G.R. No.

187769 June 4, 2014

ALVIN PATRIMONIO, Petitioner,

vs.
NAPOLEON GUTIERREZ and OCTAVIO MARASIGAN III, Respondents.

DECISION

BRION, J.:

Assailed in this petition for review on certiorari1 under Rule 45 of the Revised Rules of Court is the decision 2 dated
September 24, 2008 and the resolution3 dated April 30, 2009 of the Court of Appeals (CA) in CA-G.R. CV No. 82301.
The appellate court affirmed the decision of the Regional Trial Court (RTC) of Quezon City, Branch 77, dismissing
the complaint for declaration of nullity of loan filed by petitioner Alvin Patrimonio and ordering him to pay
respondent Octavio Marasigan III (Marasigan) the sum of P200,000.00.

The Factual Background

The facts of the case, as shown by the records, are briefly summarized below.

The petitioner and the respondent Napoleon Gutierrez (Gutierrez) entered into a business venture under the name
of Slam Dunk Corporation (Slum Dunk), a production outfit that produced mini-concerts and shows related to
basketball. Petitioner was already then a decorated professional basketball player while Gutierrez was a well-
known sports columnist.

In the course of their business, the petitioner pre-signed several checks to answer for the expenses of Slam Dunk.
Although signed, these checks had no payee’s name, date or amount. The blank checks were entrusted to
Gutierrez with the specific instruction not to fill them out without previous notification to and approval by the
petitioner. According to petitioner, the arrangement was made so that he could verify the validity of the payment
and make the proper arrangements to fund the account.

In the middle of 1993, without the petitioner’s knowledge and consent, Gutierrez went to Marasigan (the
petitioner’s former teammate), to secure a loan in the amount of P200,000.00 on the excuse that the petitioner
needed the money for the construction of his house. In addition to the payment of the principal, Gutierrez assured
Marasigan that he would be paid an interest of 5% per month from March to May 1994.

After much contemplation and taking into account his relationship with the petitioner and Gutierrez, Marasigan
acceded to Gutierrez’ request and gave him P200,000.00 sometime in February 1994. Gutierrez simultaneously
delivered to Marasigan one of the blank checks the petitioner pre-signed with Pilipinas Bank, Greenhills Branch,
Check No. 21001764 with the blank portions filled out with the words "Cash" "Two Hundred Thousand Pesos
Only", and the amount of "P200,000.00". The upper right portion of the check corresponding to the date was also
filled out with the words "May 23, 1994" but the petitioner contended that the same was not written by Gutierrez.

On May 24, 1994, Marasigan deposited the check but it was dishonored for the reason "ACCOUNT CLOSED." It was
later revealed that petitioner’s account with the bank had been closed since May 28, 1993.

Marasigan sought recovery from Gutierrez, to no avail. He thereafter sent several demand letters to the petitioner
asking for the payment of P200,000.00, but his demands likewise went unheeded. Consequently, he filed a
criminal case for violation of B.P. 22 against the petitioner, docketed as Criminal Case No. 42816.

On September 10, 1997, the petitioner filed before the Regional Trial Court (RTC) a Complaint for Declaration of
Nullity of Loan and Recovery of Damages against Gutierrez and co-respondent Marasigan. He completely denied
authorizing the loan or the check’s negotiation, and asserted that he was not privy to the parties’ loan agreement.
Only Marasigan filed his answer to the complaint. In the RTC’s order dated December 22, 1997,Gutierrez was
declared in default.

The Ruling of the RTC

The RTC ruled on February 3,2003 in favor of Marasigan.4 It found that the petitioner, in issuing the pre-signed
blank checks, had the intention of issuing a negotiable instrument, albeit with specific instructions to Gutierrez not
to negotiate or issue the check without his approval. While under Section 14 of the Negotiable Instruments Law
Gutierrez had the prima facie authority to complete the checks by filling up the blanks therein, the RTC ruled that
he deliberately violated petitioner’s specific instructions and took advantage of the trust reposed in him by the
latter.

Nonetheless, the RTC declared Marasigan as a holder in due course and accordingly dismissed the petitioner’s
complaint for declaration of nullity of the loan. It ordered the petitioner to pay Marasigan the face value of the
check with a right to claim reimbursement from Gutierrez.

The petitioner elevated the case to the Court of Appeals (CA), insisting that Marasigan is not a holder in due
course. He contended that when Marasigan received the check, he knew that the same was without a date, and
hence, incomplete. He also alleged that the loan was actually between Marasigan and Gutierrez with his check
being used only as a security.

The Ruling of the CA

On September 24, 2008, the CA affirmed the RTC ruling, although premised on different factual findings. After
careful analysis, the CA agreed with the petitioner that Marasigan is not a holder in due course as he did not
receive the check in good faith.

The CA also concluded that the check had been strictly filled out by Gutierrez in accordance with the petitioner’s
authority. It held that the loan may not be nullified since it is grounded on an obligation arising from law and ruled
that the petitioner is still liable to pay Marasigan the sum of P200,000.00.

After the CA denied the subsequent motion for reconsideration that followed, the petitioner filed the present
petition for review on certiorari under Rule 45 of the Revised Rules of Court.

The Petition

The petitioner argues that: (1) there was no loan between him and Marasigan since he never authorized the
borrowing of money nor the check’s negotiation to the latter; (2) under Article 1878 of the Civil Code, a special
power of attorney is necessary for an individual to make a loan or borrow money in behalf of another; (3) the loan
transaction was between Gutierrez and Marasigan, with his check being used only as a security; (4) the check had
not been completely and strictly filled out in accordance with his authority since the condition that the subject
check can only be used provided there is prior approval from him, was not complied with; (5) even if the check was
strictly filled up as instructed by the petitioner, Marasigan is still not entitled to claim the check’s value as he was
not a holder in due course; and (6) by reason of the bad faith in the dealings between the respondents, he is
entitled to claim for damages.

The Issues

Reduced to its basics, the case presents to us the following issues:

1. Whether the contract of loan in the amount of P200,000.00 granted by respondent Marasigan to
petitioner, through respondent Gutierrez, may be nullified for being void;

2. Whether there is basis to hold the petitioner liable for the payment of the P200,000.00 loan;
 3. Whether respondent Gutierrez has completely filled out the subject check strictly under the authority
given by the petitioner; and

4. Whether Marasigan is a holder in due course.

The Court’s Ruling

The petition is impressed with merit.

We note at the outset that the issues raised in this petition are essentially factual in nature. The main point of
inquiry of whether the contract of loan may be nullified, hinges on the very existence of the contract of loan – a
question that, as presented, is essentially, one of fact. Whether the petitioner authorized the borrowing; whether
Gutierrez completely filled out the subject check strictly under the petitioner’s authority; and whether Marasigan
is a holder in due course are also questions of fact, that, as a general rule, are beyond the scope of a Rule 45
petition.

The rule that questions of fact are not the proper subject of an appeal by certiorari, as a petition for review under
Rule 45 is limited only to questions of law, is not an absolute rule that admits of no exceptions. One notable
exception is when the findings off act of both the trial court and the CA are conflicting, making their review
necessary.5 In the present case, the tribunals below arrived at two conflicting factual findings, albeit with the same
conclusion, i.e., dismissal of the complaint for nullity of the loan. Accordingly, we will examine the parties’
evidence presented.

I. Liability Under the Contract of Loan

The petitioner seeks to nullify the contract of loan on the ground that he never authorized the borrowing of
money. He points to Article 1878, paragraph 7 of the Civil Code, which explicitly requires a written authority when
the loan is contracted through an agent. The petitioner contends that absent such authority in writing, he should
not be held liable for the face value of the check because he was not a party or privy to the agreement.

Contracts of Agency May be Oral Unless The Law Requires a Specific Form

Article 1868 of the Civil Code defines a contract of agency as a contract whereby a person "binds himself to render
some service or to do something in representation or on behalf of another, with the consent or authority of the
latter." Agency may be express, or implied from the acts of the principal, from his silence or lack of action, or his
failure to repudiate the agency, knowing that another person is acting on his behalf without authority.

As a general rule, a contract of agency may be oral.6 However, it must be written when the law requires a specific
form, for example, in a sale of a piece of land or any interest therein through an agent.

Article 1878 paragraph 7 of the Civil Code expressly requires a special power of authority before an agent can loan
or borrow money in behalf of the principal, to wit:

Art. 1878. Special powers of attorney are necessary in the following cases:

xxxx

(7) To loan or borrow money, unless the latter act be urgent and indispensable for the preservation of the things
which are under administration. (emphasis supplied)

Article 1878 does not state that the authority be in writing. As long as the mandate is express, such authority may
be either oral or written. We unequivocably declared in Lim Pin v. Liao Tian, et al., 7 that the requirement under
Article 1878 of the Civil Code refers to the nature of the authorization and not to its form. Be that as it may, the
authority must be duly established by competent and convincing evidence other than the self serving assertion of
the party claiming that such authority was verbally given, thus:

The requirements of a special power of attorney in Article 1878 of the Civil Code and of a special authority in Rule
138 of the Rules of Court refer to the nature of the authorization and not its form. The requirements are met if
there is a clear mandate from the principal specifically authorizing the performance of the act. As early as 1906,
this Court in Strong v. Gutierrez-Repide (6 Phil. 680) stated that such a mandate may be either oral or written, the
one vital thing being that it shall be express. And more recently, We stated that, if the special authority is not
written, then it must be duly established by evidence:

x x x the Rules require, for attorneys to compromise the litigation of their clients, a special authority. And while the
same does not state that the special authority be in writing the Court has every reason to expect that, if not in
writing, the same be duly established by evidence other than the self-serving assertion of counsel himself that such
authority was verbally given him.(Home Insurance Company vs. United States lines Company, et al., 21 SCRA 863;
866: Vicente vs. Geraldez, 52 SCRA 210; 225). (emphasis supplied).

The Contract of Loan Entered Into by Gutierrez in Behalf of the Petitioner Should be Nullified for Being Void;
Petitioner is Not Bound by the Contract of Loan.

A review of the records reveals that Gutierrez did not have any authority to borrow money in behalf of the
petitioner.1âwphi1 Records do not show that the petitioner executed any special power of attorney (SPA) in favor
of Gutierrez. In fact, the petitioner’s testimony confirmed that he never authorized Gutierrez (or anyone for that
matter), whether verbally or in writing, to borrow money in his behalf, nor was he aware of any such transaction:

ALVIN PATRIMONIO (witness)

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

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

xxxx

Marasigan however submits that the petitioner’s acts of pre-signing the blank checks and releasing them to
Gutierrez suffice to establish that the petitioner had authorized Gutierrez to fill them out and contract the loan in
his behalf.

Marasigan’s submission fails to persuade us.

In the absence of any authorization, Gutierrez could not enter into a contract of loan in behalf of the petitioner. As
held in Yasuma v. Heirs of De Villa,9 involving a loan contracted by de Villa secured by real estate mortgages in the
name of East Cordillera Mining Corporation, in the absence of an SPA conferring authority on de Villa, there is no
basis to hold the corporation liable, to wit:

The power to borrow money is one of those cases where corporate officers as agents of the corporation need a
special power of attorney. In the case at bar, no special power of attorney conferring authority on de Villa was ever
presented. x x x There was no showing that respondent corporation ever authorized de Villa to obtain the loans on
its behalf.

xxxx

Therefore, on the first issue, the loan was personal to de Villa. There was no basis to hold the corporation liable
since there was no authority, express, implied or apparent, given to de Villa to borrow money from petitioner.
Neither was there any subsequent ratification of his act.
 xxxx

The liability arising from the loan was the sole indebtedness of de Villa (or of his estate after his death). (citations
omitted; emphasis supplied).

This principle was also reiterated in the case of Gozun v. Mercado, 10 where this court held:

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

xxxx

Petitioner’s testimony failed to categorically state, however, whether the loan was made on behalf of respondent
or of his wife. While petitioner claims that Lilian was authorized by respondent, the statement of account marked
as Exhibit "A" states that the amount was received by Lilian "in behalf of Mrs. Annie Mercado.

It bears noting that Lilian signed in the receipt in her name alone, without indicating therein that she was acting for
and in behalf of respondent. She thus bound herself in her personal capacity and not as an agent of respondent or
anyone for that matter.

It is a general rule in the law of agency that, in order to bind the principal by a mortgage on real property executed
by an agent, it must upon its face purport to be made, signed and sealed in the name of the principal, otherwise, it
will bind the agent only. It is not enough merely that the agent was in fact authorized to make the mortgage, if he
has not acted in the name of the principal. x x x (emphasis supplied).

In the absence of any showing of any agency relations or special authority to act for and in behalf of the petitioner,
the loan agreement Gutierrez entered into with Marasigan is null and void. Thus, the petitioner is not bound by the
parties’ loan agreement.

Furthermore, that the petitioner entrusted the blank pre-signed checks to Gutierrez is not legally sufficient
because the authority to enter into a loan can never be presumed. The contract of agency and the special fiduciary
relationship inherent in this contract must exist as a matter of fact. The person alleging it has the burden of proof
to show, not only the fact of agency, but also its nature and extent. 11 As we held in People v. Yabut:12

Modesto Yambao's receipt of the bad checks from Cecilia Que Yabut or Geminiano Yabut, Jr., in Caloocan City
cannot, contrary to the holding of the respondent Judges, be licitly taken as delivery of the checks to the
complainant Alicia P. Andan at Caloocan City to fix the venue there. He did not take delivery of the checks as
holder, i.e., as "payee" or "indorsee." And there appears to beno contract of agency between Yambao and Andan
so as to bind the latter for the acts of the former. Alicia P. Andan declared in that sworn testimony before the
investigating fiscal that Yambao is but her "messenger" or "part-time employee." There was no special fiduciary
relationship that permeated their dealings. For a contract of agency to exist, the consent of both parties is
essential, the principal consents that the other party, the agent, shall act on his behalf, and the agent consents so
to act. It must exist as a fact. The law makes no presumption thereof. The person alleging it has the burden of
proof to show, not only the fact of its existence, but also its nature and extent. This is more imperative when it is
considered that the transaction dealt with involves checks, which are not legal tender, and the creditor may validly
refuse the same as payment of obligation.(at p. 630). (emphasis supplied)

The records show that Marasigan merely relied on the words of Gutierrez without securing a copy of the SPA in
favor of the latter and without verifying from the petitioner whether he had authorized the borrowing of money or
release of the check. He was thus bound by the risk accompanying his trust on the mere assurances of Gutierrez.

No Contract of Loan Was Perfected Between Marasigan And Petitioner, as The Latter’s Consent Was Not Obtained.
Another significant point that the lower courts failed to consider is that a contract of loan, like any other contract,
is subject to the rules governing the requisites and validity of contracts in general. 13 Article 1318 of the Civil
Code14enumerates the essential requisites for a valid contract, namely:

1. consent of the contracting parties;

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

3. cause of the obligation which is established.

In this case, the petitioner denied liability on the ground that the contract lacked the essential element of consent.
We agree with the petitioner. As we explained above, Gutierrez did not have the petitioner’s written/verbal
authority to enter into a contract of loan. While there may be a meeting of the minds between Gutierrez and
Marasigan, such agreement cannot bind the petitioner whose consent was not obtained and who was not privy to
the loan agreement. Hence, only Gutierrez is bound by the contract of loan.

True, the petitioner had issued several pre-signed checks to Gutierrez, one of which fell into the hands of
Marasigan. This act, however, does not constitute sufficient authority to borrow money in his behalf and neither
should it be construed as petitioner’s grant of consent to the parties’ loan agreement. Without any evidence to
prove Gutierrez’ authority, the petitioner’s signature in the check cannot be taken, even remotely, as sufficient
authorization, much less, consent to the contract of loan. Without the consent given by one party in a purported
contract, such contract could not have been perfected; there simply was no contract to speak of. 15

With the loan issue out of the way, we now proceed to determine whether the petitioner can be made liable under
the check he signed.

II. Liability Under the Instrument

The answer is supplied by the applicable statutory provision found in Section 14 of the Negotiable Instruments Law
(NIL) which states:

Sec. 14. Blanks; when may be filled.- Where the instrument is wanting in any material particular, the person in
possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on a
blank paper delivered by the person making the signature in order that the paper may be converted into a
negotiable instrument operates as a prima facie authority to fill it up as such for any amount. In order, however,
that any such instrument when completed may be enforced against any person who became a party thereto prior
to its completion, it must be filled up strictly in accordance with the authority given and within a reasonable time.
But if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all
purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority
given and within a reasonable time.

