it
has a relief that they are genuine signatures.
The signatures to the check being forged, under section 23 of the Negotiable
Instruments Law they are not a charge against plaintiff nor are the checks of any
value to the defendant.
It must therefore be held that the proximate cause of loss was due to the
negligence of the Bank of the Philippine Islands in honoring and cashing the two
forged checks.
The judgment absolving the Bank of the Philippine Islands must therefore be
reversed, and a judgment entered in favor of plaintiff-appellant and against the
Bank of the Philippine Islands, defendant-appellee, for the sum of P200,001, with
legal interest thereon from December 23,1928, until payment, together with costs
in both instances. So ordered.
60. G.R. No. 167567 September 22, 2010
SAN MIGUEL CORPORATION vs. BARTOLOME PUZON, JR.
This petition for review assails the December 21, 2004 Decision1 and March 28,
2005 Resolution2 of the Court of Appeals (CA) in CA-G.R. SP No. 83905, which
dismissed the petition before it and denied reconsideration, respectively.
Factual Antecedents
Respondent Bartolome V. Puzon, Jr., (Puzon) owner of Bartenmyk Enterprises,
was a dealer of beer products of petitioner San Miguel Corporation (SMC) for
Parañaque City. Puzon purchased SMC products on credit. To ensure payment
and as a business practice, SMC required him to issue postdated checks
equivalent to the value of the products purchased on credit before the same were
released to him. Said checks were returned to Puzon when the transactions
covered by these checks were paid or settled in full.
On December 31, 2000, Puzon purchased products on credit amounting to
₱11,820,327 for which he issued, and gave to SMC, Bank of the Philippine
Islands (BPI) Check Nos. 27904 (for ₱309,500.00) and 27903 (for
₱11,510,827.00) to cover the said transaction.
On January 23, 2001, Puzon, together with his accountant, visited the SMC Sales
Office in Parañaque City to reconcile his account with SMC. During that visit
Puzon allegedly requested to see BPI Check No. 17657. However, when he got
hold of BPI Check No. 27903 which was attached to a bond paper together with
BPI Check No. 17657 he allegedly immediately left the office with his accountant,
bringing the checks with them.
SMC sent a letter to Puzon on March 6, 2001 demanding the return of the said
checks. Puzon ignored the demand hence SMC filed a complaint against him for
theft with the City Prosecutor’s Office of Parañaque City.
Rulings of the Prosecutor and the Secretary of Department of Justice (DOJ)
The investigating prosecutor, Elizabeth Yu Guray found that the "relationship
between [SMC] and [Puzon] appears to be one of credit or creditor-debtor
relationship. The problem lies in the reconciliation of accounts and the non-
payment of beer empties which cannot give rise to a criminal prosecution for
theft."3 Thus, in her July 31, 2001 Resolution,4 she recommended the dismissal of
the case for lack of evidence. SMC appealed.
On June 4, 2003, the DOJ issued its resolution5 affirming the prosecutor’s
Resolution dismissing the case. Its motion for reconsideration having been denied
in the April 23, 2004 DOJ Resolution,6 SMC filed a petition for certiorari with the
CA.
Ruling of the Court of Appeals
The CA found that the postdated checks were issued by Puzon merely as a
security for the payment of his purchases and that these were not intended to be
encashed. It thus concluded that SMC did not acquire ownership of the checks as
it was duty bound to return the same checks to Puzon after the transactions
covering them were settled. The CA agreed with the prosecutor that there was no
theft, considering that a person cannot be charged with theft for taking personal
property that belongs to himself. It disposed of the appeal as follows:
WHEREFORE, finding no grave abuse of discretion committed by public
respondent, the instant petition is hereby DISMISSED. The assailed Resolutions
of public respondent, dated 04 June 2003 and 23 April 2004, are AFFIRMED. No
costs at this instance. SO ORDERED.7
The motion for reconsideration of SMC was denied. Hence, the present petition.
Issues
Petitioner now raises the following issues:
I upon complaint of an offended party. Thus, the decision whether to dismiss a
WHETHER X X X PUZON HAD STOLEN FROM SMC ON JANUARY 23, 2001,
AMONG OTHERS BPI CHECK NO. 27903 DATED MARCH 30, 2001 IN THE
AMOUNT OF PESOS: ELEVEN MILLION FIVE HUNDRED TEN THOUSAND
EIGHT HUNDRED TWENTY SEVEN (Php11,510,827.00)
II
WHETHER X X X THE POSTDATED CHECKS ISSUED BY PUZON,
PARTICULARLY BPI CHECK NO. 27903 DATED MARCH 30, 2001 IN THE
AMOUNT OF PESOS: ELEVEN MILLION FIVE HUNDRED TEN THOUSAND
EIGHT HUNDRED TWENTY SEVEN (Php11,510,827.00), WERE ISSUED IN
PAYMENT OF HIS BEER PURCHASES OR WERE USED MERELY AS
SECURITY TO ENSURE PAYMENT OF PUZON’S OBLIGATION.
III
WHETHER X X X THE PRACTICE OF SMC IN RETURNING THE POSTDATED
CHECKS ISSUED IN PAYMENT OF BEER PRODUCTS PURCHASED ON
CREDIT SHOULD THE TRANSACTIONS COVERED BY THESE CHECKS [BE]
SETTLED ON [THE] MATURITY DATES THEREOF COULD BE LIKENED TO A
CONTRACT OF PLEDGE.
IV
WHETHER X X X SMC HAD ESTABLISHED PROBABLE CAUSE TO JUSTIFY
THE INDICTMENT OF PUZON FOR THE CRIME OF THEFT PURSUANT TO
ART. 308 OF THE REVISED PENAL CODE.8
Petitioner's Arguments
SMC contends that Puzon was positively identified by its employees to have
taken the subject postdated checks. It also contends that ownership of the checks
was transferred to it because these were issued, not merely as security but were,
in payment of Puzon’s purchases. SMC points out that it has established more
than sufficient probable cause to justify the indictment of Puzon for the crime of
Theft.
Respondent’s Arguments
On the other hand, Puzon contends that SMC raises questions of fact that are
beyond the province of an appeal on certiorari. He also insists that there is no
probable cause to charge him with theft because the subject checks were issued
only as security and he therefore retained ownership of the same.
Our Ruling
The petition has no merit.
Preliminary Matters
At the outset we find that as pointed out by Puzon, SMC raises questions of fact.
The resolution of the first issue raised by SMC of whether respondent stole the
subject check, which calls for the Court to determine whether respondent is guilty
of a felony, first requires that the facts be duly established in the proper forum and
Nego Instruments Set 1 (#s1-70) Page 95 of 112
Lumbas. Dadat
in accord with the proper procedure. This issue cannot be resolved based on
mere allegations of facts and affidavits. The same is true with the second issue
raised by petitioner, to wit: whether the checks issued by Puzon were payments
for his purchases or were intended merely as security to ensure payment. These
issues cannot be properly resolved in the present petition for review on certiorari
which is rooted merely on the resolution of the prosecutor finding no probable
cause for the filing of an information for theft.
The third issue raised by petitioner, on the other hand, would entail venturing into
constitutional matters for a complete resolution. This route is unnecessary in the
present case considering that the main matter for resolution here only concerns
grave abuse of discretion and the existence of probable cause for theft, which at
this point is more properly resolved through another more clear cut route.
Probable Cause for Theft
"Probable cause is defined as such facts and circumstances that will engender a
well-founded belief that a crime has been committed and that the respondent is
probably guilty thereof and should be held for trial."9 On the fine points of the
determination of probable cause, Reyes v. Pearlbank Securities,
Inc.10 comprehensively elaborated that:
The determination of [the existence or absence of probable cause] lies within the
discretion of the prosecuting officers after conducting a preliminary investigation
complaint or not is dependent upon the sound discretion of the prosecuting fiscal.
He may dismiss the complaint forthwith, if he finds the charge insufficient in form
or substance or without any ground. Or he may proceed with the investigation if
the complaint in his view is sufficient and in proper form. To emphasize, the
determination of probable cause for the filing of information in court is an
executive function, one that properly pertains at the first instance to the public
prosecutor and, ultimately, to the Secretary of Justice, who may direct the filing of
the corresponding information or move for the dismissal of the case. Ultimately,
whether or not a complaint will be dismissed is dependent on the sound discretion
of the Secretary of Justice. And unless made with grave abuse of discretion,
findings of the Secretary of Justice are not subject to review.
For this reason, the Court considers it sound judicial policy to refrain from
interfering in the conduct of preliminary investigations and to leave the
Department of Justice ample latitude of discretion in the determination of what
constitutes sufficient evidence to establish probable cause for the prosecution of
supposed offenders. Consistent with this policy, courts do not reverse the
Secretary of Justice's findings and conclusions on the matter of probable cause
except in clear cases of grave abuse of discretion.
In the present case, we are also not sufficiently convinced to deviate from the
general rule of non-interference. Indeed the CA did not err in dismissing the
petition for certiorari before it, absent grave abuse of discretion on the part of the
DOJ Secretary in not finding probable cause against Puzon for theft.
The Revised Penal Code provides:
Art. 308. Who are liable for theft. - Theft is committed by any person who, with
intent to gain but without violence against, or intimidation of persons nor force
upon things, shall take personal property of another without the latter’s consent.
xxxx
"[T]he essential elements of the crime of theft are the following: (1) that there be a
taking of personal property; (2) that said property belongs to another; (3) that the
taking be done with intent to gain; (4) that the taking be done without the consent
of the owner; and (5) that the taking be accomplished without the use of violence
or intimidation against persons or force upon things."11
Considering that the second element is that the thing taken belongs to another, it
is relevant to determine whether ownership of the subject check was transferred
to petitioner. On this point the Negotiable Instruments Law provides:
Sec. 12. Antedated and postdated – The instrument is not invalid for the reason
only that it is antedated or postdated, provided this is not done for an illegal or
fraudulent purpose. The person to whom an instrument so dated
is delivered acquires the title thereto as of the date of delivery. (Underscoring
supplied.)

Note however that delivery as the term is used in the aforementioned provision
means that the party delivering did so for the purpose of giving effect
thereto.12 Otherwise, it cannot be said that there has been delivery of the
negotiable instrument. Once there is delivery, the person to whom the instrument
is delivered gets the title to the instrument completely and irrevocably.
If the subject check was given by Puzon to SMC in payment of the obligation, the
purpose of giving effect to the instrument is evident thus title to or ownership of
the check was transferred upon delivery. However, if the check was not given as
payment, there being no intent to give effect to the instrument, then ownership of
the check was not transferred to SMC.
The evidence of SMC failed to establish that the check was given in payment of
the obligation of Puzon. There was no provisional receipt or official receipt issued
for the amount of the check. What was issued was a receipt for
the document, a "POSTDATED CHECK SLIP."13
Furthermore, the petitioner's demand letter sent to respondent states "As per
company policies on receivables, all issuances are to be covered by post-dated
checks. However, you have deviated from this policy by forcibly taking away the
check you have issued to us to cover the December issuance." 14 Notably, the
term "payment" was not used instead the terms "covered" and "cover" were used.
Although the petitioner's witness, Gregorio L. Joven III, states in paragraph 6 of
his affidavit that the check was given in payment of the obligation of Puzon, the
same is contradicted by his statements in paragraph 4, where he states that "As a
standard company operating procedure, all beer purchases by dealers on credit
shall be coveredby postdated checks equivalent to the value of the beer products
purchased"; in paragraph 9 where he states that "the transaction covered by the
said check had not yet been paid for," and in paragraph 8 which clearly shows
that partial payment is expected to be made by the return of beer empties, and
not by the deposit or encashment of the check.1avvphi1 Clearly the term "cover"
was not meant to be used interchangeably with "payment."
When taken in conjunction with the counter-affidavit of Puzon – where he states
that "As the [liquid beer] contents are paid for, SMC return[s] to me the
corresponding PDCs or request[s] me to replace them with whatever was the
unpaid balance."15 – it becomes clear that both parties did not intend for the
check to pay for the beer products. The evidence proves that the check was
accepted, not as payment, but in accordance with the long-standing policy of
SMC to require its dealers to issue postdated checks to cover its receivables. The
check was only meant to coverthe transaction and in the meantime Puzon was to
pay for the transaction by some other means other than the check. This being so,
title to the check did not transfer to SMC; it remained with Puzon. The second
element of the felony of theft was therefore not established. Petitioner was not
able to show that Puzon took a check that belonged to another. Hence, the
prosecutor and the DOJ were correct in finding no probable cause for theft.
Consequently, the CA did not err in finding no grave abuse of discretion
committed by the DOJ in sustaining the dismissal of the case for theft for lack of
probable cause.
WHEREFORE, the petition is DENIED. The December 21, 2004 Decision and
March 28, 2005 Resolution of the Court of Appeals in CA-G.R. SP. No. 83905
are AFFIRMED. SO ORDERED.
61. G.R. No. 89252 May 24, 1993
RAUL SESBREÑO vs. HON. COURT OF APPEALS, DELTA MOTORS
CORPORATION AND PILIPINAS BANK
On 9 February 1981, petitioner Raul Sesbreño made a money market placement
in the amount of P300,000.00 with the Philippine Underwriters Finance
Corporation ("Philfinance"), Cebu Branch; the placement, with a term of thirty-two
(32) days, would mature on 13 March 1981, Philfinance, also on 9 February 1981,
issued the following documents to petitioner:
(a) the Certificate of Confirmation of Sale, "without recourse," No.
20496 of one (1) Delta Motors Corporation Promissory Note ("DMC
PN") No. 2731 for a term of 32 days at 17.0% per annum;
Nego Instruments Set 1 (#s1-70) Page 96 of 112
Lumbas. Dadat
(b) the Certificate of securities Delivery Receipt No. 16587 indicating demand letters to Philfinance for written instructions, as has been supposedly
the sale of DMC PN No. 2731 to petitioner, with the notation that the agreed upon in "Securities Custodianship Agreement" between Pilipinas and
said security was in custodianship of Pilipinas Bank, as per Philfinance. Philfinance did not provide the appropriate instructions; Pilipinas
Denominated Custodian Receipt ("DCR") No. 10805 dated 9 never released DMC PN No. 2731, nor any other instrument in respect thereof, to
February 1981; and petitioner.
(c) post-dated checks payable on 13 March 1981 (i.e., the maturity Petitioner also made a written demand on 14 July 19813 upon private respondent
date of petitioner's investment), with petitioner as payee, Philfinance Delta for the partial satisfaction of DMC PN No. 2731, explaining that Philfinance,
as drawer, and Insular Bank of Asia and America as drawee, in the as payee thereof, had assigned to him said Note to the extent of P307,933.33.
total amount of P304,533.33. Delta, however, denied any liability to petitioner on the promissory note, and
On 13 March 1981, petitioner sought to encash the postdated checks issued by explained in turn that it had previously agreed with Philfinance to offset its DMC
Philfinance. However, the checks were dishonored for having been drawn against PN No. 2731 (along with DMC PN No. 2730) against Philfinance PN No. 143-A
insufficient funds. issued in favor of Delta.
On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issued In the meantime, Philfinance, on 18 June 1981, was placed under the joint
by private respondent Pilipinas Bank ("Pilipinas"). It reads as follows: management of the Securities and exchange commission ("SEC") and the
PILIPINAS BANK Central Bank. Pilipinas delivered to the SEC DMC PN No. 2731, which to date
Makati Stock Exchange Bldg., apparently remains in the custody of the SEC.4
Ayala Avenue, Makati, As petitioner had failed to collect his investment and interest thereon, he filed on
Metro Manila 28 September 1982 an action for damages with the Regional Trial Court ("RTC")
February 9, 1981 of Cebu City, Branch 21, against private respondents Delta and Pilipinas. 5The
——————— trial court, in a decision dated 5 August 1987, dismissed the complaint and
VALUE DATE counterclaims for lack of merit and for lack of cause of action, with costs against
TO Raul Sesbreño petitioner.
April 6, 1981 Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195.
———————— In a Decision dated 21 March 1989, the Court of Appeals denied the appeal and
MATURITY DATE held:6
NO. 10805 Be that as it may, from the evidence on record, if there is anyone that
DENOMINATED CUSTODIAN RECEIPT appears liable for the travails of plaintiff-appellant, it is Philfinance. As
This confirms that as a duly Custodian Bank, and upon instruction of correctly observed by the trial court:
PHILIPPINE UNDERWRITES FINANCE CORPORATION, we have This act of Philfinance in accepting the investment of
in our custody the following securities to you [sic] the extent herein plaintiff and charging it against DMC PN No. 2731 when
indicated. its entire face value was already obligated or earmarked
SERIAL MAT. FACE ISSUED REGISTERED AMOUNT for set-off or compensation is difficult to comprehend and
NUMBER DATE VALUE BY HOLDER PAYEE may have been motivated with bad faith. Philfinance,
2731 4-6-81 2,300,833.34 DMC PHIL. 307,933.33 therefore, is solely and legally obligated to return the
UNDERWRITERS investment of plaintiff, together with its earnings, and to
FINANCE CORP. answer all the damages plaintiff has suffered incident
We further certify that these securities may be inspected thereto. Unfortunately for plaintiff, Philfinance was not
by you or your duly authorized representative at any time impleaded as one of the defendants in this case at bar;
during regular banking hours. hence, this Court is without jurisdiction to pronounce
Upon your written instructions we shall undertake judgement against it. (p. 11, Decision)
physical delivery of the above securities fully assigned to WHEREFORE, finding no reversible error in the decision appealed
you should this Denominated Custodianship Receipt from, the same is hereby affirmed in toto. Cost against plaintiff-
remain outstanding in your favor thirty (30) days after its appellant.
maturity. Petitioner moved for reconsideration of the above Decision, without success.
PILIPINAS BANK Hence, this Petition for Review on Certiorari.
(By Elizabeth De Villa After consideration of the allegations contained and issues raised in the
Illegible Signature) pleadings, the Court resolved to give due course to the petition and required the
In 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private respondent parties to file their respective memoranda.7
Pilipinas, Makati Branch, and handed her a demand letter informing the bank that Petitioner reiterates the assignment of errors he directed at the trial court
his placement with Philfinance in the amount reflected in the DCR No. 10805 had decision, and contends that respondent court of Appeals gravely erred: (i) in
remained unpaid and outstanding, and that he in effect was asking for the concluding that he cannot recover from private respondent Delta his assigned
physical delivery of the underlying promissory note. Petitioner then examined the portion of DMC PN No. 2731; (ii) in failing to hold private respondent Pilipinas
original of the DMC PN No. 2731 and found: that the security had been issued on solidarily liable on the DMC PN No. 2731 in view of the provisions stipulated in
10 April 1980; that it would mature on 6 April 1981; that it had a face value of DCR No. 10805 issued in favor r of petitioner, and (iii) in refusing to pierce the veil
P2,300,833.33, with the Philfinance as "payee" and private respondent Delta of corporate entity between Philfinance, and private respondents Delta and
Motors Corporation ("Delta") as "maker;" and that on face of the promissory note Pilipinas, considering that the three (3) entities belong to the "Silverio Group of
was stamped "NON NEGOTIABLE." Pilipinas did not deliver the Note, nor any Companies" under the leadership of Mr. Ricardo Silverio, Sr.8
certificate of participation in respect thereof, to petitioner. There are at least two (2) sets of relationships which we need to address: firstly,
Petitioner later made similar demand letters, dated 3 July 1981 and 3 August the relationship of petitioner vis-a-vis Delta; secondly, the relationship of petitioner
1981,2 again asking private respondent Pilipinas for physical delivery of the in respect of Pilipinas. Actually, of course, there is a third relationship that is of
original of DMC PN No. 2731. Pilipinas allegedly referred all of petitioner's critical importance: the relationship of petitioner and Philfinance. However, since

Philfinance has not been impleaded in this case, neither the trial court nor the
Court of Appeals acquired jurisdiction over the person of Philfinance. It is,
consequently, not necessary for present purposes to deal with this third
relationship, except to the extent it necessarily impinges upon or intersects the
first and second relationships.
I.
We consider first the relationship between petitioner and Delta.
The Court of appeals in effect held that petitioner acquired no rights vis-a-
vis Delta in respect of the Delta promissory note (DMC PN No. 2731) which
Philfinance sold "without recourse" to petitioner, to the extent of P304,533.33.
The Court of Appeals said on this point:
Nor could plaintiff-appellant have acquired any right over DMC PN
No. 2731 as the same is "non-negotiable" as stamped on its face
(Exhibit "6"), negotiation being defined as the transfer of an
instrument from one person to another so as to constitute the
transferee the holder of the instrument (Sec. 30, Negotiable
Instruments Law). A person not a holder cannot sue on the
instrument in his own name and cannot demand or receive payment
(Section 51, id.)9
Petitioner admits that DMC PN No. 2731 was non-negotiable but contends that
the Note had been validly transferred, in part to him by assignment and that as a
result of such transfer, Delta as debtor-maker of the Note, was obligated to pay
petitioner the portion of that Note assigned to him by the payee Philfinance.
