[G.R. No. 117660. December 18, 2000] covenanted that the purchase price of Five Million (P5,000,000.
nted that the purchase price of Five Million (P5,000,000.00) Pesos would be
AGRO CONGLOMERATES, INC. and MARIO SORIANO, petitioners, vs. THE HON. COURT
OF APPEALS and REGENT SAVINGS and LOAN BANK, INC., respondents.
DECISION
QUISUMBING, J.:
This is a petition for review challenging the decision[1] dated October 17, 1994 of the
Court of Appeals in CA-G.R. No. 32933, which affirmed in toto the judgment of the
Manila Regional Trial Court, Branch 27, in consolidated Cases Nos. 86-37374, 86-37388,
86-37543.
This petition springs from three complaints for sums of money filed by respondent bank
against herein petitioners. In the decision of the Court of Appeals, petitioners were
ordered to pay respondent bank, as follows:
Wherefore, judgment is hereby rendered in favor of plaintiff and against defendants, as
follows:
1) In Civil Case No. 86-37374, defendants [petitioners, herein] are ordered jointly and
severally, to pay to plaintiff the amount of P78,212.29, together with interest and
service charge thereon, at the rates of 14% and 3% per annum, respectively, computed
from November 10, 1982, until fully paid, plus stipulated penalty on unpaid principal at
the rate of 6% per annum, computed from November 10, 1982, plus 15% as liquidated
damage plus 10% of the total amount due, as attorneys fees, plus costs;
2) In Civil Case No. 86-37388, defendant is ordered to pay plaintiff the amount of
P632,911.39, together with interest and service charge thereon at the rate of 14% and
3% per annum, respectively, computed from January 15, 1983, until fully paid, plus
stipulated penalty on unpaid principal at the rate of 6% per annum, computed from
January 15, 1983, plus liquidated damages equivalent to 15% of the total amount due,
plus attorneys fees equivalent to 10% of the total amount due, plus costs; and
3) In Civil Case No. 86-37543, defendant is ordered to pay plaintiff, on the first cause of
action, the amount of P510,000.00, together with interest and service charge thereon,
at the rates of 14% and 2% per annum, respectively, computed from March 13, 1983,
until fully paid, plus a penalty of 6% per annum, based on the outstanding principal of
the loan, computed from March 13, 1983, until fully paid; and on the second cause of
action, the amount of P494,936.71, together with interest and service charge thereon at
the rates of 14% and 2%, per annum, respectively, computed from March 30, 1983, until
fully paid, plus a penalty charge of 6% per annum, based on the unpaid principal,
computed from March 30, 1983, until fully paid, plus (on both causes of action) an
amount equal to 15% of the total amounts due, as liquidated damages, plus attorneys
fees equal to 10% of the total amounts due, plus costs.[2]
Based on the records, the following are the factual antecedents.
On July 17, 1982, petitioner Agro Conglomerates, Inc. as vendor, sold two parcels of land
to Wonderland Food Industries, Inc. In their Memorandum of Agreement,[3] the parties
settled by the vendee, under the following terms and conditions: (1) One Million
(P1,000,000.00) Pesos shall be paid in cash upon the signing of the agreement; (2) Two
Million (P2,000,000.00) Pesos worth of common shares of stock of the Wonderland
Food Industries, Inc.; and (3) The balance of P2,000,000.00 shall be paid in four equal
installments, the first installment falling due, 180 days after the signing of the
agreement and every six months thereafter, with an interest rate of 18% per annum, to
be advanced by the vendee upon the signing of the agreement.
On July 19, 1982, the vendor, the vendee, and the respondent bank Regent Savings &
Loan Bank (formerly Summa Savings & Loan Association), executed an Addendum[4]to
the previous Memorandum of Agreement. The new arrangement pertained to the
revision of settlement of the initial payments of P1,000,000.00 and prepaid interest of
P360,000.00 (18% of P2,000,000.00) as follows:
Whereas, the parties have agreed to qualify the stipulated terms for the payment of the
said ONE MILLION THREE HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS.
WHEREFORE, in consideration of the mutual covenant and agreement of the parties,
they do further covenant and agree as follows:
1. That the VENDEE instead of paying the amount of ONE MILLION THREE HUNDRED
SIXTY THOUSAND (P1,360,000.00) PESOS in cash, hereby authorizes the VENDOR to
obtain a loan from Summa Savings and Loan Association with office address at
Valenzuela, Metro Manila, being represented herein by its President, Mr. Jaime Cario
and referred to hereafter as Financier; in the amount of ONE MILLION THREE HUNDRED
SIXTY THOUSAND (P1,360,000.00)PESOS, plus interest thereon at such rate as the
VENDEE and the Financier may agree, which amount shall cover the ONE MILLION
(P1,000,000.00) PESOS cash which was agreed to be paid upon signing of the
Memorandum of Agreement, plus 18% interest on the balance of two million pesos
stipulated upon in Item No. 1(c) of the said agreement; provided however, that said loan
shall be made for and in the name of the VENDOR.
2. The VENDEE also agrees that the full amount of ONE MILLION THREE HUNDRED SIXTY
THOUSAND (P1,360,000.00) PESOS be paid directly to the VENDOR; however, the
VENDEE hereby undertakes to pay the full amount of the said loan to the Financier on
such terms and conditions agreed upon by the Financier and the VENDOR, it being
understood that while the loan will be secured from and in the name of the VENDOR,
the VENDEE will be the one liable to pay the entire proceeds thereof including interest
and other charges.[5]
This addendum was not notarized.
Consequently, petitioner Mario Soriano signed as maker several promissory notes,[6]
payable to the respondent bank. Thereafter, the bank released the proceeds of the loan
to petitioners. However, petitioners failed to meet their obligations as they fell due.
During that time, the bank was experiencing financial turmoil and was under the
supervision of the Central Bank. Central Bank examiner and liquidator Cordula de Jesus,
endorsed the subject promissory notes to the banks counsel for collection. The bank
1
gave petitioners opportunity to settle their account by extending payment due dates. WHETHER THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE ADDENDUM,
Mario Soriano manifested his intention to re-structure the loan, yet did not show up nor SIGNED BY THE PETITIONERS, RESPONDENT BANK AND WONDERLAND INC.,
submit his formal written request. CONSTITUTES A NOVATION OF THE CONTRACT BY SUBSTITUTION OF DEBTOR, WHICH
EXEMPTS THE PETITIONERS FROM ANY LIABILITY OVER THE PROMISSORY NOTES.
Respondent bank filed three separate complaints before the Regional Trial Court of
Manila for Collection of Sums of money. The corresponding case histories are illustrated Revealed by the facts on record, the conflict among the parties started from a contract
in the table below: of sale of a farmland between petitioners and Wonderland Food Industries, Inc. As
found by the trial court, no such sale materialized.
Date of Loan Amount Payment Due Payment Extension
Date Dates A contract of sale is a reciprocal transaction. The obligation or promise of each party is
Civil Case 86-37374 the cause or consideration for the obligation or promise by the other. The vendee is
August 12, 1982 P78,212.29 Nov. 10, 1982 Feb. 8, 1983 obliged to pay the price, while the vendor must deliver actual possession of the land. In
May 9, 1983 the instant case the original plan was that the initial payments would be paid in cash.
Aug. 7, 1983 Subsequently, the parties (with the participation of respondent bank) executed an
addendum providing instead, that the petitioners would secure a loan in the name of
Civil Case 86-37388 Agro Conglomerates Inc. for the total amount of the initial payments, while the
July 19, 1982 P632,911.39 Jan. 15, 1983 May 16, 1983 settlement of said loan would be assumed by Wonderland. Thereafter, petitioner
Aug. 14, 1983 Soriano signed several promissory notes and received the proceeds in behalf of
petitioner-company.
Civil Case 86-37543
September 14, 1982 P510,000.00 March 13, 1983 June 11, 1983 By this time, we note a subsidiary contract of suretyship had taken effect since
Sept. 9, 1983 petitioners signed the promissory notes as maker and accommodation party for the
benefit of Wonderland. Petitioners became liable as accommodation party. An
October 1, 1982 P494,936.71 March 30, 1983 June 28, 1983 accommodation party is a person who has signed the instrument as maker, acceptor, or
Sept. 26, 1983 indorser, without receiving value therefor, and for the purpose of lending his name to
some other person and is liable on the instrument to a holder for value, notwithstanding
In their answer, petitioners interposed the defense of novation and insisted there was a such holder at the time of taking the instrument knew (the signatory) to be an
valid substitution of debtor. They alleged that the addendum specifically states that accommodation party.[8] He has the right, after paying the holder, to obtain
although the promissory notes were in their names, Wonderland shall be responsible reimbursement from the party accommodated, since the relation between them has in
for the payment thereof. effect become one of principal and surety, the accommodation party being the
The trial court held that petitioners are liable, to wit: surety.[9] Suretyship is defined as the relation which exists where one person has
undertaken an obligation and another person is also under the obligation or other duty
The evidences, however, disclose that Wonderland did not comply with its obligation to the obligee, who is entitled to but one performance, and as between the two who are
under said Addendum (Exh. S) as the agreement to turn over the farmland to it, did not bound, one rather than the other should perform.[10] The suretys liability to the
materialize (57 tsn, May 29, 1990), and there was, actually no sale of the land (58 tsn, creditor or promisee of the principal is said to be direct, primary and absolute; in other
ibid). Hence, Wonderland is not answerable. And since the loans obtained under the words, he is directly and equally bound with the principal.[11] And the creditor may
four promissory notes (Exhs. A, C, G, and E) have not been paid, despite opportunities proceed against any one of the solidary debtors.[12]
given by plaintiff to defendants to make payments, it stands to reason that defendants
are liable to pay their obligations thereunder to plaintiff. In fact, defendants failed to file We do not give credence to petitioners assertion that, as provided by the addendum,
a third-party complaint against Wonderland, which shows the weakness of its stand that their obligation to pay the promissory notes was novated by substitution of a new
Wonderland is answerable to make said payments.[7] debtor, Wonderland. Contrary to petitioners contention, the attendant facts herein do
not make a case of novation.
Petitioners appealed to the Court of Appeals. The trial courts decision was affirmed by
the appellate court. Novation is the extinguishment of an obligation by the substitution or change of the
obligation by a subsequent one which extinguishes or modifies the first, either by
Hence, this recourse, wherein petitioners raise the sole issue of: changing the object or principal conditions, or by substituting another in place of the
debtor, or by subrogating a third person in the rights of the creditor.[13] In order that a
novation can take place, the concurrence of the following requisites[14] are
indispensable:

2
1) There must be a previous valid obligation;
2) There must be an agreement of the parties concerned to a new contract;
3) There must be the extinguishment of the old contract; and
4) There must be the validity of the new contract.