This provision applies to an incomplete but delivered instrument. Under this rule, if the maker or drawer delivers a
pre-signed blank paper to another person for the purpose of converting it into a negotiable instrument, that
person is deemed to have prima facie authority to fill it up. It merely requires that the instrument be in the
possession of a person other than the drawer or maker and from such possession, together with the fact that the
instrument is wanting in a material particular, the law presumes agency to fill up the blanks. 16

In order however that one who is not a holder in due course can enforce the instrument against a party prior to
the instrument’s completion, two requisites must exist: (1) that the blank must be filled strictly in accordance with
the authority given; and (2) it must be filled up within a reasonable time. If it was proven that the instrument had
not been filled up strictly in accordance with the authority given and within a reasonable time, the maker can set
this up as a personal defense and avoid liability. However, if the holder is a holder in due course, there is a
conclusive presumption that authority to fill it up had been given and that the same was not in excess of
authority.17
In the present case, the petitioner contends that there is no legal basis to hold him liable both under the contract
and loan and under the check because: first, the subject check was not completely filled out strictly under the
authority he has given and second, Marasigan was not a holder in due course.

Marasigan is Not a Holder in Due Course

The Negotiable Instruments Law (NIL) defines a holder in due course, thus:

Sec. 52 — A holder in due course is a holder who has taken the instrument under the following conditions:

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

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

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

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

Section 52(c) of the NIL states that a holder in due course is one who takes the instrument "in good faith and for
value." It also provides in Section 52(d) that in order that one may be a holder in due course, it is necessary that at
the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the
person negotiating it.

Acquisition in good faith means taking without knowledge or notice of equities of any sort which could beset up
against a prior holder of the instrument.18 It means that he does not have any knowledge of fact which would
render it dishonest for him to take a negotiable paper. The absence of the defense, when the instrument was
taken, is the essential element of good faith.19

As held in De Ocampo v. Gatchalian:20

In order to show that the defendant had "knowledge of such facts that his action in taking the instrument
amounted to bad faith," it is not necessary to prove that the defendant knew the exact fraud that was practiced
upon the plaintiff by the defendant's assignor, it being sufficient to show that the defendant had notice that there
was something wrong about his assignor's acquisition of title, although he did not have notice of the particular
wrong that was committed.

It is sufficient that the buyer of a note had notice or knowledge that the note was in some way tainted with fraud.
It is not necessary that he should know the particulars or even the nature of the fraud, since all that is required is
knowledge of such facts that his action in taking the note amounted bad faith.

The term ‘bad faith’ does not necessarily involve furtive motives, but means bad faith in a commercial sense. The
manner in which the defendants conducted their Liberty Loan department provided an easy way for thieves to
dispose of their plunder. It was a case of "no questions asked." Although gross negligence does not of itself
constitute bad faith, it is evidence from which bad faith may be inferred. The circumstances thrust the duty upon
the defendants to make further inquiries and they had no right to shut their eyes deliberately to obvious facts.
(emphasis supplied).

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

WITNESS: AMBET NABUS

Q: Now, I refer to the second call… after your birthday. Tell us what you talked about?

A: Since I celebrated my birthday in that place where Nap and I live together with the other crew, there were
several visitors that included Danny Espiritu. So a week after my birthday, Bong Marasigan called me up again and
he was fuming mad. Nagmumura na siya. Hinahanap niya si… hinahanap niya si Nap, dahil pinagtataguan na siya at
sinabi na niya na kailangan I-settle na niya yung utang ni Nap, dahil…

xxxx

WITNESS: Yes. Sinabi niya sa akin na kailangan ayusin na bago pa mauwi sa kung saan ang tsekeng tumalbog… (He
told me that we have to fix it up before it…) mauwi pa kung saan…

xxxx

Q: What was your reply, if any?

A: I actually asked him. Kanino ba ang tseke na sinasabi mo?

(Whose check is it that you are referring to or talking about?)

Q: What was his answer?

A: It was Alvin’s check.

Q: What was your reply, if any?

A: I told him do you know that it is not really Alvin who borrowed money from you or what you want to appear…

xxxx

Q: What was his reply?

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

Since he knew that the underlying obligation was not actually for the petitioner, the rule that a possessor of the
instrument is prima facie a holder in due course is inapplicable. As correctly noted by the CA, his inaction and
failure to verify, despite knowledge of that the petitioner was not a party to the loan, may be construed as gross
negligence amounting to bad faith.

Yet, it does not follow that simply because he is not a holder in due course, Marasigan is already totally barred
from recovery. The NIL does not provide that a holder who is not a holder in due course may not in any case
recover on the instrument.22 The only disadvantage of a holder who is not in due course is that the negotiable
instrument is subject to defenses as if it were non-negotiable.23 Among such defenses is the filling up blank not
within the authority.

On this point, the petitioner argues that the subject check was not filled up strictly on the basis of the authority he
gave. He points to his instruction not to use the check without his prior approval and argues that the check was
filled up in violation of said instruction.

Check Was Not Completed Strictly Under The Authority Given by The Petitioner
Our own examination of the records tells us that Gutierrez has exceeded the authority to fill up the blanks and use
the check.1âwphi1 To repeat, petitioner gave Gutierrez pre-signed checks to be used in their business provided
that he could only use them upon his approval. His instruction could not be any clearer as Gutierrez’ authority was
limited to the use of the checks for the operation of their business, and on the condition that the petitioner’s prior
approval be first secured.

While under the law, Gutierrez had a prima facie authority to complete the check, such prima facie authority does
not extend to its use (i.e., subsequent transfer or negotiation)once the check is completed. In other words, only
the authority to complete the check is presumed. Further, the law used the term "prima facie" to underscore the
fact that the authority which the law accords to a holder is a presumption juris tantumonly; hence, subject to
subject to contrary proof. Thus, evidence that there was no authority or that the authority granted has been
exceeded may be presented by the maker in order to avoid liability under the instrument.

In the present case, no evidence is on record that Gutierrez ever secured prior approval from the petitioner to fill
up the blank or to use the check. In his testimony, petitioner asserted that he never authorized nor approved the
filling up of the blank checks, thus:

ATTY. DE VERA: Did you authorize anyone including Nap Gutierrez to write the date, May 23, 1994?

WITNESS: No, sir.

Q: Did you authorize anyone including Nap Gutierrez to put the word cash? In the check?

A: No, sir.

Q: Did you authorize anyone including Nap Gutierrez to write the figure P200,000 in this check?

A: No, sir.

Q: And lastly, did you authorize anyone including Nap Gutierrez to write the words P200,000 only xx in this check?

A: No, sir. (T.S.N., Alvin Patrimonio, November 11, 1999). 24

Notably, Gutierrez was only authorized to use the check for business expenses; thus, he exceeded the authority
when he used the check to pay the loan he supposedly contracted for the construction of petitioner's house. This is
a clear violation of the petitioner's instruction to use the checks for the expenses of Slam Dunk. It cannot therefore
be validly concluded that the check was completed strictly in accordance with the authority given by the
petitioner.

Considering that Marasigan is not a holder in due course, the petitioner can validly set up the personal defense
that the blanks were not filled up in accordance with the authority he gave. Consequently, Marasigan has no right
to enforce payment against the petitioner and the latter cannot be obliged to pay the face value of the check.

WHEREFORE, in view of the foregoing, judgment is hereby rendered GRANTING the petitioner Alvin Patrimonio's
petition for review on certiorari. The appealed Decision dated September 24, 2008 and the Resolution dated April
30, 2009 of the Court of Appeals are consequently ANNULLED AND SET ASIDE. Costs against the respondents.

SO ORDERED.

.R. No. 208321 July 30, 2014

WESLEYAN UNIVERSITY PHILIPPINES, Petitioner,
vs.
NOWELLA REYES, Respondent.

DECISION

VELASCO, JR., J.:

Nature of the Case

The issue in this petition boils down to the legality of respondent Nowella Reyes' termination as University
Treasurer of petitioner Wesleyan University - Philippines (WUP) on the ground of loss of trust and confidence.
Petitioner prays in this recourse that We reverse the February 28, 2013 Decision of the Court of Appeals (CA) in CA-
G.R. SP No. 122536 which declared respondent's termination illegal.

The Facts

On March 16, 2004, respondent Nowella Reyes was appointed as WUP's University Treasurer on probationary
basis. A little over a year after, she was appointed as full time University Treasurer.

On April 27, 2009, a new WUP Board of Trustees was constituted. Among its first acts was to engage the services of
Nepomuceno Suner & Associates Accounting Firm (External Auditor) to investigate circulating rumors on alleged
anomalies in the contracts entered into by petitioner and in its finances.

Discovered following an audit were irregularities in the handling of petitioner’s finances, mainly, the encashment
by its Treasury Department of checks issued to WUP personnel, a practice purportedly in violation of the imprest
system of cash management, and the encashment of various crossed checks payable to the University Treasurer by
Chinabank despite management’s intention to merelyhave the funds covered thereby transferred from one of
petitioner’s bankaccounts to another. The External Auditor’s report embodied the following findings and
recommendations:1

Treasury Department (Cash Management):

Findings:

1. It was noted that checks consisting of various checks payable to teachers, staffs and other third parties
had been the subject of encashment directly with the Treasury Department under the stewardship of
Mrs. Nowella A. Reyes,the University Treasurer. This practice is a clear violation of imprest system of cash
management, hence, resulting to unsound accounting practice. This laxity in cash management of those
checks were paid as intended for them. Recommendations:

For internal control reasons, the treasury should not accept any check encashment from its daily
collections. Checks are being issued for encashment with our depository bank for security reasons. The
mere acceptance of checks from the collections is tantamount to cash disbursement out of collections.

Findings:

2. It was also noted that various checks payable to the Treasurer of WUP x x x had been negotiated for
encashment directly to China Bank – Cabanatuan Branch, while the intention of the management for
these checks were merely for fund transfer with the other account maintained at China Bank. This
practice is a violation not only in the practice of accounting/cash custodianship but had been mingled with
spurious elements. Unfortunately, check vouchers relating to this exception are nowhere to be found or
not on file.
Findings:

3. A crossed check payable to the Treasurer – [WUP] x x x had been negotiated for encashment to China
Bank – Cabanatuan Branch despite of the restriction indicated in the face of the check. Unfortunately, the
used check was no longer found on file.

As a result of said audit, petitioner served respondent a Show Cause Order and placed her under
preventive suspension.2 The said Show Cause Order required her to explain the following matters found
by the External Auditors:

(a) your encashment of Php300,000.00 ofa crossed check you issued payable to yourself
(Chinabank Check No. 000873613 dated 26 November 2008) x x x;

(b) the encashment of various checks without any supporting vouchers x x x;

(c) unliquidated cash advances in the aggregate amount of Php9.7 million x x x. 3

On June 18, 2009, respondent submitted her Explanation. Following which, WUP’s Human Resources Development
Office (HRDO) conducted an investigation. Finding respondent’s Explanation unsatisfactory, the HRDO, on July 2,
2009, submitted an Investigation Report4 to the University President containing its findings and recommending
respondent’s dismissal as University Treasurer.

Upon receipt of her notice of termination on July 9, 2009, respondent post-haste filed a complaint for illegal
dismissal with the Arbitration Branch of the National Labor Relations Commission. She contended that her
dismissal was illegal, void and unjust, for the following reasons:

First,her 60-day preventive suspension violated the Labor Code provisions prohibiting such suspensions tolast for
more than thirty (30) days. Thus, the fact that she was not reinstated to her former position before the lapse of
thirty (30) days, amounted to constructive dismissal;5 Second,there was a violation of her right to substantive and
procedural due process, as evidencedby petitioner’s failure to apply the pertinent due process provisions under its
Administrative and Personnel Policy Manual;6 and

Finally,the charges against her werebased on mere suspicion and speculations and unsupported by evidence.7

Petitioner, for its part, predicated its defense on the contention that respondent was a highly confidential
employee who handled significant amounts of money as University Treasurer and that the irregularities attributed
to her in the performance ofher duties justify her dismissal on the basis of loss of trust and confidence. 8

Petitioner also averred that the 60-day preventive suspension thus imposed does not necessarily make
suchsuspension void, inasmuch as the law merely requires that after a 30-day preventive suspension, the affected
employee shall automatically be reinstated. But in the case of respondent, there was no need for her automatic
reinstatement inasmuch as she was duly terminated within the 30-day period of her preventive
suspension.9Moreover, respondent was duly afforded her right to due process since WUP substantially complied
with the twin-notice rule.

Ruling of the Labor Arbiter

On December 15, 2010, Labor Arbiter Reynaldo V. Abdon rendered a Decision finding for respondent. The
dispositive portion of the Labor Arbiter Decision reads:

WHEREFORE, premises considered, judgment is hereby rendered, DECLARING that complainant Nowella Reyes x x
x [was] illegally dismissed by respondent Wesleyan University Philippines.

Accordingly, respondent Wesleyan University Philippines through its President is hereby DIRECTED to:
 (1) Reinstate complainant Nowella Reyes to her former or equivalent position without loss of seniority
right;

(1.1) Since reinstatement is immediately executory, to render a Report of Compliance to this

Office within ten (10) days from receipt of this Decision.

(2) Pay complainant Reyes her backwages, from the time of her dismissal until reinstatement, the present
sum of which is P429,000.00;

(3) Pay complainant Reyes, her 13th month pay in the sum of P52,000; her shared (sic) in related learning
experience fee, P12,000.00; clothing allowance, P6,000.00; Honorarium as member of standing
committees, P4,000.00; and her vacation leave credits in the sum of P17,862.59;

(4) Pay complainant Reyes, moral damages in the sum of P150,000.00, exemplary damages in the amount
of P100,000.00, and 10% attorney’s fees in the sum of P77,086.25;

xxxx

SO ORDERED.10

The Labor Artbiter noted, as respondent has insisted, that the charges against the latter were based on mere
rumors and speculations. As observed too by the Labor Arbiter, petitioner itself was in the wrong because it had no
proper policies on its accounting and financial procedures and that the encashment and accommodation of checks
to personnel, especially after banking hours, had been the practice of its previous and present administrations.
Thus, it was unfair to put all the blame on respondent without any evidence that her actionswere highly irregular,
unfair or unjustified.11

As regards petitioner’sfindings on the alterations in the Check Disbursement Voucher (CDV), unliquidated cash
advances and duplicate checks, the Labor Arbiter found and wrote:

Anent the alleged finding of the university that there was material alteration on the documents as regards the
Check Disbursement Voucher (CDV), for allegedly there was an absence of Board Resolution entry in the CDV filed
in the Accounting while the copy submitted by the Treasurer has a Board Resolution entry as well as the word ATM
on the payee portion on the photocopy as crossed out while in the original it was not crossed out, respondent
cannot summarily state that complainant was at fault. The Human Resource should have conducted an in-depth
investigation on this matter. Unfortunately, respondent just followed the twin-notice rule, and did not conduct a
thorough administrative investigation in accordance with their own internal rules and policies in the Manual.
Consequently, this Office has serious doubt that such matter was the fault of the complainant for the blame may
fall on the accounting personnel who is handling the CDV.

With respect to the unliquidated cash advances, it is not likewise the fault of the complainant. She pointed out that
follow ups of the liquidation is [sic] being handled by the auditor, while respondent claims that she was previously
handling the same before it was transferred to Accounting Office in August 2008. We see no evidence to prove
that the liquidation is being handled by the complainant prior to August 2008. Moreover, it is common practice
thatthe Treasurer disburses the funds such as cash advances but the liquidation must be done by the beneficiary of
the fund, and the responsible people who should follow up the liquidation is the accounting office.

With respect to the duplicate checks, the same were done by a syndicate or individuals not connectedwith the
University. The bank has already admitted responsibility in the encashment of these checks and had returned the
amounts to the respondent University, thus complainant has no fault about this incident. 12

Ruling of the NLRC

Petitioner filed an appeal withthe National Labor Relations Commission (NLRC) which was granted in the tribunal’s
Decision dated July 11, 2011, declaring that respondentwas legally dismissed. However, petitioner was ordered to
pay respondent her proportionate 13th month pay, the monetary value of her vacation leave, and attorney’s fees.