Delta, however, disputes petitioner's contention and argues:
(1) that DMC PN No. 2731 was not intended to be negotiated or
otherwise transferred by Philfinance as manifested by the word "non-
negotiable" stamp across the face of the Note10 and because maker
Delta and payee Philfinance intended that this Note would be offset
against the outstanding obligation of Philfinance represented by
Philfinance PN No. 143-A issued to Delta as payee;
(2) that the assignment of DMC PN No. 2731 by Philfinance was
without Delta's consent, if not against its instructions; and
(3) assuming (arguendo only) that the partial assignment in favor of
petitioner was valid, petitioner took the Note subject to the defenses
available to Delta, in particular, the offsetting of DMC PN No. 2731
against Philfinance PN No. 143-A.11
We consider Delta's arguments seriatim.
Firstly, it is important to bear in mind that the negotiation of a negotiable
instrument must be distinguished from the assignment or transfer of an
instrument whether that be negotiable or non-negotiable. Only an instrument
qualifying as a negotiable instrument under the relevant statute may
be negotiated either by indorsement thereof coupled with delivery, or by delivery
alone where the negotiable instrument is in bearer form. A negotiable instrument
may, however, instead of being negotiated, also be assigned or transferred. The
legal consequences of negotiation as distinguished from assignment of a
negotiable instrument are, of course, different. A non-negotiable instrument may,
obviously, not be negotiated; but it may be assigned or transferred, absent an
express prohibition against assignment or transfer written in the face of the
instrument:
The words "not negotiable," stamped on the face of the bill of
lading, did not destroy its assignability, but the sole effect was to
exempt the bill from the statutory provisions relative thereto, and a
bill, though not negotiable, may be transferred by assignment; the
assignee taking subject to the equities between the original
parties.12 (Emphasis added)
DMC PN No. 2731, while marked "non-negotiable," was not at the same time
stamped "non-transferable" or "non-assignable." It contained no stipulation which
prohibited Philfinance from assigning or transferring, in whole or in part, that Note.
Delta adduced the "Letter of Agreement" which it had entered into with
Philfinance and which should be quoted in full:
April 10, 1980
Philippine Underwriters Finance Corp.
Benavidez St., Makati,
Metro Manila.
Attention: Mr. Alfredo O. Banaria
SVP-Treasurer
GENTLEMEN:
This refers to our outstanding placement of P4,601,666.67 as evidenced by your
Promissory Note No. 143-A, dated April 10, 1980, to mature on April 6, 1981.
As agreed upon, we enclose our non-negotiable Promissory Note No. 2730 and
2731 for P2,000,000.00 each, dated April 10, 1980, to be offsetted [sic] against
your PN No. 143-A upon co-terminal maturity.
Please deliver the proceeds of our PNs to our representative, Mr. Eric Castillo.
Very Truly Yours,
(Sgd.)
Florencio B. Biagan
Senior Vice President
We find nothing in his "Letter of Agreement" which can be reasonably construed
as a prohibition upon Philfinance assigning or transferring all or part of DMC PN
No. 2731, before the maturity thereof. It is scarcely necessary to add that, even
had this "Letter of Agreement" set forth an explicit prohibition of transfer upon
Philfinance, such a prohibition cannot be invoked against an assignee or
transferee of the Note who parted with valuable consideration in good faith and
without notice of such prohibition. It is not disputed that petitioner was such an
assignee or transferee. Our conclusion on this point is reinforced by the fact that
what Philfinance and Delta were doing by their exchange of their promissory
notes was this: Delta invested, by making a money market placement with
Philfinance, approximately P4,600,000.00 on 10 April 1980; but promptly, on the
same day, borrowed back the bulk of that placement, i.e., P4,000,000.00, by
issuing its two (2) promissory notes: DMC PN No. 2730 and DMC PN No. 2731,
both also dated 10 April 1980. Thus, Philfinance was left with not P4,600,000.00
but only P600,000.00 in cash and the two (2) Delta promissory notes.
Apropos Delta's complaint that the partial assignment by Philfinance of DMC PN
No. 2731 had been effected without the consent of Delta, we note that such
consent was not necessary for the validity and enforceability of the assignment in
favor of petitioner.14 Delta's argument that Philfinance's sale or assignment of part
of its rights to DMC PN No. 2731 constituted conventional subrogation, which
required its (Delta's) consent, is quite mistaken. Conventional subrogation, which
in the first place is never lightly inferred,15 must be clearly established by the
unequivocal terms of the substituting obligation or by the evident incompatibility of
the new and old obligations on every point.16 Nothing of the sort is present in the
instant case.
It is in fact difficult to be impressed with Delta's complaint, since it released its
DMC PN No. 2731 to Philfinance, an entity engaged in the business of buying
and selling debt instruments and other securities, and more generally, in money
market transactions. In Perez v. Court of Appeals,17 the Court, speaking through
Mme. Justice Herrera, made the following important statement:
There is another aspect to this case. What is involved here is a
money market transaction. As defined by Lawrence Smith "the
money market is a market dealing in standardized short-term credit
instruments (involving large amounts) where lenders and borrowers
do not deal directly with each other but through a middle manor a
dealer in the open market." It involves "commercial papers" which are
instruments "evidencing indebtness of any person or entity. . ., which
are issued, endorsed, sold or transferred or in any manner conveyed
to another person or entity, with or without recourse". The
fundamental function of the money market device in its operation is
to match and bring together in a most impersonal manner both the
"fund users" and the "fund suppliers." The money market is an
"impersonal market", free from personal considerations. "The market
mechanism is intended to provide quick mobility of money and
securities."
Nego Instruments Set 1 (#s1-70) Page 97 of 112
Lumbas. Dadat
The impersonal character of the money market device overlooks the
individuals or entities concerned. The issuer of a commercial paper in
the money market necessarily knows in advance that it would be
expenditiously transacted and transferred to any investor/lender
without need of notice to said issuer. In practice, no notification is
given to the borrower or issuer of commercial paper of the sale or
transfer to the investor.
xxx xxx xxx
There is need to individuate a money market transaction, a relatively
novel institution in the Philippine commercial scene. It has been
intended to facilitate the flow and acquisition of capital on an
impersonal basis. And as specifically required by Presidential Decree
No. 678, the investing public must be given adequate and effective
protection in availing of the credit of a borrower in the commercial
paper market.18(Citations omitted; emphasis supplied)
We turn to Delta's arguments concerning alleged compensation or offsetting
between DMC PN No. 2731 and Philfinance PN No. 143-A. It is important to note
that at the time Philfinance sold part of its rights under DMC PN No. 2731 to
petitioner on 9 February 1981, no compensation had as yet taken place and
indeed none could have taken place. The essential requirements of
compensation are listed in the Civil Code as follows:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be
at the same time a principal creditor of the other;
(2) That both debts consists in a sum of money, or if the things due
are consumable, they be of the same kind, and also of the same
quality if the latter has been stated;
(3) That the two debts are due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the
debtor. (Emphasis supplied)
On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A
was due. This was explicitly recognized by Delta in its 10 April 1980 "Letter of
Agreement" with Philfinance, where Delta acknowledged that the relevant
promissory notes were "to be offsetted (sic) against [Philfinance] PN No. 143-
A upon co-terminal maturity."
As noted, the assignment to petitioner was made on 9 February 1981 or from
forty-nine (49) days before the "co-terminal maturity" date, that is to say, before
any compensation had taken place. Further, the assignment to petitioner would
have prevented compensation had taken place between Philfinance and Delta, to
the extent of P304,533.33, because upon execution of the assignment in favor of
petitioner, Philfinance and Delta would have ceased to be creditors and debtors
of each other in their own right to the extent of the amount assigned by
Philfinance to petitioner. Thus, we conclude that the assignment effected by
Philfinance in favor of petitioner was a valid one and that petitioner accordingly
became owner of DMC PN No. 2731 to the extent of the portion thereof assigned
to him.
The record shows, however, that petitioner notified Delta of the fact of the
assignment to him only on 14 July 1981, 19 that is, after the maturity not only of
the money market placement made by petitioner but also of both DMC PN No.
2731 and Philfinance PN No. 143-A. In other words, petitioner notified Delta of his
rights as assignee after compensation had taken place by operation of law
because the offsetting instruments had both reached maturity. It is a firmly settled
doctrine that the rights of an assignee are not any greater that the rights of the
assignor, since the assignee is merely substituted in the place of the
assignor 20 and that the assignee acquires his rights subject to the equities — i.e.,
the defenses — which the debtor could have set up against the original assignor
before notice of the assignment was given to the debtor. Article 1285 of the Civil
Code provides that:

Art. 1285. The debtor who has consented to the assignment of rights
made by a creditor in favor of a third person, cannot set up against
the assignee the compensation which would pertain to him against
the assignor, unless the assignor was notified by the debtor at the
time he gave his consent, that he reserved his right to the
compensation.
If the creditor communicated the cession to him but the debtor did not
consent thereto, the latter may set up the compensation of
debts previous to the cession, but not of subsequent ones.
If the assignment is made without the knowledge of the debtor, he
may set up the compensation of all credits prior to the same and also
later ones until he had knowledge of the assignment. (Emphasis
supplied)
Article 1626 of the same code states that: "the debtor who, before having
knowledge of the assignment, pays his creditor shall be released from the
obligation." In Sison v. Yap-Tico,21 the Court explained that:
[n]o man is bound to remain a debtor; he may pay to him with whom
he contacted to pay; and if he pay before notice that his debt has
been assigned, the law holds him exonerated, for the reason that it is
the duty of the person who has acquired a title by transfer to demand
payment of the debt, to give his debt or notice.22
At the time that Delta was first put to notice of the assignment in petitioner's favor
on 14 July 1981, DMC PN No. 2731 had already been discharged by
compensation. Since the assignor Philfinance could not have then compelled
payment anew by Delta of DMC PN No. 2731, petitioner, as assignee of
Philfinance, is similarly disabled from collecting from Delta the portion of the Note
assigned to him.
It bears some emphasis that petitioner could have notified Delta of the
assignment or sale was effected on 9 February 1981. He could have notified
Delta as soon as his money market placement matured on 13 March 1981
without payment thereof being made by Philfinance; at that time, compensation
had yet to set in and discharge DMC PN No. 2731. Again petitioner could have
notified Delta on 26 March 1981 when petitioner received from Philfinance the
Denominated Custodianship Receipt ("DCR") No. 10805 issued by private
respondent Pilipinas in favor of petitioner. Petitioner could, in fine, have notified
Delta at any time before the maturity date of DMC PN No. 2731. Because
petitioner failed to do so, and because the record is bare of any indication that
Philfinance had itself notified Delta of the assignment to petitioner, the Court is
compelled to uphold the defense of compensation raised by private respondent
Delta. Of course, Philfinance remains liable to petitioner under the terms of the
assignment made by Philfinance to petitioner.
II.
We turn now to the relationship between petitioner and private respondent
Pilipinas. Petitioner contends that Pilipinas became solidarily liable with
Philfinance and Delta when Pilipinas issued DCR No. 10805 with the following
words:
Upon your written instruction, we [Pilipinas] shall undertake physical
delivery of the above securities fully assigned to you —.23
The Court is not persuaded. We find nothing in the DCR that establishes an
obligation on the part of Pilipinas to pay petitioner the amount of P307,933.33 nor
any assumption of liability in solidum with Philfinance and Delta under DMC PN
No. 2731. We read the DCR as a confirmation on the part of Pilipinas that:
(1) it has in its custody, as duly constituted custodian bank, DMC PN
No. 2731 of a certain face value, to mature on 6 April 1981 and
payable to the order of Philfinance;
(2) Pilipinas was, from and after said date of the assignment by
Philfinance to petitioner (9 February 1981), holding that Note on
behalf and for the benefit of petitioner, at least to the extent it had
been assigned to petitioner by payee Philfinance;24
(3) petitioner may inspect the Note either "personally or by authorized
representative", at any time during regular bank hours; and
(4) upon written instructions of petitioner, Pilipinas would physically
deliver the DMC PN No. 2731 (or a participation therein to the extent
of P307,933.33) "should this Denominated Custodianship receipt
remain outstanding in [petitioner's] favor thirty (30) days after its
maturity."
Thus, we find nothing written in printers ink on the DCR which could reasonably
be read as converting Pilipinas into an obligor under the terms of DMC PN No.
2731 assigned to petitioner, either upon maturity thereof or any other time. We
note that both in his complaint and in his testimony before the trial court,
petitioner referred merely to the obligation of private respondent Pilipinas to effect
the physical delivery to him of DMC PN No. 2731.25 Accordingly, petitioner's
theory that Pilipinas had assumed a solidary obligation to pay the amount
represented by a portion of the Note assigned to him by Philfinance, appears to
be a new theory constructed only after the trial court had ruled against him. The
solidary liability that petitioner seeks to impute Pilipinas cannot, however, be
lightly inferred. Under article 1207 of the Civil Code, "there is a solidary liability
only when the law or the nature of the obligation requires solidarity," The record
here exhibits no express assumption of solidary liability vis-a-vis petitioner, on the
part of Pilipinas. Petitioner has not pointed to us to any law which imposed such
liability upon Pilipinas nor has petitioner argued that the very nature of the
custodianship assumed by private respondent Pilipinas necessarily implies
solidary liability under the securities, custody of which was taken by Pilipinas.
Accordingly, we are unable to hold Pilipinas solidarily liable with Philfinance and
private respondent Delta under DMC PN No. 2731.
We do not, however, mean to suggest that Pilipinas has no responsibility and
liability in respect of petitioner under the terms of the DCR. To the contrary, we
find, after prolonged analysis and deliberation, that private respondent Pilipinas
had breached its undertaking under the DCR to petitioner Sesbreño.
We believe and so hold that a contract of deposit was constituted by the act of
Philfinance in designating Pilipinas as custodian or depositary bank. The
depositor was initially Philfinance; the obligation of the depository was owed,
however, to petitioner Sesbreño as beneficiary of the custodianship or depository
agreement. We do not consider that this is a simple case of a stipulation pour
autri. The custodianship or depositary agreement was established as an integral
part of the money market transaction entered into by petitioner with Philfinance.
Petitioner bought a portion of DMC PN No. 2731; Philfinance as assignor-vendor
deposited that Note with Pilipinas in order that the thing sold would be placed
outside the control of the vendor. Indeed, the constituting of the depositary or
custodianship agreement was equivalent to constructive delivery of the Note (to
the extent it had been sold or assigned to petitioner) to petitioner. It will be seen
that custodianship agreements are designed to facilitate transactions in the
money market by providing a basis for confidence on the part of the investors or
placers that the instruments bought by them are effectively taken out of the
pocket, as it were, of the vendors and placed safely beyond their reach, that
those instruments will be there available to the placers of funds should they have
need of them. The depositary in a contract of deposit is obliged to return the
security or the thing deposited upon demand of the depositor (or, in the presented
case, of the beneficiary) of the contract, even though a term for such return may
have been established in the said contract.26 Accordingly, any stipulation in the
contract of deposit or custodianship that runs counter to the fundamental purpose
of that agreement or which was not brought to the notice of and accepted by the
placer-beneficiary, cannot be enforced as against such beneficiary-placer.
We believe that the position taken above is supported by considerations of public
policy. If there is any party that needs the equalizing protection of the law in
money market transactions, it is the members of the general public whom place
their savings in such market for the purpose of generating interest
revenues.27 The custodian bank, if it is not related either in terms of equity
ownership or management control to the borrower of the funds, or the commercial
paper dealer, is normally a preferred or traditional banker of such borrower or
dealer (here, Philfinance). The custodian bank would have every incentive to
protect the interest of its client the borrower or dealer as against the placer of
Nego Instruments Set 1 (#s1-70) Page 98 of 112
Lumbas. Dadat
funds. The providers of such funds must be safeguarded from the impact of
stipulations privately made between the borrowers or dealers and the custodian
banks, and disclosed to fund-providers only after trouble has erupted.
In the case at bar, the custodian-depositary bank Pilipinas refused to deliver the
security deposited with it when petitioner first demanded physical delivery thereof
on 2 April 1981. We must again note, in this connection, that on 2 April 1981,
DMC PN No. 2731 had not yet matured and therefore, compensation or offsetting
against Philfinance PN No. 143-A had not yet taken place. Instead of complying
with the demand of the petitioner, Pilipinas purported to require and await the
instructions of Philfinance, in obvious contravention of its undertaking under the
DCR to effect physical delivery of the Note upon receipt of "written instructions"
from petitioner Sesbreño. The ostensible term written into the DCR (i.e., "should
this [DCR] remain outstanding in your favor thirty [30] days after its maturity") was
not a defense against petitioner's demand for physical surrender of the Note on at
least three grounds: firstly, such term was never brought to the attention of
petitioner Sesbreño at the time the money market placement with Philfinance was
made; secondly, such term runs counter to the very purpose of the custodianship
or depositary agreement as an integral part of a money market transaction; and
thirdly, it is inconsistent with the provisions of Article 1988 of the Civil Code noted
above. Indeed, in principle, petitioner became entitled to demand physical
delivery of the Note held by Pilipinas as soon as petitioner's money market
placement matured on 13 March 1981 without payment from Philfinance.
We conclude, therefore, that private respondent Pilipinas must respond to
petitioner for damages sustained by arising out of its breach of duty. By failing to
deliver the Note to the petitioner as depositor-beneficiary of the thing deposited,
Pilipinas effectively and unlawfully deprived petitioner of the Note deposited with
it. Whether or not Pilipinas itself benefitted from such conversion or unlawful
deprivation inflicted upon petitioner, is of no moment for present purposes. Prima
facie, the damages suffered by petitioner consisted of P304,533.33, the portion of
the DMC PN No. 2731 assigned to petitioner but lost by him by reason of
discharge of the Note by compensation, plus legal interest of six percent (6%)per
annum containing from 14 March 1981.
The conclusion we have reached is, of course, without prejudice to such right of
reimbursement as Pilipinas may have vis-a-vis Philfinance.
III.
The third principal contention of petitioner — that Philfinance and private
respondents Delta and Pilipinas should be treated as one corporate entity —
need not detain us for long.
In the first place, as already noted, jurisdiction over the person of Philfinance was
never acquired either by the trial court nor by the respondent Court of Appeals.
Petitioner similarly did not seek to implead Philfinance in the Petition before us.
Secondly, it is not disputed that Philfinance and private respondents Delta and
Pilipinas have been organized as separate corporate entities. Petitioner asks us
to pierce their separate corporate entities, but has been able only to cite the
presence of a common Director — Mr. Ricardo Silverio, Sr., sitting on the Board
of Directors of all three (3) companies. Petitioner has neither alleged nor proved
that one or another of the three (3) concededly related companies used the other
two (2) as mere alter egos or that the corporate affairs of the other two (2) were
administered and managed for the benefit of one. There is simply not enough
evidence of record to justify disregarding the separate corporate personalities of
delta and Pilipinas and to hold them liable for any assumed or undetermined
liability of Philfinance to petitioner.28
WHEREFORE, for all the foregoing, the Decision and Resolution of the Court of
Appeals in C.A.-G.R. CV No. 15195 dated 21 march 1989 and 17 July 1989,
respectively, are hereby MODIFIED and SET ASIDE, to the extent that such
Decision and Resolution had dismissed petitioner's complaint against Pilipinas
Bank. Private respondent Pilipinas bank is hereby ORDERED to indemnify
petitioner for damages in the amount of P304,533.33, plus legal interest thereon
at the rate of six percent (6%) per annum counted from 2 April 1981. As so
modified, the Decision and Resolution of the Court of Appeals are hereby
AFFIRMED. No pronouncement as to costs. SO ORDERED.

62. G.R. No. 101163 January 11, 1993
STATE INVESTMENT HOUSE, INC. vs. COURT OF APPEALS and NORA B.
MOULIC
The liability to a holder in due course of the drawer of checks issued to another
merely as security, and the right of a real estate mortgagee after extrajudicial
foreclosure to recover the balance of the obligation, are the issues in this Petition
for Review of the Decision of respondent Court of Appeals.
Private respondent Nora B. Moulic issued to Corazon Victoriano, as security for
pieces of jewelry to be sold on commission, two (2) post-dated Equitable Banking
Corporation checks in the amount of Fifty Thousand Pesos (P50,000.00) each,
one dated 30 August 1979 and the other, 30 September 1979. Thereafter, the
payee negotiated the checks to petitioner State Investment House. Inc. (STATE).
MOULIC failed to sell the pieces of jewelry, so she returned them to the payee
before maturity of the checks. The checks, however, could no longer be retrieved
as they had already been negotiated. Consequently, before their maturity dates,
MOULIC withdrew her funds from the drawee bank.
Upon presentment for payment, the checks were dishonored for insufficiency of
funds. On 20 December 1979, STATE allegedly notified MOULIC of the dishonor
of the checks and requested that it be paid in cash instead, although MOULIC
avers that no such notice was given her.
On 6 October 1983, STATE sued to recover the value of the checks plus
attorney's fees and expenses of litigation.
In her Answer, MOULIC contends that she incurred no obligation on the checks
because the jewelry was never sold and the checks were negotiated without her
knowledge and consent. She also instituted a Third-Party Complaint against
Corazon Victoriano, who later assumed full responsibility for the checks.
On 26 May 1988, the trial court dismissed the Complaint as well as the Third-
Party Complaint, and ordered STATE to pay MOULIC P3,000.00 for attorney's
fees.