In the instant case, the first requisite for a valid novation is lacking. There was no
novation by substitution of debtor because there was no prior obligation which was
substituted by a new contract. It will be noted that the promissory notes, which bound
the petitioners to pay, were executed after the addendum. The addendum modified the
contract of sale, not the stipulations in the promissory notes which pertain to the surety
contract. At this instance, Wonderland apparently assured the payment of future debts
to be incurred by the petitioners. Consequently, only a contract of surety arose. It was
wrong for petitioners to presume a novation had taken place. The well-settled rule is
that novation is never presumed,[15] it must be clearly and unequivocally shown.[16]
As it turned out, the contract of surety between Wonderland and the petitioners was
extinguished by the rescission of the contract of sale of the farmland. With the
rescission, there was confusion or merger in the persons of the principal obligor and the
surety, namely the petitioners herein. The addendum which was dependent thereon
likewise lost its efficacy.
It is true that the basic and fundamental rule in the interpretation of contract is that, if
the terms thereof are clear and leave no doubt as to the intention of the contracting
parties, the literal meaning shall control. However, in order to judge the intention of the
parties, their contemporaneous and subsequent acts should be considered.[17]
The contract of sale between Wonderland and petitioners did not materialize. But it was
admitted that petitioners received the proceeds of the promissory notes obtained from
respondent bank.
Sec. 22 of the Civil Code provides:
Every person who through an act of performance by another, or any other means,
acquires or comes into possession of something at the expense of the latter without just
or legal ground, shall return the same to him.
Petitioners had no legal or just ground to retain the proceeds of the loan at the expense
of private respondent. Neither could petitioners excuse themselves and hold
Wonderland still liable to pay the loan upon the rescission of their sales contract. If
petitioners sustained damages as a result of the rescission, they should have impleaded
Wonderland and asked damages. The non-inclusion of a necessary party does not
prevent the court from proceeding in the action, and the judgment rendered therein
shall be without prejudice to the rights of such necessary party.[18] But respondent
appellate court did not err in holding that petitioners are duty-bound under the law to
pay the claims of respondent bank from whom they had obtained the loan proceeds.
G.R. No. 188363 February 27, 2013
ALLIED BANKING CORPORATION, Petitioner, vs. BANK OF THE PHILIPPINE ISLANDS,
Respondents.
DECISION
VILLARAMA, JR., J.:
A collecting bank is guilty of contributory negligence when it accepted for deposit a
post-dated check notwithstanding that said check had been cleared by the drawee bank
which failed to return the check within the 24-hour reglementary period.
Petitioner Allied Banking Corporation appeals the Decision1 dated March 19, 2009 of
the Court of Appeals (CA) in CA-G.R. SP No. 97604 which set aside the Decision2 dated
December 13, 2005 of the Regional Trial Court (RTC) of Makati City, Branch 57 in Civil
Case No. 05-418.
The factual antecedents:
On October 10, 2002, a check in the amount of P1,000,000.00 payable to "Mateo Mgt.
Group International" (MMGI) was presented for deposit and accepted at petitioner's
Kawit Branch. The check, post-dated "Oct. 9, 2003", was drawn against the account of
Marciano Silva, Jr. (Silva) with respondent Bank of the Philippine Islands (BPI) Bel-Air
Branch. Upon receipt, petitioner sent the check for clearing to respondent through the
Philippine Clearing House Corporation (PCHC).3
The check was cleared by respondent and petitioner credited the account of MMGI with
P1,000,000.00. On October 22, 2002, MMGI’s account was closed and all the funds
therein were withdrawn. A month later, Silva discovered the debit of P1,000,000.00
from his account. In response to Silva’s complaint, respondent credited his account with
the aforesaid sum.4
On March 21, 2003, respondent returned a photocopy of the check to petitioner for the
reason: "Postdated." Petitioner, however, refused to accept and sent back to
respondent a photocopy of the check. Thereafter, the check, or more accurately, the
Charge Slip, was tossed several times from petitioner to respondent, and back to
petitioner, until on May 6, 2003, respondent requested the PCHC to take custody of the
check. Acting on the request, PCHC directed the respondent to deliver the original check
and informed it of PCHC’s authority under Clearing House Operating Memo (CHOM) No.
279 dated 06 September 1996 to split 50/50 the amount of the check subject of a "Ping-
Pong" controversy which shall be implemented thru the issuance of Debit Adjustment
Tickets against the outward demands of the banks involved. PCHC likewise encouraged
respondent to submit the controversy for resolution thru the PCHC Arbitration
Mechanism.5
However, it was petitioner who filed a complaint6 before the Arbitration Committee,
asserting that respondent should solely bear the entire face value of the check due to its
3
negligence in failing to return the check to petitioner within the 24-hour reglementary
period as provided in Section 20.17 of the Clearing House Rules and Regulations8
(CHRR) 2000. Petitioner prayed that respondent be ordered to reimburse the sum of
P500,000.00 with 12% interest per annum, and to pay attorney’s fees and other
arbitration expenses.
In its Answer with Counterclaims,9 respondent charged petitioner with gross negligence
for accepting the post-dated check in the first place. It contended that petitioner’s
admitted negligence was the sole and proximate cause of the loss.
On December 8, 2004, the Arbitration Committee rendered its Decision10 in favor of
petitioner and against the respondent. First, it ruled that the situation of the parties
does not involve a "Ping-Pong" controversy since the subject check was neither returned
within the reglementary time or through the PCHC return window, nor coursed through
the clearing facilities of the PCHC.
As to respondent’s direct presentation of a photocopy of the subject check, it was
declared to be without legal basis because Section 21.111 of the CHRR 2000 does not
apply to post-dated checks. The Arbitration Committee further noted that respondent
not only failed to return the check within the 24-hour reglementary period, it also failed
to institute any formal complaint within the contemplation of Section 20.312 and it
appears that respondent was already contented with the 50-50 split initially
implemented by the PCHC. Finding both parties negligent in the performance of their
duties, the Committee applied the doctrine of "Last Clear Chance" and ruled that the
loss should be shouldered by respondent alone, thus:
WHEREFORE, premises considered, judgment is hereby rendered in favor of plaintiff
Allied Banking Corporation and against defendant Bank of the Philippine Islands,
ordering the latter to pay the former the following:
(a) The sum of P500,000.00, plus interest thereon at the rate of 12% per annum counted
from the date of filing of the complaint;
(b) Attorney’s fees in the amount of P25,000.00;
(c) The sum of P2,090.00 as and by way of reimbursement of filing fees, plus the cost of
suit.
SO ORDERED.13
Respondent filed a motion for reconsideration14 but it was denied by the PCHC Board
of Directors under Board Resolution No. 10-200515 dated April 22, 2005. The Board
pointed out that what actually transpired was a "ping-pong" "not of a check but of a
Charge Slip (CS) enclosed in a carrier envelope that went back and forth through the
clearing system in apparent reaction by [petitioner] to the wrongful return via the PCHC
clearing system." Respondent’s conduct was held as a "gross and unmistakably
deliberate violation" of Section 20.2,16 in relation to Section 20.1(e) of the CHRR
2000.17
On May 13, 2005, respondent filed a petition for review18 in the RTC claiming that PCHC
erred in constricting the return of a post-dated check to Section 20.1, overlooking the
fact that Section 20.3 is also applicable which provision necessarily contemplates
defects that are referred to in Section 20.1 as both sections are subsumed under the
general provision (Section 20) on the return of regular items. Respondent also argued
that assuming it to be liable, the PCHC erred in holding it solely responsible and should
bear entirely the consequent loss considering that while respondent may have the "last"
opportunity in proximity, it was petitioner which had the longest, fairest and clearest
chance to discover the mistake and avoid the happening of the loss. Lastly, respondent
assailed the award of attorney’s fees, arguing that PCHC’s perception of "malice" against
it and misuse of the clearing machinery is clearly baseless and unfounded.
In its Decision dated December 13, 2005, the RTC affirmed with modification the
Arbitration Committee’s decision by deleting the award of attorney’s fees. The RTC
found no merit in respondent’s stance that through inadvertence it failed to discover
that the check was post-dated and that confirmation within 24 hours is often "elusive if
not outright impossible" because a drawee bank receives hundreds if not thousands of
checks in an ordinary clearing day. Thus:
Petitioner admitted par. 4 in its Answer with Counterclaim and in its Memorandum,
further adding that upon receipt of the subject check "through inadvertence", it did not
notice that the check was postdated, hence, petitioner did not return the same to
respondent."
These contradict petitioner’s belated contention that it discovered the defect only after
the lapse of the reglementary period. What the evidence on record discloses is that
petitioner received the check on October 10, 2002, that it was promptly sent for
clearing, that through inadvertence, it did not notice that the check was postdated.
Petitioner did not even state when it discovered the defect in the subject check.
Likewise, petitioner’s contention that its discovery of the defect was a non-issue in view
of the admissions made in its Answer is unavailing. The Court has noted the fact that the
PCHC Arbitration Committee conducted a clarificatory hearing during which petitioner
admitted that its standard operating procedure as regards confirmation of checks was
not followed. No less than petitioner’s witness admitted that BPI tried to call up the
drawer of the check, as their procedure dictates when it comes to checks in large
amounts. However, having initially failed to contact the drawer, no follow up calls were
made nor other actions taken. Despite these, petitioner cleared the check. Having
admitted making said calls, it is simply impossible for petitioner to have missed the fact
that the check was postdated.19 (Emphasis supplied)
With the denial of its motion for partial reconsideration, respondent elevated the case
to the CA by filing a petition for review under Rule 42 of the 1997 Rules of Civil
Procedure, as amended.