Adopting a stance entirely opposite to that of the Labor Arbiter, the NLRC held that respondent failed to
controvert and disprove the established charges of petitioner (as appellant-respondent) and insteadconveniently
put the blame on other departments for her inculpatory acts. The NLRC opined that her termination was not
motivated by the change of petitioner’s officers but by the University’s goal to promote the economy and
efficiency of its Treasury Department.13

In net effect, the NLRC found petitioner’s contention of loss of trust and confidence in respondent with sufficient
basis. While respondent, so the NLRC notes, may not have been guilty ofwillful breach of trust, the fact that she
held a highly confidential position, and considering that anomalous transactions transpired under her command
responsibility, provided petitioner with ample ground todistrust and dismiss her.14 The NLRC explained:

In this case, complainant-appellee [herein respondent] may not have been guilty of willful breach of trust. But as
Treasurer of [WUP] who handles and supervises all monetary transactions in the University and being a highly
confidential employee at that, holding trust and confidence and after considering the series of irregular and
anomalous transactions that transpired under complainant-appellee’s command responsibility, respondent has
basis or ample reason to distrust complainant-appellee. Thus, we cannot justly deny [WUP] the authority to
dismiss complainant-appellee.

The principle of respondent (sic) superior or command responsibility may be cited as basis for the termination of
employment of managerial employees based on loss of trust and confidence. In the Etcuban case (Ibid) the
Supreme Court in upholding the validity of petitioner-employee’s dismissal on the ground of loss of trust and
confidence, ruled that even if the employee x x x had no actual and direct participation in the alleged anomalies,
his failure to detect any anomaly that would normally fall withinthe scope of his work reflects his ineffectiveness
and amounts to gross negligence and incompetence which are likewise justifiable grounds for his irregularity, for
what is material is that his actuations were more than sufficient to sow in his employer the seed of mistrust and
loss of confidence.

As found by the External Auditor, complainant-appellee should have implemented an imprest system of cash
management in order to secure the indicated payees in those checks and they were paid of the checks as intended
for them. It appears that checks payable to teachers, staffs and other third parties had beenthe subject of
encashment directly with the Treasury Department x x x and this is an unsound accounting practice.

Moreover, the External Auditors found that various checks payable to the Treasurer of Wesleyan University has
been negotiated for encashment directly to China Bank-Cabanatuan Branch while the intention of the
management for those checks weremerely for fund transfer with the other account maintained at China Bank.
That this practice violated accounting or cash custodianship and check vouchers are nowhere to be found.

Further, the crossed check payable to the Treasurer (complainantappellee) in the amount of P300,000.00 dated 26
November 2008 had been negotiated for encashment to China Bank – Cabanatuan Branch despite of restriction
indicated in the face of the check and that the used check was no longer found on file. There is a need for a clear
policy when to issue crossed-checks or otherwise and the use of debit/credit memo to transfer one account to
another with the same bank. That these acts of violation of cash and check custodianship by complainant-appellee
resulted in the loss of respondent-appellant thus affecting the economy of the respondent-appellant institution.

In view of our finding that respondents-appellants (sic) has validly terminated complainant-appellee the latter’s
claim for damages and attorney’s fees lacks sufficient factual and legal basis. Accordingly, the Labor Arbiter’s
decision directing the reinstatement of complainantappellee with full backwages ishereby vacated and set aside. 15

The NLRC denied respondent’s motion for reconsideration in a Resolution dated September 29, 2011.Therefrom,
respondent went on Certiorari to the CA, inCA-G.R. SP No. 122536.
 Ruling of the Court of Appeals

On February 28, 2013, the CA, through its assailed Decision,16 found the NLRC’s ruling tainted with grave abuse of
discretion and reinstated the Decision of the Labor Arbiter. The fallo of the CA Decision reads:

WHEREFORE, premises considered, the assailed Decision and Resolution of the National Labor Relations
Commission dated July 11, 2011 and September 29, 2011 are REVERSED and SET ASIDE. The Decision of the Labor
Arbiter dated December 15, 2010 is hereby REINSTATED, subject to the modification that if reinstatement is no
longer feasible, petitioner shall be awarded separation pay equivalent to one month salary for every year ofservice
reckoned from the time of employment to the finality of this decision. 17

Holding that respondent’s termination was unjust, the CA, in virtual restoration of the findings and conclusions of
the Labor Arbiter, pointed out, among others, that: (1) respondent sufficiently countered all charges against her;
(2) it had been the practice of the previous and present administrations of petitioner to encash and accommodate
checks of WUP personnel; thus, it would be unjust to penalize respondent for observing a practice already in place
when she assumed office; (3) the duty to liquidate cash advances is assigned to the internal auditor; (4) it has been
established that the encashments of spurious duplicate checks were perpetrated by individuals not connected with
WUP, and that the bank admitted responsibility therefor and had returned the amount involved to petitioner; (5)
there was no imputation of any violation of the University’s Administration and Personnel Policy Manual; (6) while
the acts complained of violated the imprest system of cash management, there was no showing that the said
system had been adopted and observed in the school’s accounting and financial procedures; and (7) there was no
showing that respondent had the responsibility to implement changes in petitioner’s accounting system even if it
were not in accordance with the generally accepted principles of accounting.18

Hence, the instant petition.

The Issues

For consideration herein are the following issues raised by petitioner:

1. Whether or not the CA over-reached its power of review under Rule 65 of the Rules of Court when it
reversed the judgment of the NLRC; and

2. Whether or not the CA erred in finding respondent illegally dismissed by petitioner on the ground of
loss of trust and confidence.

The Court’s Ruling

The petition is impressed with merit. The CA erred in reinstating the Labor Arbiter’s Decision and in finding that
respondent was illegally dismissed.

The CA’s power of review

We first resolve the procedural issue raised in this recourse. Petitioner contends that the CA over-reached its
power of review under Rule 65 when it substituted its own judgment over errors of judgment that it found in the
NLRC Decision, stressing that the province of a writ of certiorari is to correct only errors of jurisdiction and not
errors of judgment.

This contention is misplaced. It is settled that under Section 9 of Batas Pambansa Blg.129, 19 as amended by
Republic Act No. 7902,20 the CA, pursuant to the exercise of its original jurisdiction over petitions for certiorari, is
specifically given the power to pass upon the evidence, if and when necessary, to resolve factual issues. Sec. 9
clearly states:
The Court of Appeals shall have the power to try cases and conduct hearings, receive evidence and perform any
and all acts necessary to resolve factual issues raised in cases falling within its original and appellate jurisdiction,
including the power to grant and conduct new trials or further proceedings. x x x

Hence, the appellate court acted within its sound discretion when it re-evaluated the NLRC’s factual findings and
substituted the latter’s own judgment.

Loss of trust and confidence as a ground for termination

We now proceed to the substantive issue on the propriety of respondent’s dismissal due to loss of trust and
confidence.As provided in Art. 282(c) of Presidential Decree No. 442, otherwise known as the Labor Code of the
Philippines:

Article 282. Termination by employer.An employer may terminate an employment for any of the following causes:

xxxx

c. Fraud or willful breach by the employee of the trust reposed in him by his employer or duly authorized
representative;

We explained in M+W Zander Philippines, Inc. v. Enriquez 21 the requisites of a valid dismissal based on loss of trust
and confidence. As the case elucidates:

Article 282 (c) of the Labor Code allows an employer to terminate the services of an employee for loss of trust and
confidence. Certain guidelines must be observed for the employer to terminate an employee for loss of trust and
confidence. We held in General Bank and Trust Company v. Court of Appeals, viz.:

[L]oss of confidence should not be simulated. It should not be used as a subterfuge for causes which are improper,
illegal, or unjustified. Loss of confidence may not be arbitrarily asserted in the face of overwhelming evidence to
the contrary. It must be genuine, not a mere afterthought tojustify earlier action taken in bad faith.

The first requisite for dismissal on the ground of loss of trust and confidence is that the employee concerned must
be one holding a position of trust and confidence.

There are two classes of positions of trust: managerial employees and fiduciary rank-and-file employees.

Managerial employees are defined as those vested with the powers or prerogatives to lay down management
policies and to hire, transfer, suspend, lay-off, recall, discharge,assign or discipline employees or effectively
recommend such managerialactions. They refer to those whose primary duty consists of the management of the
establishment in which they are employed or of a department or a subdivision thereof, and to other officers or
members of the managerialstaff. Officers and members of the managerial staff perform work directlyrelated to
management policies of their employer and customarily and regularly exercise discretion and independent
judgment.

The second class or fiduciary rank-and-file employees consist of cashiers, auditors, property custodians, etc., or
those who, in the normal exercise of their functions, regularlyhandle significant amounts of money or property.
These employees, though rank-and-file, are routinely charged with the care and custody of the employer’s money
or property, and are thus classified as occupying positions of trust and confidence.22

xxxx

The second requisite of terminating an employee for loss of trust and confidence is that there must be an act that
would justify the loss of trust and confidence. To be a valid cause for dismissal, the loss of confidence must be
based on a willful breach of trust and founded on clearly established facts. 23
To summarize, the first requisite is that the employee concerned must be one holding a position of trust and
confidence, thus, one who is either: (1) a managerial employee; or (2) a fiduciary rank-and-file employee, who, in
the normal exercise of his or her functions, regularly handles significant amounts of money or property of the
employer. The secondrequisite is that the loss of confidence must be based on a willful breach of trust and
founded on clearly established facts.

In Lima Land, Inc. v. Cuevas,24 We discussed the difference between the criteria for determining the validity of
invoking loss of trust and confidence as a ground for terminating a managerial employee on the one hand and a
rank-and-file employee on the other. In the said case, We held that with respect to rank-and-file personnel, loss of
trust and confidence, as ground for valid dismissal,requires proof of involvement in the alleged events in question,
and that mere uncorroborated assertions and accusations by the employer would not suffice. Withrespect to a
managerial employee, the mere existence of a basis for believing that such employee has breached the trust of his
employer would suffice for his dismissal. The following excerpts from Lima Land are instructive:

As firmly entrenched in our jurisprudence, loss of trust and confidence, as a just cause for termination of
employment, is premised on the fact that an employee concerned holds a position where greater trust is placed by
management and from whom greater fidelity to duty is correspondingly expected. This includes managerial
personnel entrusted with confidence on delicate matters, such as the custody, handling, or care and protection of
the employer’s property.The betrayal of this trust is the essence of the offense for which an employee is penalized.

It must be noted, however, that ina plethora of cases, this Court has distinguished the treatment of managerial
employees from that of rank-and-file personnel, insofar as the application of the doctrine of loss of trust and
confidence is concerned. Thus, with respect to rank-and-file personnel, loss of trust and confidence, as ground for
valid dismissal, requires proof of involvement in the alleged events in question, and that mere uncorroborated
assertions and accusations by the employer will not be sufficient. But as regards a managerial employee, the mere
existence of a basis for believing that such employee has breached the trust of his employer would suffice for his
dismissal. Hence, in the case of managerial employees, proof beyond reasonable doubt is not required, it being
sufficient that there is some basis for such loss of confidence, such as when the employer has reasonableground to
believe that the employee concerned is responsible for the purported misconduct, and the nature of his
participation therein renders him unworthy of the trust and confidence demanded of his position.

On the other hand, loss of trust and confidence as a ground of dismissal has never been intended to afford an
occasion for abuse because of its subjective nature. It should not be used as a subterfuge for causes which are
illegal, improper, and unjustified. It must be genuine, not a mere afterthought intended to justify an earlier action
taken in bad faith. Let it not be forgotten that what is at stake is the means of livelihood, the name, and the
reputation of the employee. To countenance an arbitrary exercise of that prerogative is to negate the employee’s
constitutional right to security of tenure.25

Respondent’s employment classification is irrelevant in light of her proven willful breach

There is no doubt that respondent held a position of trust; thus, greater fidelity is expected of her. She was not an
ordinary rank-and-file employee but an employee occupying a very sensitive position. As University Treasurer, she
handled and supervised all monetary transactions and was the highest custodian of funds belonging to WUP. 26 To
be sure, in the normal exercise of her functions, she regularly handled significant amounts of money of her
employer and managed a critical department.

The presence of the first requisite iscertain. So is as regards the second requisite. Indeed, the Court finds that
petitioner adequately proved respondent’s dismissal was for a just cause, based on a willful breach of trust and
founded on clearly established facts as required by jurisprudence. At the end of the day, the question of whether
she was a managerial or rank-andfile employee does not matter in this case because not only is there basis for
believing that she breached the trust of her employer, her involvement in the irregularities attending to
petitioner’sfinances has also been proved.

To recall, petitioner, per its account, allegedly lost trust and confidence in respondent owing to any or an interplay
of the following events: (1) she encashed a check payable to the University Treasurer in the amount of three
hundred thousand pesos (PhP 300,000); (2) she encashed crossed checks payable to the University Treasurer,
when the intention of management in this regard was to merely transfer funds from one of petitioner’s accounts
to another in the same bank; (3) she allowed the Treasury Department to encash the checks issued to WUP
personnel rather than requiring the latter to have said checks encashed by the bank, in violation of the imprest
system of accounting; (4) she caused the disbursement of checks without supporting check vouchers; (5) there
were unliquidated cash advances; and (6) spurious duplicate checks bearing her signature were encashed causing
damage to petitioner.

We disagree with the CA’s finding that respondent has sufficiently countered all inculpatory allegations and
accusations against her. On the contrary, We find that here, there was anadmitted, actual and real breach of duty
committed by respondent, which translates into a breach of trust and confidence in her. For perspective,
respondent’s explanation as to the charges against her is as follows:

1. That the alleged crossed check issued by her payable to THE TREASURER – WUP was done in the
exercise of her duty and function as such, and not with her name and not to herself and personal favor,
and that said check had been prepared passing through the usual system; 2. That the University heads
were the beneficiaries of said amount who strongly requested that their love giftbe given, hence, the
encashment;

3. That the amount of the check was properly disposed of as evidenced by the document bearing the
signatures of recipients;

4. That the Office to pointto if vouchers and supporting documents will have to be checked concerning
payments made is the Accounting Office;

5. That cash advances to various University personnel pass through her office in the exercise of her duties
assuch but the office who follow up the liquidation of payments received is the Office of the University
Auditor;

6. That respondent Reyes adopted her reply on the show-cause order in the investigation previously
conducted by Dr. Jeremias Garcia about the duplicated checks alleging among others:

a) She and her staff confirmed that only the checks issued to General Capulong and Leodigario
David were encashed by the University Teller;

b) The check issued to Norma de Jesus was encashed by the Pick-up Chinabank Teller on
December 5, 2008 while collecting deposits from the University with the assistance of the
University teller;

c) That the check issued to Mercedes was not encashed with the University teller but with
WEMCOOP;

d) As to the encashment and accommodation of checks to personnel, it has been the practice of
previousand present administration moreso when employees cannot anymore go to Chinabank
to transact business as it is mostly beyond banking hours when checks are ready for
disbursement;

e) That Respondent’s department has no control over fraudulent transactions done outside the
University, that it is the Bank’s duty to protect its clients as tothe proper procedures to secure
our account;

f) That the computer system program of the University’s depository bank has very limited
capabilities to detect fraudulent entries;
 g) That the signature verifier also had been remiss in carefully checking the authenticity
ofprevious signatories.27

a. Respondent’s encashment of checks

As it were, respondent did not deny, in fact admitted, the encashment of the three hundred thousand peso (PhP
300,000) crossed check payable to the University Treasurer which covered the total amount of the "love gift" for
administrative and academic officials of WUP. Neither did she deny the fact that the Treasury Department
encashed checks issued to WUP personnel rather than requiring them to have the checks encashed by the bank.
Instead, she explained that the beneficiaries of the amounts strongly requested that their love gifts be given in
cash, hence the encashment of the PhP 300,000 crossed check and, thereafter, the accommodation and
encashment of their checks directly by the Treasury Department. Moreover, she submitted a document bearing
the signatures of the recipients of the "love gift" as proof that the amount was disposed properly. 28 She further
insisted that this was the usual practice of the University and that she merely accommodated the requests of WUP
personnel especially when Chinabank was already closed.

Jurisprudence has pronounced that the crossing of a check means that the check may not be encashed but only
deposited in the bank.29 As Treasurer, respondent knew or is at least expected to be aware of and abide by this
basic banking practice and commercial custom. Clearly, the issuance of a crossed check reflects management’s
intention to safeguard the funds covered thereby, its special instruction to have the same deposited to another
account and its restriction on its encashment.

Here, respondent, as aptly detailed inthe auditor’s report, disregarded management’s intentions and ignored the
measures in place to secure the handling of WUP’s funds. By encashing the crossed checks, respondent put the
funds covered thereby under the riskof being lost, stolen, co-mingled with other funds or spent for other purposes.
Furthermore, the accommodation and encashment by the Treasury Department of checks issued to WUP
personnel were highly irregular. First, WUP, not being a bank, had no business encashing the checks of its
personnel.30 More importantly, in encashing the said checks, the Treasury Department made disbursements
contrary to the wishes ofmanagement because, in issuing said checks, management has madeclear its intention
that monies therefor would be sourced from petitioner’s deposit with Chinabank, under a specific account, and not
from the cash available in the Treasury Department.