STATE elevated the order of dismissal to the Court of Appeals, but the appellate
court affirmed the trial court on the ground that the Notice of Dishonor to MOULIC
was made beyond the period prescribed by the Negotiable Instruments Law and
that even if STATE did serve such notice on MOULIC within the reglementary
period it would be of no consequence as the checks should never have been
presented for payment. The sale of the jewelry was never effected; the checks,
therefore, ceased to serve their purpose as security for the jewelry.
We are not persuaded.
The negotiability of the checks is not in dispute. Indubitably, they were negotiable.
After all, at the pre-trial, the parties agreed to limit the issue to whether or not
STATE was a holder of the checks in due course.1
In this regard, Sec. 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 was 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.
Culled from the foregoing, a prima facie presumption exists that the holder of a
negotiable instrument is a holder in due course.2 Consequently, the burden of
proving that STATE is not a holder in due course lies in the person who disputes
the presumption. In this regard, MOULIC failed.
The evidence clearly shows that: (a) on their faces the post-dated checks were
complete and regular: (b) petitioner bought these checks from the payee,
Corazon Victoriano, before their due dates;3 (c) petitioner took these checks in
good faith and for value, albeit at a discounted price; and, (d) petitioner was never
informed nor made aware that these checks were merely issued to payee as
security and not for value.
Consequently, STATE is indeed a holder in due course. As such, it holds the
instruments free from any defect of title of prior parties, and from defenses
available to prior parties among themselves; STATE may, therefore, enforce full
payment of the checks.4
MOULIC cannot set up against STATE the defense that there was failure or
absence of consideration. MOULIC can only invoke this defense against STATE if
it was privy to the purpose for which they were issued and therefore is not a
holder in due course.
That the post-dated checks were merely issued as security is not a ground for the
discharge of the instrument as against a holder in due course. For the only
grounds are those outlined in Sec. 119 of the Negotiable Instruments Law:
Sec. 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.
Obviously, MOULIC may only invoke paragraphs (c) and (d) as possible grounds
for the discharge of the instrument. But, the intentional cancellation contemplated
under paragraph (c) is that cancellation effected by destroying the instrument
either by tearing it up,5 burning it,6 or writing the word "cancelled" on the
instrument. The act of destroying the instrument must also be made by the holder
of the instrument intentionally. Since MOULIC failed to get back possession of the
post-dated checks, the intentional cancellation of the said checks is altogether
impossible.
On the other hand, the acts which will discharge a simple contract for the
payment of money under paragraph (d) are determined by other existing
legislations since Sec. 119 does not specify what these acts are, e.g., Art. 1231 of
the Civil Code7 which enumerates the modes of extinguishing obligations. Again,
none of the modes outlined therein is applicable in the instant case as Sec. 119
contemplates of a situation where the holder of the instrument is the creditor while
its drawer is the debtor. In the present action, the payee, Corazon Victoriano, was
no longer MOULIC's creditor at the time the jewelry was returned.
Correspondingly, MOULIC may not unilaterally discharge herself from her liability
by the mere expediency of withdrawing her funds from the drawee bank. She is
thus liable as she has no legal basis to excuse herself from liability on her checks
to a holder in due course.
Moreover, the fact that STATE failed to give Notice of Dishonor to MOULIC is of
no moment. The need for such notice is not absolute; there are exceptions under
Sec. 114 of the Negotiable Instruments Law:
Sec. 114. When notice need not be given to drawer. — Notice of
dishonor is not required to be given to the drawer in the following
cases: (a) Where the drawer and the drawee are the same person;
(b) When the drawee is a fictitious person or a person not having
capacity to contract; (c) When the drawer is the person to whom the
instrument is presented for payment: (d) Where the drawer has no
right to expect or require that the drawee or acceptor will honor the
instrument; (e) Where the drawer had countermanded payment.
Indeed, MOULIC'S actuations leave much to be desired. She did not retrieve the
checks when she returned the jewelry. She simply withdrew her funds from her
drawee bank and transferred them to another to protect herself. After withdrawing
her funds, she could not have expected her checks to be honored. In other words,
she was responsible for the dishonor of her checks, hence, there was no need to
serve her Notice of Dishonor, which is simply bringing to the knowledge of the
drawer or indorser of the instrument, either verbally or by writing, the fact that a
specified instrument, upon proper proceedings taken, has not been accepted or
has not been paid, and that the party notified is expected to pay it.8
In addition, the Negotiable Instruments Law was enacted for the purpose of
facilitating, not hindering or hampering transactions in commercial paper. Thus,
Nego Instruments Set 1 (#s1-70) Page 99 of 112
Lumbas. Dadat
the said statute should not be tampered with haphazardly or lightly. Nor should it
be brushed aside in order to meet the necessities in a single case.9
The drawing and negotiation of a check have certain effects aside from the
transfer of title or the incurring of liability in regard to the instrument by the
transferor. The holder who takes the negotiated paper makes a contract with the
parties on the face of the instrument. There is an implied representation that
funds or credit are available for the payment of the instrument in the bank upon
which it is drawn.10 Consequently, the withdrawal of the money from the drawee
bank to avoid liability on the checks cannot prejudice the rights of holders in due
course. In the instant case, such withdrawal renders the drawer, Nora B. Moulic,
liable to STATE, a holder in due course of the checks.
Under the facts of this case, STATE could not expect payment as MOULIC left no
funds with the drawee bank to meet her obligation on the checks,11 so that Notice
of Dishonor would be futile.
The Court of Appeals also held that allowing recovery on the checks would
constitute unjust enrichment on the part of STATE Investment House, Inc. This is
error.
The record shows that Mr. Romelito Caoili, an Account Assistant, testified that the
obligation of Corazon Victoriano and her husband at the time their property
mortgaged to STATE was extrajudicially foreclosed amounted to P1.9 million; the
bid price at public auction was only P1 million.12 Thus, the value of the property
foreclosed was not even enough to pay the debt in full.
Where the proceeds of the sale are insufficient to cover the debt in an
extrajudicial foreclosure of mortgage, the mortgagee is entitled to claim the
deficiency from the debtor.13 The step thus taken by the mortgagee-bank in
resorting to an extra-judicial foreclosure was merely to find a proceeding for the
sale of the property and its action cannot be taken to mean a waiver of its right to
demand payment for the whole debt.14 For, while Act 3135, as amended, does
not discuss the mortgagee's right to recover such deficiency, it does not contain
any provision either, expressly or impliedly, prohibiting recovery. In this
jurisdiction, when the legislature intends to foreclose the right of a creditor to sue
for any deficiency resulting from foreclosure of a security given to guarantee an
obligation, it so expressly provides. For instance, with respect to pledges, Art.
2115 of the Civil Code15 does not allow the creditor to recover the deficiency from
the sale of the thing pledged. Likewise, in the case of a chattel mortgage, or a
thing sold on installment basis, in the event of foreclosure, the vendor "shall have
no further action against the purchaser to recover any unpaid balance of the
price. Any agreement to the contrary will be void".16
It is clear then that in the absence of a similar provision in Act No. 3135, as
amended, it cannot be concluded that the creditor loses his right recognized by
the Rules of Court to take action for the recovery of any unpaid balance on the
principal obligation simply because he has chosen to extrajudicially foreclose the
real estate mortgage pursuant to a Special Power of Attorney given him by the
mortgagor in the contract of mortgage.17
The filing of the Complaint and the Third-Party Complaint to enforce the checks
against MOULIC and the VICTORIANO spouses, respectively, is just another
means of recovering the unpaid balance of the debt of the VICTORIANOs.
In fine, MOULIC, as drawer, is liable for the value of the checks she issued to the
holder in due course, STATE, without prejudice to any action for recompense she
may pursue against the VICTORIANOs as Third-Party Defendants who had
already been declared as in default.
WHEREFORE, the petition is GRANTED. The decision appealed from is
REVERSED and a new one entered declaring private respondent NORA B.
MOULIC liable to petitioner STATE INVESTMENT HOUSE, INC., for the value of
EBC Checks Nos. 30089658 and 30089660 in the total amount of P100,000.00,
P3,000.00 as attorney's fees, and the costs of suit, without prejudice to any action
for recompense she may pursue against the VICTORIANOs as Third-Party
Defendants. Costs against private respondent. SO ORDERED.
63. G.R. No. 100290 June 4, 1993

NORBERTO TIBAJIA, JR. and CARMEN TIBAJIA vs. THE HONORABLE
COURT OF APPEALS and EDEN TAN
Petitioners, spouses Norberto Tibajia, Jr. and Carmen Tibajia, are before this
Court assailing the decision * of respondent appellate court dated 24 April 1991 in
CA-G.R. SP No. 24164 denying their petition for certiorari prohibition, and
injunction which sought to annul the order of Judge Eutropio Migriño of the
Regional Trial Court, Branch 151, Pasig, Metro Manila in Civil Case No. 54863
entitled "Eden Tan vs. Sps. Norberto and Carmen Tibajia."
Stated briefly, the relevant facts are as follows:
Case No. 54863 was a suit for collection of a sum of money filed by Eden Tan
against the Tibajia spouses. A writ of attachment was issued by the trial court on
17 August 1987 and on 17 September 1987, the Deputy Sheriff filed a return
stating that a deposit made by the Tibajia spouses in the Regional Trial Court of
Kalookan City in the amount of Four Hundred Forty Two Thousand Seven
Hundred and Fifty Pesos (P442,750.00) in another case, had been garnished by
him. On 10 March 1988, the Regional Trial Court, Branch 151 of Pasig, Metro
Manila rendered its decision in Civil Case No. 54863 in favor of the plaintiff Eden
Tan, ordering the Tibajia spouses to pay her an amount in excess of Three
Hundred Thousand Pesos (P300,000.00). On appeal, the Court of Appeals
modified the decision by reducing the award of moral and exemplary damages.
The decision having become final, Eden Tan filed the corresponding motion for
execution and thereafter, the garnished funds which by then were on deposit with
the cashier of the Regional Trial Court of Pasig, Metro Manila, were levied upon.
On 14 December 1990, the Tibajia spouses delivered to Deputy Sheriff Eduardo
Bolima the total money judgment in the following form:
Cashier's Check P262,750.00
Cash 135,733.70
————
Total P398,483.70
Private respondent, Eden Tan, refused to accept the payment made by the
Tibajia spouses and instead insisted that the garnished funds deposited with the
cashier of the Regional Trial Court of Pasig, Metro Manila be withdrawn to satisfy
the judgment obligation. On 15 January 1991, defendant spouses (petitioners)
filed a motion to lift the writ of execution on the ground that the judgment debt had
already been paid. On 29 January 1991, the motion was denied by the trial court
on the ground that payment in cashier's check is not payment in legal tender and
that payment was made by a third party other than the defendant. A motion for
reconsideration was denied on 8 February 1991. Thereafter, the spouses Tibajia
filed a petition for certiorari, prohibition and injunction in the Court of Appeals. The
appellate court dismissed the petition on 24 April 1991 holding that payment by
cashier's check is not payment in legal tender as required by Republic Act No.
529. The motion for reconsideration was denied on 27 May 1991.
In this petition for review, the Tibajia spouses raise the following issues:
I WHETHER OR NOT THE BPI CASHIER'S CHECK NO. 014021 IN
THE AMOUNT OF P262,750.00 TENDERED BY PETITIONERS
FOR PAYMENT OF THE JUDGMENT DEBT, IS "LEGAL TENDER".
II WHETHER OR NOT THE PRIVATE RESPONDENT MAY
VALIDLY REFUSE THE TENDER OF PAYMENT PARTLY IN
CHECK AND PARTLY IN CASH MADE BY PETITIONERS, THRU
AURORA VITO AND COUNSEL, FOR THE SATISFACTION OF
THE MONETARY OBLIGATION OF PETITIONERS-SPOUSES.1
The only issue to be resolved in this case is whether or not payment by means of
check (even by cashier's check) is considered payment in legal tender as
required by the Civil Code, Republic Act No. 529, and the Central Bank Act.
It is contended by the petitioners that the check, which was a cashier's check of
the Bank of the Philippine Islands, undoubtedly a bank of good standing and
reputation, and which was a crossed check marked "For Payee's Account Only"
and payable to private respondent Eden Tan, is considered legal tender, payment
with which operates to discharge their monetary obligation.2 Petitioners, to
support their contention, cite the case of New Pacific Timber and Supply Co., Inc.
v. Señeris3 where this Court held through Mr. Justice Hermogenes Concepcion,
Jr. that "It is a well-known and accepted practice in the business sector that a
cashier's check is deemed as cash".
The provisions of law applicable to the case at bar are the following:
a. Article 1249 of the Civil Code which 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.
The delivery of promissory notes payable to order, or bills of
exchange or other mercantile documents shall produce the effect of
payment only when they have been cashed, or when through the
fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall
be held in abeyance.;
b. Section 1 of Republic Act No. 529, as amended, which provides:
Sec. 1. Every provision contained in, or made with respect to, any
obligation which purports to give the obligee the right to require
payment in gold or in any particular kind of coin or currency other
than Philippine currency or in an amount of money of the Philippines
measured thereby, shall be as it is hereby declared against public
policy null and void, and of no effect, and no such provision shall be
contained in, or made with respect to, any obligation thereafter
incurred. Every obligation heretofore and hereafter incurred, whether
or not any such provision as to payment is contained therein or made
with respect thereto, shall be discharged upon payment in any coin
or currency which at the time of payment is legal tender for public
and private debts.
c. Section 63 of Republic Act No. 265, as amended (Central Bank Act) which
provides:
Sec. 63. Legal character — Checks representing deposit money do
not have legal tender power and their acceptance in the payment of
debts, both public and private, is at the option of the creditor:
Provided, however, that a check which has been cleared and
credited to the account of the creditor shall be equivalent to a
delivery to the creditor of cash in an amount equal to the amount
credited to his account.
From the aforequoted provisions of law, it is clear that this petition must fail.
In the recent cases of Philippine Airlines, Inc. vs. Court of Appeals4 and Roman
Catholic Bishop of Malolos, Inc. vs. Intermediate Appellate Court,5 this Court held
that —
A check, whether a manager's check or ordinary check, is not legal
tender, and an offer of a check in payment of a debt is not a valid
tender of payment and may be refused receipt by the obligee or
creditor.
The ruling in these two (2) cases merely applies the statutory provisions which lay
down the rule that a check is not legal tender and that a creditor may validly
refuse payment by check, whether it be a manager's, cashier's or personal check.
Petitioners erroneously rely on one of the dissenting opinions in the Philippine
Airlines case6 to support their cause. The dissenting opinion however does not in
any way support the contention that a check is legal tender but, on the contrary,
states that "If the PAL checks in question had not been encashed by Sheriff
Reyes, there would be no payment by PAL and, consequently, no discharge or
satisfaction of its judgment obligation."7 Moreover, the circumstances in
the Philippine Airlines case are quite different from those in the case at bar for in
that case the checks issued by the judgment debtor were made payable to the
sheriff, Emilio Z. Reyes, who encashed the checks but failed to deliver the
proceeds of said encashment to the judgment creditor.
In the more recent case of Fortunado vs. Court of Appeals,8 this Court stressed
that, "We are not, by this decision, sanctioning the use of a check for the payment
of obligations over the objection of the creditor."
WHEREFORE, the petition is DENIED. The appealed decision is hereby
AFFIRMED, with costs against the petitioners. SO ORDERED.
Nego Instruments Set 1 (#s1-70) Page 100 of 112
Lumbas. Dadat
64. G.R. No. 198660 October 23, 2013
TING TING PUA vs. SPOUSES BENITO LO BUN TIONG and CAROLINE SIOK
CHING TENG
Under consideration is the Motion for Reconsideration interposed by petitioner
Ting Ting Pua Pua) of our Resolution dated April 18, 2012 effectively affirming the
Decision1 and Resolution2 dated March 31, 2011 and September 26, 2011,
respectively, of the Court of Appeals CA) In CA- G.R. CV No. 93755, which, in
turn, reversed the Decision of the Regional Trial Court RTC) of the City of Manila,
Branch 29 in Civil Case No. 97-83027.
As culled from the adverted R TC Decision, as adopted for the most part by the
CA, the antecedent facts may be summarized as follows:
The controversy arose from a Complaint for a Sum of Money3 filed by petitioner
Pua against respondent-spouses Benito Lo Bun Tiong Benito) and Caroline Siok
Ching Teng Caroline). In the complaint, Pua prayed that, among other things,
respondents, or then defendants, pay Pua the amount eight million five hundred
thousand pesos (PhP 8,500,000), covered by a check. (Exhibit "A," for plaintiff)
During trial, petitioner Pua clarified that the PhP 8,500,000 check was given by
respondents to pay the loans they obtained from her under a compounded
interest agreement on various dates in 1988.4 As Pua narrated, her sister, Lilian
Balboa (Lilian), vouched for respondents’ ability to pay so that when respondents
approached her, she immediately acceded and lent money to respondents
without requiring any collateral except post-dated checks bearing the borrowed
amounts.5 In all, respondents issued 176 checks for a total amount of one million
nine hundred seventy-five thousand pesos (PhP 1,975,000). These checks were
dishonored upon presentment to the drawee bank.7
As a result of the dishonor, petitioner demanded payment. Respondents,
however, pleaded for more time because of their financial difficulties.8 Petitioner
Pua obliged and simply reminded the respondents of their indebtedness from
time to time.9
Sometime in September 1996, when their financial situation turned better,
respondents allegedly called and asked petitioner Pua for the computation of their
loan obligations.10 Hence, petitioner handed them a computation dated October 2,
199611 which showed that, at the agreed 2% compounded interest rate per
month, the amount of the loan payable to petitioner rose to thirteen million two
hundred eighteen thousand five hundred forty-four pesos and 20/100 (PhP
13,218,544.20).12 On receiving the computation, the respondents asked petitioner
to reduce their indebtedness to PhP 8,500,000.13 Wanting to get paid the soonest
possible time, petitioner Pua agreed to the lowered amount.14
Respondents then delivered to petitioner Asiatrust Check No. BND057750
bearing the reduced amount of PhP 8,500,000 dated March 30, 1997 with the
assurance that the check was good.15 In turn, respondents demanded the return
of the 17 previously dishonored checks. Petitioner, however, refused to return the
bad checks and advised respondents that she will do so only after the
encashment of Asiatrust Check No. BND057750.16
Like the 17 checks, however, Check No. BND057750 was also dishonored when
it was presented by petitioner to the drawee bank. Hence, as claimed by
petitioner, she decided to file a complaint to collect the money owed her by
respondents.
For the defense, both respondents Caroline and Benito testified along with Rosa
Dela Cruz Tuazon (Tuazon), who was the OIC-Manager of Asiatrust-Binondo
Branch in 1997. Respondents categorically denied obtaining a loan from
petitioner.17 Respondent Caroline, in particular, narrated that, in August 1995, she
and petitioner’s sister, Lilian, forged a partnership that operated a mahjong
business. Their agreement was for Lilian to serve as the capitalist while
respondent Caroline was to act as the cashier. Caroline also agreed to use her
personal checks to pay for the operational expenses including the payment of the
winners of the games.18 As the partners anticipated that Caroline will not always
be in town to prepare these checks, she left with Lilian five (5) pre-signed and
consecutively numbered checks19 on the condition that these checks will only be

used to cover the costs of the business operations and in no circumstance will the
amount of the checks exceed PhP 5,000.20
In March 1996, however, respondent Caroline and Lilian had a serious
disagreement that resulted in the dissolution of their partnership and the
cessation of their business. In the haste of the dissolution and as a result of their
bitter separation, respondent Caroline alleged that she forgot about the five (5)
pre-signed checks she left with Lilian.21 It was only when Lilian’s husband,
Vicente Balboa (Vicente), filed a complaint for sum of money in February 1997
against respondents to recover five million one hundred seventy-five thousand
two hundred fifty pesos (PhP 5,175,250), covering three of the five post-dated
and pre-signed checks.22
Respondent Caroline categorically denied having completed Check No.