By Decision dated March 19, 2009, the CA set aside the RTC judgment and ruled for a
60-40 sharing of the loss as it found petitioner guilty of contributory negligence in
accepting what is clearly a post-dated check. The CA found that petitioner’s failure to
notice the irregularity on the face of the check was a breach of its duty to the public and
4
a telling sign of its lack of due diligence in handling checks coursed through it. While the
CA conceded that the drawee bank has a bigger responsibility in the clearing of checks,
it declared that the presenting bank cannot take lightly its obligation to make sure that
only valid checks are introduced into the clearing system. According to the CA,
considerations of public policy and substantial justice will be served by allocating the
damage on a 60-40 ratio, as it thus decreed:
WHEREFORE, the decision of the Regional Trial Court of Makati City (Branch 57) dated
December 13, 2005 is ANNULLED and SET ASIDE and judgment is rendered ordering
petitioner to pay respondent Allied Banking Corporation the sum of P100,000.00 plus
interest thereon at the rate of 6% from July 10, 2003, which shall become 12% per
annum from finality hereof, until fully paid, aside from costs.
SO ORDERED.
Its motion for reconsideration having been denied by the CA, petitioner is now before
the Court seeking a partial reversal of the CA’s decision and affirmance of the December
13, 2005 Decision of the RTC.
Essentially, the two issues for resolution are: (1) whether the doctrine of last clear
chance applies in this case; and (2) whether the 60-40 apportionment of loss ordered by
the CA was justified.
As well established by the records, both petitioner and respondent were admittedly
negligent in the encashment of a check post-dated one year from its presentment.
Petitioner argues that the CA should have sustained PCHC’s finding that despite the
antecedent negligence of petitioner in accepting the postdated check for deposit,
respondent, by exercising reasonable care and prudence, might have avoided injurious
consequences had it not negligently cleared the check in question. It pointed out that in
applying the doctrine of last clear chance, the PCHC cited the case of Philippine Bank of
Commerce v. Court of Appeals21 which ruled that assuming the bank’s depositor,
private respondent, was negligent in entrusting cash to a dishonest employee, thus
providing the latter with the opportunity to defraud the company, it cannot be denied
that petitioner bank had the last clear opportunity to avert the injury incurred by its
client, simply by faithfully observing their self-imposed validation procedure.
Petitioner underscores respondent’s failure to observe clearing house rules and its own
standard operating procedure which, the PCHC said constitute further negligence so
much so that respondent should be solely liable for the loss. Specifically, respondent
failed to return the subject check within the 24-hour reglementary period under Section
20.1 and to institute any formal complaint within the contemplation of Section 20.3 of
the CHRR 2000. The PCHC likewise faulted respondent for not making follow-up calls or
taking any other action after it initially attempted, without success, to contact by
telephone the drawer of the check, and clearing the check despite such lack of
confirmation from its depositor in violation of its own standard procedure for checks
involving large amounts.
The doctrine of last clear chance, stated broadly, is that the negligence of the plaintiff
does not preclude a recovery for the negligence of the defendant where it appears that
the defendant, by exercising reasonable care and prudence, might have avoided
injurious consequences to the plaintiff notwithstanding the plaintiff’s negligence.22 The
doctrine necessarily assumes negligence on the part of the defendant and contributory
negligence on the part of the plaintiff, and does not apply except upon that
assumption.23 Stated differently, the antecedent negligence of the plaintiff does not
preclude him from recovering damages caused by the supervening negligence of the
defendant, who had the last fair chance to prevent the impending harm by the exercise
of due diligence.24 Moreover, in situations where the doctrine has been applied, it was
defendant’s failure to exercise such ordinary care, having the last clear chance to avoid
loss or injury, which was the proximate cause of the occurrence of such loss or injury.25
In this case, the evidence clearly shows that the proximate cause of the unwarranted
encashment of the subject check was the negligence of respondent who cleared a post-
dated check sent to it thru the PCHC clearing facility without observing its own
verification procedure. As correctly found by the PCHC and upheld by the RTC, if only
respondent exercised ordinary care in the clearing process, it could have easily noticed
the glaring defect upon seeing the date written on the face of the check "Oct. 9, 2003".
Respondent could have then promptly returned the check and with the check thus
dishonored, petitioner would have not credited the amount thereof to the payee’s
account. Thus, notwithstanding the antecedent negligence of the petitioner in accepting
the post-dated check for deposit, it can seek reimbursement from respondent the
amount credited to the payee’s account covering the check.
What petitioner omitted to mention is that in the cited case of Philippine Bank of
Commerce v. Court of Appeals,26 while the Court found petitioner bank as the culpable
party under the doctrine of last clear chance since it had, thru its teller, the last
opportunity to avert the injury incurred by its client simply by faithfully observing its
own validation procedure, it nevertheless ruled that the plaintiff depositor (private
respondent) must share in the loss on account of its contributory negligence. Thus:
The foregoing notwithstanding, it cannot be denied that, indeed, private respondent
was likewise negligent in not checking its monthly statements of account. Had it done
so, the company would have been alerted to the series of frauds being committed
against RMC by its secretary. The damage would definitely not have ballooned to such
an amount if only RMC, particularly Romeo Lipana, had exercised even a little vigilance
in their financial affairs. This omission by RMC amounts to contributory negligence
which shall mitigate the damages that may be awarded to the private respondent under
Article 2179 of the New Civil Code, to wit:
"x x x. When the plaintiff’s own negligence was the immediate and proximate cause of
his injury, he cannot recover damages. But if his negligence was only contributory, the
immediate and proximate cause of the injury being the defendant's lack of due care, the
plaintiff may recover damages, but the courts shall mitigate the damages to be
awarded."
In view of this, we believe that the demands of substantial justice are satisfied by
allocating the damage on a 60-40 ratio. Thus, 40% of the damage awarded by the
5
respondent appellate court, except the award of P25,000.00 attorney’s fees, shall be
borne by private respondent RMC; only the balance of 60% needs to be paid by the
petitioners. The award of attorney’s fees shall be borne exclusively by the petitioners.27
(Italics in the original; emphasis supplied)
In another earlier case,28 the Court refused to hold petitioner bank solely liable for the
loss notwithstanding the finding that the proximate cause of the loss was due to its
negligence. Since the employees of private respondent bank were likewise found
negligent, its claim for damages is subject to mitigation by the courts. Thus:
Both banks were negligent in the selection and supervision of their employees resulting
in the encashment of the forged checks by an impostor. Both banks were not able to
overcome the presumption of negligence in the selection and supervision of their
employees. It was the gross negligence of the employees of both banks which resulted
in the fraud and the subsequent loss. While it is true that petitioner BPI’s negligence
may have been the proximate cause of the loss, respondent CBC’s negligence
contributed equally to the success of the impostor in encashing the proceeds of the
forged checks. Under these circumstances, we apply Article 2179 of the Civil Code to the
effect that while respondent CBC may recover its losses, such losses are subject to
mitigation by the courts. x x x
Considering the comparative negligence of the two (2) banks, we rule that the demands
of substantial justice are satisfied by allocating the loss of P2,413,215.16 and the costs
of the arbitration proceedings in the amount of P7,250.00 and the costs of litigation on
a 60-40 ratio. Conformably with this ruling, no interests and attorney’s fees can be
awarded to either of the parties.29 (Emphasis supplied)
Apportionment of damages between parties who are both negligent was followed in
subsequent cases involving banking transactions notwithstanding the court’s finding
that one of them had the last clear opportunity to avoid the occurrence of the loss.
In Bank of America NT & SA v. Philippine Racing Club,30 the Court ruled:
In the case at bar, petitioner cannot evade responsibility for the loss by attributing
negligence on the part of respondent because, even if we concur that the latter was
indeed negligent in pre-signing blank checks, the former had the last clear chance to
avoid the loss. To reiterate, petitioner’s own operations manager admitted that they
could have called up the client for verification or confirmation before honoring the
dubious checks. Verily, petitioner had the final opportunity to avert the injury that befell
the respondent. x x x Petitioner’s negligence has been undoubtedly established and,
thus, pursuant to Art. 1170 of the NCC, it must suffer the consequence of said
negligence.
In the interest of fairness, however, we believe it is proper to consider respondent’s
own negligence to mitigate petitioner’s liability.1âwphi1 Article 2179 of the Civil Code
provides:
xxxx
Explaining this provision in Lambert v. Heirs of Ray Castillon, the Court held:
"The underlying precept on contributory negligence is that a plaintiff who is partly
responsible for his own injury should not be entitled to recover damages in full but must
bear the consequences of his own negligence. The defendant must thus be held liable
only for the damages actually caused by his negligence. xxx xxx xxx"
xxxx
Following established jurisprudential precedents, we believe the allocation of sixty
percent (60%) of the actual damages involved in this case (represented by the amount
of the checks with legal interest) to petitioner is proper under the premises. Respondent
should, in light of its contributory negligence, bear forty percent (40%) of its own loss.31
(Emphasis supplied)
In Philippine National Bank v. F.F. Cruz and Co., Inc.,32 the Court made a similar
disposition, thus:
Given the foregoing, we find no reversible error in the findings of the appellate court
that PNB was negligent in the handling of FFCCI’s combo account, specifically, with
respect to PNB’s failure to detect the forgeries in the subject applications for manager’s
check which could have prevented the loss. x x x PNB failed to meet the high standard of
diligence required by the circumstances to prevent the fraud. In Philippine Bank of
Commerce v. Court of Appeals and The Consolidated Bank & Trust Corporation v. Court
of Appeals, where the bank’s negligence is the proximate cause of the loss and the
depositor is guilty of contributory negligence, we allocated the damages between the
bank and the depositor on a 60-40 ratio. We apply the same ruling in this case
considering that, as shown above, PNB’s negligence is the proximate cause of the loss
while the issue as to FFCCI’s contributory negligence has been settled with finality in
G.R. No. 173278. Thus, the appellate court properly adjudged PNB to bear the greater
part of the loss consistent with these rulings.33
"Contributory negligence is conduct on the part of the injured party, contributing as a
legal cause to the harm he has suffered, which falls below the standard to which he is
required to conform for his own protection."34 Admittedly, petitioner’s acceptance of
the subject check for deposit despite the one year postdate written on its face was a
clear violation of established banking regulations and practices. In such instances,
payment should be refused by the drawee bank and returned through the PCHC within
the 24-hour reglementary period. As aptly observed by the CA, petitioner’s failure to
comply with this basic policy regarding post-dated checks was "a telling sign of its lack of
due diligence in handling checks coursed through it."35
It bears stressing that "the diligence required of banks is more than that of a Roman
paterfamilias or a good father of a family. The highest degree of diligence is
expected,"36 considering the nature of the banking business that is imbued with public
interest. While it is true that respondent's liability for its negligent clearing of the check
is greater, petitioner cannot take lightly its own violation of the long-standing rule
against encashment of post-dated checks and the injurious consequences of allowing
such checks into the clearing system.