That the encashment of crossed checks and payment of checks directly to WUP personnel had been the practice of
the previous and present administration of petitioner is of no moment. To Our mind, this was simply respondent’s
convenient excuse, a poorlydisguised afterthought, when her unbecoming carelessness in managing WUP’s
finances was exposed. Moreover, the prevalence of this practice could have been contained if only respondent
consistently observed the regular procedure for encashing crossed checks and properly handled requests for
accommodation of checks issued to the WUP personnel.

b. Unliquidated cash advances

On the matter of unliquidated cash advances in the aggregate amount of nine million seven hundred thousand
pesos (PhP 9,700,000), respondent explained that while it was true that cash advances to WUP personnel passed
through her office in the exercise of her duties as University Treasurer, the office that follows up the liquidation of
advances received is the office of the University Auditor.31 However, granting that the responsibility of handling
the liquidation of cash advances is no longer lodged in her office, there is proof showing that before the Treasury
Department was relieved of said responsibility, the total unliquidated cash advances was even bigger, amounting
to eleven million five hundred thirty-three thousand two hundred thirty pesos and thirty-seven centavos (PhP
11,533,230.37). There is nothing in the records before us showing that respondent denied the following findings in
the Investigation Report of the WUP’s Human Resource Development Office (HRDO)on this matter, to wit:

In the matter of unliquidated cash advances in the aggregate amount of Php9.7million as found by the External
Auditors, respondent’s contention was that cash advances tovarious University personnel pass through her office
in the exercise of her duties as such but the office who follows up the liquidation of payments received is the
Office of the University Auditor.
On the inquiry done x x x of the Internal Auditor, Treasury and Accounting officer on July 1, 2009, it was found out
that the responsibility of handling cash advances and liquidation report was transferred from Treasury Office to
Accounting Office on August 2008, when Ms. Luzviminda Torres, the personnel handling the same detailed at the
Treasury Office went on leave. It was transferred to Ms. Julieta Mateo. What was surprising was that as per
certification and summary submitted by Ms. Mateo, the amount of unliquidated cash advances previous to August
2008, when the same was under the responsibility of the Treasury Office, was even bigger with the total amount of
ELEVEN MILLION FIVE HUNDRED THIRTY THREE THOUSAND, TWO HUNDRED THIRTY PESOS AND THIRTY SEVEN
CENTAVOS (Attached as Annex "G")

Even if there is truth in the contention of herein Respondent that she was no longer the one in charge of the
liquidation proceedings, the same would not absolve her from gross negligence of duties. The fact that the said
function was with her office until August 2008, with unliquidated cash advances even bigger, still showed that she
reneged in her duties which she had overlooked for so long. She now mistakenly points the responsibility to the
Office of the University Auditor. These informations are enough to be considered as Respondent’s acts constitutive
of breach of trust and confidence.32

xxx

c. Other irregularities inrespondent’s performance

In all, We find the Investigation Report of the HRDO a credible, extensive and thorough account of respondent’s
involvementin incidents which are sufficient grounds for petitioner’s loss of trust and confidence in her, to wit:

Respondent Nowella C. Reyes has committed breach of trust and confidence in the conduct of her office.

In her answer, Respondent admitted the encashment of the crossed check with the defense that the same was
done in the performance of her duty, not for her personal use but because of the request of University heads who
wanted their love gifts begiven. She alsoadmitted habitual encashment of checks issued by the University to its
personnel on the basis of practice of previous administration.

The charge against Respondent of the act of improper encashment of a check, which aside from being irregular is
clearly violative of imprest system of cash management. Moreover, the same being a crossed check, should not be
negotiated for encashment to Chinabank – Cabanatuan Branch because of the restriction indicated on its face,
which Mrs. Reyes, by reason of her office knew very well.

During the investigation conducted, it was revealed that the check disbursement voucher attached by Respondent
on her answer to justify the regularity of its issuance and eventual encashment was not exactly the same as the
one filed at the Accounting Office. It showed that the photocopy of the original CDV which was attached by
Respondent (attached as Annex "E"of this report) bear some material alterations, namely:

1. The absence of entry of the Board Resolution which was reflected as a sort of inquiry by the Internal
Auditor, and which at present was left blank on the original, as compared to the photocopy submitted by
respondent bearing an entry of the Board Resolution number;

2. The word ATM on the payee portion of the CDV in the original as compared to the photocopy wherein
the entry ATM was crossed out.

During a discussion with the external auditors, it was categorically stated by them that during the courseof
external audit, said document was inexistent in the records presented by the Accounting and Treasurer’s Offices.
The production of the photocopy by Respondent already altered only after the suspension was effected cast doubt
on the regularity of its issuance, negating her otherwise claim. Another significant observation was that the
original copy of CDV (attached as Annex "F" of this report) and corresponding signatures of administrative heads
who received payments showed folded marks halfways, with the fastener holes unmatched, showing that those
two documents were not really filed together, as regularly done, and the same were not filed in the regular course
and must have been kept previously on a different manner in possession of person other than the office which
must file the same.

xxxx

On the last charge in the show cause order specifically the existence of duplicate checks in the account of the
University amounting to Php 1.050 Million, included in Respondent’s defenses were that among the checks
duplicated, only two of them were encashed with the University Teller, and the check originally named to Norma
de Jesus as payee was paid by the pick-up teller only through the assistance of the University teller.

Again, Respondent’s defense were void of truth and merit. The act of encashing checks issued by the Treasury
Office, clearly violative of imprest system of cash management which Mrs. Reyes by reason of her office knew very
well, showed that Respondent directly reneged in her duty to observe economic security measures.

As found on the documents attachedto the Investigation report of Dr. Garcia which had been expressly adopted by
herein respondent in her answer is an Affidavit of Norma de Jesus stating that she actually encashed the check
with the personnel of the Treasury Office particularly Shirley Punay, who gave her the amountequivalent days after
the check was handed to the Treasury office.

However noble the intention of herein Respondent in helping her fellow workers in the University by her acts of
accommodation by encashing their checks directly withthe Treasury Office when Chinabank was already closed,
the same still reneged in her duty to protect the economic security of the University. An act of misconduct which
caused [sic]33

An employer cannot be compelled toretain an employee who is guilty of acts inimical to the interests of the
employer. A company has the right to dismiss its employees if only as a measure of self-protection. This is all the
more true in the case of supervisors or personnel occupying positions of responsibility.34 In this case, let it be
remembered that respondent was not an ordinary rank-and-file employee as she was no less the Treasurer who
was in charge of the coffers of the University. It would be oppressive to require petitioner to retain in their
management an officer who has admitted to knowingly and intentionally committing acts which jeopardized its
finances and who was untrustworthy in the handling and custody of University funds.

WHEREFORE, premises considered, we GRANTthe petition. The assailed Decision of the Court of Appeals in CA-G.R.
SP No. 122536 is, thus, SET ASIDE. The Decision of the National Labor Relations Commission in NLRC RAB III Case
No. 07-15131-09 is REINSTATED.

G.R. No. 176697 September 10, 2014

CESAR V. AREZA and LOLITA B. AREZA, Petitioners,

vs.
EXPRESS SAVINGS BANK, INC. and MICHAEL POTENCIANO, Respondnets.

DECISION

PEREZ, J.:

Before this Court is a Petition for Review on Certiorari under Ruic 45 of the Rules of Court, which seeks to reverse
the Decision1 and Resolution2 dated 29 June 2006 and 12 February 2007 of the Court of Appeals in CAG.R. CV No.
83192. The Court of Appeals affirmed with modification the 22 April 2004 Resolution 3 of the Regional Trial Court
(RTC) of Calamba, Laguna, Branch 92, in Civil Case No. B-5886.

The factual antecedents follow.

Petitioners Cesar V. Areza and LolitaB. Areza maintained two bank deposits with respondent Express Savings
Bank’s Biñan branch: 1) Savings Account No. 004-01-000185-5 and 2) Special Savings Account No. 004-02-000092-
3.

They were engaged in the business of "buy and sell" of brand new and second-hand motor vehicles. On 2 May
2000, they received an order from a certain Gerry Mambuay (Mambuay) for the purchase of a second-hand
Mitsubishi Pajero and a brand-new Honda CRV.

The buyer, Mambuay, paid petitioners with nine (9) Philippine Veterans Affairs Office (PVAO) checks payable to
different payees and drawn against the Philippine Veterans Bank (drawee), each valued at Two Hundred Thousand
Pesos (P200,000.00) for a total of One Million Eight Hundred Thousand Pesos (P1,800,000.00).

About this occasion, petitioners claimed that Michael Potenciano (Potenciano), the branch manager of respondent
Express Savings Bank (the Bank) was present during the transaction and immediately offered the services of the
Bank for the processing and eventual crediting of the said checks to petitioners’ account.4 On the other
hand,Potenciano countered that he was prevailed upon to accept the checks by way of accommodation of
petitioners who were valued clients of the Bank.5

On 3 May 2000, petitioners deposited the said checks in their savings account with the Bank. The Bank, inturn,
deposited the checks with its depositary bank, Equitable-PCI Bank, in Biñan,Laguna. Equitable-PCI Bank presented
the checks to the drawee, the Philippine Veterans Bank, which honored the checks.

On 6 May 2000, Potenciano informedpetitioners that the checks they deposited with the Bank werehonored. He
allegedly warned petitioners that the clearing of the checks pertained only to the availability of funds and did not
mean that the checks were not infirmed. 6 Thus, the entire amount of P1,800,000.00 was credited to petitioners’
savings account. Based on this information, petitioners released the two cars to the buyer.

Sometime in July 2000, the subjectchecks were returned by PVAO to the drawee on the ground that the amount
on the face of the checks was altered from the original amount of P4,000.00 to P200,000.00. The drawee returned
the checks to Equitable-PCI Bank by way of Special Clearing Receipts. In August 2000, the Bank was informed by
Equitable-PCI Bank that the drawee dishonored the checks onthe ground of material alterations. Equitable-PCI
Bank initially filed a protest with the Philippine Clearing House. In February 2001, the latter ruled in favor of the
drawee Philippine Veterans Bank. Equitable-PCI Bank, in turn, debited the deposit account of the Bank in the
amount of P1,800,000.00.

The Bank insisted that they informed petitioners of said development in August 2000 by furnishing them copies of
the documents given by its depositary bank.7 On the other hand, petitioners maintained that the Bank never
informed them of these developments.

On 9 March 2001, petitioners issued a check in the amount of P500,000.00. Said check was dishonored by the Bank
for the reason "Deposit Under Hold." According topetitioners, the Bank unilaterally and unlawfully put their
account with the Bank on hold. On 22 March 2001, petitioners’ counsel sent a demand letter asking the Bank to
honor their check. The Bank refused to heed their request and instead, closed the Special Savings Account of the
petitioners with a balance of P1,179,659.69 and transferred said amount to their savings account. The Bank then
withdrew the amount of P1,800,000.00representing the returned checks from petitioners’ savings account.

Acting on the alleged arbitrary and groundless dishonoring of their checks and the unlawful and unilateral
withdrawal from their savings account, petitioners filed a Complaint for Sum of Money with Damages against the
Bank and Potenciano with the RTC of Calamba.

On 15 January 2004, the RTC, through Judge Antonio S. Pozas, ruled in favor of petitioners. The dispositive portion
of the Decision reads:
WHEREFORE, the foregoing considered, the Court orders that judgment be rendered in favor of plaintiffs and
against the defendants jointly and severally to pay plaintiffs as follows, to wit:

1. P1,800,000.00 representing the amount unlawfully withdrawn by the defendants from the account of
plaintiffs;

2. P500,000.00 as moral damages; and

3. P300,000.00 as attorney’s fees.8

The trial court reduced the issue to whether or not the rights of petitioners were violated by respondents when
the deposits of the former were debited by respondents without any court order and without their knowledge and
consent. According to the trial court, it is the depositary bank which should safeguard the right ofthe depositors
over their money. Invoking Article 1977 of the Civil Code, the trial court stated that the depositary cannot make
use of the thing deposited without the express permission of the depositor. The trial court also held that
respondents should have observed the 24-hour clearing house rule that checks should be returned within 24-hours
after discovery of the forgery but in no event beyond the period fixed by law for filing a legal action. In this case,
petitioners deposited the checks in May 2000, and respondents notified them of the problems on the check three
months later or in August 2000. In sum, the trial court characterized said acts of respondents as attended with bad
faith when they debited the amount of P1,800,000.00 from the account of petitioners.

Respondents filed a motion for reconsideration while petitioners filed a motion for execution from the Decision of
the RTC on the ground that respondents’ motion for reconsideration did not conform with Section 5, Rule 16 of the
Rules of Court; hence, it was a mere scrap of paper that did not toll the running of the period to appeal.

On 22 April 2004, the RTC, through Pairing Judge Romeo C. De Leon granted the motion for reconsideration, set
aside the Pozas Decision, and dismissed the complaint. The trial court awarded respondents their counterclaim of
moral and exemplary damages of P100,000.00 each. The trial court first applied the principle of liberality when it
disregarded the alleged absence of a notice of hearing in respondents’ motion for reconsideration. On the merits,
the trial court considered the relationship of the Bank and petitioners with respect to their savings account
deposits as a contract of loan with the bank as the debtor and petitioners as creditors. As such, Article 1977 of the
Civil Code prohibiting the depository from making use of the thing deposited without the express permission of the
depositor is not applicable. Instead, the trial court applied Article 1980 which provides that fixed, savings and
current deposits ofmoney in banks and similar institutions shall be governed by the provisions governing simple
loan. The trial court then opined thatthe Bank had all the right to set-off against petitioners’ savings deposits the
value of their nine checks that were returned.

On appeal, the Court of Appeals affirmed the ruling of the trial court but deleted the award of damages. The
appellate court made the following ratiocination:

Any argument as to the notice of hearing has been resolved when the pairing judge issued the order on February
24, 2004 setting the hearing on March 26, 2004. A perusal of the notice of hearing shows that request was
addressed to the Clerk of Court and plaintiffs’ counsel for hearing to be set on March 26, 2004.

The core issues in this case revolve on whether the appellee bank had the right to debit the amount
of P1,800,000.00 from the appellants’ accounts and whether the bank’s act of debiting was done "without the
plaintiffs’ knowledge."

We find that the elements of legal compensation are all present in the case at bar. Hence, applying the case of the
Bank of the Philippine Islands v. Court of Appeals, the obligors bound principally are at the same time creditors of
each other. Appellee bank stands as a debtor of appellant, a depositor. At the same time, said bank is the creditor
of the appellant with respect to the dishonored treasury warrant checks which amount were already credited to
the account of appellants. When the appellants had withdrawn the amount of the checks they deposited and later
on said checks were returned, they became indebted to the appellee bank for the corresponding amount.
It should be noted that [G]erry Mambuay was the appellants’ walkin buyer. As sellers, appellants oughtto have
exercised due diligence in assessing his credit or personal background. The 24-hour clearing house rule is not the
one that governs in this case since the nine checks were discovered by the drawee bank to contain material
alterations.

Appellants merely allege that they were not informed of any development on the checks returned. However, this
Court believes that the bank and appellants had opportunities to communicate about the checks considering that
several transactions occurred from the time of alleged return of the checks to the date of the debit.

However, this Court agrees withappellants that they should not pay moral and exemplary damages to each of the
appellees for lack of basis. The appellants were not shown to have acted in bad faith. 9

Petitioners filed the present petition for review on certiorariraising both procedural and substantive issues, to wit:

1. Whether or not the Honorable Court of Appeals committed a reversible error of law and grave abuse of
discretion in upholding the legality and/or propriety of the Motion for Reconsideration filed in violation of
Section 5, Rule 15 ofthe Rules on Civil Procedure;

2. Whether or not the Honorable Court of Appeals committed a grave abuse of discretion in declaring that
the private respondents "had the right to debit the amount of P1,800,000.00 from the appellants’
accounts" and the bank’s act of debiting was done with the plaintiff’s knowledge. 10

Before proceeding to the substantive issue, we first resolve the procedural issue raised by petitioners.

Sections 5, Rule 15 of the Rules of Court states:

Section 5. Notice of hearing. – The notice of hearing shall be addressed to all parties concerned, and shall specify
the time and date of the hearing which must not be later than ten (10) days after the filing of the motion.

Petitioners claim that the notice of hearing was addressed to the Clerk of Court and not to the adverse party as the
rules require. Petitioners add that the hearing on the motion for reconsideration was scheduled beyond 10 days
from the date of filing.