BND057750 by using a check writer or typewriter as she had no check writer and
she had always completed checks in her own handwriting.23 She insisted that
petitioner and her sister completed the check after its delivery.24 Furthermore, she
could not have gone to see petitioner Pua with her husband as they had been
separated in fact for nearly 10 years.25 As for the 17 checks issued by her in
1988, Caroline alleged that they were not intended for Pua but were issued for
the benefit of other persons.26 Caroline postulated that the complaint is designed
to allow Pua’s sister, Lilian, to recover her losses in the foreign exchange
business she had with Caroline in the 1980s. Respondent Benito corroborated
Caroline’s testimony respecting their almost a decade separation.27 As such, he
could not have had accompanied his wife to see petitioner to persuade the latter
to lower down any alleged indebtedness.28 In fact, Benito declared, before the
filing of the Complaint, he had never met petitioner Pua, let alone approached her
with his wife to borrow money.29He claimed that he was impleaded in the case to
attach his property and force him to enter into an amicable settlement with
petitioner.30 Benito pointed out that Check No. BND057750 was issued under
Asiatrust Account No. 5513-0054-9, which is solely under the name of his wife.31
The witness for the respondents, Ms. Tuazon, testified that respondent Caroline
opened Asiatrust Account No. 5513-0054-9 in September 1994.32 She claimed
that the average maintaining balance of respondent Caroline was PhP 2,000 and
the highest amount issued by Caroline from her account was PhP 435,000.33 She
maintained that respondent Caroline had always completed her checks with her
own handwriting and not with a check writer. On October 15, 1996, Caroline’s
checking account was closed at the instance of the bank due to 69 instances of
check issuance against insufficient balance.34
After trial, the RTC issued its Decision dated January 31, 2006 in favor of
petitioner. In holding thus, the RTC stated that the possession by petitioner of the
checks signed by Caroline, under the Negotiable Instruments Law, raises the
presumption that they were issued and delivered for a valuable consideration. On
the other hand, the court a quo discounted the testimony for the defense
completely denying respondents’ loan obligation to Pua.35
The trial court, however, refused to order respondents to pay petitioner the
amount of PhP 8,500,000 considering that the agreement to pay interest on the
loan was not expressly stipulated in writing by the parties. The RTC, instead,
ordered respondents to pay the principal amount of the loan as represented by
the 17 checks plus legal interest from the date of demand. As rectified,36 the
dispositive portion of RTC’s Decision reads:
Defendant-spouses Benito Lo Bun Tiong and Caroline Siok Ching Teng, are
hereby ordered jointly and solidarily:
1. To pay plaintiff ₱1,975,000.00 plus 12% interest per annum from
September 30, 1998, until fully paid;
2. To pay plaintiff attorney’s fees of ₱200,000.00; and
3. To pay the costs of the suit.
Aggrieved, respondents went to the CA arguing that the court a quo erred in
finding that they obtained and are liable for a loan from petitioner. To
respondents, petitioner has not sufficiently proved the existence of the loan that
they supposedly acquired from her way back in the late 1980s by any written
agreement or memorandum.
By Decision of March 31, 2011, as reiterated in a Resolution dated September
26, 2011, the appellate court set aside the RTC Decision holding that Asiatrust
Bank Check No. BND057550 was an incomplete delivered instrument and that
petitioner has failed to prove the existence of respondents’ indebtedness to her.
Hence, the CA added, petitioner does not have a cause of action against
respondents.37
Hence, petitioner came to this Court via a Petition for Review on
Certiorari38 alleging grievous reversible error on the part of the CA in reversing the
findings of the court a quo.
As adverted to at the outset, the Court, in a Minute Resolution dated April 18,
2012, resolved to deny the petition.39
In this Motion for Reconsideration,40 petitioner pleads that this Court take a
second hard look on the facts and issues of the present case and affirm the
RTC’s case disposition. Petitioner argues, in the main, that the finding of the
appellate court that petitioner has not established respondents’ indebtedness to
her is not supported by the evidence on record and is based solely on
respondents’ general denial of liability.
Respondents, on the other hand, argued in their Comment on the Motion for
Reconsideration dated October 6, 2012 that the CA correctly ruled that Asiatrust
Check No. BND057550 is an incomplete instrument which found its way into
petitioner’s hands and that the petitioner failed to prove respondents’
indebtedness to her. Petitioner, so respondents contend, failed to show to whom
the 17 1988 checks were delivered, for what consideration or purpose, and under
whose account said checks were deposited or negotiated.
Clearly, the issue in the present case is factual in nature as it involves an inquiry
into the very existence of the debt supposedly owed by respondents to petitioner.
The general rule is that this Court in petitions for review on certiorari only
concerns itself with questions of law, not of fact,41 the resolution of factual issues
being the primary function of lower courts.42 However, several exceptions have
been laid down by jurisprudence to allow the scrutiny of the factual arguments
advanced by the contending parties, viz: (1) the conclusion is grounded on
speculations, surmises or conjectures; (2) the inference is manifestly mistaken,
absurd or impossible ; (3) there is grave abuse of discretion; (4) the judgment is
based on a misapprehension of facts; (5) the findings of fact are conflicting ; (6)
there is no citation of specific evidence on which the factual findings are based;
(7) the findings of absence of fact are contradicted by the presence of evidence
on record ; (8) the findings of the CA are contrary to those of the trial court ; (9)
the CA manifestly overlooked certain relevant and undisputed facts that, if
properly considered, would justify a different conclusion ; (10) the findings of the
CA are beyond the issues of the case; and (11) such findings are contrary to the
admissions of both parties.43 At the very least, therefore, the inconsonance of the
findings of the RTC and the CA regarding the existence of the loan sanctions the
recalibration of the evidence presented by the parties before the trial court.
In the main, petitioner asserts that respondents owed her a sum of money way
back in 1988 for which the latter gave her several checks. These checks,
however, had all been dishonored and petitioner has not been paid the amount of
the loan plus the agreed interest. In 1996, respondents approached her to get the
computation of their liability including the 2% compounded interest. After
bargaining to lower the amount of their liability, respondents supposedly gave her
a postdated check bearing the discounted amount of the money they owed to
petitioner. Like the 1988 checks, the drawee bank likewise dishonored this check.
To prove her allegations, petitioner submitted the original copies of the 17 checks
issued by respondent Caroline in 1988 and the check issued in 1996, Asiatrust
Check No. BND057750. In ruling in her favor, the RTC sustained the version of
the facts presented by petitioner.
Respondents, on the other hand, completely deny the existence of the debt
asserting that they had never approached petitioner to borrow money in 1988 or
in 1996. They hypothesize, instead, that petitioner Pua is simply acting at the
instance of her sister, Lilian, to file a false charge against them using a check left
to fund a gambling business previously operated by Lilian and respondent
Nego Instruments Set 1 (#s1-70) Page 101 of 112
Lumbas. Dadat
Caroline. While not saying so in express terms, the appellate court considered
respondents’ denial as worthy of belief.
After another circumspect review of the records of the present case, however, this
Court is inclined to depart from the findings of the CA.
Certainly, in a suit for a recovery of sum of money, as here, the plaintiff-creditor
has the burden of proof to show that defendant had not paid her the amount of
the contracted loan. However, it has also been long established that where the
plaintiff-creditor possesses and submits in evidence an instrument showing the
indebtedness, a presumption that the credit has not been satisfied arises in her
favor. Thus, the defendant is, in appropriate instances, required to overcome the
said presumption and present evidence to prove the fact of payment so that no
judgment will be entered against him.44
In overruling the trial court, however, the CA opined that petitioner "failed to
establish [the] alleged indebtedness in writing."45 Consequently, so the CA held,
respondents were under no obligation to prove their defense. Clearly, the CA had
discounted the value of the only hard pieces of evidence extant in the present
case—the checks issued by respondent Caroline in 1988 and 1996 that were in
the possession of, and presented in court by, petitioner.
In Pacheco v. Court of Appeals,46 this Court has expressly recognized that a
check "constitutes an evidence of indebtedness"47 and is a veritable "proof of an
obligation."48 Hence, it can be used "in lieu of and for the same purpose as a
promissory note."49 In fact, in the seminal case of Lozano v. Martinez,50 We
pointed out that a check functions more than a promissory note since it not only
contains an undertaking to pay an amount of money but is an "order addressed to
a bank and partakes of a representation that the drawer has funds on deposit
against which the check is drawn, sufficient to ensure payment upon its
presentation to the bank."51 This Court reiterated this rule in the relatively recent
Lim v. Mindanao Wines and Liquour Galleria stating that "a check, the entries of
which are in writing, could prove a loan transaction." 52 This very same principle
underpins Section 24 of the Negotiable Instruments Law (NIL):
Section 24. Presumption of consideration. – Every negotiable instrument is
deemed prima facie to have been issued for a valuable consideration; and every
person whose signature appears thereon to have become a party for value.
Consequently, the 17 original checks, completed and delivered to petitioner, are
sufficient by themselves to prove the existence of the loan obligation of the
respondents to petitioner. Note that respondent Caroline had not denied the
genuineness of these checks.53 Instead, respondents argue that they were given
to various other persons and petitioner had simply collected all these 17 checks
from them in order to damage respondents’ reputation.54 This account is not only
incredible; it runs counter to human experience, as enshrined in Sec. 16 of the
NIL which provides that when an instrument is no longer in the possession of the
person who signed it and it is complete in its terms "a valid and intentional
delivery by him is presumed until the contrary is proved."
The appellate court’s justification in giving credit to respondents’ contention that
the respondents had delivered the 17 checks to persons other than petitioner lies
on the supposed failure of petitioner "to establish for whose accounts [the checks]
were deposited and subsequently dishonored."55 This is clearly contrary to the
evidence on record. It seems that the appellate court overlooked the original
copies of the bank return slips offered by petitioner in evidence. These return
slips show that the 1988 checks issued by respondent Caroline were dishonored
by the drawee banks because they were "drawn against insufficient
funds."56 Further, a close scrutiny of these return slips will reveal that the checks
were deposited either in petitioner’s account57 or in the account of her brother,
Ricardo Yulo—a fact she had previously testified to explaining that petitioner
indorsed some checks to her brother to pay for a part of the capital she used in
her financing business.58
As for the Asiatrust check issued by respondent Caroline in 1996 to substitute the
compounded value of the 1988 checks, the appellate court likewise sympathized
with respondents’ version of the story holding that it is buttressed by respondents’
allegations describing the same defense made in the two related cases filed
against them by petitioner’s brother-in-law, Vicente Balboa.1âwphi1 These

related cases consisted of a criminal case for violation of BP 2259and a civil case
for collection of sum of money60 involving three (3) of the five (5) consecutively
numbered checks she allegedly left with Lilian.61 It should be noted, however, that
while respondents were exculpated from their criminal liability,62 in Sps. Benito Lo
Bun Tiong and Caroline Siok Ching Teng v. Vicente Balboa,63 this Court
sustained the factual findings of the appellate court in the civil case finding
respondents civilly liable to pay the amount of the checks.
It bears to note that the Decision of the appellate court categorically debunked the
same defense advanced by respondents in the present case primarily because of
Caroline’s admission to the contrary. The Decision of the appellate court found
without any reversible error by this Court reads, thus:
The claim of Caroline Siok Ching Teng that the three (3) checks were part of the
blank checks she issued and delivered to Lilian Balboa, wife of plaintiff-appellee,
and intended solely for the operational expenses of their mahjong business is
belied by her admission that she issued three (3) checks (Exhs. "A", "B" "C")
because Vicente showed the listing of their account totaling ₱5,175,250.00 (TSN,
November 17, 1997, p. 10).64 x x x
Clearly, respondents’ defense that Caroline left blank checks with petitioner’s
sister who, it is said, is now determined to recoup her past losses and bring
financial ruin to respondents by falsifying the same blank checks, had already
been thoroughly passed upon and rejected by this Court. It cannot, therefore, be
used to support respondents’ denial of their liability.
Respondents’ other defenses are equally unconvincing. They assert that
petitioner could not have accepted a check worth PhP 8.5 million considering that
she should have known that respondent Caroline had issued several checks for
PhP 25,000 each in favor of Lilian and all of them had bounced.65 Needless to
state, an act done contrary to law cannot be sustained to defeat a legal obligation;
repeated failure to honor obligations covered by several negotiable instruments
cannot serve to defeat yet another obligation covered by another instrument.
Indeed, it seems that respondent Caroline had displayed a cavalier attitude
towards the value, and the obligation concomitant with the issuance, of a check.
As attested to by respondents’ very own witness, respondent Caroline has a
documented history of issuing insufficiently funded checks for 69 times, at the
very least.66 This fact alone bolsters petitioner’s allegation that the checks
delivered to her by respondent Caroline were similarly not funded.
In Magdiwang Realty Corp. v. Manila Banking Corp., We stressed that the
quantum of evidence required in civil cases—preponderance of evidence—"is a
phrase which, in the last analysis, means probability to truth. It is evidence which
is more convincing to the court as worthier of belief than that which is offered in
opposition thereto."67 Based on the evidence submitted by the parties and the
legal presumptions arising therefrom, petitioner’s evidence outweighs that of
respondents. This preponderance of evidence in favor of Pua requires that a
judgment ordering respondents to pay their obligation be entered.
As aptly held by the court a quo, however, respondents cannot be obliged to pay
the interest of the loan on the ground that the supposed agreement to pay such
interest was not reduced to writing. Article 1956 of the Civil Code, which refers to
monetary interest, specifically mandates that no interest shall be due unless it has
been expressly stipulated in writing.68 Thus, the collection of interest in loans or
forbearance of money is allowed only when these two conditions concur: (1) there
was an express stipulation for the payment of interest; (2) the agreement for the
payment of the interest was reduced in writing.69 Absent any of these two
conditions, the money debtor cannot be made liable for interest. Thus, petitioner
is entitled only to the principal amount of the loan plus the allowable legal interest
from the time of the demand,70 at the rate of 6% per annum.71
Respondent Benito cannot escape the joint and solidary liability to pay the loan
on the ground that the obligation arose from checks solely issued by his wife.
Without any evidence to the contrary, it is presumed that the proceeds of the loan
redounded to the benefit of their family. Hence, the conjugal partnership is liable
therefor.72 The unsupported allegation that respondents were separated in fact,
standing alone, does not persuade this Court to solely bind respondent Caroline
and exempt Benito. As the head of the family, there is more reason that
respondent Benito should answer for the liability incurred by his wife presumably
in support of their family.
WHEREFORE, the Motion for Reconsideration is GRANTED. The Resolution of
this Court dated April 18, 2012 is set aside and a new one entered REVERSING
and SETTING ASIDE the Decision dated March 31, 2011 and the Resolution
dated September 26, 2011 of the Court of Appeals in CA-G.R. CV No. 93755.
The Decision in Civil Case No. 97-83027 of the Regional Trial Court (RTC) of the
City of Manila, Branch 29 is REINSTATED with MODIFICATION.
Accordingly, respondents Benito Lo Bun Tiong and Caroline Siok Ching Teng are
ordered jointly and solidarily to pay petitioner PhP 1,975,000 plus 6% interest per
annum from April 18, 1997, until fully paid, and ₱200,000.00 as attorney’s fees.
SO ORDERED.
65. G.R. No. 93397 March 3, 1997
TRADERS ROYAL BANK vs. COURT OF APPEALS, FILRITERS GUARANTY
ASSURANCE CORPORATION and CENTRAL BANK of the PHILIPPINES
Assailed in this Petition for Review on Certiorari is the Decision of the respondent
Court of Appeals dated January 29, 1990,1 affirming the nullity of the transfer of
Central Bank Certificate of Indebtedness (CBCI) No. D891,2 with a face value of
P500,000.00, from the Philippine Underwriters Finance Corporation (Philfinance)
to the petitioner Trader's Royal Bank (TRB), under a Repurchase
Agreement3 dated February 4, 1981, and a Detached Assignment4dated April 27,
1981.
Docketed as Civil Case No. 83-17966 in the Regional Trial Court of Manila,
Branch 32, the action was originally filed as a Petition for Mandamus5 under Rule
65 of the Rules of Court, to compel the Central Bank of the Philippines to register
the transfer of the subject CBCI to petitioner Traders Royal Bank (TRB).
In the said petition, TRB stated that:
3. On November 27, 1979, Filriters Guaranty Assurance Corporation (Filriters)
executed a "Detached Assignment" . . ., whereby Filriters, as registered owner,
sold, transferred, assigned and delivered unto Philippine Underwriters Finance
Corporation (Philfinance) all its rights and title to Central Bank Certificates of
Indebtedness of PESOS: FIVE HUNDRED THOUSAND (P500,000) and having
an aggregate value of PESOS: THREE MILLION FIVE HUNDRED THOUSAND
(P3,500,000.00);
4. The aforesaid Detached Assignment (Annex "A") contains an express
authorization executed by the transferor intended to complete the assignment
through the registration of the transfer in the name of PhilFinance, which
authorization is specifically phrased as follows: '(Filriters) hereby irrevocably
authorized the said issuer (Central Bank) to transfer the said bond/certificates on
the books of its fiscal agent;
5. On February 4, 1981, petitioner entered into a Repurchase Agreement with
PhilFinance . . ., whereby, for and in consideration of the sum of PESOS: FIVE
HUNDRED THOUSAND (P500,000.00), PhilFinance sold, transferred and
delivered to petitioner CBCI 4-year, 8th series, Serial No. D891 with a face value
of P500,000.00 . . ., which CBCI was among those previously acquired by
PhilFinance from Filriters as averred in paragraph 3 of the Petition;
6. Pursuant to the aforesaid Repurchase Agreement (Annex "B"), Philfinance
agreed to repurchase CBCI Serial No. D891 (Annex "C"), at the stipulated price of
PESOS: FIVE HUNDRED NINETEEN THOUSAND THREE HUNDRED SIXTY-
ONE & 11/100 (P519,361.11) on April 27, 1981;
7. PhilFinance failed to repurchase the CBCI on the agreed date of maturity, April
27, 1981, when the checks it issued in favor of petitioner were dishonored for
insufficient funds;
8. Owing to the default of PhilFinance, it executed a Detached Assignment in
favor of the Petitioner to enable the latter to have its title completed and
registered in the books of the respondent. And by means of said Detachment,
Philfinance transferred and assigned all, its rights and title in the said CBCI
(Annex "C") to petitioner and, furthermore, it did thereby "irrevocably authorize the
said issuer (respondent herein) to transfer the said bond/certificate on the books
of its fiscal agent." . . .
Nego Instruments Set 1 (#s1-70) Page 102 of 112
Lumbas. Dadat
9. Petitioner presented the CBCI (Annex "C"), together with the two (2)
aforementioned Detached Assignments (Annexes "B" and "D"), to the Securities
Servicing Department of the respondent, and requested the latter to effect the
transfer of the CBCI on its books and to issue a new certificate in the name of
petitioner as absolute owner thereof;
10. Respondent failed and refused to register the transfer as requested, and
continues to do so notwithstanding petitioner's valid and just title over the same
and despite repeated demands in writing, the latest of which is hereto attached as
Annex "E" and made an integral part hereof;
11. The express provisions governing the transfer of the CBCI were substantially
complied with the petitioner's request for registration, to wit:
"No transfer thereof shall be valid unless made at said office (where
the Certificate has been registered) by the registered owner hereof,
in person or by his attorney duly authorized in writing, and similarly
noted hereon, and upon payment of a nominal transfer fee which
may be required, a new Certificate shall be issued to the transferee
of the registered holder thereof."
and, without a doubt, the Detached Assignments presented to respondent were
sufficient authorizations in writing executed by the registered owner, Filriters, and
its transferee, PhilFinance, as required by the above-quoted provision;
12. Upon such compliance with the aforesaid requirements, the ministerial duties
of registering a transfer of ownership over the CBCI and issuing a new certificate
to the transferee devolves upon the respondent;
Upon these assertions, TRB prayed for the registration by the Central Bank of the
subject CBCI in its name.
On December 4, 1984, the Regional Trial Court the case took cognizance of the
defendant Central Bank of the Philippines' Motion for Admission of Amended
Answer with Counter Claim for Interpleader6 thereby calling to fore the
respondent Filriters Guaranty Assurance Corporation (Filriters), the registered
owner of the subject CBCI as respondent.
For its part, Filriters interjected as Special Defenses the following:
11. Respondent is the registered owner of CBCI No. 891;
12. The CBCI constitutes part of the reserve investment against liabilities required
of respondent as an insurance company under the Insurance Code;
13. Without any consideration or benefit whatsoever to Filriters, in violation of law
and the trust fund doctrine and to the prejudice of policyholders and to all who
have present or future claim against policies issued by Filriters, Alfredo Banaria,
then Senior Vice-President-Treasury of Filriters, without any board resolution,
knowledge or consent of the board of directors of Filriters, and without any
clearance or authorization from the Insurance Commissioner, executed a
detached assignment purportedly assigning CBCI No. 891 to Philfinance;
xxx xxx xxx
14. Subsequently, Alberto Fabella, Senior Vice-President-Comptroller are Pilar
Jacobe, Vice-President-Treasury of Filriters (both of whom were holding the same
positions in Philfinance), without any consideration or benefit redounding to
Filriters and to the grave prejudice of Filriters, its policy holders and all who have
present or future claims against its policies, executed similar detached
assignment forms transferring the CBCI to plaintiff;
xxx xxx xxx
15. The detached assignment is patently void and inoperative because the
assignment is without the knowledge and consent of directors of Filriters, and not
duly authorized in writing by the Board, as requiring by Article V, Section 3 of CB
Circular No. 769;
16. The assignment of the CBCI to Philfinance is a personal act of Alfredo
Banaria and not the corporate act of Filriters and such null and void;
a) The assignment was executed without consideration and for that reason, the
assignment is void from the beginning (Article 1409, Civil Code);
b) The assignment was executed without any knowledge and consent of the
board of directors of Filriters;
c) The CBCI constitutes reserve investment of Filriters against liabilities, which is
a requirement under the Insurance Code for its existence as an insurance

company and the pursuit of its business operations. The assignment of the CBCI
is illegal act in the sense of malum in se or malum prohibitum, for anyone to
make, either as corporate or personal act;
d) The transfer of dimunition of reserve investments of Filriters is expressly
prohibited by law, is immoral and against public policy;
e) The assignment of the CBCI has resulted in the capital impairment and in the
solvency deficiency of Filriters (and has in fact helped in placing Filriters under
conservatorship), an inevitable result known to the officer who executed
assignment.