6
Petitioner repeatedly harps on respondent's transgression of clearing house rules when
the latter resorted to direct presentment way beyond the reglementary period but
glosses over its own negligent act that clearly fell short of the conduct expected of it as a
collecting bank. Petitioner must bear the consequences of its omission to exercise
extraordinary diligence in scrutinizing checks presented by its depositors.
Assessing the facts and in the light of the cited precedents, the Court thus finds no error
committed by the CA in allocating the resulting loss from the wrongful encashment of
the subject check on a 60-40 ratio.
WHEREFORE, the petition for review on certiorari is DENIED. The Decision dated March
19, 2009 of the Court of Appeals in CA-G.R. SP No. 97604 is hereby AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
G.R. No. L-26767 February 22, 1968
ANG TIONG, plaintiff-appellee,
vs.
LORENZO TING, doing business under the name and style of PRUNES PRESERVED MFG.,
and FELIPE ANG, defendants.
FELIPE ANG, defendant-appellant.
Chipeco & Alcaraz, Jr. for plaintiff-appellee.
Ang, Atienza & Tabora for defendant-appellant.
CASTRO, J.:
On August 15, 1960 Lorenzo Ting issued Philippine Bank of Communications check
K-81618, for the sum of P4,000, payable to "cash or bearer". With Felipe Ang's signature
(indorsement in blank) at the back thereof, the instrument was received by the plaintiff
Ang Tiong who thereafter presented it to the drawee bank for payment. The bank
dishonored it. The plaintiff then made written demands on both Lorenzo Ting and Felipe
Ang that they make good the amount represented by the check. These demands went
unheeded; so he filed in the municipal court of Manila an action for collection of the
sum of P4,000, plus P500 attorney's fees. On March 6, 1962 the municipal court
adjudged for the plaintiff against the two defendants.
Only Felipe Ang appealed to the Court of First Instance of Manila (civil case 50018),
which rendered judgment on July 31, 1962, amended by an order dated August 9, 1962,
directing him to pay to the plaintiff "the sum of P4,000, with interest at the legal rate
from the date of the filing of the complaint, a further sum of P400 as attorney's fees,
and costs."
Felipe Ang then elevated the case to the Court of Appeals, which certified it to this
Court because the issues raised are purely of law.
The appellant imputes to the court a quo three errors, namely, (1) that it refused
to apply article 2071 of the new Civil Code to the case at bar; (2) that it adjudged him a
general indorser under the Negotiable Instruments Law (Act 2031); and (3) that it held
that he "cannot obtain his release from the contract of suretyship or obtain security to
protect himself against any proceedings on the part of the creditor and against the
danger of insolvency of the principal debtor," because he is "jointly and severally liable
on the instrument."
This, appeal is absolutely without merit.
1. The genuineness and due execution of the instrument are not controverted.
That the appellee is a holder thereof for value is admitted.
Having arisen from a bank check which is indisputably a negotiable instrument, the
present case is, therefore, in so far as the indorsee is concerned vis-a-vis the indorser,
governed solely plaintiff the Negotiable Instruments Law (see secs. 1 and 185). Article
2071 of the new Civil Code, invoked by the appellant, the pertinent portion of which
states, "The guarantor, even before been paid, may proceed against the principal
debtor; (1) when he is sued for the payment; . . . the action of the guarantor is to obtain
release from the guaranty, to demand a security that shall protect him from any
proceedings by the creditor . . .," is here completely irrelevant and can have no
application whatsoever.
We are in agreement with the trial judge that nothing in the check in question
indicates that the appellant is not a general indorser within the purview of section 63 of
the Negotiable Instruments Law which makes "a person placing his signature upon an
instrument otherwise than as maker, drawer or acceptor" a general indorser, — "unless
he clearly indicates plaintiff appropriate words his intention to be bound in some other
capacity," which he did not do. And section 66 ordains that "every indorser who
indorses without qualification, warrants to all subsequent holders in due course" (a)
that the instrument is genuine and in all respects what it purports to be; (b) that he has
a good title to it; (c) that all prior parties have capacity to contract; and (d) that the
instrument is at the time of his indorsement valid and subsisting. In addition, "he
engages that on due presentment, it shall be accepted or paid, or both, as the case may
be, and that if it be dishonored, he will pay the amount thereof to the holder." 1
2. Even on the assumption that the appellant is a mere accommodation party, as
he professes to be, he is nevertheless, by the clear mandate of section 29 of the
Negotiable Instruments Law, yet "liable on the instrument to a holder for value,
notwithstanding that such holder at the time of taking the instrument knew him to be
only an accommodation party." To paraphrase, the accommodation party is liable to a
holder for value as if the contract was not for accommodation. It is not a valid defense
that the accommodation party did not receive any valuable consideration when he
executed the instrument. Nor is it correct to say that the holder for value is not a holder
in due course merely because at the time he acquired the instrument, he knew that the
indorser was only an accommodation party. 2
7
 3. That the appellant, again assuming him to be an accommodation indorser, may
obtain security from the maker to protect himself against the danger of insolvency of Despite repeated demands for payment, the latest of which were on September 13,
the latter, cannot in any manner affect his liability to the appellee, as the said remedy is 1988 and September 9, 1986, on Antonio Ang Eng Liong and Tomas Ang, respectively,
a matter of concern exclusively between accommodation indorser and accommodated respondent Bank claimed that the defendants failed and refused to settle their
party. So that the fact that the appellant stands only as a surety in relation to the maker, obligation, resulting in a total indebtedness of P539,638.96 as of July 31, 1990, broken
granting this to be true for the sake of argument, is immaterial to the claim of the down as follows:
appellee, and does not a whit diminish nor defeat the rights of the latter who is a holder
for value. The liability of the appellant remains primary and unconditional. To sanction
the appellant's theory is to give unwarranted legal recognition to the patent absurdity of
a situation where an indorser, when sued on an instrument by a holder in due course PN-No. DVO-78-382 PN-No. DVO-78-390
and for value, can escape liability on his indorsement by the convenient expedient of
interposing the defense that he is a mere accomodation indorser.
Outstanding Balance P50,000.00 P30,000.00
ACCORDINGLY, the judgment a quo is affirmed in toto, at appellant's cost. Add Past due charges for 4,199 Past due charges for 4,253
days (from 01-31-79 to 07- days (from 12-8-78 to 07-31-
31-90) 90)
TOMAS ANG, 14% Interest P203,538.98 P125,334.41
Petitioner,
2% Service Charge P11,663.89 P7,088.34
- versus -
12% Overdue Charge P69,983.34 P42,530.00
ASSOCIATED BANK AND ANTONIO ANG ENG LIONGRespondents.
G.R. No. 146511 September 5, 2007 Total P285,186.21 P174,952.75
Less: Charges paid P500.00 None
X -------------------------------------------------------------------------------------- X Amount Due P334,686.21 P204,952.75

DECISION
AZCUNA, J.:
This petition for certiorari under Rule 45 of the Rules on Civil Procedure seeks to review
the October 9, 2000 Decision[1] and December 26, 2000 Resolution[2] of the Court of
Appeals in CA-G.R. CV No. 53413 which reversed and set aside the January 5, 1996
Decision[3] of the Regional Trial Court, Branch 16, Davao City, in Civil Case No. 20,299-
90, dismissing the complaint filed by respondents for collection of a sum of money.
On August 28, 1990, respondent Associated Bank (formerly Associated Banking
Corporation and now known as United Overseas Bank Philippines) filed a collection suit
against Antonio Ang Eng Liong and petitioner Tomas Ang for the two (2) promissory
notes that they executed as principal debtor and co-maker, respectively.
In the Complaint,[4] respondent Bank alleged that on October 3 and 9, 1978, the
defendants obtained a loan of P50,000, evidenced by a promissory note bearing PN-No.
DVO-78-382, and P30,000, evidenced by a promissory note bearing PN-No. DVO-78-390.
As agreed, the loan would be payable, jointly and severally, on January 31, 1979 and
December 8, 1978, respectively. In addition, subsequent amendments[5] to the
promissory notes as well as the disclosure statements[6] stipulated that the loan would
earn 14% interest rate per annum, 2% service charge per annum, 1% penalty charge per
month from due date until fully paid, and attorneys fees equivalent to 20% of the
outstanding obligation.
In his Answer,[7] Antonio Ang Eng Liong only admitted to have secured a loan
amounting to P80,000. He pleaded though that the bank be ordered to submit a more
reasonable computation considering that there had been no correct and reasonable
statement of account sent to him by the bank, which was allegedly collecting excessive
interest, penalty charges, and attorneys fees despite knowledge that his business was
destroyed by fire, hence, he had no source of income for several years.
For his part, petitioner Tomas Ang filed an Answer with Counterclaim and Cross-
claim.[8] He interposed the affirmative defenses that: the bank is not the real party in
interest as it is not the holder of the promissory notes, much less a holder for value or a
holder in due course; the bank knew that he did not receive any valuable consideration
for affixing his signatures on the notes but merely lent his name as an accommodation
party; he accepted the promissory notes in blank, with only the printed provisions and
the signature of Antonio Ang Eng Liong appearing therein; it was the bank which
completed the notes upon the orders, instructions, or representations of his co-
defendant; PN-No. DVO-78-382 was completed in excess of or contrary to the authority
given by him to his co-defendant who represented that he would only borrow P30,000
from the bank; his signature in PN-No. DVO-78-390 was procured through fraudulent
means when his co-defendant claimed that his first loan did not push through; the
promissory notes did not indicate in what capacity he was intended to be bound; the
bank granted his co-defendant successive extensions of time within which to pay,
without his (Tomas Ang) knowledge and consent; the bank imposed new and additional
stipulations on interest, penalties, services charges and attorneys fees more onerous
than the terms of the notes, without his knowledge and consent, in the absence of legal
and factual basis and in violation of the Usury Law; the bank caused the inclusion in the

8
promissory notes of stipulations such as waiver of presentment for payment and notice
of dishonor which are against public policy; and the notes had been impaired since they
were never presented for payment and demands were made only several years after
they fell due when his co-defendant could no longer pay them.
Regarding his counterclaim, Tomas Ang argued that by reason of the banks acts or
omissions, it should be held liable for the amount of P50,000 for attorneys fees and
expenses of litigation. Furthermore, on his cross-claim against Antonio Ang Eng Liong,
he averred that he should be reimbursed by his co-defendant any and all sums that he
may be adjudged liable to pay, plus P30,000, P20,000 and P50,000 for moral and
exemplary damages, and attorneys fees, respectively.