As held in Maturan v. Araula,11 the rule requiring that the notice be addressed to the adverse party has
beensubstantially complied with when a copy of the motion for reconsideration was furnished to the counsel of
the adverse party, coupled with the fact that the trial court acted on said notice of hearing and, as prayed for,
issued an order12 setting the hearing of the motion on 26 March 2004.

We would reiterate later that there is substantial compliance with the foregoing Rule if a copy of the said motion
for reconsideration was furnished to the counsel of the adverse party. 13

Now to the substantive issues to which procedural imperfection must, in this case, give way.

The central issue is whether the Bank had the right to debit P1,800,000.00 from petitioners’ accounts.

On 6 May 2000, the Bank informed petitioners that the subject checks had been honored. Thus, the
amountof P1,800,000.00 was accordingly credited to petitioners’ accounts, prompting them to release the
purchased cars to the buyer.

Unknown to petitioners, the Bank deposited the checks in its depositary bank, Equitable-PCI Bank. Three months
had passed when the Bank was informed by its depositary bank that the drawee had dishonored the checks on the
ground of material alterations.
The return of the checks created a chain of debiting of accounts, the last loss eventually falling upon the savings
account of petitioners with respondent bank. The trial court inits reconsidered decision and the appellate court
were one in declaring that petitioners should bear the loss.

We reverse.

The fact that material alteration caused the eventual dishonor of the checks issued by PVAO is undisputed. In this
case, before the alteration was discovered, the checks were already cleared by the drawee bank, the Philippine
Veterans Bank. Three months had lapsed before the drawee dishonored the checks and returned them to
Equitable-PCI Bank, the respondents’ depositary bank. And itwas not until 10 months later when petitioners’
accounts were debited. A question thus arises: What are the liabilities of the drawee, the intermediary banks, and
the petitioners for the altered checks?

LIABILITY OF THE DRAWEE

Section 63 of Act No. 2031 orthe Negotiable Instruments Law provides that the acceptor, by accepting the
instrument, engages that he will pay it according to the tenor of his acceptance. The acceptor is a drawee who
accepts the bill. In Philippine National Bank v. Court of Appeals, 14 the payment of the amount of a check implies
not only acceptance but also compliance with the drawee’s obligation.

In case the negotiable instrument isaltered before acceptance, is the drawee liable for the original or the altered
tenor of acceptance? There are two divergent intepretations proffered by legal analysts.15 The first view is
supported by the leading case of National City Bank ofChicago v. Bank of the Republic. 16 In said case, a certain
Andrew Manning stole a draft and substituted his name for that of the original payee. He offered it as payment to
a jeweler in exchange for certain jewelry. The jeweler deposited the draft to the defendant bank which
collectedthe equivalent amount from the drawee. Upon learning of the alteration, the drawee sought to recover
from the defendant bank the amount of the draft, as money paid by mistake. The court denied recovery on the
ground that the drawee by accepting admitted the existence of the payee and his capacity to endorse. 17 Still, in
Wells Fargo Bank & Union Trust Co. v. Bank of Italy,18 the court echoed the court’s interpretation in National City
Bank of Chicago, in this wise:

We think the construction placed upon the section by the Illinois court is correct and that it was not the legislative
intent that the obligation of the acceptor should be limited to the tenorof the instrument as drawn by the maker,
as was the rule at common law,but that it should be enforceable in favor of a holder in due course against the
acceptor according to its tenor at the time of its acceptance or certification.

The foregoing opinion and the Illinois decision which it follows give effect to the literal words of the Negotiable
Instruments Law. As stated in the Illinois case: "The court must take the act as it is written and should give to the
words their natural and common meaning . . . ifthe language of the act conflicts with statutes or decisions in force
before its enactment the courts should not give the act a strained construction in order to make it harmonize with
earlier statutes or decisions." The wording of the act suggests that a change in the common law was intended. A
careful reading thereof, independent of any common-law influence, requires that the words "according to the
tenor of his acceptance" be construed as referring to the instrument as it was at the time it came into the hands of
the acceptor for acceptance, for he accepts no other instrument than the one presented to him — the altered
form — and it alone he engages to pay. This conclusion is in harmony with the law of England and the continental
countries. It makes for the usefulness and currency of negotiable paper without seriously endangering accepted
banking practices, for 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 specialpaper which will
make alterations obvious. All of the arguments advanced against the conclusion herein announced seem highly
technical in the face of the practical facts that the drawee bank has authenticated an instrument in a certain form,
and that commercial policy favors the protection of anyone who, in due course, changes his position on the faith of
that authentication.19

The second view is that the acceptor/drawee despite the tenor of his acceptance is liable only to the extent of the
bill prior to alteration.20 This view appears to be in consonance with Section 124 of the Negotiable Instruments Law
which statesthat a material alteration avoids an instrument except as against an assenting party and subsequent
indorsers, but a holder in due course may enforce payment according to its original tenor. Thus, when the drawee
bank pays a materially altered check, it violates the terms of the check, as well as its duty tocharge its client’s
account only for bona fide disbursements he had made. If the drawee did not pay according to the original tenor of
the instrument, as directed by the drawer, then it has no right to claim reimbursement from the drawer, much
less, the right to deduct the erroneous payment it made from the drawer’s account which it was expected to treat
with utmost fidelity.21 The drawee, however, still has recourse to recover its loss. It may pass the liability back to
the collecting bank which is what the drawee bank exactly did in this case. It debited the account of Equitable-PCI
Bank for the altered amount of the checks.

LIABILITY OF DEPOSITARY BANK AND COLLECTING BANK

A depositary bank is the first bank to take an item even though it is also the payor bank, unless the item is
presented for immediate payment over the counter.22 It is also the bank to which a check is transferred for deposit
in an account at such bank, evenif the check is physically received and indorsed first by another bank. 23 A collecting
bank is defined as any bank handling an item for collection except the bank on which the check is drawn. 24

When petitioners deposited the check with the Bank, they were designating the latter as the collecting bank. This
is in consonance with the rule that a negotiable instrument, such as a check, whether a manager's check or
ordinary check, is not legal tender. As such, after receiving the deposit, under its own rules, the Bank shall credit
the amount in petitioners’ account or infuse value thereon only after the drawee bank shall have paid the amount
of the check or the check has been cleared for deposit. 25

The Bank and Equitable-PCI Bank are both depositary and collecting banks.

A depositary/collecting bank where a check is deposited, and which endorses the check upon presentment with
the drawee bank, is an endorser. Under Section 66 of the Negotiable Instruments Law, an endorser warrants "that
the instrument is genuine and in all respects what it purports to be; that he has good title to it; that all prior parties
had capacity to contract; and that the instrument is at the time of his endorsement valid and subsisting." It has
been repeatedly held that in check transactions, the depositary/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. 26 If any of the warranties made by the
depositary/collecting bank turns out to be false, then the drawee bank may recover from it up to the amount of
the check.27

The law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with it for the purpose of
determining their genuineness and regularity. The collecting bank being primarily engaged in banking holds itself
out to the public as the expert and the law holds it to a high standard of conduct. 28

As collecting banks, the Bank and Equitable-PCI Bank are both liable for the amount of the materially altered
checks. Since Equitable-PCI Bank is not a party to this case and the Bank allowed its account with EquitablePCI
Bank to be debited, it has the option toseek recourse against the latter in another forum.

24-HOUR CLEARING RULE

Petitioners faulted the drawee bank for not following the 24-hour clearing period because it was only in August
2000 that the drawee bank notified Equitable-PCI that there were material alterations in the checks.

We do not subscribe to the position taken by petitioners that the drawee bank was at fault because it did not
follow the 24-hour clearing period which provides that when a drawee bank fails to return a forged or altered
check to the collecting bank within the 24-hour clearing period, the collecting bank is absolved from liability.
Section 21 of the Philippine Clearing House Rules and Regulations provides: Sec. 21. Special Return Items Beyond
The Reglementary Clearing Period.- Items which have been the subject of material alteration or items bearing
forged endorsement when such endorsement is necessary for negotiation shall be returned by direct presentation
or demand to the Presenting Bank and not through the regular clearing house facilities within the period
prescribed by law for the filing of a legal action by the returning bank/branch, institution or entity sending the
same.

Antonio Viray, in his book Handbook on Bank Deposits, elucidated:

It is clear that the so-called "24-hour" rule has been modified. In the case of Hongkong & Shanghai vs. People’s
Bank reiterated in Metropolitan Bank and Trust Co. vs. FNCB, the Supreme Court strictly enforced the 24-hour rule
under which the drawee bank forever loses the right to claim against presenting/collecting bank if the check is not
returned at the next clearing day orwithin 24 hours. Apparently, the commercial banks felt strict enforcement of
the 24-hour rule is too harsh and therefore made representations and obtained modification of the rule, which
modification is now incorporated in the Manual of Regulations. Since the same commercial banks controlled the
Philippine Clearing House Corporation, incorporating the amended rule in the PCHC Rules naturally followed.

As the rule now stands, the 24-hour rule is still in force, that is, any check which should be refused by the drawee
bank in accordance with long standing and accepted banking practices shall be returned through the PCHC/local
clearing office, as the case may be, not later than the next regular clearing (24-hour). The modification, however, is
that items which have been the subject of material alteration or bearing forged endorsement may be returned
even beyond 24 hours so long that the same is returned within the prescriptive period fixed by law. The consensus
among lawyers is that the prescriptiveperiod is ten (10)years because a check or the endorsement thereon is a
written contract. Moreover, the item need not be returned through the clearing house but by direct presentation
to the presenting bank.29

In short, the 24-hour clearing ruledoes not apply to altered checks.

LIABILITY OF PETITIONERS

The 2008 case of Far East Bank & Trust Company v. Gold Palace Jewellery Co.30 is in point. A foreigner purchased
several pieces of jewelry from Gold Palace Jewellery using a United Overseas Bank (Malaysia) issued draft
addressed to the Land Bank of the Philippines (LBP). Gold Palace Jewellery deposited the draft in the company’s
account with Far East Bank. Far East Bank presented the draft for clearing to LBP. The latter cleared the same and
Gold Palace Jewellery’s account was credited with the amount stated in the draft. Consequently, Gold Palace
Jewellery released the pieces of jewelries to the foreigner. Three weeks later, LBP informed Far East Bank that the
amount in the foreign draft had been materially altered from P300,000.00 to P380,000.00. LBP returnedthe check
to Far East Bank. Far East Bank refunded LBP the P380,000.00 paid by LBP. Far East Bank initially
debited P168,053.36 from Gold Palace Jewellery’s account and demanded the payment of the difference between
the amount in the altered draft and the amount debited from Gold Palace Jewellery.

However, for the reasons already discussed above, our pronouncement in the Far East Bank and Trust
Companycase that "the drawee is liable on its payment of the check according to the tenor of the check at the time
of payment, which was the raised amount"31 is inapplicable to the factual milieu obtaining herein.

We only adopt said decision in so far as it adjudged liability on the part of the collecting bank, thus:

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. 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, 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.

As the transaction in this case had been closed and the principalagent 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. x x x 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. 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,
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. 32

Applying the foregoing ratiocination, the Bank cannot debit the savings account of petitioners. A
depositary/collecting bank may resist or defend against a claim for breach of warranty if the drawer, the payee, or
either the drawee bank or depositary bank was negligent and such negligence substantially contributed tothe loss
from alteration. In the instant case, no negligence can be attributed to petitioners. We lend credence to their claim
that at the time of the sales transaction, the Bank’s branch manager was present and even offered the Bank’s
services for the processing and eventual crediting of the checks. True to the branch manager’s words, the checks
were cleared three days later when deposited by petitioners and the entire amount ofthe checks was credited to
their savings account.

ON LEGAL COMPENSATION

Petitioners insist that the Bank cannotbe considered a creditor of the petitioners because it should have made a
claim of the amount of P1,800,000.00 from Equitable-PCI Bank, its own depositary bank and the collecting bank in
this case and not from them.

The Bank cannot set-off the amount it paid to Equitable-PCI Bank with petitioners’ savings account. Under Art.
1278 of the New Civil Code, compensation shall take place when two persons, in their own right, are creditors and
debtors of each other. And the requisites for legal compensation are:

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 consist 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 be 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.

It is well-settled that the relationship of the depositors and the Bank or similar institution is that of creditor-debtor.
Article 1980 of the New Civil Code provides that fixed, savings and current deposits of money in banks and similar
institutions shall be governed by the provisions concerning simple loans. The bank is the debtorand the depositor
is the creditor. The depositor lends the bank money and the bank agrees to pay the depositor on demand. The
savings deposit agreement between the bank and the depositor is the contract that determines the rights and
obligations of the parties.33

But as previously discussed, petitioners are not liable for the deposit of the altered checks. The Bank, asthe
depositary and collecting bank ultimately bears the loss. Thus, there being no indebtedness to the Bank on the part
of petitioners, legal compensation cannot take place. DAMAGES

The Bank incurred a delay in informing petitioners of the checks’ dishonor. The Bank was informed of the dishonor
by Equitable-PCI Bank as early as August 2000 but it was only on 7 March 2001 when the Bank informed
petitioners that it will debit from their account the altered amount. This delay is tantamount to negligence on the
part of the collecting bank which would entitle petitioners to an award for damages under Article 1170 of the New
Civil Code which reads:

Art. 1170. 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.

The damages in the form of actual or compensatory damages represent the amount debited by the Bank from
petitioners’ account.

We delete the award of moral damages. Contrary to the lower court’s finding, there was no showing that the Bank
acted fraudulently or in bad faith. It may have been remiss in its duty to diligently protect the account of its
depositors but its honest but mistaken belief that petitioners’ account should be debited is not tantamount to bad
faith. We also delete the award of attorney’s fees for it is not a sound public policy to place a premium on the right
to litigate. No damages can becharged to those who exercise such precious right in good faith, even if done
erroneously.34

To recap, the drawee bank, Philippine Veterans Bank in this case, is only liable to the extent of the check prior to
alteration.1âwphi1 Since Philippine Veterans Bank paid the altered amount of the check, it may pass the liability
back as it did, to Equitable-PCI Bank,the collecting bank. The collecting banks, Equitable-PCI Bank and the Bank, are
ultimately liable for the amount of the materially altered check. It cannot further pass the liability back to the
petitioners absent any showing in the negligence on the part of the petitioners which substantially contributed to
the loss from alteration.

Based on the foregoing, we affirm the Pozasdecision only insofar as it ordered respondents to jointly and severally
pay petitioners P1,800,000.00, representing the amount withdrawn from the latter’s account. We do not conform
with said ruling regarding the finding of bad faith on the part of respondents, as well as its failure toobserve the
24-hour clearing rule.

WHEREFORE, the petition is GRANTED. The Decision and Resolution dated 29 June 2006 and 12 February 2007
respectively of the Court of Appeals in CA-G.R. CV No. 83192 are REVERSED and SET ASIDE. The 15 January 2004
Decision of the Regional Trial Court of Calamba City, Branch 92 in Civil Case No. B-5886 rendered by Judge Antonio
S. Pozas is REINSTATEDonly insofar as it ordered respondents to jointly and severally pay petitioners P1,800,000.00
representing the amount withdrawn from the latter’s account. The award of moral damages and attorney’s fees
are DELETED.

G.R. No. 180144 September 24, 2014

LEONARDO BOGNOT, Petitioner,

vs.
RRI LENDING CORPORATION, represented by its General Manager, DARIO J. BERNARDEZ, Respondent.
 DECISION

BRION, J.:

Before the Court is the petition for review on certiorari1 filed by Leonardo Bognot (petitioner) assailing the March
28, 2007 decision2 and the October 15, 2007 resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 66915.

Background Facts

RRI Lending Corporation (respondent) is an entity engaged in the business of lending money to its borrowers
within Metro Manila. It is duly represented by its General Manager, Mr. Dario J. Bernardez (Bernardez).

Sometime in September 1996, the petitioner and his younger brother, Rolando A. Bognot (collectively referred to
as the "Bognot siblings"), applied for and obtained a loan of Five Hundred Thousand Pesos (P500,000.00) from the
respondent, payable on November 30, 1996.4 The loan was evidenced by a promissory note and was secured by a
post dated check5 dated November 30, 1996.

Evidence on record shows that the petitioner renewed the loan several times on a monthly basis. He paid a
renewal fee of P54,600.00 for each renewal, issued a new post-dated checkas security, and executed and/or
renewed the promissory note previouslyissued. The respondent on the other hand, cancelled and returned to the
petitioner the post-dated checks issued prior to their renewal.