17. Plaintiff had acted in bad faith and with knowledge of the illegality and
invalidity of the assignment.
a) The CBCI No. 891 is not a negotiable instrument and as a certificate of
indebtedness is not payable to bearer but is a registered in the name of Filriters;
b) The provision on transfer of the CBCIs provides that the Central Bank shall
treat the registered owner as the absolute owner and that the value of the
registered certificates shall be payable only to the registered owner; a sufficient
notice to plaintiff that the assignments do not give them the registered owner's
right as absolute owner of the CBCI's;
c) CB Circular 769, Series of 1980 (Rules and Regulations Governing CBCIs)
provides that the registered certificates are payable only to the registered owner
(Article II, Section 1).
18. Plaintiff knew full well that the assignment by Philfinance of CBCI No. 891 by
Filriters is not a regular transaction made in the usual of ordinary course of
business;
a) The CBCI constitutes part of the reserve investments of Filriters against
liabilities requires by the Insurance Code and its assignment or transfer is
expressly prohibited by law. There was no attempt to get any clearance or
authorization from the Insurance Commissioner;
b) The assignment by Filriters of the CBCI is clearly not a transaction in the usual
or regular course of its business;
c) The CBCI involved substantial amount and its assignment clearly constitutes
disposition of "all or substantially all" of the assets of Filriters, which requires the
affirmative action of the stockholders (Section 40, Corporation [sic] Code.7
In its Decision8 dated April 29, 1988, the Regional Trial Court of Manila, Branch
XXXIII found the assignment of CBCI No. D891 in favor of Philfinance, and the
subsequent assignment of the same CBCI by Philfinance in favor of Traders
Royal Bank null and void and of no force and effect. The dispositive portion of the
decision reads:
ACCORDINGLY, judgment is hereby rendered in favor of the respondent Filriters
Guaranty Assurance Corporation and against the plaintiff Traders Royal Bank:
(a) Declaring the assignment of CBCI No. 891 in favor of PhilFinance, and the
subsequent assignment of CBCI by PhilFinance in favor of the plaintiff Traders
Royal Bank as null and void and of no force and effect;
(b) Ordering the respondent Central Bank of the Philippines to disregard the said
assignment and to pay the value of the proceeds of the CBCI No. D891 to the
Filriters Guaranty Assurance Corporation;
(c) Ordering the plaintiff Traders Royal Bank to pay respondent Filriters Guaranty
Assurance Corp. The sum of P10,000 as attorney's fees; and
(d) to pay the costs. SO ORDERED.9
The petitioner assailed the decision of the trial court in the Court of Appeals 10,
but their appeals likewise failed. The findings of the fact of the said court are
hereby reproduced:
The records reveal that defendant Filriters is the registered owner of
CBCI No. D891. Under a deed of assignment dated November 27,
1971, Filriters transferred CBCI No. D891 to Philippine Underwriters
Finance Corporation (Philfinance). Subsequently, Philfinance
transferred CBCI No. D891, which was still registered in the name of
Filriters, to appellant Traders Royal Bank (TRB). The transfer was
made under a repurchase agreement dated February 4, 1981,
granting Philfinance the right to repurchase the instrument on or
before April 27, 1981. When Philfinance failed to buy back the note
on maturity date, it executed a deed of assignment, dated April 27,
1981, conveying to appellant TRB all its right and the title to CBCI
No. D891.
Armed with the deed of assignment, TRB then sought the transfer
and registration of CBCI No. D891 in its name before the Security
and Servicing Department of the Central Bank (CB). Central Bank,
however, refused to effect the transfer and registration in view of an
adverse claim filed by defendant Filriters.
Left with no other recourse, TRB filed a special civil action
for mandamus against the Central Bank in the Regional Trial Court of
Manila. The suit, however, was subsequently treated by the lower
court as a case of interpleader when CB prayed in its amended
answer that Filriters be impleaded as a respondent and the court
adjudge which of them is entitled to the ownership of CBCI No. D891.
Failing to get a favorable judgment. TRB now comes to this Court on
appeal. 11
In the appellate court, petitioner argued that the subject CBCI was a negotiable
instrument, and having acquired the said certificate from Philfinance as a holder
in due course, its possession of the same is thus free fro any defect of title of prior
parties and from any defense available to prior parties among themselves, and it
may thus, enforce payment of the instrument for the full amount thereof against
all parties liable thereon. 12
In ignoring said argument, the appellate court that the CBCI is not a negotiable
instrument, since the instrument clearly stated that it was payable to Filriters, the
registered owner, whose name was inscribed thereon, and that the certificate
lacked the words of negotiability which serve as an expression of consent that the
instrument may be transferred by negotiation.
Obviously, the assignment of the certificate from Filriters to Philfinance was
fictitious, having made without consideration, and did not conform to Central Bank
Circular No. 769, series of 1980, better known as the "Rules and Regulations
Governing Central Bank Certificates of Indebtedness", which provided that any
"assignment of registered certificates shall not be valid unless made . . . by the
registered owner thereof in person or by his representative duly authorized in
writing."
Petitioner's claimed interest has no basis, since it was derived from Philfinance
whose interest was inexistent, having acquired the certificate through simulation.
What happened was Philfinance merely borrowed CBCI No. D891 from Filriters, a
sister corporation, to guarantee its financing operations.
Said the Court:
In the case at bar, Alfredo O. Banaria, who signed the deed of
assignment purportedly for and on behalf of Filriters, did not have the
necessary written authorization from the Board of Directors of
Filriters to act for the latter. For lack of such authority, the assignment
did not therefore bind Filriters and violated as the same time Central
Bank Circular No. 769 which has the force and effect of a law,
resulting in the nullity of the transfer (People v. Que Po Lay, 94 Phil.
640; 3M Philippines, Inc. vs. Commissioner of Internal Revenue, 165
SCRA 778).
In sum, Philfinance acquired no title or rights under CBCI No. D891
which it could assign or transfer to Traders Royal Bank and which the
latter can register with the Central Bank.
WHEREFORE, the judgment appealed from is AFFIRMED, with
costs against plaintiff-appellant. SO ORDERED. 13
Petitioner's present position rests solely on the argument that Philfinance owns
90% of Filriters equity and the two corporations have identical corporate officers,
thus demanding the application of the doctrine or piercing the veil of corporate
fiction, as to give validity to the transfer of the CBCI from registered owner to
petitioner TRB. 14 This renders the payment by TRB to Philfinance of CBCI, as
actual payment to Filriters. Thus, there is no merit to the lower court's ruling that
the transfer of the CBCI from Filriters to Philfinance was null and void for lack of
consideration.
Nego Instruments Set 1 (#s1-70) Page 103 of 112
Lumbas. Dadat
Admittedly, the subject CBCI is not a negotiable instrument in the absence of
words of negotiability within the meaning of the negotiable instruments law (Act
2031).
The pertinent portions of the subject CBCI read:
xxx xxx xxx
The Central Bank of the Philippines (the Bank) for value received,
hereby promises to pay bearer, of if this Certificate of indebtedness
be registered, to FILRITERS GUARANTY ASSURANCE
CORPORATION, the registered owner hereof, the principal sum of
FIVE HUNDRED THOUSAND PESOS.
xxx xxx xxx
Properly understood, a certificate of indebtedness pertains to certificates for the
creation and maintenance of a permanent improvement revolving fund, is similar
to a "bond," (82 Minn. 202). Being equivalent to a bond, it is properly understood
as acknowledgment of an obligation to pay a fixed sum of money. It is usually
used for the purpose of long term loans.
The appellate court ruled that the subject CBCI is not a negotiable instrument,
stating that:
As worded, the instrument provides a promise "to pay Filriters
Guaranty Assurance Corporation, the registered owner hereof." Very
clearly, the instrument is payable only to Filriters, the registered
owner, whose name is inscribed thereon. It lacks the words of
negotiability which should have served as an expression of consent
that the instrument may be transferred by negotiation.15
A reading of the subject CBCI indicates that the same is payable to FILRITERS
GUARANTY ASSURANCE CORPORATION, and to no one else, thus,
discounting the petitioner's submission that the same is a negotiable instrument,
and that it is a holder in due course of the certificate.
The language of negotiability which characterize a negotiable paper as a credit
instrument is its freedom to circulate as a substitute for money. Hence, freedom
of negotiability is the touchtone relating to the protection of holders in due course,
and the freedom of negotiability is the foundation for the protection which the law
throws around a holder in due course (11 Am. Jur. 2d, 32). This freedom in
negotiability is totally absent in a certificate indebtedness as it merely to pay a
sum of money to a specified person or entity for a period of time.
As held in Caltex (Philippines), Inc. v. Court of Appeals, 16:
The accepted rule is that the negotiability or non-negotiability of an
instrument is determined from the writing, that is, from the face of the
instrument itself. In the construction of a bill or note, the intention of
the parties is to control, if it can be legally ascertained. While the
writing may be read in the light of surrounding circumstance in order
to more perfectly understand the intent and meaning of the parties,
yet as they have constituted the writing to be the only outward and
visible expression of their meaning, no other words are to be added
to it or substituted in its stead. The duty of the court in such case is to
ascertain, not what the parties may have secretly intended as
contradistinguished from what their words express, but what is the
meaning of the words they have used. What the parties meant must
be determined by what they said.
Thus, the transfer of the instrument from Philfinance to TRB was merely an
assignment, and is not governed by the negotiable instruments law. The pertinent
question then is, was the transfer of the CBCI from Filriters to Philfinance and
subsequently from Philfinance to TRB, in accord with existing law, so as to entitle
TRB to have the CBCI registered in its name with the Central Bank?
The following are the appellate court's pronouncements on the matter:
Clearly shown in the record is the fact that Philfinance's title over
CBCI No. D891 is defective since it acquired the instrument from
Filriters fictitiously. Although the deed of assignment stated that the
transfer was for "value received", there was really no consideration
involved. What happened was Philfinance merely borrowed CBCI

No. D891 from Filriters, a sister corporation. Thus, for lack of any
consideration, the assignment made is a complete nullity.
What is more, We find that the transfer made by Filriters to
Philfinance did not conform to Central Bank Circular No. 769, series
of 1980, otherwise known as the "Rules and Regulations Governing
Central Bank Certificates of Indebtedness", under which the note was
issued. Published in the Official Gazette on November 19, 1980,
Section 3 thereof provides that any assignment of registered
certificates shall not be valid unless made . . . by the registered
owner thereof in person or by his representative duly authorized in
writing.
In the case at bar, Alfredo O. Banaria, who signed the deed of
assignment purportedly for and on behalf of Filriters, did not have the
necessary written authorization from the Board of Directors of
Filriters to act for the latter. For lack of such authority, the assignment
did not therefore bind Filriters and violated at the same time Central
Bank Circular No. 769 which has the force and effect of a law,
resulting in the nullity of the transfer (People vs. Que Po Lay, 94 Phil.
640; 3M Philippines, Inc. vs. Commissioner of Internal Revenue, 165
SCRA 778).
In sum, Philfinance acquired no title or rights under CBCI No. D891
which it could assign or transfer to Traders Royal Bank and which the
latter can register with the Central Bank
Petitioner now argues that the transfer of the subject CBCI to TRB must upheld,
as the respondent Filriters and Philfinance, though separate corporate entities on
paper, have used their corporate fiction to defraud TRB into purchasing the
subject CBCI, which purchase now is refused registration by the Central Bank.
Says the petitioner;
Since Philfinance own about 90% of Filriters and the two companies
have the same corporate officers, if the principle of piercing the veil
of corporate entity were to be applied in this case, then TRB's
payment to Philfinance for the CBCI purchased by it could just as
well be considered a payment to Filriters, the registered owner of the
CBCI as to bar the latter from claiming, as it has, that it never
received any payment for that CBCI sold and that said CBCI was
sold without its authority.
xxx xxx xxx
We respectfully submit that, considering that the Court of Appeals
has held that the CBCI was merely borrowed by Philfinance from
Filriters, a sister corporation, to guarantee its (Philfinance's) financing
operations, if it were to be consistent therewith, on the issued raised
by TRB that there was a piercing a veil of corporate entity, the Court
of Appeals should have ruled that such veil of corporate entity was, in
fact, pierced, and the payment by TRB to Philfinance should be
construed as payment to Filriters. 17
We disagree with Petitioner.
Petitioner cannot put up the excuse of piercing the veil of corporate entity, as this
merely an equitable remedy, and may be awarded only in cases when the
corporate fiction is used to defeat public convenience, justify wrong, protect fraud
or defend crime or where a corporation is a mere alter ego or business conduit of
a person. 18
Peiercing the veil of corporate entity requires the court to see through the
protective shroud which exempts its stockholders from liabilities that ordinarily,
they could be subject to, or distinguished one corporation from a seemingly
separate one, were it not for the existing corporate fiction. But to do this, the court
must be sure that the corporate fiction was misused, to such an extent that
injustice, fraud, or crime was committed upon another, disregarding, thus, his,
her, or its rights. It is the protection of the interests of innocent third persons
dealing with the corporate entity which the law aims to protect by this doctrine.
The corporate separateness between Filriters and Philfinance remains, despite
the petitioners insistence on the contrary. For one, other than the allegation that
Filriters is 90% owned by Philfinance, and the identity of one shall be maintained
as to the other, there is nothing else which could lead the court under
circumstance to disregard their corporate personalities.
Though it is true that when valid reasons exist, the legal fiction that a corporation
is an entity with a juridical personality separate from its stockholders and from
other corporations may be disregarded, 19 in the absence of such grounds, the
general rule must upheld. The fact that Filfinance owns majority shares in Filriters
is not by itself a ground to disregard the independent corporate status of Filriters.
In Liddel & Co., Inc. vs. Collector of Internal Revenue, 20 the mere ownership by a
single stockholder or by another corporation of all or nearly all of the capital stock
of a corporation is not of itself a sufficient reason for disregarding the fiction of
separate corporate personalities.
In the case at bar, there is sufficient showing that the petitioner was not
defrauded at all when it acquired the subject certificate of indebtedness from
Philfinance.
On its face the subject certificates states that it is registered in the name of
Filriters. This should have put the petitioner on notice, and prompted it to inquire
from Filriters as to Philfinance's title over the same or its authority to assign the
certificate. As it is, there is no showing to the effect that petitioner had any
dealings whatsoever with Filriters, nor did it make inquiries as to the ownership of
the certificate.
The terms of the CBCI No. D891 contain a provision on its TRANSFER. Thus:
TRANSFER. This Certificate shall pass by delivery unless it is
registered in the owner's name at any office of the Bank or any
agency duly authorized by the Bank, and such registration is noted
hereon. After such registration no transfer thereof shall be valid
unless made at said office (where the Certificates has been
registered) by the registered owner hereof, in person, or by his
attorney, duly authorized in writing and similarly noted hereon and
upon payment of a nominal transfer fee which may be required, a
new Certificate shall be issued to the transferee of the registered
owner thereof. The bank or any agency duly authorized by the Bank
may deem and treat the bearer of this Certificate, or if this Certificate
is registered as herein authorized, the person in whose name the
same is registered as the absolute owner of this Certificate, for the
purpose of receiving payment hereof, or on account hereof, and for
all other purpose whether or not this Certificate shall be overdue.
This is notice to petitioner to secure from Filriters a written authorization for the
transfer or to require Philfinance to submit such an authorization from Filriters.
Petitioner knew that Philfinance is not registered owner of the CBCI No. D891.
The fact that a non-owner was disposing of the registered CBCI owned by
another entity was a good reason for petitioner to verify of inquire as to the title
Philfinance to dispose to the CBCI.
Moreover, CBCI No. D891 is governed by CB Circular No. 769, series of 1990 21,
known as the Rules and Regulations Governing Central Bank Certificates of
Indebtedness, Section 3, Article V of which provides that:
Sec. 3. Assignment of Registered Certificates. — Assignment of
registered certificates shall not be valid unless made at the office
where the same have been issued and registered or at the Securities
Servicing Department, Central Bank of the Philippines, and by the
registered owner thereof, in person or by his representative, duly
authorized in writing. For this purpose, the transferee may be
designated as the representative of the registered owner.
Petitioner, being a commercial bank, cannot feign ignorance of Central Bank
Circular 769, and its requirements. An entity which deals with corporate agents
within circumstances showing that the agents are acting in excess of corporate
authority, may not hold the corporation liable. 22 This is only fair, as everyone
must, in the exercise of his rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and good faith. 23
The transfer made by Filriters to Philfinance did not conform to the said. Central
Bank Circular, which for all intents, is considered part of the law. As found by the
Nego Instruments Set 1 (#s1-70) Page 104 of 112
Lumbas. Dadat
courts a quo, Alfredo O. Banaria, who had signed the deed of assignment from
Filriters to Philfinance, purportedly for and in favor of Filriters, did not have the
necessary written authorization from the Board of Directors of Filriters to act for
the latter. As it is, the sale from Filriters to Philfinance was fictitious, and therefore
void and inexistent, as there was no consideration for the same. This is fatal to
the petitioner's cause, for then, Philfinance had no title over the subject certificate
to convey the Traders Royal Bank. Nemo potest nisi quod de jure potest — no
man can do anything except what he can do lawfully.
Concededly, the subject CBCI was acquired by Filriters to form part of its legal
and capital reserves, which are required by law 24 to be maintained at a mandated
level. This was pointed out by Elias Garcia, Manager-in-Charge of respondent
Filriters, in his testimony given before the court on May 30, 1986.
Q Do you know this Central Bank Certificate of Indebtedness, in short, CBCI No.
D891 in the face value of P5000,000.00 subject of this case?
A Yes, sir.
Q Why do you know this?
A Well, this was CBCI of the company sought to be examined by the Insurance
Commission sometime in early 1981 and this CBCI No. 891 was among the
CBCI's that were found to be missing.
Q Let me take you back further before 1981. Did you have the knowledge of this
CBCI No. 891 before 1981?
A Yes, sir. This CBCI is an investment of Filriters required by the Insurance
Commission as legal reserve of the company.
Q Legal reserve for the purpose of what?
A Well, you see, the Insurance companies are required to put up legal reserves
under Section 213 of the Insurance Code equivalent to 40 percent of the
premiums receipt and further, the Insurance Commission requires this reserve to
be invested preferably in government securities or government binds. This is how
this CBCI came to be purchased by the company.
It cannot, therefore, be taken out of the said funds, without violating the
requirements of the law. Thus, the anauthorized use or distribution of the same by
a corporate officer of Filriters cannot bind the said corporation, not without the
approval of its Board of Directors, and the maintenance of the required reserve
fund.
Consequently, the title of Filriters over the subject certificate of indebtedness
must be upheld over the claimed interest of Traders Royal Bank.
ACCORDINGLY, the petition is DISMISSED and the decision appealed from
dated January 29, 1990 is hereby AFFIRMED. SO ORDERED.
66. G.R. No. 146717 May 19, 2006
TRANSFIELD PHILIPPINES, INC. vs. LUZON HYDRO CORPORATION,
AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED and
SECURITY BANK CORPORATION
The adjudication of this case proved to be a two-stage process as its constituent
parts involve two segregate but equally important issues. The first stage relating
to the merits of the case, specifically the question of the propriety of calling on the
securities during the pendency of the arbitral proceedings, was resolved in favor
of Luzon Hydro Corporation (LHC) with the Court’s Decision1 of 22 November
2004. The second stage involving the issue of forum-shopping on which the Court
required the parties to submit their respective memoranda2 is disposed of in this
Resolution.
The disposal of the forum-shopping charge is crucial to the parties to this case on
account of its profound effect on the final outcome of the international arbitral
proceedings which they have chosen as their principal dispute resolution
mechanism.3
LHC claims that Transfield Philippines, Inc. (TPI) is guilty of forum-shopping when
it filed the following suits:
1. Civil Case No. 04-332 filed on 19 March 2004, pending before the
Regional Trial Court (RTC) of Makati, Branch 56 for confirmation,
recognition and enforcement of the Third Partial Award in case

11264 TE/MW, ICC International Court of Arbitration,
entitled Transfield Philippines, Inc. v. Luzon Hydro Corporation.4
2. ICC Case No. 11264/TE/MW, Transfield Philippines, Inc. v. Luzon
Hydro Corporation filed before the International Court of Arbitration,
International Chamber of Commerce (ICC) a request for arbitration
dated 3 November 2000 pursuant to the Turnkey Contract between
LHC and TPI;
3. G.R. No. 146717, Transfield Philippines, Inc. v. Luzon Hydro
Corporation, Australia and New Zealand Banking Group Limited and
Security Bank Corp. filed on 5 February 2001, which was an appeal
by certiorari with prayer for TRO/preliminary prohibitory and
mandatory injunction, of the Court of Appeals Decision dated 31
January 2001 in CA-G.R. SP No. 61901.
a. CA-G.R. SP No. 61901 was a petition for review of the Decision in
Civil Case No. 00-1312, wherein TPI claimed that LHC’s call on the
securities was premature considering that the issue of default has not
yet been resolved with finality; the petition was however denied by
the Court of Appeals;
b. Civil Case No. 00-1312 was a complaint for injunction with prayer
for temporary restraining order and/or writ of preliminary injunction
dated 5 November 2000, which sought to restrain LHC from calling
on the securities and respondent banks from transferring or paying of
the securities; the complaint was denied by the RTC.