In its Reply,[9] respondent Bank countered that it is the real party in interest and is the
holder of the notes since the Associated Banking Corporation and Associated Citizens
Bank are its predecessors-in-interest. The fact that Tomas Ang never received any
moneys in consideration of the two (2) loans and that such was known to the bank are
immaterial because, as an accommodation maker, he is considered as a solidary debtor
who is primarily liable for the payment of the promissory notes. Citing Section 29 of the
Negotiable Instruments Law (NIL), the bank posited that absence or failure of
consideration is not a matter of defense; neither is the fact that the holder knew him to
be only an accommodation party.
Respondent Bank likewise retorted that the promissory notes were completely filled up
at the time of their delivery. Assuming that such was not the case, Sec. 14 of the NIL
provides that the bank has the prima facie authority to complete the blank form.
Moreover, it is presumed that one who has signed as a maker acted with care and had
signed the document with full knowledge of its content. The bank noted that Tomas Ang
is a prominent businessman in Davao City who has been engaged in the auto parts
business for several years, hence, certainly he is not so nave as to sign the notes without
knowing or bothering to verify the amounts of the loans covered by them. Further, he is
already in estoppel since despite receipt of several demand letters there was not a
single protest raised by him that he signed for only one note in the amount of P30,000.
It was denied by the bank that there were extensions of time for payment accorded to
Antonio Ang Eng Liong. Granting that such were the case, it said that the same would
not relieve Tomas Ang from liability as he would still be liable for the whole obligation
less the share of his co-debtor who received the extended term.
The bank also asserted that there were no additional or new stipulations imposed other
than those agreed upon. The penalty charge, service charge, and attorneys fees were
reflected in the amendments to the promissory notes and disclosure statements.
Reference to the Usury Law was misplaced as usury is legally non-existent; at present,
interest can be charged depending on the agreement of the lender and the borrower.
Lastly, the bank contended that the provisions on presentment for payment and notice
of dishonor were expressly waived by Tomas Ang and that such waiver is not against
public policy pursuant to Sections 82 (c) and 109 of the NIL. In fact, there is even no
necessity therefor since being a solidary debtor he is absolutely required to pay and
primarily liable on both promissory notes.
On October 19, 1990, the trial court issued a preliminary pre-trial order directing the
parties to submit their respective pre-trial guide.[10] When Antonio Ang Eng Liong failed
to submit his brief, the bank filed an ex-parte motion to declare him in default.[11] Per
Order of November 23, 1990, the court granted the motion and set the ex-parte hearing
for the presentation of the banks evidence.[12] Despite Tomas Angs motion[13] to
modify the Order so as to exclude or cancel the ex-parte hearing based on then Sec. 4,
Rule 18 of the old Rules of Court (now Sec. 3[c.], Rule 9 of the Revised Rules on Civil
Procedure), the hearing nonetheless proceeded.[14]
Eventually, a decision[15] was rendered by the trial court on February 21, 1991. For his
supposed bad faith and obstinate refusal despite several demands from the bank,
Antonio Ang Eng Liong was ordered to pay the principal amount of P80,000 plus 14%
interest per annum and 2% service charge per annum. The overdue penalty charge and
attorneys fees were, however, reduced for being excessive, thus:
WHEREFORE, judgment is rendered against defendant Antonio Ang Eng Liong and in
favor of plaintiff, ordering the former to pay the latter:
On the first cause of action:
1) the amount of P50,000.00 representing the principal obligation with 14%
interest per annum from June 27, 1983 with 2% service charge and 6% overdue penalty
charges per annum until fully paid;
2) P11,663.89 as accrued service charge; and
3) P34,991.67 as accrued overdue penalty charge.
On the second cause of action:
1) the amount of P50,000.00 (sic) representing the principal account with 14%
interest from June 27, 1983 with 2% service charge and 6% overdue penalty charges per
annum until fully paid;
2) P7,088.34 representing accrued service charge;
3) P21,265.00 as accrued overdue penalty charge;
4) the amount of P10,000.00 as attorneys fees; and
5) the amount of P620.00 as litigation expenses and to pay the costs.
SO ORDERED.[16]
The decision became final and executory as no appeal was taken therefrom. Upon the
banks ex-parte motion, the court accordingly issued a writ of execution on April 5,
1991.[17]
Thereafter, on June 3, 1991, the court set the pre-trial conference between the bank
and Tomas Ang,[18] who, in turn, filed a Motion to Dismiss[19] on the ground of lack of
jurisdiction over the case in view of the alleged finality of the February 21, 1991
Decision. He contended that Sec. 4, Rule 18 of the old Rules sanctions only one
9
judgment in case of several defendants, one of whom is declared in default. Moreover,
in his Supplemental Motion to Dismiss,[20] Tomas Ang maintained that he is released
from his obligation as a solidary guarantor and accommodation party because, by the
banks actions, he is now precluded from asserting his cross-claim against Antonio Ang
Eng Liong, upon whom a final and executory judgment had already been issued.
The court denied the motion as well as the motion for reconsideration thereon.[21]
Tomas Ang subsequently filed a petition for certiorari and prohibition before this Court,
which, however, resolved to refer the same to the Court of Appeals.[22] In accordance
with the prayer of Tomas Ang, the appellate court promulgated its Decision on January
29, 1992 in CA G.R. SP No. 26332, which annulled and set aside the portion of the Order
dated November 23, 1990 setting the ex-parte presentation of the banks evidence
against Antonio Ang Eng Liong, the Decision dated February 21, 1991 rendered against
him based on such evidence, and the Writ of Execution issued on April 5, 1991.[23]
Trial then ensued between the bank and Tomas Ang. Upon the latters motion during the
pre-trial conference, Antonio Ang Eng Liong was again declared in default for his failure
to answer the cross-claim within the reglementary period.[24]
When Tomas Ang was about to present evidence in his behalf, he filed a Motion for
Production of Documents,[25] reasoning:
xxx
2. That corroborative to, and/or preparatory or incident to his testimony[,] there is [a]
need for him to examine original records in the custody and possession of plaintiff, viz:
a. original Promissory Note (PN for brevity) # DVO-78-382 dated October 3,
1978[;]
b. original of Disclosure Statement in reference to PN # DVO-78-382;
c. original of PN # DVO-78-390 dated October 9, 1978;
d. original of Disclosure Statement in reference to PN # DVO-78-390;
e. Statement or Record of Account with the Associated Banking Corporation
or its successor, of Antonio Ang in CA No. 470 (cf. Exh. O) including bank records,
withdrawal slips, notices, other papers and relevant dates relative to the overdraft of
Antonio Eng Liong in CA No. 470;
f. Loan Applications of Antonio Ang Eng Liong or borrower relative to PN Nos.
DVO-78-382 and DVO-78-390 (supra);
g. Other supporting papers and documents submitted by Antonio Ang Eng
Liong relative to his loan application vis--vis PN. Nos. DVO-78-382 and DVO-78-390 such
as financial statements, income tax returns, etc. as required by the Central Bank or bank
rules and regulations.
3. That the above matters are very material to the defenses of defendant Tomas Ang,
viz:
- the bank is not a holder in due course when it accepted the [PNs] in blank.
- The real borrower is Antonio Ang Eng Liong which fact is known to the
bank.
- That the PAYEE not being a holder in due course and knowing that
defendant Tomas Ang is merely an accommodation party, the latter may raise against
such payee or holder or successor-in-interest (of the notes) PERSONAL and EQUITABLE
DEFENSES such as FRAUD in INDUCEMENT, DISCHARGE ON NOTE, Application of
[Articles] 2079, 2080 and 1249 of the Civil Code, NEGLIGENCE in delaying collection
despite Eng Liongs OVERDRAFT in C.A. No. 470, etc.[26]
In its Order dated May 16, 1994,[27] the court denied the motion stating that the
promissory notes and the disclosure statements have already been shown to and
inspected by Tomas Ang during the trial, as in fact he has already copies of the same;
the Statements or Records of Account of Antonio Ang Eng Liong in CA No. 470, relative
to his overdraft, are immaterial since, pursuant to the previous ruling of the court, he is
being sued for the notes and not for the overdraft which is personal to Antonio Ang Eng
Liong; and besides its non-existence in the banks records, there would be legal obstacle
for the production and inspection of the income tax return of Antonio Ang Eng Liong if
done without his consent.
When the motion for reconsideration of the aforesaid Order was denied, Tomas Ang
filed a petition for certiorari and prohibition with application for preliminary injunction
and restraining order before the Court of Appeals docketed as CA G.R. SP No. 34840.[28]
On August 17, 1994, however, the Court of Appeals denied the issuance of a Temporary
Restraining Order.[29]
Meanwhile, notwithstanding its initial rulings that Tomas Ang was deemed to have
waived his right to present evidence for failure to appear during the pendency of his
petition before the Court of Appeals, the trial court decided to continue with the
hearing of the case.[30]
After the trial, Tomas Ang offered in evidence several documents, which included a copy
of the Trust Agreement between the Republic of the Philippines and the Asset
Privatization Trust, as certified by the notary public, and news clippings from the Manila
Bulletin dated May 18, 1994 and May 30, 1994.[31] All the documentary exhibits were
admitted for failure of the bank to submit its comment to the formal offer.[32]
Thereafter, Tomas Ang elected to withdraw his petition in CA G.R. SP No. 34840 before
the Court of Appeals, which was then granted.[33]
On January 5, 1996, the trial court rendered judgment against the bank, dismissing the
complaint for lack of cause of action.[34] It held that:
Exh. 9 and its [sub-markings], the Trust Agreement dated 27 February 1987 for the
defense shows that: the Associated Bank as of June 30, 1986 is one of DBPs or
Development Bank of the [Philippines] non-performing accounts for transfer; on
February 27, 1987 through Deeds of Transfer executed by and between the Philippine
National Bank and Development Bank of the Philippines and the National Government,
both financial institutions assigned, transferred and conveyed their non-performing
assets to the National Government; the National Government in turn and as TRUSTOR,
transferred, conveyed and assigned by way of trust unto the Asset Privatization Trust
said non-performing assets, [which] took title to and possession of, [to] conserve,
provisionally manage and dispose[,] of said assets identified for privatization or
disposition; one of the powers and duties of the APT with respect to trust properties
10
consisting of receivables is to handle the administration, collection and enforcement of
the receivables; to bring suit to enforce payment of the obligations or any installment
thereof or to settle or compromise any of such obligations, or any other claim or
demand which the government may have against any person or persons[.]