Sometime in March 1997, the petitioner applied for another loan renewal. He again executed as principal and
signed Promissory Note No. 97-0356 payable on April 1, 1997; his co-maker was again Rolando. As security for the
loan, the petitioner also issued BPI Check No. 0595236,7 post dated to April 1, 1997.8

Subsequently, the loan was again renewed on a monthly basis (until June 30, 1997), as shown by the Official
Receipt No. 7979 dated May 5, 1997, and the Disclosure Statement dated May 30, 1997 duly signed by Bernardez.
The petitioner purportedly paid the renewal fees and issued a post-dated check dated June 30, 1997 as security. As
had been done in the past, the respondent superimposed the date "June 30, 1997" on the upper right portion of
Promissory Note No. 97-035 to make it appear that it would mature on the said date.

Several days before the loan’s maturity, Rolando’s wife, Julieta Bognot (Mrs. Bognot), went to the respondent’s
office and applied for another renewal of the loan. She issued in favor of the respondent Promissory Note No. 97-
051, and International Bank Exchange (IBE) Check No. 00012522, dated July 30, 1997, in the amount of P54,600.00
as renewal fee.

On the excuse that she needs to bring home the loan documents for the Bognot siblings’ signatures and
replacement, Mrs. Bognot asked the respondent’s clerk to release to her the promissory note, the disclosure
statement, and the check dated July 30, 1997. Mrs. Bognot, however, never returned these documents nor issued
a new post-dated check. Consequently, the respondent sent the petitioner follow-up letters demanding payment
of the loan, plus interest and penalty charges. These demands went unheeded.

On November 27, 1997, the respondent, through Bernardez, filed a complaint for sum of money before the
Regional Trial Court (RTC) against the Bognot siblings. The respondent mainly alleged that the loan renewal
payable on June 30, 1997 which the Bognot siblings applied for remained unpaid; that before June30, 1997, Mrs.
Bognot applied for another loan extension and issued IBE Check No. 00012522 as payment for the renewal fee;
that Mrs. Bognot convinced the respondent’s clerk to release to her the promissory note and the other loan
documents; that since Mrs. Bognot never issued any replacement check, no loanextension took place and the loan,
originally payable on June 30, 1997, became due on this date; and despite repeated demands, the Bognot siblings
failed to pay their joint and solidary obligation.

Summons were served on the Bognotsiblings. However, only the petitioner filed his answer.
In his Answer,10 the petitioner claimed that the complaint states no cause of action because the respondent’s claim
had been paid, waived, abandoned or otherwise extinguished. He denied being a party to any loan application
and/or renewal in May 1997. He also denied having issued the BPI check post-dated to June 30, 1997, as well as
the promissory note dated June 30, 1997, claiming that this note had been tampered. He claimed that the one (1)
month loan contracted by Rolando and his wife in November 1996 which was lastly renewed in March 1997 had
already been fully paid and extinguished in April 1997. 11

Trial on the merits thereafter ensued.

The Regional Trial Court Ruling

In a decision12 dated January 17, 2000,the RTC ruled in the respondent’s favor and ordered the Bognot siblings to
pay the amount of the loan, plus interest and penalty charges. It considered the wordings of the promissory note
and found that the loan they contracted was joint and solidary. It also noted that the petitioner signed the
promissory note as a principal (and not merely as a guarantor), while Rolando was the co-maker. It brushed the
petitioner’s defense of full payment aside, ruling that the respondent had successfully proven, by preponderance
of evidence, the nonpayment of the loan. The trial court said:

Records likewise reveal that while he claims that the obligation had been fully paid in his Answer, he did not, in
order to protect his right filed (sic) a cross-claim against his co-defendant Rolando Bognot despite the fact that the
latter did not file any responsive pleading.

In fine, defendants are liable solidarily to plaintiff and must pay the loan of P500,000.00 plus 5% interest monthly
as well as 10% monthly penalty charges from the filing of the complaint on December 3, 1997 until fully paid. As
plaintiff was constrained to engage the services of counsel in order to protect his right,defendants are directed to
pay the former jointly and severally the amount of P50,000.00 as and by way of attorney’s fee.

The petitioner appealed the decision to the Court of Appeals.

The Court of Appeals Ruling

In its decision dated March 28, 2007, the CA affirmed the RTC’s findings. It found the petitioner’s defense of
payment untenable and unsupported by clear and convincing evidence. It observed that the petitioner did not
present any evidence showing that the check dated June 30, 1997 had, in fact, been encashed by the respondent
and the proceeds applied to the loan, or any official receipt evidencing the payment of the loan. It further stated
that the only document relied uponby the petitioner to substantiate his defense was the April 1, 1997 checkhe
issued which was cancelled and returned to him by the respondent.

The CA, however, noted the respondent’s established policy of cancelling and returning the post-dated checks
previously issued, as well as the subsequent loan renewals applied for by the petitioner, as manifested by the
official receipts under his name. The CA thus ruled that the petitioner failed to discharge the burden of proving
payment.

The petitioner moved for the reconsideration of the decision, but the CA denied his motion in its resolution of
October 15, 2007, hence, the present recourse to us pursuant toRule 45 of the Rules of Court.

The Petition

The petitioner submits that the CA erred in holding him solidarily liable with Rolando and his wife. Heclaimed that
based on the legal presumption provided by Article 1271 of the Civil Code, 13 his obligation had been discharged by
virtue of his possession of the post-dated check (stamped "CANCELLED") that evidenced his indebtedness. He
argued that it was Mrs. Bognot who subsequently assumed the obligation by renewing the loan, paying the fees
and charges, and issuing a check. Thus, there is an entirely new obligation whose payment is her sole
responsibility.
The petitioner also argued that as a result of the alteration of the promissory note without his consent (e.g., the
superimposition of the date "June 30, 1997" on the upper right portion of Promissory Note No. 97-035 to make it
appear that it would mature on this date), the respondent can no longer collect on the tampered note, let alone,
hold him solidarily liable with Rolando for the payment of the loan. He maintained that even without the proof of
payment, the material alteration of the promissory note is sufficient to extinguish his liability.

Lastly, he claimed that he had been released from his indebtedness by novation when Mrs. Bognot renewed the
loan and assumed the indebtedness.

The Case for the Respondents

The respondent submits that the issues the petitioner raised hinge on the appreciation of the adduced evidence
and of the factual lower courts’ findings that, as a rule, are notreviewable by this Court.

The Issues

The case presents to us the following issues:

1. Whether the CA committed a reversible error in holding the petitioner solidarily liable with Rolando;

2. Whether the petitioner is relieved from liability by reason of the material alteration in the promissory
note; and

3. Whether the parties’ obligation was extinguished by: (i) payment; and (ii) novation by substitution of
debtors.

Our Ruling

We find the petition partly meritorious.

As a rule, the Court’s jurisdiction in a Rule 45 petition is limited to the review of pure questions of
law.14 Appreciation of evidence and inquiry on the correctness of the appellate court's factual findings are not the
functions of this Court; we are not a trier of facts. 15

A question of law exists when the doubt or dispute relates to the application of the law on given facts. On the
other hand, a question of fact exists when the doubt or dispute relates to the truth or falsity of the parties’ factual
allegations.16

As the respondent correctly pointedout, the petitioner’s allegations are factual issuesthat are not proper for the
petition he filed. In the absence of compelling reasons, the Court cannot re-examine, review or re-evaluate the
evidence and the lower courts’ factual conclusions. This is especially true when the CA affirmed the lower court’s
findings, as in this case. Since the CA’s findings of facts affirmed those of the trial court, they are binding on this
Court, rendering any further factual review unnecessary.

If only to lay the issues raised - both factual and legal – to rest, we shall proceed to discuss their merits and
demerits.

No Evidence Was Presented to Establish the Fact of Payment

Jurisprudence tells us that one who pleads payment has the burden of proving it; 17 the burden rests on the
defendant to prove payment, rather than on the plaintiff to prove non-payment.18 Indeed, once the existence of
an indebtedness is duly established by evidence, the burden of showing with legal certainty that the obligation has
been discharged by payment rests on the debtor.19
In the present case, the petitioner failed to satisfactorily prove that his obligation had already been extinguished
by payment. As the CA correctly noted, the petitioner failed to present any evidence that the respondent had in
fact encashed his check and applied the proceeds to the payment of the loan. Neither did he present official
receipts evidencing payment, nor any proof that the check had been dishonored.

We note that the petitioner merely relied on the respondent’s cancellation and return to him of the check dated
April 1, 1997. The evidence shows that this check was issued to secure the indebtedness. The acts imputed on the
respondent, standing alone, do not constitute sufficient evidence of payment.

Article 1249, paragraph 2 of the Civil Code provides:

xxxx

The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall
produce the effect of payment only when they have been cashed, or when through the fault of the creditor they
have been impaired. (Emphasis supplied)

Also, we held in Bank of the Philippine Islands v. Spouses Royeca:20

Settled is the rule that payment must be made in legal tender. A check is not legal tender and, therefore, cannot
constitute a valid tender of payment. Since a negotiable instrument is only a substitute for money and not money,
the delivery of such an instrument does not, by itself, operate as payment. Mere delivery of checks does not
discharge the obligation under a judgment. The obligation is not extinguished and remains suspended until the
payment by commercial document is actually realized.(Emphasis supplied)

Although Article 1271 of the Civil Code provides for a legal presumption of renunciation of action (in cases where a
private document evidencing a credit was voluntarily returned by the creditor to the debtor), this presumption is
merely prima facieand is not conclusive; the presumption loses efficacy when faced with evidence to the contrary.

Moreover, the cited provision merely raises a presumption, not of payment, but of the renunciation of the credit
where more convincing evidence would be required than what normally would be called for to prove
payment.21Thus, reliance by the petitioner on the legal presumption to prove payment is misplaced.

To reiterate, no cash payment was proven by the petitioner. The cancellation and return of the check dated April 1,
1997, simply established his renewal of the loan – not the fact of payment. Furthermore, it has been established
during trial, through repeated acts, that the respondent cancelled and surrendered the post-dated check
previously issued whenever the loan is renewed. We trace whatwould amount to a practice under the facts of this
case, to the following testimonial exchanges:

Civil Case No. 97-0572

TSN December 14, 1998, Page 13.

Atty. Almeda:

Q: In the case of the renewal of the loan you admitted that a renewal fee is charged to the debtor which he or she
must pay before a renewal is allowed. I show you Exhibit "3" official receipt of plaintiff dated July 3, 1997, would
this be your official receipt which you issued to your client which they make renewal of the loan?

A: Yes, sir.

xxx xxx xxx

Q: And naturally when a loan has been renewed, the old one which is replaced by the renewal has already been
cancelled, is that correct?

A: Yes, sir.

Q: It is also true to say that all promissory notes and all postdated checks covered by the old loan which have been
the subject of the renewal are deemed cancelled and replaced is that correct?

A: Yes, sir. xxx22

Civil Case No. 97-0572

TSN November 27, 1998, Page 27.

Q: What happened to the check that Mr. Bognot issued?

Court: There are two Bognots. Who in particular?

Q: Leonardo Bognot, Your Honor.

A: Every month, they were renewed, he issued a new check, sir.

Q: Do you have a copy of the checks?

A: We returned the check upon renewing the loan.23

In light of these exchanges, wefind that the petitioner failed to discharge his burden ofproving payment.

The Alteration of the Promissory Note

Did Not Relieve the Petitioner From Liability

We now come to the issue of material alteration. The petitioner raised as defense the alleged material alteration
of Promissory Note No. 97-035 as basis to claim release from his loan. He alleged that the respondent’s
superimposition of the due date "June 30, 1997" on the promissory note without his consent effectively relieved
him of liability.

We find this defense untenable.

Although the respondent did not dispute the fact of alteration, he nevertheless denied that the alteration was
done without the petitioner’s consent. The parties’ Pre-Trial Order dated November 3, 199824 states that:

xxx There being no possibility of a possible compromise agreement, stipulations, admissions, and denials were
made, to wit:

FOR DEFENDANT LEONARDO BOGNOT

13. That the promissory note subject of this case marked as Annex "A" of the complaint was originally dated April
1, 1997 with a superimposed rubber stamp mark "June 30, 1997" to which the plaintiff admitted the
superimposition.

14. The superimposition was done without the knowledge, consent or prior consultation with Leonardo Bognot
which was denied by plaintiff."25 (Emphasis supplied)
Significantly, the respondent also admitted in the Pre-Trial Order that part of its company practice is to rubber
stamp, or make a superimposition through a rubber stamp, the old promissory note which has been renewed to
make it appear that there is a new loan obligation. The petitioner did not rebut this statement. To our mind, the
failure to rebut is tantamount to an admission of the respondent’s allegations:

"22. That it is the practice of plaintiff to just rubber stamp or make superimposition through a rubber stamp on old
promissory note which has been renewed to make it appear that there is a new loan obligation to which the
plaintiff admitted." (Emphasis Supplied).26

Even assuming that the note had indeed been tampered without the petitioner’s consent, the latter cannot totally
avoid payment of his obligation to the respondent based on the contract of loan.

Based on the records, the Bognot Siblings had applied for and were granted a loan of P500,000.00 by the
respondent. The loan was evidenced by a promissory note and secured by a post-dated check27 dated November
30, 1996. In fact, the petitioner himself admitted his loan application was evidenced by the Promissory Note dated
April 1, 1997.28 This loan was renewed several times by the petitioner, after paying the renewal fees, as shown by
the Official Receipt Nos. 79729 and 58730 dated May 5 and July 3, 1997, respectively. These official receipts were
issued in the name of the petitioner. Although the petitioner had insisted that the loan had been extinguished, no
other evidence was presented to prove payment other than the cancelled and returnedpost-dated check.

Under this evidentiary situation, the petitioner cannot validly deny his obligation and liability to the respondent
solely on the ground that the Promissory Note in question was tampered. Notably, the existence of the obligation,
as well as its subsequent renewals, have been duly established by: first, the petitioner’s application for the loan;
second, his admission that the loan had been obtained from the respondent; third, the post-dated checks issued
by the petitioner to secure the loan; fourth, the testimony of Mr. Bernardez on the grant, renewal and non-
payment of the loan; fifth, proof of non-payment of the loan; sixth, the loan renewals; and seventh, the approval
and receipt of the loan renewals.

In Guinsatao v. Court of Appeals,31 this Court pointed out that while a promissory note is evidence of an
indebtedness, it is not the only evidence, for the existence of the obligation can be proven by other documentary
evidence such as a written memorandum signed by the parties. In Pacheco v. Court of Appeals, 32 this Court
likewise expressly recognized that a check constitutes anevidence of indebtedness and is a veritable proof of an
obligation. It canbe used in lieu of and for the same purpose as a promissory note and can therefore be presented
to establish the existence of indebtedness. 33

In the present petition, we find that the totality of the evidence on record sufficiently established the existence of
the petitioner’s indebtedness (and liability) based on the contract ofloan. Even with the tampered promissory
note, we hold that the petitioner can still be held liable for the unpaid loan.

The Petitioner’s BelatedClaim of Novation by Substitution May no Longer be Entertained

It has not escaped the Court’s attention that the petitioner raised the argument that the obligation had been
extinguished by novation. The petitioner never raised this issue before the lower courts.

It is a settled principle of law thatno issue may be raised on appeal unless it has been brought before the lower
tribunal for its consideration.34 Matters neither alleged in the pleadingsnor raised during the proceedings below
cannot be ventilated for the first time on appeal before the Supreme Court. 35

In any event, we find no merit in the defense of novation as we discuss at length below. Novation cannot be
presumed and must be clearly and unequivocably proven.

Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by substituting a
new debtor in place of the old one, or by subrogating a third person to the rights of the creditor. 36
Article 1293 of the Civil Code defines novation as follows:

"Art. 1293. Novation which consists insubstituting a new debtor in the place of the originalone, may be made even
without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by
the new debtor gives him rights mentioned in Articles 1236 and 1237."

To give novation legal effect, the original debtor must be expressly released from the obligation, and the new
debtor must assume the original debtor’s place in the contractual relationship. Depending on who took the
initiative, novation by substitution of debtor has two forms – substitution by expromision and substitution by
delegacion. The difference between these two was explained in Garcia v. Llamas:37

"In expromision, the initiative for the change does not come from -- and may even be made without the
knowledge of -- the debtor, since it consists of a third person’s assumption of the obligation. As such, it logically
requires the consent of the third person and the creditor. In delegacion, the debtor offers, and the creditor
accepts, a third person who consents to the substitution and assumes the obligation; thus, the consent of these
three persons are necessary."