On the other hand, TPI claims that it is LHC which is guilty of forum-shopping
when it raised the issue of forum-shopping not only in this case, but also in Civil
Case No. 04-332, and even asked for the dismissal of the other case based on
this ground. Moreover, TPI argues that LHC is relitigating in Civil Case No. 04-
332 the very same causes of action in ICC Case No. 11264/TE/MW, and even
manifesting therein that it will present evidence earlier presented before the
arbitral tribunal.5
Meanwhile, ANZ Bank and Security Bank moved to be excused from filing a
memorandum. They claim that with the finality of the Court’s Decision dated 22
November 2004, any resolution by the Court on the issue of forum-shopping will
not materially affect their role as the banking entities involved are
concerned.6 The Court granted their respective motions.
On 1 August 2005, TPI moved to set the case for oral argument, positing that the
resolution of the Court on the issue of forum-shopping may have significant
implications on the interpretation of the Alternative Dispute Resolution Act of
2004, as well as the viability of international commercial arbitration as an
alternative mode of dispute resolution in the country.7 Said motion was opposed
by LHC in its opposition filed on 2 September 2005, with LHC arguing that the
respective memoranda of the parties are sufficient for the Court to resolve the
issue of forum-shopping.8 On 28 October 2005, TPI filed its Manifestation and
Reiterative Motion9 to set the case for oral argument, where it manifested that the
International Chamber of Commerce (ICC) arbitral tribunal had issued its Final
Award ordering LHC to pay TPI US$24,533,730.00 (including the
US$17,977,815.00 proceeds of the two standby letters of credit). TPI also
submitted a copy thereof with a Supplemental Petition10 to the Regional Trial
Court (RTC), seeking recognition and enforcement of the said award.11
The essence of forum-shopping is the filing of multiple suits involving the same
parties for the same cause of action, either simultaneously or successively, for
the purpose of obtaining a favorable judgment.12 Forum-shopping has likewise
been defined as the act of a party against whom an adverse judgment has been
rendered in one forum, seeking and possibly getting a favorable opinion in
another forum, other than by appeal or the special civil action of certiorari, or the
institution of two or more actions or proceedings grounded on the same cause on
the supposition that one or the other court would make a favorable disposition.13
Thus, for forum-shopping to exist, there must be (a) identity of parties, or at least
such parties as represent the same interests in both actions; (b) identity of rights
asserted and relief prayed for, the relief being founded on the same facts; and (c)
the identity of the two preceding particulars is such that any judgment rendered in
the other action will, regardless of which party is successful, amount to res
judicata in the action under consideration.14
There is no identity of causes of action between and among the arbitration case,
the instant petition, and Civil Case No. 04-332.
The arbitration case, ICC Case No. 11264 TE/MW, is an arbitral proceeding
commenced pursuant to the Turnkey Contract between TPI and LHC, to
determine the primary issue of whether the delays in the construction of the
project were excused delays, which would consequently render valid TPI’s claims
for extension of time to finish the project. Together with the primary issue to be
settled in the arbitration case is the equally important question of monetary
awards to the aggrieved party.
On the other hand, Civil Case No. 00-1312, the precursor of the instant petition,
was filed to enjoin LHC from calling on the securities and respondent banks from
transferring or paying the securities in case LHC calls on them. However, in view
of the fact that LHC collected the proceeds, TPI, in its appeal and petition for
review asked that the same be returned and placed in escrow pending the
resolution of the disputes before the ICC arbitral tribunal.15
While the ICC case thus calls for a thorough review of the facts which led to the
delay in the construction of the project, as well as the attendant responsibilities of
the parties therein, in contrast, the present petition puts in issue the propriety of
drawing on the letters of credit during the pendency of the arbitral case, and of
course, absent a final determination by the ICC Arbitral tribunal. Moreover, as
pointed out by TPI, it did not pray for the return of the proceeds of the letters of
credit. What it asked instead is that the said moneys be placed in escrow until the
final resolution of the arbitral case. Meanwhile, in Civil Case No. 04-332, TPI no
longer seeks the issuance of a provisional relief, but rather the issuance of a writ
of execution to enforce the Third Partial Award.
Neither is there an identity of parties between and among the three (3) cases.
The ICC case only involves TPI and LHC logically since they are the parties to
the Turnkey Contract. In comparison, the instant petition includes Security Bank
and ANZ Bank, the banks sought to be enjoined from releasing the funds of the
letters of credit. The Court agrees with TPI that it would be ineffectual to ask the
ICC to issue writs of preliminary injunction against Security Bank and ANZ Bank
since these banks are not parties to the arbitration case, and that the ICC Arbitral
tribunal would not even be able to compel LHC to obey any writ of preliminary
injunction issued from its end.16 Civil Case No. 04-322, on the other hand,
logically involves TPI and LHC only, they being the parties to the arbitration
agreement whose partial award is sought to be enforced.
As a fundamental point, the pendency of arbitral proceedings does not foreclose
resort to the courts for provisional reliefs. The Rules of the ICC, which governs
the parties’ arbitral dispute, allows the application of a party to a judicial authority
for interim or conservatory measures.17 Likewise, Section 14 of Republic Act
(R.A.) No. 876 (The Arbitration Law)18 recognizes the rights of any party to
petition the court to take measures to safeguard and/or conserve any matter
which is the subject of the dispute in arbitration. In addition, R.A. 9285, otherwise
known as the "Alternative Dispute Resolution Act of 2004," allows the filing of
provisional or interim measures with the regular courts whenever the arbitral
tribunal has no power to act or to act effectively.19
TPI’s verified petition in Civil Case No. 04-332, filed on 19 March 2004, was
captioned as one "For: Confirmation, Recognition and Enforcement of Foreign
Arbitral Award in Case 11264 TE/MW, ICC International Court of Arbitration,
‘Transfield Philippines, Inc. v. Luzon Hydro Corporation (Place of arbitration:
Singapore)."20 In the said petition, TPI prayed:
1. That the THIRD PARTIAL AWARD dated February 18, 2004 in
Case No. 11264/TE/MW made by the ICC International Court of
Arbitration, the signed original copy of which is hereto attached as
Annex "H" hereof, be confirmed, recognized and enforced in
accordance with law.
2. That the corresponding writ of execution to enforce Question 31 of
the said Third Partial Award, be issued, also in accordance with law.
Nego Instruments Set 1 (#s1-70) Page 105 of 112
Lumbas. Dadat
3. That TPI be granted such other relief as may be deemed just and
equitable, and allowed, in accordance with law.21
The pertinent portion of the Third Partial Award22 relied upon by TPI were the
answers to Questions 10 to 26, to wit:
"Question 30 Did TPI [LHC] wrongfully draw upon the security?
Yes
"Question 31 Is TPI entitled to have returned to it any sum wrongfully taken by
LHC for liquidated damages?
Yes
"Question 32 Is TPI entitled to any acceleration costs?
TPI is entitled to the reasonable costs TPI incurred after Typhoon Zeb as a result
of LHC’s 5 February 1999 Notice to Correct.23
According to LHC, the filing of the above case constitutes forum-shopping since it
is the same claim for the return of US$17.9 Million which TPI made before the
ICC Arbitral Tribunal and before this Court. LHC adds that while Civil Case No.
04-332 is styled as an action for money, the Third Partial Award used as basis of
the suit does not authorize TPI to seek a writ of execution for the sums drawn on
the letters of credit. Said award does not even contain an order for the payment of
money, but instead has reserved the quantification of the amounts for a
subsequent determination, LHC argues. In fact, even the Fifth Partial
Award,24 dated 30 March 2005, does not contain such orders. LHC insists that the
declarations or the partial awards issued by the ICC Arbitral Tribunal do not
constitute orders for the payment of money and are not intended to be
enforceable as such, but merely constitute amounts which will be included in the
Final Award and will be taken into account in determining the actual amount
payable to the prevailing party.25
R.A. No. 9825 provides that international commercial arbitrations shall be
governed shall be governed by the Model Law on International Commercial
Arbitration ("Model Law") adopted by the United Nations Commission on
International Trade Law (UNCITRAL).26 The UNCITRAL Model Law provides:
ARTICLE 35. Recognition and enforcement
(1) An arbitral award, irrespective of the country in which it was
made, shall be recognized as binding and, upon application in writing
to the competent court, shall be enforced subject to the provisions of
this article and of article 36.
(2) The party relying on an award or applying for its enforcement
shall supply the duly authenticated original award or a duly certified
copy thereof, and the original arbitration agreement referred to in
article 7 or a duly certified copy thereof. If the award or agreement is
not made in an official language of this State, the party shall supply a
duly certified translation thereof into such language.
Moreover, the New York Convention,27 to which the Philippines is a signatory,
governs the recognition and enforcement of foreign arbitral awards. The
applicability of the New York Convention in the Philippines was confirmed in
Section 42 of R.A. 9285. Said law also provides that the application for the
recognition and enforcement of such awards shall be filed with the proper RTC.
While TPI’s resort to the RTC for recognition and enforcement of the Third Partial
Award is sanctioned by both the New York Convention and R.A. 9285, its
application for enforcement, however, was premature, to say the least. True, the
ICC Arbitral Tribunal had indeed ruled that LHC wrongfully drew upon the
securities, yet there is no order for the payment or return of the proceeds of the
said securities. In fact, Paragraph 2142, which is the final paragraph of the Third
Partial Award, reads:
2142. All other issues, including any issues as to quantum and costs, are
reserved to a future award.28
Meanwhile, the tribunal issued its Fifth Partial Award29 on 30 March 2005. It
contains, among others, a declaration that while LHC wrongfully drew on the
securities, the drawing was made in good faith, under the mistaken assumption
that the contractor, TPI, was in default. Thus, the tribunal ruled that while the
amount drawn must be returned, TPI is not entitled to any damages or interests

due to LHC’s drawing on the securities.30 In the Fifth Partial Award, the tribunal
ordered:
6. Order
6.1 General
166. This Fifth Partial Award deals with many issues of
quantum.1avvphil.net However, it does not resolve them all. The outstanding
quantum issues will be determined in a future award. It will contain a
reconciliation of the amounts awarded to each party and a determination of the
net amount payable to Claimant or Respondent, as the case may be.
167. In view of this the Tribunal will make no orders for payment in this Fifth
Partial Award. The Tribunal will make a number of declarations concerning the
quantum issues it has resolved in this Award together with the outstanding liability
issues. The declarations do not constitute orders for the payment of money
and are not intended to be enforceable as such. They merely constitute
amounts which will be included in the Final Award and will be taken into
account in determining the actual amount payable.31 (Emphasis Supplied.)
Further, in the Declarations part of the award, the tribunal held:
6.2 Declarations
168. The Tribunal makes the following declarations:
xxx
3. LHC is liable to repay TPI the face value of the securities drawn down by it,
namely, $17,977,815. It is not liable for any further damages claimed by TPI in
respect of the drawdown of the securities.
x x x.32
Finally, on 9 August 2005, the ICC Arbitral tribunal issued its Final Award, in
essence awarding US$24,533,730.00, which included TPI’s claim of
U$17,977,815.00 for the return of the securities from LHC.33
The fact that the ICC Arbitral tribunal included the proceeds of the securities
shows that it intended to make a final determination/award as to the said issue
only in the Final Award and not in the previous partial awards. This supports
LHC’s position that when the Third Partial Award was released and Civil Case
No. 04-332 was filed, TPI was not yet authorized to seek the issuance of a writ of
execution since the quantification of the amounts due to TPI had not yet been
settled by the ICC Arbitral tribunal. Notwithstanding the fact that the amount of
proceeds drawn on the securities was not disputed the application for the
enforcement of the Third Partial Award was precipitately filed. To repeat, the
declarations made in the Third Partial Award do not constitute orders for the
payment of money.
Anent the claim of TPI that it was LHC which committed forum-shopping, suffice it
to say that its bare allegations are not sufficient to sustain the charge.
WHEREFORE, the Court RESOLVES to DISMISS the charges of forum-shopping
filed by both parties against each other.
No pronouncement as to costs. SO ORDERED.
67. G.R. No. L-56169 June 26, 1992
TRAVEL-ON, INC. vs. COURT OF APPEALS and ARTURO S. MIRANDA
Petitioner Travel-On. Inc. ("Travel-On") is a travel agency selling airline tickets on
commission basis for and in behalf of different airline companies. Private
respondent Arturo S. Miranda had a revolving credit line with petitioner. He
procured tickets from petitioner on behalf of airline passengers and derived
commissions therefrom.
On 14 June 1972, Travel-On filed suit before the Court of First Instance ("CFI") of
Manila to collect on six (6) checks issued by private respondent with a total face
amount of P115,000.00. The complaint, with a prayer for the issuance of a writ of
preliminary attachment and attorney's fees, averred that from 5 August 1969 to 16
January 1970, petitioner sold and delivered various airline tickets to respondent at
a total price of P278,201.57; that to settle said account, private respondent paid
various amounts in cash and in kind, and thereafter issued six (6) postdated
checks amounting to P115,000.00 which were all dishonored by the drawee
banks. Travel-On further alleged that in March 1972, private respondent made
another payment of P10,000.00 reducing his indebtedness to P105,000.00. The
writ of attachment was granted by the court a quo.
In his answer, private respondent admitted having had transactions with Travel-
On during the period stipulated in the complaint. Private respondent, however,
claimed that he had already fully paid and even overpaid his obligations and that
refunds were in fact due to him. He argued that he had issued the postdated
checks for purposes of accommodation, as he had in the past accorded similar
favors to petitioner. During the proceedings, private respondent contested several
tickets alleged to have been erroneously debited to his account. He claimed
reimbursement of his alleged over payments, plus litigation expenses, and
exemplary and moral damages by reason of the allegedly improper attachment of
his properties.
In support of his theory that the checks were issued for accommodation, private
respondent testified that he bad issued the checks in the name of Travel-On in
order that its General Manager, Elita Montilla, could show to Travel-On's Board of
Directors that the accounts receivable of the company were still good. He further
stated that Elita Montilla tried to encash the same, but that these were dishonored
and were subsequently returned to him after the accommodation purpose had
been attained.
Travel-On's witness, Elita Montilla, on the other hand explained that the
"accommodation" extended to Travel-On by private respondent related to
situations where one or more of its passengers needed money in Hongkong, and
upon request of Travel-On respondent would contact his friends in Hongkong to
advance Hongkong money to the passenger. The passenger then paid Travel-On
upon his return to Manila and which payment would be credited by Travel-On to
respondent's running account with it.
In its decision dated 31 January 1975, the court a quo ordered Travel-On to pay
private respondent the amount of P8,894.91 representing net overpayments by
private respondent, moral damages of P10,000.00 for the wrongful issuance of
the writ of attachment and for the filing of this case, P5,000.00 for attorney's fees
and the costs of the suit.
The trial court ruled that private respondent's indebtedness to petitioner was not
satisfactorily established and that the postdated checks were issued not for the
purpose of encashment to pay his indebtedness but to accommodate the General
Manager of Travel-On to enable her to show to the Board of Directors that Travel-
On was financially stable.
Petitioner filed a motion for reconsideration that was, however, denied by the trial
court, which in fact then increased the award of moral damages to P50,000.00.
On appeal, the Court of Appeals affirmed the decision of the trial court, but
reduced the award of moral damages to P20,000.00, with interest at the legal rate
from the date of the filing of the Answer on 28 August 1972.
Petitioner moved for reconsideration of the Court of Appeal's' decision, without
success.
In the instant Petition for Review, it is urged that the postdated checks are per
se evidence of liability on the part of private respondent. Petitioner further argues
that even assuming that the checks were for accommodation, private respondent
is still liable thereunder considering that petitioner is a holder for value.
Both the trial and appellate courts had rejected the checks as evidence of
indebtedness on the ground that the various statements of account prepared by
petitioner did not show that Private respondent had an outstanding balance of
P115,000.00 which is the total amount of the checks he issued. It was pointed out
that while the various exhibits of petitioner showed various accountabilities of
private respondent, they did not satisfactorily establish the amount of the
outstanding indebtedness of private respondent. The appellate court made much
of the fact that the figures representing private respondent's unpaid accounts
found in the "Schedule of Outstanding Account" dated 31 January 1970 did not
tally with the figures found in the statement which showed private respondent's
transactions with petitioner for the years 1969 and 1970; that there was no
satisfactory explanation as to why the total outstanding amount
of P278,432.74 was still used as basis in the accounting of 7 April 1972
Nego Instruments Set 1 (#s1-70) Page 106 of 112
Lumbas. Dadat
considering that according to the table of transactions for the year 1969 and
1970, the total unpaid account of private respondent amounted to P239,794.57.
We have, however, examined the record and it shows that the 7 April 1972
Statement of Account had simply not been updated; that if we use as basis the
figure as of 31 January 1970 which is P278,432.74 and from it deduct P38,638.17
which represents some of the payments subsequently made by private
respondent, the figure — P239,794.57 will be obtained.
Also, the fact alone that the various statements of account had variances in
figures, simply did not mean that private respondent had no more financial
obligations to petitioner. It must be stressed that private respondent's account
with petitioner was a running or open one, which explains the varying figures in
each of the statements rendered as of a given date.
The appellate court erred in considering only the statements of account in
determining whether private respondent was indebted to petitioner under the
checks. By doing so, it failed to give due importance to the most telling piece of
evidence of private respondent's indebtedness — the checks themselves which
he had issued.
Contrary to the view held by the Court of Appeals, this Court finds that the checks
are the all important evidence of petitioner's case; that these checks clearly
established private respondent's indebtedness to petitioner; that private
respondent was liable thereunder.
It is important to stress that a check which is regular on its face is deemed prima
facie to have been issued for a valuable consideration and every person whose
signature appears thereon is deemed to have become a party thereto for
value. 1 Thus, the mere introduction of the instrument sued on in evidence prima
facie entitles the plaintiff to recovery. Further, the rule is quite settled that a
negotiable instrument is presumed to have been given or indorsed for a sufficient
consideration unless otherwise contradicted and overcome by other competent
evidence. 2
In the case at bar, the Court of Appeals, contrary to these established rules,
placed the burden of proving the existence of valuable consideration upon
petitioner. This cannot be countenanced; it was up to private respondent to show
that he had indeed issued the checks without sufficient consideration. The Court
considers that Private respondent was unable to rebut satisfactorily this legal
presumption. It must also be noted that those checks were issued immediately
after a letter demanding payment had been sent to private respondent by
petitioner Travel-On.
The fact that all the checks issued by private respondent to petitioner were
presented for payment by the latter would lead to no other conclusion than that
these checks were intended for encashment. There is nothing in the checks
themselves (or in any other document for that matter) that states otherwise.
We are unable to accept the Court of Appeals' conclusion that the checks here
involved were issued for "accommodation" and that accordingly private
respondent maker of those checks was not liable thereon to petitioner payee of
those checks.
In the first place, while the Negotiable Instruments Law does refer to
accommodation transactions, no such transaction was here shown. Section 29 of
the Negotiable Instruments Law provides as follows:
Sec. 29. Liability of accommodation party. — An accommodation
party is one who has signed the instrument as maker, drawer,
acceptor, or indorser, without receiving value therefor, and for the
purpose of lending his name to some other person. Such a person is
liable on the instrument to a holder for value, notwithstanding such
holder, at the time of taking the instrument, knew him to be only an
accommodation party.
In accommodation transactions recognized by the Negotiable Instruments
Law, an accommodating party lends his credit to the accommodated party,
by issuing or indorsing a check which is held by a payee or indorsee as a
holder in due course, who gave full value therefor to the accommodated
party. The latter, in other words, receives or realizes full value which the
accommodated party then must repay to the accommodating party, unless

of course the accommodating party intended to make a donation to the
accommodated party. But the accommodating party is bound on the check
to the holder in due course who is necessarily a third party and is not the
accommodated party. Having issued or indorsed the check, the
accommodating party has warranted to the holder in due course that he will
pay the same according to its tenor. 3
In the case at bar, Travel-On was payee of all six (6) checks, it presented these
checks for payment at the drawee bank but the checks bounced. Travel-On
obviously was not an accommodated party; it realized no value on the checks
which bounced.
Travel-On was entitled to the benefit of the statutory presumption that it was a
holder in due course, 4 that the checks were supported by valuable
consideration. 5 Private respondent maker of the checks did not successfully
rebut these presumptions. The only evidence aliunde that private respondent
offered was his own self-serving uncorroborated testimony. He claimed that he
had issued the checks to Travel-On as payee to "accommodate" its General
Manager who allegedly wished to show those checks to the Board of Directors of
Travel-On to "prove" that Travel-On's account receivables were somehow "still
good." It will be seen that this claim was in fact a claim that the checks were
merely simulated, that private respondent did not intend to bind himself thereon.
Only evidence of the clearest and most convincing kind will suffice for that
purpose; 6 no such evidence was submitted by private respondent. The latter's
explanation was denied by Travel-On's General Manager; that explanation, in any
case, appears merely contrived and quite hollow to us. Upon the other hand, the
"accommodation" or assistance extended to Travel-On's passengers abroad as
testified by petitioner's General Manager involved, not the accommodation
transactions recognized by the NIL, but rather the circumvention of then existing
foreign exchange regulations by passengers booked by Travel-On, which
incidentally involved receipt of full consideration by private respondent.