The Manila Bulletin news clippings dated May 18, 1994 and May 30, 1994, Exh. 9-A, 9-B,
9-C, and 9-D, show that the Monetary Board of the Bangko Sentral ng Pilipinas approved
the rehabilitation plan of the Associated Bank. One main feature of the rehabilitation
plan included the financial assistance for the bank by the Philippine Deposit Insurance
Corporation (PDIC) by way of the purchase of AB Assets worth P1.3945 billion subject to
a buy-back arrangement over a 10 year period. The PDIC had approved of the rehab
scheme, which included the purchase of ABs bad loans worth P1.86 at 25% discount.
This will then be paid by AB within a 10-year period plus a yield comparable to the
prevailing market rates x x x.
Based then on the evidence presented by the defendant Tomas Ang, it would readily
appear that at the time this suit for Sum of Money was filed which was on August [28],
1990, the notes were held by the Asset Privatization Trust by virtue of the Deeds of
Transfer and Trust Agreement, which was empowered to bring suit to enforce payment
of the obligations. Consequently, defendant Tomas Ang has sufficiently established that
plaintiff at the time this suit was filed was not the holder of the notes to warrant the
dismissal of the complaint.[35]
Respondent Bank then elevated the case to the Court of Appeals. In the appellants brief
captioned, ASSOCIATED BANK, Plaintiff-Appellant versus ANTONIO ANG ENG LIONG and
TOMAS ANG, Defendants, TOMAS ANG, Defendant-Appellee, the following errors were
alleged:
I.
THE LOWER COURT ERRED IN NOT HOLDING DEFENDANT ANTONIO ANG ENG LIONG
AND DEFENDANT-APPELLEE TOMAS ANG LIABLE TO PLAINTIFF-APPELLANT ON THEIR
UNPAID LOANS DESPITE THE LATTERS DOCUMENTARY EXHIBITS PROVING THE SAID
OBLIGATIONS.
II.
THE LOWER COURT ERRED IN DISMISSING PLAINTIFF-APPELLANTS COMPLAINT ON THE
BASIS OF NEWSPAPER CLIPPINGS WHICH WERE COMPLETELY HEARSAY IN CHARACTER
AND IMPROPER FOR JUDICIAL NOTICE.[36]
The bank stressed that it has established the causes of action outlined in its Complaint
by a preponderance of evidence. As regards the Deed of Transfer and Trust Agreement,
it contended that the same were never authenticated by any witness in the course of
the trial; the Agreement, which was not even legible, did not mention the promissory
notes subject of the Complaint; the bank is not a party to the Agreement, which showed
that it was between the Government of the Philippines, acting through the Committee
on Privatization represented by the Secretary of Finance as trustor and the Asset
Privatization Trust, which was created by virtue of Proclamation No. 50; and the
Agreement did not reflect the signatures of the contracting parties. Lastly, the bank
averred that the news items appearing in the Manila Bulletin could not be the subject of
judicial notice since they were completely hearsay in character.[37]
On October 9, 2000, the Court of Appeals reversed and set aside the trial courts ruling.
The dispositive portion of the Decision[38] reads:
WHEREFORE, premises considered, the Decision of the Regional Trial Court of Davao
City, Branch 16, in Civil Case No. 20,299-90 is hereby REVERSED AND SET ASIDE and
another one entered ordering defendant-appellee Tomas Ang to pay plaintiff-appellant
Associated Bank the following:
1. P50,000.00 representing the principal amount of the loan under PN-No.
DVO-78-382 plus 14% interest thereon per annum computed from January 31, 1979
until the full amount thereof is paid;
2. P30,000.00 representing the principal amount of the loan under PN-No.
DVO-78-390 plus 14% interest thereon per annum computed from December 8, 1978
until the full amount thereof is paid;
All other claims of the plaintiff-appellant are DISMISSED for lack of legal basis.
Defendant-appellees counterclaim is likewise DISMISSED for lack of legal and factual
bases.
No pronouncement as to costs.
SO ORDERED.[39]
The appellate court disregarded the banks first assigned error for being irrelevant in the
final determination of the case and found its second assigned error as not meritorious.
Instead, it posed for resolution the issue of whether the trial court erred in dismissing
the complaint for collection of sum of money for lack of cause of action as the bank was
said to be not the holder of the notes at the time the collection case was filed.
In answering the lone issue, the Court of Appeals held that the bank is a holder under
Sec. 191 of the NIL. It concluded that despite the execution of the Deeds of Transfer and
Trust Agreement, the Asset Privatization Trust cannot be declared as the holder of the
subject promissory notes for the reason that it is neither the payee or indorsee of the
notes in possession thereof nor is it the bearer of said notes. The Court of Appeals
observed that the bank, as the payee, did not indorse the notes to the Asset
Privatization Trust despite the execution of the Deeds of Transfer and Trust Agreement
and that the notes continued to remain with the bank until the institution of the
collection suit.
With the bank as the holder of the promissory notes, the Court of Appeals held that
Tomas Ang is accountable therefor in his capacity as an accommodation party. Citing
Sec. 29 of the NIL, he is liable to the bank in spite of the latters knowledge, at the time
of taking the notes, that he is only an accommodation party. Moreover, as a co-maker
who agreed to be jointly and severally liable on the promissory notes, Tomas Ang
11
cannot validly set up the defense that he did not receive any consideration therefor as
the fact that the loan was granted to the principal debtor already constitutes a sufficient
consideration.
Further, the Court of Appeals agreed with the bank that the experience of Tomas Ang in
business rendered it implausible that he would just sign the promissory notes as a co-
maker without even checking the real amount of the debt to be incurred, or that he
merely acted on the belief that the first loan application was cancelled. According to the
appellate court, it is apparent that he was negligent in falling for the alibi of Antonio Ang
Eng Liong and such fact would not serve to exonerate him from his responsibility under
the notes.
Nonetheless, the Court of Appeals denied the claims of the bank for service, penalty and
overdue charges as well as attorneys fees on the ground that the promissory notes
made no mention of such charges/fees.
In his motion for reconsideration,[40] Tomas Ang raised for the first time the assigned
errors as follows:
xxx
2) Related to the above jurisdictional issues, defendant-appellee Tomas Ang has recently
discovered that upon the filing of the complaint on August 28, 1990, under the
jurisdictional rule laid down in BP Blg. 129, appellant bank fraudulently failed to specify
the amount of compounded interest at 14% per annum, service charges at 2% per
annum and overdue penalty charges at 12% per annum in the prayer of the complaint as
of the time of its filing, paying a total of only P640.00(!!!) as filing and court docket fees
although the total sum involved as of that time was P647,566.75 including 20%
attorneys fees. In fact, the stated interest in the body of the complaint alone amount to
P328,373.39 (which is actually compounded and capitalized) in both causes of action
and the total service and overdue penalties and charges and attorneys fees further
amount to P239,193.36 in both causes of action, as of July 31, 1990, the time of filing of
the complaint. Significantly, appellant fraudulently misled the Court, describing the 14%
imposition as interest, when in fact the same was capitalized as principal by appellant
bank every month to earn more interest, as stated in the notes. In view thereof, the trial
court never acquired jurisdiction over the case and the same may not be now corrected
by the filing of deficiency fees because the causes of action had already prescribed and
more importantly, the jurisdiction of the Municipal Trial Court had been increased to
P100,000.00 in principal claims last March 20, 1999, pursuant to SC Circular No. 21-99,
section 5 of RA No. 7691, and section 31, Book I of the 1987 Administrative Code. In
other words, as of today, jurisdiction over the subject falls within the exclusive
jurisdiction of the MTC, particularly if the bank foregoes capitalization of the stipulated
interest.
3) BY FAILING TO GIVE NOTICE OF ITS APPEAL AND APPEAL BRIEF TO APPELLEE ANG ENG
LIONG, THE APPEALED JUDGMENT OF THE TRIAL COURT WHICH LEFT OUT TOMAS ANGS
CROSS-CLAIM AGAINST ENG LIONG (BECAUSE IT DISMISSED THE MAIN CLAIM), HAD
LONG BECOME FINAL AND EXECUTORY, AS AGAINST ENG LIONG. Accordingly, Tomas
Angs right of subrogation against Ang Eng Liong, expressed in his cross-claim, is now
SEVERAL TIMES foreclosed because of the fault or negligence of appellant bank since
1979 up to its insistence of an ex-parte trial, and now when it failed to serve notice of
appeal and appellants brief upon him. Accordingly, appellee Tomas Ang should be
released from his suretyship obligation pursuant to Art. 2080 of the Civil Code. The
above is related to the issues above-stated.
4) This Court may have erred in ADDING or ASSIGNING its own bill of error for the
benefit of appellant bank which defrauded the judiciary by the payment of deficient
docket fees.[41]
Finding no cogent or compelling reason to disturb the Decision, the Court of Appeals
denied the motion in its Resolution dated December 26, 2000.[42]
Petitioner now submits the following issues for resolution:
1. Is [A]rticle 2080 of the Civil Code applicable to discharge petitioner Tomas
Ang as accommodation maker or surety because of the failure of [private] respondent
bank to serve its notice of appeal upon the principal debtor, respondent Eng Liong?
2. Did the trial court have jurisdiction over the case at all?
3. Did the Court of Appeals [commit] error in assigning its own error and
raising its own issue?
4. Are petitioners other real and personal defenses such as successive
extensions coupled with fraudulent collusion to hide Eng Liongs default, the payees
grant of additional burdens, coupled with the insolvency of the principal debtor, and the
defense of incomplete but delivered instrument, meritorious?[43]
Petitioner allegedly learned after the promulgation of the Court of Appeals decision
that, pursuant to the parties agreement on the compounding of interest with the
principal amount (per month in case of default), the interest on the promissory notes as
of July 31, 1990 should have been only P81,647.22 for PN No. DVO-78-382 (instead of
P203,538.98) and P49,618.33 for PN No. DVO-78-390 (instead of P125,334.41) while the
principal debt as of said date should increase to P647,566.75 (instead of P539,638.96).
He submits that the bank carefully and shrewdly hid the fact by describing the amounts
as interest instead of being part of either the principal or penalty in order to pay a lesser
amount of docket fees. According to him, the total fees that should have been paid at
the time of the filing of the complaint on August 28, 1990 was P2,216.30 and not
P614.00 or a shortage of 71%. Petitioner contends that the bank may not now pay the
deficiency because the last demand letter sent to him was dated September 9, 1986, or
more than twenty years have elapsed such that prescription had already set in.