In both cases, the original debtor must be released from the obligation; otherwise, there can be no valid
novation.38Furthermore, novation by substitution of debtor must alwaysbe made with the consent of the
creditor.39

The petitioner contends thatnovation took place through a substitution of debtors when Mrs. Bognot renewed the
loan and assumed the debt. He alleged that Mrs. Bognot assumed the obligation by paying the renewal fees and
charges, and by executing a new promissory note. He further claimed that she issued her own check 40 to cover the
renewal fees, which fact, according to the petitioner, was done with the respondent’s consent.

Contrary to the petitioner’s contention, Mrs. Bognot did not substitute the petitioner as debtor. She merely
attempted to renew the original loan by executing a new promissory note 41 and check. The purported one month
renewal of the loan, however, did not push through, as Mrs. Bognot did not return the documents or issue a new
post dated check. Since the loan was not renewed for another month, the originaldue date, June 30,1997,
continued to stand.

More importantly, the respondent never agreed to release the petitioner from his obligation. That the respondent
initially allowed Mrs. Bognot to bring home the promissory note, disclosure statement and the petitioner’s
previous check dated June 30, 1997, does not ipso factoresult in novation. Neither will this acquiescence constitute
an implied acceptance of the substitution of the debtor.

In order to give novation legal effect, the creditor should consent to the substitution of a new debtor. Novation
must be clearly and unequivocally shown, and cannot be presumed.

Since the petitioner failed to show thatthe respondent assented to the substitution, no valid novation took place
with the effect of releasing the petitioner from his obligation to the respondent.

Moreover, in the absence of showing that Mrs. Bognot and the respondent had agreed to release the petitioner,
the respondent can still enforce the payment of the obligation against the original debtor. Mere acquiescence to
the renewal of the loan, when there is clearly no agreement to release the petitioner from his responsibility, does
not constitute novation.

The Nature of the Petitioner’s Liability

On the nature of the petitioner’s liability, we rule however, that the CA erred in holding the petitioner solidarily
liable with Rolando.
A solidary obligation is one in which each of the debtors is liable for the entire obligation, and each of the creditors
is entitled to demand the satisfaction of the whole obligation from any or all of the debtors.42 There is solidary
liability when the obligation expressly so states, when the law so provides, or when the nature of the obligation so
requires.43 Thus, when the obligor undertakes to be "jointly and severally" liable, the obligation is solidary,

In this case, both the RTC and the CA found the petitioner solidarily liable with Rolando based on Promissory Note
No. 97-035 dated June 30, 1997. Under the promissory note, the Bognot Siblings defined the parameters of their
obligation as follows:

"FOR VALUE RECEIVED, I/WE, jointly and severally, promise to pay to READY RESOURCES INVESTORS RRI LENDING
CORPO. or Order, its office at Paranaque, M.M. the principal sum of Five Hundred Thousand PESOS (P500,000.00),
PhilippineCurrency, with interest thereon at the rate of Five percent (5%) per month/annum, payable in One
Installment (01) equal daily/weekly/semi-monthly/monthly of PESOS Five Hundred Thousand Pesos (P500,000.00),
first installment to become due on June 30, 1997. xxx"44 (Emphasis Ours).

Although the phrase "jointly and severally" in the promissory note clearly and unmistakably provided for the
solidary liability of the parties, we note and stress that the promissory note is merely a photocopyof the original,
which was never produced.

Under the best evidence rule, whenthe subject of inquiry is the contents of a document, no evidence isadmissible
other than the original document itself except in the instances mentioned in Section 3, Rule 130 of the Revised
Rules of Court.45

The records show that the respondenthad the custody of the original promissory note dated April 1, 1997, with a
superimposed rubber stamp mark "June 30, 1997", and that it had been given every opportunity to present it. The
respondent even admitted during pre-trial that it could not present the original promissory note because it is in
the custody of its cashier who is stranded in Bicol. 46 Since the respondent never produced the original of the
promissory note, much less offered to produce it, the photocopy of the promissory note cannot be admitted as
evidence. Other than the promissory note in question, the respondent has not presented any other evidence to
support a finding of solidary liability. As we earlier noted, both lower courts completely relied on the note when
they found the Bognot siblingssolidarily liable.

The well-entrenched rule is that solidary obligation cannot be inferred lightly. It must be positively and clearly
expressed and cannot be presumed.47

In view of the inadmissibility of the promissory note, and in the absence of evidence showing that the petitioner
had bound himself solidarily with Rolando for the payment of the loan, we cannot but conclude that the obligation
to pay is only joint.48

The 5% Monthly Interest Stipulated in the Promissory Note is Unconscionable and Should be Equitably Reduced

Finally, on the issue of interest, while we agree with the CA that the petitioner is liable to the respondentfor the
unpaid loan, we find the imposition of the 5% monthly interest to be excessive, iniquitous, unconscionable and
exorbitant, and hence, contrary to morals and jurisprudence. Although parties to a loan agreement have wide
latitude to stipulate on the applicable interest rate under Central Bank Circular No. 905 s. 1982 (which suspended
the Usury Law ceiling on interest effective January 1, 1983), we stress that unconscionable interest rates may still
be declared illegal.49

In several cases, we haveruled that stipulations authorizing iniquitous or unconscionable interests are contrary to
morals and are illegal. In Medel v. Court of Appeals,50 we annulled a stipulated 5.5% per month or 66% per annum
interest on a P500,000.00 loan, and a 6% per month or 72% per annum interest on a P60,000.00 loan, respectively,
for being excessive, iniquitous, unconscionableand exorbitant.1âwphi1
We reiterated this ruling in Chua v. Timan,51 where we held that the stipulated interest rates of 3% per month and
higher are excessive, iniquitous, unconscionable and exorbitant, and must therefore be reduced to 12% per
annum.

Applying these cited rulings, we now accordingly hold that the stipulated interest rate of 5% per month, (or 60%
per annum) in the promissory note is excessive, unconscionable, contrary to morals and is thus illegal. It is void ab
initiofor violating Article 130652 of the Civil Code.1âwphi1 We accordingly find it equitable to reduce the interest
rate from 5% per month to 1% per month or 12% per annum in line with the prevailing jurisprudence.

WHEREFORE, premises considered, the Decision dated March 28, 2007 of the Court of Appeals in CA-G.R. CV No.
66915 is hereby AFFIRMED with MODIFICATION, as follows:

1. The petitioner Leonardo A. Bognotand his brother, Rolando A. Bognot are JOINTLY LIABLE to pay the
sum of P500,000.00 plus 12% interest per annum from December 3, 1997 until fully paid.

2. The rest of the Court of Appeals' dispositions are hereby AFFIRMED.

Costs against petitioner Leonardo A. Bognot.

G.R. No. 184458, January 14, 2015

RODRIGO RIVERA, Petitioner, v. SPOUSES SALVADOR CHUA AND S. VIOLETA CHUA, Respondents.

[G.R. NO. 184472]

SPS. SALVADOR CHUA AND VIOLETA S. CHUA, Petitioners, v. RODRIGO RIVERA, Respondent.

DECISION

PEREZ, J.:

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

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

We proceed to the facts.

The parties were friends of long standing having known each other since 1973: Rivera and Salvador
are kumpadres, the former is the godfather of the Spouses Chua’s son.

On 24 February 1995, Rivera obtained a loan from the Spouses Chua: chanroblesvi rtua llawli bra ry

PROMISSORY NOTE

120,000.00
FOR VALUE RECEIVED, I, RODRIGO RIVERA promise to pay spouses SALVADOR C. CHUA and VIOLETA SY
CHUA, the sum of One Hundred Twenty Thousand Philippine Currency (P120,000.00) on December 31,
1995.

It is agreed and understood that failure on my part to pay the amount of (P120,000.00) One Hundred
Twenty Thousand Pesos on December 31, 1995. (sic) I agree to pay the sum equivalent to FIVE PERCENT
(5%) interest monthly from the date of default until the entire obligation is fully paid for.

Should this note be referred to a lawyer for collection, I agree to pay the further sum equivalent to twenty
percent (20%) of the total amount due and payable as and for attorney’s fees which in no case shall be less
than P5,000.00 and to pay in addition the cost of suit and other incidental litigation expense.

Any action which may arise in connection with this note shall be brought in the proper Court of the City of
Manila.

Manila, February 24, 1995[.]

(SGD.) RODRIGO RIVERA4

In October 1998, almost three years from the date of payment stipulated in the promissory note, Rivera, as
partial payment for the loan, issued and delivered to the Spouses Chua, as payee, a check numbered
012467, dated 30 December 1998, drawn against Rivera’s current account with the Philippine Commercial
International Bank (PCIB) in the amount of P25,000.00.

On 21 December 1998, the Spouses Chua received another check presumably issued by Rivera, likewise
drawn against Rivera’s PCIB current account, numbered 013224, duly signed and dated, but blank as to
payee and amount. Ostensibly, as per understanding by the parties, PCIB Check No. 013224 was issued in
the amount of P133,454.00 with “cash” as payee. Purportedly, both checks were simply partial payment for
Rivera’s loan in the principal amount of P120,000.00.

Upon presentment for payment, the two checks were dishonored for the reason “account closed.”

As of 31 May 1999, the amount due the Spouses Chua was pegged at P366,000.00 covering the principal of
P120,000.00 plus five percent (5%) interest per month from 1 January 1996 to 31 May 1999.

The Spouses Chua alleged that they have repeatedly demanded payment from Rivera to no avail. Because
of Rivera’s unjustified refusal to pay, the Spouses Chua were constrained to file a suit on 11 June 1999. The
case was raffled before the MeTC, Branch 30, Manila and docketed as Civil Case No. 163661.

In his Answer with Compulsory Counterclaim, Rivera countered that: (1) he never executed the subject
Promissory Note; (2) in all instances when he obtained a loan from the Spouses Chua, the loans were
always covered by a security; (3) at the time of the filing of the complaint, he still had an existing
indebtedness to the Spouses Chua, secured by a real estate mortgage, but not yet in default; (4) PCIB
Check No. 132224 signed by him which he delivered to the Spouses Chua on 21 December 1998, should
have been issued in the amount of only P1,300.00, representing the amount he received from the Spouses
Chua’s saleslady; (5) contrary to the supposed agreement, the Spouses Chua presented the check for
payment in the amount of P133,454.00; and (6) there was no demand for payment of the amount of
P120,000.00 prior to the encashment of PCIB Check No. 0132224. 5 chanRoblesv irtual Lawlib rary

In the main, Rivera claimed forgery of the subject Promissory Note and denied his indebtedness thereunder.

The MeTC summarized the testimonies of both parties’ respective witnesses: chan roblesv irtuallawl ib rary

[The spouses Chua’s] evidence include[s] documentary evidence and oral evidence (consisting of the
testimonies of [the spouses] Chua and NBI Senior Documents Examiner Antonio Magbojos). x x x

xxxx

Witness Magbojos enumerated his credentials as follows: joined the NBI (1987); NBI document examiner
(1989); NBI Senior Document Examiner (1994 to the date he testified); registered criminologist; graduate
of 18th Basic Training Course [i]n Questioned Document Examination conducted by the NBI; twice attended
a seminar on US Dollar Counterfeit Detection conducted by the US Embassy in Manila; attended a seminar
on Effective Methodology in Teaching and Instructional design conducted by the NBI Academy; seminar
lecturer on Questioned Documents, Signature Verification and/or Detection; had examined more than a
hundred thousand questioned documents at the time he testified.
Upon [order of the MeTC], Mr. Magbojos examined the purported signature of [Rivera] appearing in the
Promissory Note and compared the signature thereon with the specimen signatures of [Rivera] appearing on
several documents. After a thorough study, examination, and comparison of the signature on the questioned
document (Promissory Note) and the specimen signatures on the documents submitted to him, he concluded
that the questioned signature appearing in the Promissory Note and the specimen signatures of [Rivera]
appearing on the other documents submitted were written by one and the same person. In connection with
his findings, Magbojos prepared Questioned Documents Report No. 712-1000 dated 8 January 2001, with
the following conclusion: “The questioned and the standard specimen signatures RODGRIGO RIVERA were
written by one and the same person.”

[Rivera] testified as follows: he and [respondent] Salvador are “kumpadres;” in May 1998, he obtained a
loan from [respondent] Salvador and executed a real estate mortgage over a parcel of land in favor of
[respondent Salvador] as collateral; aside from this loan, in October, 1998 he borrowed P25,000.00 from
Salvador and issued PCIB Check No. 126407 dated 30 December 1998; he expressly denied execution of the
Promissory Note dated 24 February 1995 and alleged that the signature appearing thereon was not his
signature; [respondent Salvador’s] claim that PCIB Check No. 0132224 was partial payment for the
Promissory Note was not true, the truth being that he delivered the check to [respondent Salvador] with the
space for amount left blank as he and [respondent] Salvador had agreed that the latter was to fill it in with
the amount of ?1,300.00 which amount he owed [the spouses Chua]; however, on 29 December 1998
[respondent] Salvador called him and told him that he had written P133,454.00 instead of P1,300.00; x x x.
To rebut the testimony of NBI Senior Document Examiner Magbojos, [Rivera] reiterated his averment that
the signature appearing on the Promissory Note was not his signature and that he did not execute the
Promissory Note.6

After trial, the MeTC ruled in favor of the Spouses Chua: chanroblesv irt uallawl ibra ry

WHEREFORE, [Rivera] is required to pay [the spouses Chua]: P120,000.00 plus stipulated interest at the
rate of 5% per month from 1 January 1996, and legal interest at the rate of 12% percent per annum from
11 June 1999, as actual and compensatory damages; 20% of the whole amount due as attorney’s fees.7

On appeal, the Regional Trial Court, Branch 17, Manila affirmed the Decision of the MeTC, but deleted the
award of attorney’s fees to the Spouses Chua: chanroblesv irt uallawl ibra ry

WHEREFORE, except as to the amount of attorney’s fees which is hereby deleted, the rest of the Decision
dated October 21, 2002 is hereby AFFIRMED.8

Both trial courts found the Promissory Note as authentic and validly bore the signature of Rivera.

Undaunted, Rivera appealed to the Court of Appeals which affirmed Rivera’s liability under the Promissory
Note, reduced the imposition of interest on the loan from 60% to 12% per annum, and reinstated the award
of attorney’s fees in favor of the Spouses Chua: chanroblesvi rt uallawli bra ry

WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the MODIFICATION that the
interest rate of 60% per annum is hereby reduced to 12% per annum and the award of attorney’s fees is
reinstated at the reduced amount of P50,000.00 Costs against [Rivera].9

Hence, these consolidated petitions for review on certiorari of Rivera in G.R. No. 184458 and the Spouses
Chua in G.R. No. 184472, respectively raising the following issues: chan roble svirtuallaw lib rary

A. In G.R. No. 184458

1. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE RULING OF THE RTC
AND M[e]TC THAT THERE WAS A VALID PROMISSORY NOTE EXECUTED BY [RIVERA].

2. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT DEMAND IS NO
LONGER NECESSARY AND IN APPLYING THE PROVISIONS OF THE NEGOTIABLE INSTRUMENTS LAW.

3. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN AWARDING ATTORNEY’S FEES
DESPITE THE FACT THAT THE SAME HAS NO BASIS IN FACT AND IN LAW AND DESPITE THE FACT THAT
[THE SPOUSES CHUA] DID NOT APPEAL FROM THE DECISION OF THE RTC DELETING THE AWARD OF
ATTORNEY’S FEES.10 chanRoblesvi rtual Lawli bra ry

B. In G.R. No. 184472

[WHETHER OR NOT] THE HONORABLE COURT OF APPEALS COMMITTED GROSS LEGAL ERROR WHEN IT
MODIFIED THE APPEALED JUDGMENT BY REDUCING THE INTEREST RATE FROM 60% PER ANNUM TO 12%
PER ANNUM IN SPITE OF THE FACT THAT RIVERA NEVER RAISED IN HIS ANSWER THE DEFENSE THAT THE
SAID STIPULATED RATE OF INTEREST IS EXORBITANT, UNCONSCIONABLE, UNREASONABLE, INEQUITABLE,
ILLEGAL, IMMORAL OR VOID.11

As early as 15 December 2008, we already disposed of G.R. No. 184472 and denied the petition, via a
Minute Resolution, for failure to sufficiently show any reversible error in the ruling of the appellate court
specifically concerning the correct rate of interest on Rivera’s indebtedness under the Promissory Note.12 chanRob lesvi rtua lLawl ibra ry

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

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

Rivera continues to deny that he executed the Promissory Note; he claims that given his friendship with the
Spouses Chua who were money lenders, he has been able to maintain a loan account with them. However,
each of these loan transactions was respectively “secured by checks or sufficient collateral.”