Thus, we believe and so hold that private respondent must be held liable on the
six (6) checks here involved. Those checks in themselves constituted evidence of
indebtedness of private respondent, evidence not successfully overturned or
rebutted by private respondent.
Since the checks constitute the best evidence of private respondent's liability to
petitioner Travel-On, the amount of such liability is the face amount of the checks,
reduced only by the P10,000.00 which Travel-On admitted in its complaint to
have been paid by private respondent sometime in March 1992.
The award of moral damages to Private respondent must be set aside, for the
reason that Petitioner's application for the writ of attachment rested on sufficient
basis and no bad faith was shown on the part of Travel-On. If anyone was in bad
faith, it was private respondent who issued bad checks and then pretended to
have "accommodated" petitioner's General Manager by assisting her in a
supposed scheme to deceive petitioner's Board of Directors and to misrepresent
Travel-On's financial condition.
ACCORDINGLY, the Court Resolved to GRANT due course to the Petition for
Review on Certiorari and to REVERSE and SET ASIDE the Decision dated 22
October 1980 and the Resolution of 23 January 1981 of the Court of Appeals, as
well as the Decision dated 31 January 1975 of the trial court, and to enter a new
decision requiring private respondent Arturo S. Miranda to pay to petitioner
Travel-On the amount of P105,000.00 with legal interest thereon from 14 June
1972, plus ten percent (10%) of the total amount due as attorney's fees. Costs
against Private respondent.
68. G.R. No. 158262 July 21, 2008
SPS. PEDRO AND FLORENCIA VIOLAGO vs. BA FINANCE CORPORATION
and AVELINO VIOLAGO
This is a Petition for Review on Certiorari of the August 20, 2002 Decision 1 and
May 15, 2003 Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No. 48489
entitled BA Finance Corporation, Plaintiff-Appellee v. Sps. Pedro and Florencia
Violago, Defendants and Third Party Plaintiffs-Appellants v. Avelino Violago,
Third Party Defendant-Appellant. Petitioners-spouses Pedro and Florencia
Violago pray for the reversal of the appellate court’s 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 latter’s 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 Esmeraldo’s name by the LTO-San Rafael Branch. Despite the
spouses’ demand for the car and Avelino’s 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 attorney’s 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 RTC’s order.
This CA decision became final and executory.
Nego Instruments Set 1 (#s1-70) Page 107 of 112
Lumbas. Dadat
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. Avelino’s 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 RTC’s 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 attorney’s fees, and another amount also equivalent to twenty
five percent (25%) of the said unpaid balance, as liquidated damages. The
defendant-third party-plaintiffs are also required to shoulder the litigation
expenses and costs.1awphil
As indemnification, third-party defendant Avelino Violago is ordered to deliver to
defendants-third-party plaintiffs spouses Pedro F. Violago and Florencia R.
Violago the aforedescribed motor vehicle; or if such delivery is not possible, to
pay to the said spouses the sum of P198,003.06, together with the penalty
thereon at three (3%) a month from March 1, 1984, until the amount is entirely
paid.
In either case, the third-party defendant should pay to the defendant-third-party
plaintiffs spouses a sum equivalent to twenty-five percent (25%) of P198,003.06
as attorney’s 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 court’s 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 Court’s Ruling
The ruling of the appellate court is set aside insofar as it dismissed, without
prejudice, the third party complaint of petitioners against Avelino thereby
effectively absolving Avelino from any liability under the third party complaint.
In addressing the threshold issue of whether BA Finance is a holder in due
course of the promissory note, we must determine whether the note is a
negotiable instrument and, hence, covered by the NIL. In their appeal to the CA,
petitioners argued that the promissory note is a negotiable instrument and that
the provisions of the NIL, not the Civil Code, should be applied. In the present
petition, however, petitioners claim that Article 1318 of the Civil Code14should be
applied since their consent was vitiated by fraud, and, thus, the promissory note
does not carry any legal effect despite its negotiation. Either way, the petitioners’
arguments deserve no merit.
The promissory note is clearly negotiable. The appellate court was correct in
finding all the requisites of a negotiable instrument present. The NIL provides:
Section 1. Form of Negotiable Instruments. – An instrument to be negotiable must
conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum
certain in money;
(c) Must be payable on demand, or at a fixed or determinable future
time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be
named or otherwise indicated therein with reasonable certainty.
The promissory note signed by petitioners reads:
209,601.00 Makati, Metro Manila, Philippines, August 4, 1983
For value received, I/we, jointly and severally, promise to pay to the order of
VIOLAGO MOTOR SALES CORPORATION, its office, the principal sum of TWO
HUNDRED NINE THOUSAND SIX HUNDRED ONE ONLY Pesos (P209,601.00),
Philippines Currency, with interest at the rate stipulated herein below, in
installments as follows:
Thirty Six (36) successive monthly installments of P5,822.25, the first installment
to be paid on 9-16-83, and the succeeding monthly installments on the 16th day
of each and every succeeding month thereafter until the account is fully paid,
provided that the penalty charge of three (3%) per cent per month or a fraction
thereof shall be added on each unpaid installment from maturity thereof until fully
paid.
xxxx
Notice of demand, presentment, dishonor and protest are hereby waived.
(Sgd.)
PEDRO F. VIOLAGO
763 Constancia St., Sampaloc, Manila same
(Address)
(Sgd.)
Marivic Avaria
(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
Nego Instruments Set 1 (#s1-70) Page 108 of 112
Lumbas. Dadat
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
(Sgd.) corporation for the payment of the amount stated in the instrument.
respondent
FromFLORENCIA R. VIOLAGO
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
(Address)
committed upon them.
In Concept Builders, Inc. v. NLRC, we held:
(Sgd.)
It is a fundamental principle of corporation law that a corporation is an entity
Jesus Tuazon
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
(WITNESS)
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 Avelino’s 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 Arcilla’s 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 CA’s 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 [CA’s] 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 CA’s 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.
69. G.R. No. 132560 January 30, 2002
WESTMONT BANK (formerly ASSOCIATED BANKING CORP.) vs. EUGENE
ONG
This is a petition for review of the decision1 dated January 13, 1998, of the Court
of Appeals in CA-G.R. CV No. 28304 ordering the petitioner to pay respondent
₱1,754,787.50 plus twelve percent (12%) interest per annum computed from
October 7, 1977, the date of the first extrajudicial demand, plus damages.
The facts of this case are undisputed.
Respondent Eugene Ong maintained a current account with petitioner, formerly
the Associated Banking Corporation, but now known as Westmont Bank.
Sometime in May 1976, he sold certain shares of stocks through Island Securities
Corporation. To pay Ong, Island Securities purchased two (2) Pacific Banking
Corporation manager’s checks,2 both dated May 4, 1976, issued in the name of
Eugene Ong as payee. Before Ong could get hold of the checks, his friend
Paciano Tanlimco got hold of them, forged Ong’s signature and deposited these
with petitioner, where Tanlimco was also a depositor. Even though Ong’s
specimen signature was on file, petitioner accepted and credited both checks to
the account of Tanlimco, without verifying the ‘signature indorsements’ appearing
at the back thereof. Tanlimco then immediately withdrew the money and
absconded.
Instead of going straight to the bank to stop or question the payment, Ong first
sought the help of Tanlimco’s family to recover the amount. Later, he reported the
incident to the Central Bank, which like the first effort, unfortunately proved futile.
It was only on October 7, 1977, about five (5) months from discovery of the fraud,
did Ong cry foul and demanded in his complaint that petitioner pay the value of
the two checks from the bank on whose gross negligence he imputed his loss. In
his suit, he insisted that he did not "deliver, negotiate, endorse or transfer to any
person or entity" the subject checks issued to him and asserted that the
signatures on the back were spurious.3
The bank did not present evidence to the contrary, but simply contended that
since plaintiff Ong claimed to have never received the originals of the two (2)
checks in question from Island Securities, much less to have authorized Tanlimco
to receive the same, he never acquired ownership of these checks. Thus, he had
no legal personality to sue as he is not a real party in interest. The bank then filed
a demurrer to evidence which was denied.
On February 8, 1989, after trial on the merits, the Regional Trial Court of Manila,
Branch 38, rendered a decision, thus:
IN VIEW OF THE FOREGOING, the court hereby renders judgment for the
plaintiff and against the defendant, and orders the defendant to pay the plaintiff:
1. The sum of P1,754,787.50 representing the total face value of the
two checks in question, exhibits "A" and "B", respectively, with
interest thereon at the legal rate of twelve percent (12%) per annum
computed from October 7, 1977 (the date of the first extrajudicial
demand) up to and until the same shall have been paid in full;
2. Moral damages in the amount of P250,000.00;
3. Exemplary or corrective damages in the sum of P100,000.00 by
way of example or correction for the public good;
4. Attorney’s fees of P50,000.00 and costs of suit.
Defendant’s counterclaims are dismissed for lack of merit. SO ORDERED.4
Petitioner elevated the case to the Court of Appeals without success. In its
decision, the appellate court held:
WHEREFORE, in view of the foregoing, the appealed decision is AFFIRMED in
toto.5
Petitioner now comes before this Court on a petition for review, alleging that the
Court of Appeals erred:
I (a) a legal right or rights of the plaintiff, (b) a correlative obligation of the
... IN AFFIRMING THE TRIAL COURT’S CONCLUSION THAT RESPONDENT
HAS A CAUSE OF ACTION AGAINST THE PETITIONER.
II
... IN AFFIRMING THE TRIAL COURT’S DECISION FINDING PETITIONER
LIABLE TO RESPONDENT AND DECLARING THAT THE LATTER MAY
RECOVER DIRECTLY FROM THE FORMER; AND
III
... IN NOT ADJUDGING RESPONDENT GUILTY OF LACHES AND IN NOT
ABSOLVING PETITIONER FROM LIABILITY.
Essentially the issues in this case are: (1) whether or not respondent Ong has a
cause of action against petitioner Westmont Bank; and (2) whether or not Ong is
barred to recover the money from Westmont Bank due to laches.
Respondent admitted that he was never in actual or physical possession of the
two (2) checks of the Island Securities nor did he authorize Tanlimco or any of the
latter’s representative to demand, accept and receive the same. For this reason,
petitioner argues, respondent cannot sue petitioner because under Section 51 of
the Negotiable Instruments Law6 it is only when a person becomes a holder of a
negotiable instrument can he sue in his own name. Conversely, prior to his
becoming a holder, he had no right or cause of action under such negotiable
instrument. Petitioner further argues that since Section 1917 of the Negotiable
Instruments Law defines a "holder" as the ‘payee or indorsee of a bill or note, who
is in possession of it, or the bearer thereof,’ in order to be a holder, it is a
requirement that he be in possession of the instrument or the bearer thereof.
Simply stated, since Ong never had possession of the checks nor did he
authorize anybody, he did not become a holder thereof hence he cannot sue in
his own name.8
Petitioner also cites Article 12499 of the Civil Code explaining that a check, even if
it is a manager’s check, is not legal tender. Hence, the creditor cannot be
compelled to accept payment thru this means.10 It is petitioner’s position that for
all intents and purposes, Island Securities has not yet tendered payment to
respondent Ong, thus, any action by Ong should be directed towards collecting
the amount from Island Securities. Petitioner claims that Ong’s cause of action
against it has not ripened as of yet. It may be that petitioner would be liable to the
drawee bank - - but that is a matter between petitioner and drawee-bank, Pacific
Banking Corporation.11
For its part, respondent Ong leans on the ruling of the trial court and the Court of
Appeals which held that the suit of Ong against the petitioner bank is a desirable
shortcut to reach the party who ought in any event to be ultimately liable. 12 It
likewise cites the ruling of the courts a quo which held that according to the
general rule, a bank who has obtained possession of a check upon an
unauthorized or forged indorsement of the payee’s signature and who collects the
amount of the check from the drawee is liable for the proceeds thereof to the
Nego Instruments Set 1 (#s1-70) Page 109 of 112
Lumbas. Dadat
payee. The theory of said rule is that the collecting bank’s possession of such
check is wrongful.13
Respondent also cites Associated Bank vs. Court of Appeals14 which held that the
collecting bank or last endorser generally suffers the loss because it has the duty
to ascertain the genuineness of all prior endorsements. The collecting bank is
also made liable because it is privy to the depositor who negotiated the check.
The bank knows him, his address and history because he is a client. Hence, it is
in a better position to detect forgery, fraud or irregularity in the indorsement.15
Anent Article 1249 of the Civil Code, Ong points out that bank checks are
specifically governed by the Negotiable Instruments Law which is a special law
and only in the absence of specific provisions or deficiency in the special law may
the Civil Code be invoked.16
Considering the contentions of the parties and the evidence on record, we find no
reversible error in the assailed decisions of the appellate and trial courts, hence
there is no justifiable reason to grant the petition.
Petitioner’s claim that respondent has no cause of action against the bank is
clearly misplaced. As defined, a cause of action is the act or omission by which a
party violates a right of another.17 The essential elements of a cause of action are:
defendant, and (c) an act or omission of the defendant in violation of said legal
right.18
The complaint filed before the trial court expressly alleged respondent’s right as
payee of the manager’s checks to receive the amount involved, petitioner’s
correlative duty as collecting bank to ensure that the amount gets to the rightful
payee or his order, and a breach of that duty because of a blatant act of
negligence on the part of petitioner which violated respondent’s rights.19
Under Section 23 of the Negotiable Instruments Law:
When a signature is forged or made without the authority of the person whose
signature it purports to be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to enforce payment thereof against
any party thereto, can be acquired through or under such signature, unless the
party against whom it is sought to enforce such right is precluded from setting up
the forgery or want of authority.
Since the signature of the payee, in the case at bar, was forged to make it appear
that he had made an indorsement in favor of the forger, such signature should be
deemed as inoperative and ineffectual. Petitioner, as the collecting bank, grossly
erred in making payment by virtue of said forged signature. The payee, herein
respondent, should therefore be allowed to recover from the collecting bank.
The collecting bank is liable to the payee and must bear the loss because it is its
legal duty to ascertain that the payee’s endorsement was genuine before cashing
the check.20 As a general rule, a bank or corporation who has obtained
possession of a check upon an unauthorized or forged indorsement of the
payee’s signature and who collects the amount of the check from the drawee, is
liable for the proceeds thereof to the payee or other owner, notwithstanding that
the amount has been paid to the person from whom the check was obtained.21
The theory of the rule is that the possession of the check on the forged or
unauthorized indorsement is wrongful, and when the money had been collected
on the check, the bank or other person or corporation can be held as for moneys
had and received, and the proceeds are held for the rightful owners who may
recover them. The position of the bank taking the check on the forged or
unauthorized indorsement is the same as if it had taken the check and collected
the money without indorsement at all and the act of the bank amounts to
conversion of the check.22
Petitioner’s claim that since there was no delivery yet and respondent has never
acquired possession of the checks, respondent’s remedy is with the drawer and
not with petitioner bank. Petitioner relies on the view to the effect that where there
is no delivery to the payee and no title vests in him, he ought not to be allowed to
recover on the ground that he lost nothing because he never became the owner
of the check and still retained his claim of debt against the drawer.23 However,
another view in certain cases holds that even if the absence of delivery is
considered, such consideration is not material. The rationale for this view is that

in said cases the plaintiff uses one action to reach, by a desirable short cut, the
person who ought in any event to be ultimately liable as among the innocent
persons involved in the transaction. In other words, the payee ought to be allowed
to recover directly from the collecting bank, regardless of whether the check was
delivered to the payee or not.24
Considering the circumstances in this case, in our view, petitioner could not
escape liability for its negligent acts. Admittedly, respondent Eugene Ong at the
time the fraudulent transaction took place was a depositor of petitioner bank.
Banks are engaged in a business impressed with public interest, and it is their
duty to protect in return their many clients and depositors who transact business
with them.25 They have the obligation to treat their client’s account meticulously
and with the highest degree of care, considering the fiduciary nature of their
relationship. The diligence required of banks, therefore, is more than that of a
good father of a family.26 In the present case, petitioner was held to be grossly
negligent in performing its duties. As found by the trial court:
xxx (A)t the time the questioned checks were accepted for deposit to Paciano
Tanlimco’s account by defendant bank, defendant bank, admittedly had in its files
specimen signatures of plaintiff who maintained a current account with them
(Exhibits "L-1" and "M-1"; testimony of Emmanuel Torio). Given the substantial
face value of the two checks, totalling P1,754,787.50, and the fact that they were
being deposited by a person not the payee, the very least defendant bank should
have done, as any reasonable prudent man would have done, was to verify the
genuineness of the indorsements thereon. The Court cannot help but note that
had defendant conducted even the most cursory comparison with plaintiff’s
specimen signatures in its files (Exhibit "L-1" and "M-1") it would have at once
seen that the alleged indorsements were falsified and were not those of the
plaintiff-payee. However, defendant apparently failed to make such a verification
or, what is worse did so but, chose to disregard the obvious dissimilarity of the
signatures. The first omission makes it guilty of gross negligence; the second of
bad faith. In either case, defendant is liable to plaintiff for the proceeds of the
checks in question.27
These findings are binding and conclusive on the appellate and the reviewing
courts.
On the second issue, petitioner avers that respondent Ong is barred by laches for
failing to assert his right for recovery from the bank as soon as he discovered the
scam. The lapse of five months before he went to seek relief from the bank,
according to petitioner, constitutes laches.
In turn, respondent contends that petitioner presented no evidence to support its
claim of laches. On the contrary, the established facts of the case as found by the
trial court and affirmed by the Court of Appeals are that respondent left no stone
unturned to obtain relief from his predicament.
On the matter of delay in reporting the loss, respondent calls attention to the fact
that the checks were issued on May 4, 1976, and on the very next day, May 5,
1976, these were already credited to the account of Paciano Tanlimco and
presented for payment to Pacific Banking Corporation. So even if the theft of the
checks were discovered and reported earlier, respondent argues, it would not
have altered the situation as the encashment of the checks was consummated
within twenty four hours and facilitated by the gross negligence of the petitioner
bank.28
Laches may be defined as the failure or neglect for an unreasonable and
unexplained length of time, to do that which, by exercising due diligence, could or
should have been done earlier. It is negligence or omission to assert a right within
a reasonable time, warranting a presumption that the party entitled thereto has
either abandoned or declined to assert it.29 It concerns itself with whether or not
by reason of long inaction or inexcusable neglect, a person claiming a right
should be barred from asserting the same, because to allow him to do so would
be unjust to the person against whom such right is sought to be enforced.30
In the case at bar, it cannot be said that respondent sat on his rights. He
immediately acted after knowing of the forgery by proceeding to seek help from
the Tanlimco family and later the Central Bank, to remedy the situation and
recover his money from the forger, Paciano Tanlimco. Only after he had
exhausted possibilities of settling the matter amicably with the family of Tanlimco
and through the CB, about five months after the unlawful transaction took place,
did he resort to making the demand upon the petitioner and eventually before the
court for recovery of the money value of the two checks. These acts cannot be
construed as undue delay in or abandonment of the assertion of his rights.
Moreover, the claim of petitioner that respondent should be barred by laches is
clearly a vain attempt to deflect responsibility for its negligent act.1âwphi1 As
explained by the appellate court, it is petitioner which had the last clear chance to
stop the fraudulent encashment of the subject checks had it exercised due
diligence and followed the proper and regular banking procedures in clearing
checks.31 As we had earlier ruled, the one who had the last clear opportunity to
avoid the impending harm but failed to do so is chargeable with the
consequences thereof.32
WHEREFORE, the instant petition is DENIED for lack of merit. The assailed
decision of the Court of Appeals, sustaining the judgment of the Regional Trial
Court of Manila, is AFFIRMED. Costs against petitioner. SO ORDERED.
70. G.R. No. 138074 August 15, 2003
CELY YANG vs. HON. COURT OF APPEALS, PHILIPPINE COMMERCIAL
INTERNATIONAL BANK, FAR EAST BANK & TRUST CO., EQUITABLE
BANKING CORPORATION, PREM CHANDIRAMANI and FERNANDO DAVID
For review on certiorari is the decision1 of the Court of Appeals, dated March 25,
1999, in CA-G.R. CV No. 52398, which affirmed with modification the joint
decision of the Regional Trial Court (RTC) of Pasay City, Branch 117, dated July
4, 1995, in Civil Cases Nos. 54792 and 5492.3 The trial court dismissed the
complaint against herein respondents Far East Bank & Trust Company (FEBTC),
Equitable Banking Corporation (Equitable), and Philippine Commercial
International Bank (PCIB) and ruled in favor of respondent Fernando David as to
the proceeds of the two cashier’s checks, including the earnings thereof pendente
lite. Petitioner Cely Yang was ordered to pay David moral damages of
₱100,000.00 and attorney’s fees also in the amount of ₱100,000.00.