Consequently, the banks claim must be dismissed as the trial court loses jurisdiction
over the case.
Petitioner also argues that the Court of Appeals should not have assigned its own error
and raised it as an issue of the case, contending that no question should be entertained
on appeal unless it has been advanced in the court below or is within the issues made by
the parties in the pleadings. At any rate, he opines that the appellate courts decision
that the bank is the real party in interest because it is the payee named in the note or
12
the holder thereof is too simplistic since: (1) the power and control of Asset Privatization
Trust over the bank are clear from the explicit terms of the duly certified trust
documents and deeds of transfer and are confirmed by the newspaper clippings; (2)
even under P.D. No. 902-A or the General Banking Act, where a corporation or a bank is
under receivership, conservation or rehabilitation, it is only the representative
(liquidator, receiver, trustee or conservator) who may properly act for said entity, and,
in this case, the bank was held by Asset Privatization Trust as trustee; and (3) it is not
entirely accurate to say that the payee who has not indorsed the notes in all cases is the
real party in interest because the rights of the payee may be subject of an assignment of
incorporeal rights under Articles 1624 and 1625 of the Civil Code.
Lastly, petitioner maintains that when respondent Bank served its notice of appeal and
appellants brief only on him, it rendered the judgment of the trial court final and
executory with respect to Antonio Ang Eng Liong, which, in effect, released him
(Antonio Ang Eng Liong) from any and all liability under the promissory notes and,
thereby, foreclosed petitioners cross-claims. By such act, the bank, even if it be the
holder of the promissory notes, allegedly discharged a simple contract for the payment
of money (Sections 119 [d] and 122, NIL [Act No. 2031]), prevented a surety like
petitioner from being subrogated in the shoes of his principal (Article 2080, Civil Code),
and impaired the notes, producing the effect of payment (Article 1249, Civil Code).
The petition is unmeritorious.
Procedurally, it is well within the authority of the Court of Appeals to raise, if it deems
proper under the circumstances obtaining, error/s not assigned on an appealed case. In
Mendoza v. Bautista,[44] this Court recognized the broad discretionary power of an
appellate court to waive the lack of proper assignment of errors and to consider errors
not assigned, thus:
As a rule, no issue may be raised on appeal unless it has been brought before the lower
tribunal for its consideration. Higher courts are precluded from entertaining matters
neither alleged in the pleadings nor raised during the proceedings below, but ventilated
for the first time only in a motion for reconsideration or on appeal.
However, as with most procedural rules, this maxim is subject to exceptions. Indeed, our
rules recognize the broad discretionary power of an appellate court to waive the lack of
proper assignment of errors and to consider errors not assigned. Section 8 of Rule 51 of
the Rules of Court provides:
SEC. 8. Questions that may be decided. No error which does not affect the jurisdiction
over the subject matter or the validity of the judgment appealed from or the
proceedings therein will be considered, unless stated in the assignment of errors, or
closely related to or dependent on an assigned error and properly argued in the brief,
save as the court may pass upon plain errors and clerical errors.
Thus, an appellate court is clothed with ample authority to review rulings even if they
are not assigned as errors in the appeal in these instances: (a) grounds not assigned as
errors but affecting jurisdiction over the subject matter; (b) matters not assigned as
errors on appeal but are evidently plain or clerical errors within contemplation of law;
(c) matters not assigned as errors on appeal but consideration of which is necessary in
arriving at a just decision and complete resolution of the case or to serve the interests of
justice or to avoid dispensing piecemeal justice; (d) matters not specifically assigned as
errors on appeal but raised in the trial court and are matters of record having some
bearing on the issue submitted which the parties failed to raise or which the lower court
ignored; (e) matters not assigned as errors on appeal but closely related to an error
assigned; and (f) matters not assigned as errors on appeal but upon which the
determination of a question properly assigned is dependent. (Citations omitted)[45]
To the Courts mind, even if the Court of Appeals regarded petitioners two assigned
errors as irrelevant and not meritorious, the issue of whether the trial court erred in
dismissing the complaint for collection of sum of money for lack of cause of action (on
the ground that the bank was not the holder of the notes at the time of the filing of the
action) is in reality closely related to and determinant of the resolution of whether the
lower court correctly ruled in not holding Antonio Ang Eng Liong and petitioner Tomas
Ang liable to the bank on their unpaid loans despite documentary exhibits allegedly
proving their obligations and in dismissing the complaint based on newspaper clippings.
Hence, no error could be ascribed to the Court of Appeals on this point.
Now, the more relevant question is: who is the real party in interest at the time of the
institution of the complaint, is it the bank or the Asset Privatization Trust?
To answer the query, a brief history on the creation of the Asset Privatization Trust is
proper.
Taking into account the imperative need of formally launching a program for the
rationalization of the government corporate sector, then President Corazon C. Aquino
issued Proclamation No. 50[46] on December 8, 1986. As one of the twin cornerstones
of the program was to establish the privatization of a good number of government
corporations, the proclamation created the Asset Privatization Trust, which would, for
the benefit of the National Government, take title to and possession of, conserve,
provisionally manage and dispose of transferred assets that were identified for
privatization or disposition.[47]
In accordance with the provisions of Section 23[48] of the proclamation, then President
Aquino subsequently issued Administrative Order No. 14 on February 3, 1987, which
approved the identification of and transfer to the National Government of certain assets
(consisting of loans, equity investments, accrued interest receivables, acquired assets
and other assets) and liabilities (consisting of deposits, borrowings, other liabilities and
contingent guarantees) of the Development Bank of the Philippines (DBP) and the
Philippine National Bank (PNB). The transfer of assets was implemented through a Deed
of Transfer executed on February 27, 1987 between the National Government, on one
hand, and the DBP and PNB, on the other. In turn, the National Government designated
the Asset Privatization Trust to act as its trustee through a Trust Agreement, whereby
the non-performing accounts of DBP and PNB, including, among others, the DBPs equity
with respondent Bank, were entrusted to the Asset Privatization Trust.[49] As provided
for in the Agreement, among the powers and duties of the Asset Privatization Trust with
respect to the trust properties consisting of receivables was to handle their
administration and collection by bringing suit to enforce payment of the obligations or
any installment thereof or settling or compromising any of such obligations or any other
13
claim or demand which the Government may have against any person or persons, and
to do all acts, institute all proceedings, and to exercise all other rights, powers, and
privileges of ownership that an absolute owner of the properties would otherwise have
the right to do.[50]
Incidentally, the existence of the Asset Privatization Trust would have expired five (5)
years from the date of issuance of Proclamation No. 50.[51] However, its original term
was extended from December 8, 1991 up to August 31, 1992,[52] and again from
December 31, 1993 until June 30, 1995,[53] and then from July 1, 1995 up to December
31, 1999,[54] and further from January 1, 2000 until December 31, 2000.[55]
Thenceforth, the Privatization and Management Office was established and took over,
among others, the powers, duties and functions of the Asset Privatization Trust under
the proclamation.[56]
Based on the above backdrop, respondent Bank does not appear to be the real party in
interest when it instituted the collection suit on August 28, 1990 against Antonio Ang
Eng Liong and petitioner Tomas Ang. At the time the complaint was filed in the trial
court, it was the Asset Privatization Trust which had the authority to enforce its claims
against both debtors. In fact, during the pre-trial conference, Atty. Roderick Orallo,
counsel for the bank, openly admitted that it was under the trusteeship of the Asset
Privatization Trust.[57] The Asset Privatization Trust, which should have been
represented by the Office of the Government Corporate Counsel, had the authority to
file and prosecute the case.
The foregoing notwithstanding, this Court can not, at present, readily subscribe to
petitioners insistence that the case must be dismissed. Significantly, it stands without
refute, both in the pleadings as well as in the evidence presented during the trial and up
to the time this case reached the Court, that the issue had been rendered moot with the
occurrence of a supervening event the buy-back of the bank by its former owner,
Leonardo Ty, sometime in October 1993. By such re-acquisition from the Asset
Privatization Trust when the case was still pending in the lower court, the bank
reclaimed its real and actual interest over the unpaid promissory notes; hence, it could
rightfully qualify as a holder[58] thereof under the NIL.
Notably, Section 29 of the NIL defines an accommodation party as a person "who has
signed the instrument as maker, drawer, acceptor, or indorser, without receiving value
therefor, and for the purpose of lending his name to some other person." As gleaned
from the text, an accommodation party is one who meets all the three requisites, viz: (1)
he must be a party to the instrument, signing as maker, drawer, acceptor, or indorser;
(2) he must not receive value therefor; and (3) he must sign for the purpose of lending
his name or credit to some other person.[59] An accommodation party lends his name
to enable the accommodated party to obtain credit or to raise money; he receives no
part of the consideration for the instrument but assumes liability to the other party/ies
thereto.[60] The accommodation party is liable on the instrument to a holder for value
even though the holder, at the
time of taking the instrument, knew him or her to be merely an
accommodation party, as if the contract was not for accommodation.[61]
As petitioner acknowledged it to be, the relation between an accommodation party and
the accommodated party is one of principal and surety the accommodation party being
the surety.[62] As such, he is deemed an original promisor and debtor from the
beginning;[63] he is considered in law as the same party as the debtor in relation to
whatever is adjudged touching the obligation of the latter since their liabilities are
interwoven as to be inseparable.[64] Although a contract of suretyship is in essence
accessory or collateral to a valid principal obligation, the surety's liability to the creditor
is immediate, primary and absolute; he is directly and equally bound with the
principal.[65] As an equivalent of a regular party to the undertaking, a surety becomes
liable to the debt and duty of the principal obligor even without possessing a direct or
personal interest in the obligations nor does he receive any benefit therefrom.[66]
Contrary to petitioners adamant stand, however, Article 2080[67] of the Civil Code does
not apply in a contract of suretyship.[68] Art. 2047 of the Civil Code states that if a
person binds himself solidarily with the principal debtor, the provisions of Section 4,
Chapter 3, Title I, Book IV of the Civil Code must be observed. Accordingly, Articles 1207
up to 1222 of the Code (on joint and solidary obligations) shall govern the relationship
of petitioner with the bank.