Rivera points out that the Spouses Chua “never demanded payment for the loan nor interest thereof (sic)
from [Rivera] for almost four (4) years from the time of the alleged default in payment [i.e., after December
31, 1995].”13chanRoblesvi rtua lLaw lib rary

On the issue of the supposed forgery of the promissory note, we are not inclined to depart from the lower
courts’ uniform rulings that Rivera indeed signed it.

Rivera offers no evidence for his asseveration that his signature on the promissory note was forged, only
that the signature is not his and varies from his usual signature. He likewise makes a confusing defense of
having previously obtained loans from the Spouses Chua who were money lenders and who had allowed him
a period of “almost four (4) years” before demanding payment of the loan under the Promissory Note.

First, we cannot give credence to such a naked claim of forgery over the testimony of the National Bureau of
Investigation (NBI) handwriting expert on the integrity of the promissory note.

On that score, the appellate court aptly disabled Rivera’s contention: chanro blesvi rt uallawl ibra ry

[Rivera] failed to adduce clear and convincing evidence that the signature on the promissory note is a
forgery. The fact of forgery cannot be presumed but must be proved by clear, positive and convincing
evidence. Mere variance of signatures cannot be considered as conclusive proof that the same was forged.
Save for the denial of Rivera that the signature on the note was not his, there is nothing in the records to
support his claim of forgery. And while it is true that resort to experts is not mandatory or indispensable to
the examination of alleged forged documents, the opinions of handwriting experts are nevertheless helpful
in the court’s determination of a document’s authenticity.

To be sure, a bare denial will not suffice to overcome the positive value of the promissory note and the
testimony of the NBI witness. In fact, even a perfunctory comparison of the signatures offered in evidence
would lead to the conclusion that the signatures were made by one and the same person.

It is a basic rule in civil cases that the party having the burden of proof must establish his case by
preponderance of evidence, which simply means “evidence which is of greater weight, or more convincing
than that which is offered in opposition to it.”

Evaluating the evidence on record, we are convinced that [the Spouses Chua] have established a prima
facie case in their favor, hence, the burden of evidence has shifted to [Rivera] to prove his allegation of
forgery. Unfortunately for [Rivera], he failed to substantiate his defense.14

Well-entrenched in jurisprudence is the rule that factual findings of the trial court, especially when affirmed
by the appellate court, are accorded the highest degree of respect and are considered conclusive between
the parties.15 A review of such findings by this Court is not warranted except upon a showing of highly
meritorious circumstances, such as: (1) when the findings of a trial court are grounded entirely on
speculation, surmises or conjectures; (2) when a lower court's inference from its factual findings is
manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion in the appreciation of
facts; (4) when the findings of the appellate court go beyond the issues of the case, or fail to notice certain
relevant facts which, if properly considered, will justify a different conclusion; (5) when there is a
misappreciation of facts; (6) when the findings of fact are conclusions without mention of the specific
evidence on which they are based, are premised on the absence of evidence, or are contradicted by
evidence on record.16 None of these exceptions obtains in this instance. There is no reason to depart from
the separate factual findings of the three (3) lower courts on the validity of Rivera’s signature reflected in
the Promissory Note.

Indeed, Rivera had the burden of proving the material allegations which he sets up in his Answer to the
plaintiff’s claim or cause of action, upon which issue is joined, whether they relate to the whole case or only
to certain issues in the case.17 chanRob lesvi rtual Lawli bra ry

In this case, Rivera’s bare assertion is unsubstantiated and directly disputed by the testimony of a
handwriting expert from the NBI. While it is true that resort to experts is not mandatory or indispensable to
the examination or the comparison of handwriting, the trial courts in this case, on its own, using the
handwriting expert testimony only as an aid, found the disputed document valid.18 cha nRoblesvi rt ualLawl ibra ry

Hence, the MeTC ruled that: chanroble svirtual lawlib rary

[Rivera] executed the Promissory Note after consideration of the following: categorical statement of
[respondent] Salvador that [Rivera] signed the Promissory Note before him, in his ([Rivera’s]) house; the
conclusion of NBI Senior Documents Examiner that the questioned signature (appearing on the Promissory
Note) and standard specimen signatures “Rodrigo Rivera” “were written by one and the same person”;
actual view at the hearing of the enlarged photographs of the questioned signature and the standard
specimen signatures.19

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

We disagree.

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

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

In all, Rivera’s evidence or lack thereof consisted only of a barefaced claim of forgery and a discordant
defense to assail the authenticity and validity of the Promissory Note. Although the burden of proof rested
on the Spouses Chua having instituted the civil case and after they established a prima facie case against
Rivera, the burden of evidence shifted to the latter to establish his defense.21 Consequently, Rivera failed to
discharge the burden of evidence, refute the existence of the Promissory Note duly signed by him and
subsequently, that he did not fail to pay his obligation thereunder. On the whole, there was no question left
on where the respective evidence of the parties preponderated—in favor of plaintiffs, the Spouses Chua.

Rivera next argues that even assuming the validity of the Promissory Note, demand was still necessary in
order to charge him liable thereunder. Rivera argues that it was grave error on the part of the appellate
court to apply Section 70 of the Negotiable Instruments Law (NIL).22 chanRoblesvi rtua lLawl ibra ry

We agree that the subject promissory note is not a negotiable instrument and the provisions of the NIL do
not apply to this case. Section 1 of the NIL requires the concurrence of the following elements to be a
negotiable instrument: c hanro blesvi rt uallawli bra ry

(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.

On the other hand, Section 184 of the NIL defines what negotiable promissory note is: chan roblesv irt uallawl ibra ry

SECTION 184. Promissory Note, Defined. – A negotiable promissory note within the meaning of this Act is an
unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on
demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer. Where a
note is drawn to the maker’s own order, it is not complete until indorsed by him.
The Promissory Note in this case is made out to specific persons, herein respondents, the Spouses Chua,
and not to order or to bearer, or to the order of the Spouses Chua as payees.

However, even if Rivera’s Promissory Note is not a negotiable instrument and therefore outside the coverage
of Section 70 of the NIL which provides that presentment for payment is not necessary to charge the person
liable on the instrument, Rivera is still liable under the terms of the Promissory Note that he issued.

The Promissory Note is unequivocal about the date when the obligation falls due and becomes demandable—
31 December 1995. As of 1 January 1996, Rivera had already incurred in delay when he failed to pay the
amount of P120,000.00 due to the Spouses Chua on 31 December 1995 under the Promissory Note.

Article 1169 of the Civil Code explicitly provides: c hanro blesvi rt uallawl ibra ry

Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of their obligation.

However, the demand by the creditor shall not be necessary in order that delay may exist:
(1) When the obligation or the law expressly so declare; or
(2) When from the nature and the circumstances of the obligation it appears that the designation of the time
when the thing is to be delivered or the service is to be rendered was a controlling motive for the
establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply
in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his
obligation, delay by the other begins. (Emphasis supplied)

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

We refer to the clause in the Promissory Note containing the stipulation of interest: cha nrob lesvi rtu allawlib rary

It is agreed and understood that failure on my part to pay the amount of (P120,000.00) One Hundred
Twenty Thousand Pesos on December 31, 1995. (sic) I agree to pay the sum equivalent to FIVE PERCENT
(5%) interest monthly from the date of default until the entire obligation is fully paid for.23

which expressly requires the debtor (Rivera) to pay a 5% monthly interest from the “date of default” until
the entire obligation is fully paid for. The parties evidently agreed that the maturity of the obligation at a
date certain, 31 December 1995, will give rise to the obligation to pay interest. The Promissory Note
expressly provided that after 31 December 1995, default commences and the stipulation on payment of
interest starts.

The date of default under the Promissory Note is 1 January 1996, the day following 31 December 1995, the
due date of the obligation. On that date, Rivera became liable for the stipulated interest which the
Promissory Note says is equivalent to 5% a month. In sum, until 31 December 1995, demand was not
necessary before Rivera could be held liable for the principal amount of P120,000.00. Thereafter, on 1
January 1996, upon default, Rivera became liable to pay the Spouses Chua damages, in the form of
stipulated interest.

The liability for damages of those who default, including those who are guilty of delay, in the performance of
their obligations is laid down on Article 117024 of the Civil Code.

Corollary thereto, Article 2209 solidifies the consequence of payment of interest as an indemnity for
damages when the obligor incurs in delay: chan roblesv irtuallaw lib rary

Art. 2209. 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 the
interest agreed upon, and in the absence of stipulation, the legal interest, which is six percent per annum.
(Emphasis supplied)

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

We do not consider the stipulation on payment of interest in this case as a penal clause although Rivera, as
obligor, assumed to pay additional 5% monthly interest on the principal amount of P120,000.00 upon
default.

Article 1226 of the Civil Code provides: chan roble svirtuallaw lib rary

Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages
and the payment of interests in case of noncompliance, if there is no stipulation to the
contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud
in the fulfillment of the obligation.

The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.

The penal clause is generally undertaken to insure performance and works as either, or both, punishment
and reparation. It is an exception to the general rules on recovery of losses and damages. As an exception
to the general rule, a penal clause must be specifically set forth in the obligation.25 cha nRoblesvi rt u alLawli bra ry

In high relief, the stipulation in the Promissory Note is designated as payment of interest, not as a penal
clause, and is simply an indemnity for damages incurred by the Spouses Chua because Rivera defaulted in
the payment of the amount of P120,000.00. The measure of damages for the Rivera’s delay is limited to the
interest stipulated in the Promissory Note. In apt instances, in default of stipulation, the interest is that
provided by law.26 c hanRoble svirtual Lawlib ra ry

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

It bears emphasizing that the undertaking based on the note clearly states the date of payment to be 31
December 1995. Given this circumstance, demand by the creditor is no longer necessary in order that delay
may exist since the contract itself already expressly so declares. The mere failure of [Spouses Chua] to
immediately demand or collect payment of the value of the note does not exonerate [Rivera] from his
liability therefrom. Verily, the trial court committed no reversible error when it imposed interest from 1
January 1996 on the ratiocination that [Spouses Chua] were relieved from making demand under Article
1169 of the Civil Code.

xxxx

As observed by [Rivera], the stipulated interest of 5% per month or 60% per annum in addition to legal
interests and attorney’s fees is, indeed, highly iniquitous and unreasonable. Stipulated interest rates are
illegal if they are unconscionable and the Court is allowed to temper interest rates when necessary. Since
the interest rate agreed upon is void, the parties are considered to have no stipulation regarding the interest
rate, thus, the rate of interest should be 12% per annum computed from the date of judicial or extrajudicial
demand.[27 chanRoblesvi rtua lLaw lib rary

The appellate court found the 5% a month or 60% per annum interest rate, on top of the legal interest and
attorney’s fees, steep, tantamount to it being illegal, iniquitous and unconscionable.

Significantly, the issue on payment of interest has been squarely disposed of in G.R. No. 184472 denying
the petition of the Spouses Chua for failure to sufficiently show any reversible error in the ruling of the
appellate court, specifically the reduction of the interest rate imposed on Rivera’s indebtedness under the
Promissory Note. Ultimately, the denial of the petition in G.R. No. 184472 is res judicata in its concept of
“bar by prior judgment” on whether the Court of Appeals correctly reduced the interest rate stipulated in the
Promissory Note.

Res judicata applies in the concept of “bar by prior judgment” if the following requisites concur: (1) the
former judgment or order must be final; (2) the judgment or order must be on the merits; (3) the decision
must have been rendered by a court having jurisdiction over the subject matter and the parties; and (4)
there must be, between the first and the second action, identity of parties, of subject matter and of causes
of action.28
chanRoblesvi rtua lLawl ibra ry

In this case, the petitions in G.R. Nos. 184458 and 184472 involve an identity of parties and subject matter
raising specifically errors in the Decision of the Court of Appeals. Where the Court of Appeals’ disposition on
the propriety of the reduction of the interest rate was raised by the Spouses Chua in G.R. No. 184472, our
ruling thereon affirming the Court of Appeals is a “bar by prior judgment.”
At the time interest accrued from 1 January 1996, the date of default under the Promissory Note, the then
prevailing rate of legal interest was 12% per annum under Central Bank (CB) Circular No. 416 in cases
involving the loan or forbearance of money.29 Thus, the legal interest accruing from the Promissory Note is
12% per annum from the date of default on 1 January 1996.

However, the 12% per annum rate of legal interest is only applicable until 30 June 2013, before the advent
and effectivity of Bangko Sentral ng Pilipinas (BSP) Circular No. 799, Series of 2013 reducing the rate of
legal interest to 6% per annum. Pursuant to our ruling in Nacar v. Gallery Frames,30 BSP Circular No. 799 is
prospectively applied from 1 July 2013. In short, the applicable rate of legal interest from 1 January 1996,
the date when Rivera defaulted, to date when this Decision becomes final and executor is divided into two
periods reflecting two rates of legal interest: (1) 12% per annum from 1 January 1996 to 30 June 2013; and
(2) 6% per annum FROM 1 July 2013 to date when this Decision becomes final and executory.

As for the legal interest accruing from 11 June 1999, when judicial demand was made, to the date when this
Decision becomes final and executory, such is likewise divided into two periods: (1) 12% per annum from
11 June 1999, the date of judicial demand to 30 June 2013; and (2) 6% per annum from 1 July 2013 to
date when this Decision becomes final and executor.31 We base this imposition of interest on interest due
earning legal interest on Article 2212 of the Civil Code which provides that “interest due shall earn legal
interest from the time it is judicially demanded, although the obligation may be silent on this point.”

From the time of judicial demand, 11 June 1999, the actual amount owed by Rivera to the Spouses Chua
could already be determined with reasonable certainty given the wording of the Promissory Note.32 chanRob lesvi rtua lLawl ibra ry

We cite our recent ruling in Nacar v. Gallery Frames:33 chanRoble svirtua lLawli bra ry

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for damages. The provisions under Title XVIII on “Damages” of
the Civil Code govern in determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the
rate of interest, as well as the accrual thereof, is imposed, as follows: ChanRobles Vi rtua lawlib rary

1. When the 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 6% 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 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 6% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.

And, in addition to the above, judgments that have become final and executory prior to July 1,
2013, shall not be disturbed and shall continue to be implemented applying the rate of interest fixed
therein. (Emphasis supplied)

On the reinstatement of the award of attorney’s fees based on the stipulation in the Promissory Note, we
agree with the reduction thereof but not the ratiocination of the appellate court that the attorney’s fees are
in the nature of liquidated damages or penalty. The interest imposed in the Promissory Note already
answers as liquidated damages for Rivera’s default in paying his obligation. We award attorney’s fees, albeit
in a reduced amount, in recognition that the Spouses Chua were compelled to litigate and incurred expenses
to protect their interests.34 Thus, the award of P50,000.00 as attorney’s fees is proper.

For clarity and to obviate confusion, we chart the breakdown of the total amount owed by Rivera to the
Spouses Chua: chanroblesv irt uallawl ibra ry

Face value Stipulated Interest Interest due Attorney’s Total

of the A&B earning legal fees Amount
Promissory interest A & B
Note
February A. January 1, 1996 A. June 11, 1999 Wholesale
24, 1995 to to June 30, 2013 (date of judicial amount
December demand) to June
31, 1995 B. July 1 2013 to 30, 2013
date when this B. July 1, 2013 to
Decision becomes date when this
final and executory Decision becomes
final and executory
P120,000.00 A. 12 % per A. 12% per P50,000.00 Total
annum on the annum on the total amount of
principal amount of amount of column Columns
P120,000.00 2 1-4
B. 6% per B. 6% per
annum on the annum on the total
principal amount of amount of column
P120,000.00 235

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

WHEREFORE, the petition in G.R. No. 184458 is DENIED. The Decision of the Court of Appeals in CA-G.R.
SP No. 90609 is MODIFIED. Petitioner Rodrigo Rivera is ordered to pay respondents Spouse Salvador and
Violeta Chua the following: chan rob lesvi rt uallawlib ra ry

(1) the principal amount of P120,000.00;

(2) legal interest of 12% per annum of the principal amount of P120,000.00
reckoned from 1 January 1996 until 30 June 2013;
(3) legal interest of 6% per annum of the principal amount of P120,000.00
form 1 July 2013 to date when this Decision becomes final and
executory;
(4) 12% per annum applied to the total of paragraphs 2 and 3 from 11 June
1999, date of judicial demand, to 30 June 2013, as interest due earning
legal interest;
(5) 6% per annum applied to the total amount of paragraphs 2 and 3 from 1
July 2013 to date when this Decision becomes final and executor, as
interest due earning legal interest;
(6) Attorney’s fees in the amount of P50,000.00; and
(7) 6% per annum interest on the total of the monetary awards from the
 finality of this Decision until full payment thereof.
Costs against petitioner Rodrigo Rivera.