The facts of this case are not disputed, to wit:
On or before December 22, 1987, petitioner Cely Yang and private respondent
Prem Chandiramani entered into an agreement whereby the latter was to give
Yang a PCIB manager’s check in the amount of ₱4.2 million in exchange for two
(2) of Yang’s manager’s checks, each in the amount of ₱2.087 million, both
payable to the order of private respondent Fernando David. Yang and
Chandiramani agreed that the difference of ₱26,000.00 in the exchange would be
their profit to be divided equally between them.
Yang and Chandiramani also further agreed that the former would secure from
FEBTC a dollar draft in the amount of US$200,000.00, payable to PCIB FCDU
Account No. 4195-01165-2, which Chandiramani would exchange for another
dollar draft in the same amount to be issued by Hang Seng Bank Ltd. of Hong
Kong.
Accordingly, on December 22, 1987, Yang procured the following:
a) Equitable Cashier’s Check No. CCPS 14-009467 in the sum of
₱2,087,000.00, dated December 22, 1987, payable to the order of
Fernando David;
b) FEBTC Cashier’s Check No. 287078, in the amount of
₱2,087,000.00, dated December 22, 1987, likewise payable to the
order of Fernando David; and
c) FEBTC Dollar Draft No. 4771, drawn on Chemical Bank, New
York, in the amount of US$200,000.00, dated December 22, 1987,
payable to PCIB FCDU Account No. 4195-01165-2.
At about one o’clock in the afternoon of the same day, Yang gave the
aforementioned cashier’s checks and dollar drafts to her business associate,
Albert Liong, to be delivered to Chandiramani by Liong’s messenger, Danilo
Ranigo. Ranigo was to meet Chandiramani at Philippine Trust Bank, Ayala
Avenue, Makati City, Metro Manila where he would turn over Yang’s cashier’s
checks and dollar draft to Chandiramani who, in turn, would deliver to Ranigo a
Nego Instruments Set 1 (#s1-70) Page 110 of 112
Lumbas. Dadat
PCIB manager’s check in the sum of P4.2 million and a Hang Seng Bank dollar
draft for US$200,000.00 in exchange.
Chandiramani did not appear at the rendezvous and Ranigo allegedly lost the two
cashier’s checks and the dollar draft bought by petitioner. Ranigo reported the
alleged loss of the checks and the dollar draft to Liong at half past four in the
afternoon of December 22, 1987. Liong, in turn, informed Yang, and the loss was
then reported to the police.
It transpired, however, that the checks and the dollar draft were not lost, for
Chandiramani was able to get hold of said instruments, without delivering the
exchange consideration consisting of the PCIB manager’s check and the Hang
Seng Bank dollar draft.
At three o’clock in the afternoon or some two (2) hours after Chandiramani and
Ranigo were to meet in Makati City, Chandiramani delivered to respondent
Fernando David at China Banking Corporation branch in San Fernando City,
Pampanga, the following: (a) FEBTC Cashier’s Check No. 287078, dated
December 22, 1987, in the sum of ₱2.087 million; and (b) Equitable Cashier’s
Check No. CCPS 14-009467, dated December 22, 1987, also in the amount of
₱2.087 million. In exchange, Chandiramani got US$360,000.00 from David,
which Chandiramani deposited in the savings account of his wife, Pushpa
Chandiramani; and his mother, Rani Reynandas, who held FCDU Account No.
124 with the United Coconut Planters Bank branch in Greenhills, San Juan, Metro
Manila. Chandiramani also deposited FEBTC Dollar Draft No. 4771, dated
December 22, 1987, drawn upon the Chemical Bank, New York for
US$200,000.00 in PCIB FCDU Account No. 4195-01165-2 on the same date.
Meanwhile, Yang requested FEBTC and Equitable to stop payment on the
instruments she believed to be lost. Both banks complied with her request, but
upon the representation of PCIB, FEBTC subsequently lifted the stop payment
order on FEBTC Dollar Draft No. 4771, thus enabling the holder of PCIB FCDU
Account No. 4195-01165-2 to receive the amount of US$200,000.00.
On December 28, 1987, herein petitioner Yang lodged a Complaint4 for injunction
and damages against Equitable, Chandiramani, and David, with prayer for a
temporary restraining order, with the Regional Trial Court of Pasay City. The
Complaint was docketed as Civil Case No. 5479. The Complaint was
subsequently amended to include a prayer for Equitable to return to Yang the
amount of P2.087 million, with interest thereon until fully paid.5
On January 12, 1988, Yang filed a separate case for injunction and damages,
with prayer for a writ of preliminary injunction against FEBTC, PCIB,
Chandiramani and David, with the RTC of Pasay City, docketed as Civil Case No.
5492. This complaint was later amended to include a prayer that defendants
therein return to Yang the amount of P2.087 million, the value of FEBTC Dollar
Draft No. 4771, with interest at 18% annually until fully paid.6
On February 9, 1988, upon the filing of a bond by Yang, the trial court issued a
writ of preliminary injunction in Civil Case No. 5479. A writ of preliminary
injunction was subsequently issued in Civil Case No. 5492 also.
Meanwhile, herein respondent David moved for dismissal of the cases against
him and for reconsideration of the Orders granting the writ of preliminary
injunction, but these motions were denied. David then elevated the matter to the
Court of Appeals in a special civil action for certiorari docketed as CA-G.R. SP
No. 14843, which was dismissed by the appellate court.
As Civil Cases Nos. 5479 and 5492 arose from the same set of facts, the two
cases were consolidated. The trial court then conducted pre-trial and trial of the
two cases, but the proceedings had to be suspended after a fire gutted the Pasay
City Hall and destroyed the records of the courts.
After the records were reconstituted, the proceedings resumed and the parties
agreed that the money in dispute be invested in Treasury Bills to be awarded in
favor of the prevailing side. It was also agreed by the parties to limit the issues at
the trial to the following:
1. Who, between David and Yang, is legally entitled to the proceeds
of Equitable Banking Corporation (EBC) Cashier’s Check No. CCPS
14-009467 in the sum of ₱2,087,000.00 dated December 22, 1987,
and Far East Bank and Trust Company (FEBTC) Cashier’s Check

No. 287078 in the sum of ₱2,087,000.00 dated December 22, 1987,
together with the earnings derived therefrom pendente lite?
2. Are the defendants FEBTC and PCIB solidarily liable to Yang for
having allowed the encashment of FEBTC Dollar Draft No. 4771, in
the sum of US$200,000.00 plus interest thereon despite the stop
payment order of Cely Yang?7
On July 4, 1995, the trial court handed down its decision in Civil Cases Nos. 5479
and 5492, to wit:
WHEREFORE, the Court renders judgment in favor of defendant Fernando David
against the plaintiff Cely Yang and declaring the former entitled to the proceeds of
the two (2) cashier’s checks, together with the earnings derived
therefrom pendente lite; ordering the plaintiff to pay the defendant Fernando
David moral damages in the amount of ₱100,000.00; attorney’s fees in the
amount of ₱100,000.00 and to pay the costs. The complaint against Far East
Bank and Trust Company (FEBTC), Philippine Commercial International Bank
(PCIB) and Equitable Banking Corporation (EBC) is dismissed. The decision is
without prejudice to whatever action plaintiff Cely Yang will file against defendant
Prem Chandiramani for reimbursement of the amounts received by him from
defendant Fernando David. SO ORDERED.8
In finding for David, the trial court ratiocinated:
The evidence shows that defendant David was a holder in due course for the
reason that the cashier’s checks were complete on their face when they were
negotiated to him. They were not yet overdue when he became the holder thereof
and he had no notice that said checks were previously dishonored; he took the
cashier’s checks in good faith and for value. He parted some $200,000.00 for the
two (2) cashier’s checks which were given to defendant Chandiramani; he had
also no notice of any infirmity in the cashier’s checks or defect in the title of the
drawer. As a matter of fact, he asked the manager of the China Banking
Corporation to inquire as to the genuineness of the cashier’s checks (tsn,
February 5, 1988, p. 21, September 20, 1991, pp. 13-14). Another proof that
defendant David is a holder in due course is the fact that the stop payment order
on [the] FEBTC cashier’s check was lifted upon his inquiry at the head office (tsn,
September 20, 1991, pp. 24-25). The apparent reason for lifting the stop payment
order was because of the fact that FEBTC realized that the checks were not
actually lost but indeed reached the payee defendant David.9
Yang then moved for reconsideration of the RTC judgment, but the trial court
denied her motion in its Order of September 20, 1995.
In the belief that the trial court misunderstood the concept of a holder in due
course and misapprehended the factual milieu, Yang seasonably filed an appeal
with the Court of Appeals, docketed as CA-G.R. CV No. 52398.
On March 25, 1999, the appellate court decided CA-G.R. CV No. 52398 in this
wise:
WHEREFORE, this court AFFIRMS the judgment of the lower court with
modification and hereby orders the plaintiff-appellant to pay defendant-
appellant PCIB the amount of Twenty-Five Thousand Pesos (₱25,000.00).
SO ORDERED.10
In affirming the trial court’s judgment with respect to herein respondent David, the
appellate court found that:
In this case, defendant-appellee had taken the necessary precautions to verify,
through his bank, China Banking Corporation, the genuineness of whether (sic)
the cashier’s checks he received from Chandiramani. As no stop payment order
was made yet (at) the time of the inquiry, defendant-appellee had no notice of
what had transpired earlier between the plaintiff-appellant and Chandiramani. All
he knew was that the checks were issued to Chandiramani with whom he was he
had (sic) a transaction. Further on, David received the checks in question in due
course because Chandiramani, who at the time the checks were delivered to
David, was acting as Yang’s agent.
David had no notice, real or constructive, cogent for him to make further inquiry
as to any infirmity in the instrument(s) and defect of title of the holder. To
mandate that each holder inquire about every aspect on how the instrument came
about will unduly impede commercial transactions, Although negotiable
instruments do not constitute legal tender, they often take the place of
money as a means of payment.
The mere fact that David and Chandiramani knew one another for a long time is
not sufficient to establish that they connived with each other to defraud Yang.
There was no concrete proof presented by Yang to support her theory.11
The appellate court awarded ₱25,000.00 in attorney’s fees to PCIB as it found
the action filed by Yang against said bank to be "clearly unfounded and
baseless." Since PCIB was compelled to litigate to protect itself, then it was
entitled under Article 220812 of the Civil Code to attorney’s fees and litigation
expenses.
Hence, the instant recourse wherein petitioner submits the following issues for
resolution:
a - WHETHER THE CHECKS WERE ISSUED TO PREM CHANDIRAMANI BY
PETITIONER;
b - WHETHER THE ALLEGED TRANSACTION BETWEEN PREM
CHANDIRAMANI AND FERNANDO DAVID IS LEGITIMATE OR A SCHEME BY
BOTH PRIVATE RESPONDENTS TO SWINDLE PETITIONER;
c - WHETHER FERNANDO DAVID GAVE PREM CHANDIRAMANI
US$360,000.00 OR JUST A FRACTION OF THE AMOUNT REPRESENTING
HIS SHARE OF THE LOOT;
d - WHETHER PRIVATE RESPONDENTS FERNANDO DAVID AND PCIB ARE
ENTITLED TO DAMAGES AND ATTORNEY’S FEES.13
At the outset, we must stress that this is a petition for review under Rule 45 of the
1997 Rules of Civil Procedure. It is basic that in petitions for review under Rule
45, the jurisdiction of this Court is limited to reviewing questions of law, questions
of fact are not entertained absent a showing that the factual findings complained
of are totally devoid of support in the record or are glaringly erroneous.14 Given
the facts in the instant case, despite petitioner’s formulation, we find that the
following are the pertinent issues to be resolved:
a) Whether the Court of Appeals erred in holding herein respondent
Fernando David to be a holder in due course; and
b) Whether the appellate court committed a reversible error in
awarding damages and attorney’s fees to David and PCIB.
On the first issue, petitioner Yang contends that private respondent Fernando
David is not a holder in due course of the checks in question. While it is true that
he was named the payee thereof, David failed to inquire from Chandiramani
about how the latter acquired possession of said checks. Given his failure to do
so, it cannot be said that David was unaware of any defect or infirmity in the title
of Chandiramani to the checks at the time of their negotiation. Moreover,
inasmuch as the checks were crossed, then David should have, pursuant to our
ruling in Bataan Cigar & Cigarette Factory, Inc. v. Court of Appeals, G.R. No.
93048, March 3, 1994, 230 SCRA 643, been put on guard that the checks were
issued for a definite purpose and accordingly, made inquiries to determine if he
received the checks pursuant to that purpose. His failure to do so negates the
finding in the proceedings below that he was a holder in due course.
Finally, the petitioner argues that there is no showing whatsoever that David gave
Chandiramani any consideration of value in exchange for the aforementioned
checks.
Private respondent Fernando David counters that the evidence on record shows
that when he received the checks, he verified their genuineness with his bank,
and only after said verification did he deposit them. David stresses that he had no
notice of previous dishonor or any infirmity that would have aroused his
suspicions, the instruments being complete and regular upon their face. David
stresses that the checks in question were cashier’s checks. From the very nature
of cashier’s checks, it is highly unlikely that he would have suspected that
something was amiss. David also stresses negotiable instruments are presumed
to have been issued for valuable consideration, and he who alleges otherwise
must controvert the presumption with sufficient evidence. The petitioner failed to
discharge this burden, according to David. He points out that the checks were
delivered to him as the payee, and he took them as holder and payee thereof.
Clearly, he concludes, he should be deemed to be their holder in due course.
Nego Instruments Set 1 (#s1-70) Page 111 of 112
Lumbas. Dadat
We shall now resolve the first issue.
Every holder of a negotiable instrument is deemed prima facie a holder in due
course. However, this presumption arises only in favor of a person who is a
holder as defined in Section 191 of the Negotiable Instruments Law,15meaning a
"payee or indorsee of a bill or note, who is in possession of it, or the bearer
thereof."
In the present case, it is not disputed that David was the payee of the checks in
question. The weight of authority sustains the view that a payee may be a holder
in due course.16 Hence, the presumption that he is a prima facieholder in due
course applies in his favor. However, said presumption may be rebutted. Hence,
what is vital to the resolution of this issue is whether David took possession of the
checks under the conditions provided for in Section 52 17 of the Negotiable
Instruments Law. All the requisites provided for in Section 52 must concur in
David’s case, otherwise he cannot be deemed a holder in due course.
We find that the petitioner’s challenge to David’s status as a holder in due course
hinges on two arguments: (1) the lack of proof to show that David tendered any
valuable consideration for the disputed checks; and (2) David’s failure to inquire
from Chandiramani as to how the latter acquired possession of the checks, thus
resulting in David’s intentional ignorance tantamount to bad faith. In sum,
petitioner posits that the last two requisites of Section 52 are missing, thereby
preventing David from being considered a holder in due course. Unfortunately for
the petitioner, her arguments on this score are less than meritorious and far from
persuasive.
First, with respect to consideration, Section 2418 of the Negotiable Instruments
Law creates a presumption that every party to an instrument acquired the same
for a consideration19 or for value.20 Thus, the law itself creates a presumption in
David’s favor that he gave valuable consideration for the checks in question. In
alleging otherwise, the petitioner has the onus to prove that David got hold of the
checks absent said consideration. In other words, the petitioner must present
convincing evidence to overthrow the presumption. Our scrutiny of the records,
however, shows that the petitioner failed to discharge her burden of proof. The
petitioner’s averment that David did not give valuable consideration when he took
possession of the checks is unsupported, devoid of any concrete proof to sustain
it. Note that both the trial court and the appellate court found that David did not
receive the checks gratis, but instead gave Chandiramani US$360,000.00 as
consideration for the said instruments. Factual findings of the Court of Appeals
are conclusive on the parties and not reviewable by this Court; they carry great
weight when the factual findings of the trial court are affirmed by the appellate
court.21
Second, petitioner fails to point any circumstance which should have put David on
inquiry as to the why and wherefore of the possession of the checks by
Chandiramani. David was not privy to the transaction between petitioner and
Chandiramani. Instead, Chandiramani and David had a separate dealing in which
it was precisely Chandiramani’s duty to deliver the checks to David as payee. The
evidence shows that Chandiramani performed said task to the letter. Petitioner
admits that David took the step of asking the manager of his bank to verify from
FEBTC and Equitable as to the genuineness of the checks and only accepted the
same after being assured that there was nothing wrong with said checks. At that
time, David was not aware of any "stop payment" order. Under these
circumstances, David thus had no obligation to ascertain from Chandiramani what
the nature of the latter’s title to the checks was, if any, or the nature of his
possession. Thus, we cannot hold him guilty of gross neglect amounting to legal
absence of good faith, absent any showing that there was something amiss about
Chandiramani’s acquisition or possession of the checks. David did not close his
eyes deliberately to the nature or the particulars of a fraud allegedly committed by
Chandiramani upon the petitioner, absent any knowledge on his part that the
action in taking the instruments amounted to bad faith.22
Belatedly, and we say belatedly since petitioner did not raise this matter in the
proceedings below, petitioner now claims that David should have been put on
alert as the instruments in question were crossed checks. Pursuant to Bataan
Cigar & Cigarette Factory, Inc. v. Court of Appeals, David should at least have
 Nego Instruments Set 1 (#s1-70) Page 112 of 112
Lumbas. Dadat
inquired as to whether he was acquiring said checks for the purpose for which The appellate court likewise found that like David, PCIB was dragged into this
they were issued, according to petitioner’s submission. case on unfounded and baseless grounds. Both were thus compelled to litigate to
Petitioner’s reliance on the Bataan Cigar case, however, is misplaced. The facts protect their interests, which makes an award of attorney’s fees justified under
in the present case are not on all fours with Bataan Cigar. In the latter case, the Article 2208 (2)28 of the Civil Code. Hence, we rule that the award of attorney’s
crossed checks were negotiated and sold at a discount by the payee, while in the fees to David and PCIB was proper.
instant case, the payee did not negotiate further the checks in question but WHEREFORE, the instant petition is DENIED. The assailed decision of the Court
promptly deposited them in his bank account. of Appeals, dated March 25, 1999, in CA-G.R. CV No. 52398 is AFFIRMED.
The Negotiable Instruments Law is silent with respect to crossed checks, Costs against the petitioner. SO ORDERED.
although the Code of Commerce23 makes reference to such instruments.
Nonetheless, this Court has taken judicial cognizance of the practice that a check
with two parallel lines in the upper left hand corner means that it could only be
deposited and not converted into cash.24 The effects of crossing a check, thus,
relates to the mode of payment, meaning that the drawer had intended the check
for deposit only by the rightful person, i.e., the payee named therein. In Bataan
Cigar, the rediscounting of the check by the payee knowingly violated the avowed
intention of crossing the check. Thus, in accepting the cross checks and paying
cash for them, despite the warning of the crossing, the subsequent holder could
not be considered in good faith and thus, not a holder in due course. Our ruling
in Bataan Cigar reiterates that in De Ocampo & Co. v. Gatchalian.25
The factual circumstances in De Ocampo and in Bataan Cigar are not present in
this case. For here, there is no dispute that the crossed checks were delivered
and duly deposited by David, the payee named therein, in his bank account. In
other words, the purpose behind the crossing of the checks was satisfied by the
payee.
Proceeding to the issue of damages, petitioner merely argues that respondents
David and PCIB are not entitled to damages, attorney’s fees, and costs of suit as
both acted in bad faith towards her, as shown by her version of the facts which
gave rise to the instant case.
Respondent David counters that he was maliciously and unceremoniously
dragged into this suit for reasons which have nothing to do with him at all, but
which arose from petitioner’s failure to receive her share of the profit promised
her by Chandiramani.1âwphi1 Moreover, in filing this suit which has lasted for
over a decade now, the petitioner deprived David of the rightful enjoyment of the
two checks, to which he is entitled, under the law, compelled him to hire the
services of counsel to vindicate his rights, and subjected him to social humiliation
and besmirched reputation, thus harming his standing as a person of good repute
in the business community of Pampanga. David thus contends that it is but proper
that moral damages, attorney’s fees, and costs of suit be awarded him.
For its part, respondent PCIB stresses that it was established by both the trial
court and the appellate court that it was needlessly dragged into this case.
Hence, no error was committed by the appellate court in declaring PCIB entitled
to attorney’s fees as it was compelled to litigate to protect itself.
We have thoroughly perused the records of this case and find no reason to
disagree with the finding of the trial court, as affirmed by the appellate court, that:
[D]efendant David is entitled to [the] award of moral damages as he has been
needlessly and unceremoniously dragged into this case which should have been
brought only between the plaintiff and defendant Chandiramani.26
A careful reading of the findings of facts made by both the trial court and
appellate court clearly shows that the petitioner, in including David as a party in
these proceedings, is barking up the wrong tree. It is apparent from the factual
findings that David had no dealings with the petitioner and was not privy to the
agreement of the latter with Chandiramani. Moreover, any loss which the
petitioner incurred was apparently due to the acts or omissions of Chandiramani,
and hence, her recourse should have been against him and not against David. By
needlessly dragging David into this case all because he and Chandiramani knew
each other, the petitioner not only unduly delayed David from obtaining the value
of the checks, but also caused him anxiety and injured his business reputation
while waiting for its outcome. Recall that under Article 221727 of the Civil Code,
moral damages include mental anguish, serious anxiety, besmirched reputation,
wounded feelings, social humiliation, and similar injury. Hence, we find the award
of moral damages to be in order.