The case of Inciong, Jr. v. CA[69] is illuminating:
Petitioner also argues that the dismissal of the complaint against Naybe, the principal
debtor, and against Pantanosas, his co-maker, constituted a release of his obligation,
especially because the dismissal of the case against Pantanosas was upon the motion of
private respondent itself. He cites as basis for his argument, Article 2080 of the Civil
Code which provides that:
"The guarantors, even though they be solidary, are released from their obligation
whenever by come act of the creditor, they cannot be subrogated to the rights,
mortgages, and preferences of the latter."
It is to be noted, however, that petitioner signed the promissory note as a solidary co-
maker and not as a guarantor. This is patent even from the first sentence of the
promissory note which states as follows:
"Ninety one (91) days after date, for value received, I/we, JOINTLY and SEVERALLY
promise to pay to the PHILIPPINE BANK OF COMMUNICATIONS at its office in the City of
Cagayan de Oro, Philippines the sum of FIFTY THOUSAND ONLY (P50,000.00) Pesos,
Philippine Currency, together with interest x x x at the rate of SIXTEEN (16) per cent per
annum until fully paid."
A solidary or joint and several obligation is one in which each debtor is liable for the
entire obligation, and each creditor is entitled to demand the whole obligation. On the
other hand, Article 2047 of the Civil Code states:
"By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.
14
If a person binds himself solidarily with the principal debtor, the provisions of Section 4,
Chapter 3, Title I of this Book shall be observed. In such a case the contract is called a
suretyship." (Italics supplied.)
While a guarantor may bind himself solidarily with the principal debtor, the liability of a
guarantor is different from that of a solidary debtor. Thus, Tolentino explains:
"A guarantor who binds himself in solidum with the principal debtor under the
provisions of the second paragraph does not become a solidary co-debtor to all intents
and purposes. There is a difference between a solidary co-debtor, and a fiador in
solidum (surety). The later, outside of the liability he assumes to pay the debt before the
property of the principal debtor has been exhausted, retains all the other rights, actions
and benefits which pertain to him by reason of rights of the fiansa; while a solidary co-
debtor has no other rights than those bestowed upon him in Section 4, Chapter 3, title I,
Book IV of the Civil Code."
Section 4, Chapter 3, Title I, Book IV of the Civil Code states the law on joint and several
obligations. Under Art. 1207 thereof, when there are two or more debtors in one and
the same obligation, the presumption is that obligation is joint so that each of the
debtors is liable only for a proportionate part of the debt. There is a solidarily liability
only when the obligation expressly so states, when the law so provides or when the
nature of the obligation so requires.
Because the promissory note involved in this case expressly states that the three
signatories therein are jointly and severally liable, any one, some or all of them may be
proceeded against for the entire obligation. The choice is left to the solidary creditor to
determine against whom he will enforce collection. (Citations omitted)[70]
In the instant case, petitioner agreed to be jointly and severally liable under the two
promissory notes that he co-signed with Antonio Ang Eng Liong as the principal debtor.
This being so, it is completely immaterial if the bank would opt to proceed only against
petitioner or Antonio Ang Eng Liong or both of them since the law confers upon the
creditor the prerogative to choose whether to enforce the entire obligation against any
one, some or all of the debtors. Nonetheless, petitioner, as an accommodation party,
may seek reimbursement from Antonio Ang Eng Liong, being the party
accommodated.[71]
It is plainly mistaken for petitioner to say that just because the bank failed to serve the
notice of appeal and appellants brief to Antonio Ang Eng Liong, the trial courts
judgment, in effect, became final and executory as against the latter and, thereby, bars
his (petitioners) cross-claims against him: First, although no notice of appeal and
appellants brief were served to Antonio Ang Eng Liong, he was nonetheless impleaded
in the case since his name appeared in the caption of both the notice and the brief as
one of the defendants-appellees;[72] Second, despite including in the caption of the
appellees brief his co-debtor as one of the defendants-appellees, petitioner did not also
serve him a copy thereof;[73] Third, in the caption of the Court of Appeals decision,
Antonio Ang Eng Liong was expressly named as one of the defendants-appellees;[74]
and Fourth, it was only in his motion for reconsideration from the adverse judgment of
the Court of Appeals that petitioner belatedly chose to serve notice to the counsel of his
co-defendant-appellee.[75]
Likewise, this Court rejects the contention of Antonio Ang Eng Liong, in his special
appearance through counsel, that the Court of Appeals, much less this Court, already
lacked jurisdiction over his person or over the subject matter relating to him because he
was not a party in CA-G.R. CV No. 53413. Stress must be laid of the fact that he had
twice put himself in default one, in not filing a pre-trial brief and another, in not filing his
answer to petitioners cross-claims. As a matter of course, Antonio Ang Eng Liong, being
a party declared in default, already waived his right to take part in the trial proceedings
and had to contend with the judgment rendered by the court based on the evidence
presented by the bank and petitioner. Moreover, even without considering these
default judgments, Antonio Ang Eng Liong even categorically admitted having secured a
loan totaling P80,000. In his Answer to the complaint, he did not deny such liability but
merely pleaded that the bank be ordered to submit a more reasonable computation
instead of collecting excessive interest, penalty charges, and attorneys fees. For failing
to tender an issue and in not denying the material allegations stated in the complaint, a
judgment on the pleadings[76] would have also been proper since not a single issue was
generated by the Answer he filed.
As the promissory notes were not discharged or impaired through any act or omission of
the bank, Sections 119 (d)[77] and 122[78] of the NIL as well as Art. 1249[79] of the Civil
Code would necessarily find no application. Again, neither was petitioners right of
reimbursement barred nor was the banks right to proceed against Antonio Ang Eng
Liong expressly renounced by the omission to serve notice of appeal and appellants
brief to a party already declared in default.
Consequently, in issuing the two promissory notes, petitioner as accommodating party
warranted to the holder in due course that he would pay the same according to its
tenor.[80] It is no defense to state on his part that he did not receive any value
therefor[81] because the phrase "without receiving value therefor" used in Sec. 29 of
the NIL means "without receiving value by virtue of the instrument" and not as it is
apparently supposed to mean, "without receiving payment for lending his name."[82]
Stated differently, when a third person advances the face value of the note to the
accommodated party at the time of its creation, the consideration for the note as
regards its maker is the money advanced to the accommodated party. It is enough that
value was given for the note at the time of its creation.[83] As in the instant case, a sum
of money was received by virtue of the notes, hence, it is immaterial so far as the bank
is concerned whether one of the signers, particularly petitioner, has or has not received
anything in payment of the use of his name.[84]
Under the law, upon the maturity of the note, a surety may pay the debt, demand the
collateral security, if there be any, and dispose of it to his benefit, or, if applicable,
subrogate himself in the place of the creditor with the right to enforce the guaranty
against the other signers of the note for the reimbursement of what he is entitled to
recover from them.[85] Regrettably, none of these were prudently done by petitioner.
When he was first notified by the bank sometime in 1982 regarding his accountabilities
under the promissory notes, he lackadaisically relied on Antonio Ang Eng Liong, who
represented that he would take care of the matter, instead of directly communicating
with the bank for its settlement.[86] Thus, petitioner cannot now claim that he was
prejudiced by the supposed extension of time given by the bank to his co-debtor.
15
Furthermore, since the liability of an accommodation party remains not only primary
but also unconditional to a holder for value, even if the accommodated party receives
an extension of the period for payment without the consent of the accommodation
party, the latter is still liable for the whole obligation and such extension does not
release him because as far as a holder for value is concerned, he is a solidary co-
debtor.[87] In Clark v. Sellner,[88] this Court held:
x x x The mere delay of the creditor in enforcing the guaranty has not by any means
impaired his action against the defendant. It should not be lost sight of that the
defendant's signature on the note is an assurance to the creditor that the collateral
guaranty will remain good, and that otherwise, he, the defendant, will be personally
responsible for the payment.
True, that if the creditor had done any act whereby the guaranty was impaired in its
value, or discharged, such an act would have wholly or partially released the surety; but
it must be born in mind that it is a recognized doctrine in the matter of suretyship that
with respect to the surety, the creditor is under no obligation to display any diligence in
the enforcement of his rights as a creditor. His mere inaction indulgence, passiveness, or
delay in proceeding against the principal debtor, or the fact that he did not enforce the
guaranty or apply on the payment of such funds as were available, constitute no
defense at all for the surety, unless the contract expressly requires diligence and
promptness on the part of the creditor, which is not the case in the present action.
There is in some decisions a tendency toward holding that the creditor's laches may
discharge the surety, meaning by laches a negligent forbearance. This theory, however,
is not generally accepted and the courts almost universally consider it essentially
inconsistent with the relation of the parties to the note. (21 R.C.L., 1032-1034)[89]
Neither can petitioner benefit from the alleged insolvency of Antonio Ang Eng Liong for
want of clear and convincing evidence proving the same. Assuming it to be true, he also
did not exercise diligence in demanding security to protect himself from the danger
thereof in the event that he (petitioner) would eventually be sued by the bank. Further,
whether petitioner may or may not obtain security from Antonio Ang Eng Liong cannot
in any manner affect his liability to the bank; the said remedy is a matter of concern
exclusively between themselves as accommodation party and accommodated party. The
fact that petitioner stands only as a surety in relation to Antonio Ang Eng Liong is
immaterial to the claim of the bank and does not a whit diminish nor defeat the rights of
the latter as a holder for value. To sanction his theory is to give unwarranted legal
recognition to the patent absurdity of a situation where a co-maker, when sued on an
instrument by a holder in due course and for value, can escape liability by the
convenient expedient of interposing the defense that he is a merely an accommodation
party.[90]
In sum, as regards the other issues and errors alleged in this petition, the Court notes
that these were the very same questions of fact raised on appeal before the Court of
Appeals, although at times couched in different terms and explained more lengthily in
the petition. Suffice it to say that the same, being factual, have been satisfactorily
passed upon and considered both by the trial and appellate courts. It is doctrinal that
only errors of law and not of fact are reviewable by this Court in petitions for review on
certiorari under Rule 45 of the Rules of Court. Save for the most cogent and compelling
reason, it is not our function under the rule to examine, evaluate or weigh the probative
value of the evidence presented by the parties all over again.[91]
WHEREFORE, the October 9, 2000 Decision and December 26, 2000 Resolution of the
Court of Appeals in CA-G.R. CV No. 53413 are AFFIRMED. The petition is DENIED for lack
of merit.
No costs.
SO ORDERED.
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 Resolution3 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
16
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.
17

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
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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
19
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
20
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 debtor and 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. 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.
21
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
REINSTATED 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. The award of moral damages and attorney’s fees are DELETED.

SO ORDERED.

22