G.R. No.

L-15894 January 30, 1964 2159692

Brigida San Luis de Santos9-15-5213,900.00
11- 3-52
RP V EQUITABLE BANKING CORP.
2159673
Silva Sanches de Apolinario
10-14-52
14,810.00
11-11-52

Appeal from a decision of the Court of First Instance of Manila dismissing the complaints 2159667
Francisca Gomez de Galvez
10-12-52
16,200.75
11-11-52
and the third-party complaints in the above entitled cases, without special pronouncement 2451448
Gaudencia Ruiz Alvarez 7- 1-5212,702.767-15-52
as to costs. The cases are before us, only questions of law being raised in the appeal,
apart from the fact that the amount involved in G.R. No. L-16895 exceeds P200,000, and 2132653
Anastacia Capili Trinidad 6-25-528,794.217-15-52
that the evidence introduced therein is the same evidence in G.R. No. L-15894.
2468979
Monica Anselmo de Pascua7- 1-5213,870.249- 852

2468944
Rosalia Manalo de Nazario7-10-5214,701.769- 8-52
The Republic of the Philippines, hereinafter referred to as the Government, seeks to
recover: (1) from the Equitable Banking Corporation — hereinafter referred to as the 2159682
Luisa Santos de Arellano 11-18-52
16,400.50
12- 8-52
Equitable Bank — in case G.R. No. L-15894, the sum of P17,100, representing the
aggregate value of four (4) treasury warrants — hereinafter referred to as warrants — paid 2159669
Leticia Moreno de Ocampo11-16-52
15,880.75
12- 8-52

to said bank by the Treasurer of the Philippines — hereinafter referred to as the Treasurer 2159670
Juana Castro de Jesus 10-12-52
16,200.00
12-15-52
— thru the Clearing Office of the Central Bank of the Philippines; and (2) from the Bank
of the Philippine Islands — hereinafter referred to as the PI Bank — in G.R. No. L-15895, 2159671
Antonia Sison de Mauricio 9- 9-5212,900.75
11-10-52
the total sum of P342,767.63, representing the aggregate value of twenty-four (24) 2159660
Rosario Pilapil de Rodrigo 9- 4-5213,950.399-23-52
warrants similarly paid by the Treasurer to the PI Bank. These claims for refund are based
upon a common ground — although said twenty-eight (28) warrants were executed on 2169658
Mauricia Sison de Angeles9-12-5215,200.769-23-52
genuine government forms, the signature thereon of the drawing office and that of the
2159686
Lucia Angeles de Natalio 9-12-5212,890.74
10-27-52
representative of the Auditor General in that office are forged.
2468977
Nicolasa Alvares Jaranilla 7- 2-5215,340.767-25-52

It is not disputed that from July to December 1952, the Corporacion de los Padres 2468978
Maria Antonio de los Reyes7- 2-5214,722.317-25-52
Dominicos — hereinafter referred to as the Corporacion — had acquired the twenty-four
(24) treasury warrants involved in case G.R. No. L-15895 by accommodating its former 2159659
Je Jastive de Fernandez 8-16-5214,820.008-27-52

trusted employee — one Jacinto Carranza — who asked the Corporacion to cash the 2159656
Gregoria Pascual de Lira 8-15-5212,900.758-27-52
warrants, alleging that it was difficult to do so directly with the Government and that his
wife expected a sort of commission for the encashment; that the Corporacion acceded to 2159666
Luisa Dancel de Mendoza10-11-52
16,300.75
12- 2-52
Carranza's request, provided that the warrants would first be deposited with PI Bank, and
that actual payment of the value of the warrants would be made only after the same had
been duly accepted and cleared by the Treasurer and the proceeds thereof duly credited and that, accordingly, the PI Bank credited the proceeds of said warrants to the
to the account of the Corporacion in the PI Bank; that the warrants were, accordingly, Corporation, which, in turn, withdrew said proceeds by means of its own checks and
deposited by the Corporacion with said bank, which accepted them "subject to collection eventually paid the corresponding amounts to Jacinto Carranza. On December 23, 1952,
only"; that when the warrants were deposited with the PI Bank, each bore the indorsement the Treasurer returned three (3) of said warrants (Nos. 2159659, 2159656, and 2159666)
of the respective payees and that of the Corporation; that, subsequently, the PI Bank to the Central Bank, and demanded, on the ground that they had been forged, that the
presented the warrants for payment to the drawee thereof — the Government — thru the value thereof be charged against the accounts of the PI Bank in the Clearing Office and
Clearing Office of the Central Bank — hereinafter referred to as the Clearing Office; that credited back to the demand deposit of the Bureau of the Treasury, hereinafter referred
after being cleared, the warrants were paid by the Treasurer as follows: to as the Treasury. Four (4) days later, two (2) more warrants (Nos. 2468977 and
2468978), and, finally, on January 16, 1953, the remaining nineteen (19) warrants were
returned by the Treasury to the Central Bank for the same reason and with the same
T/W No. Payee Date ISSUED
Amount
Date Cleared demand. The Central Bank in turn referred said warrants, together with the letters of
demand of the Treasurer, for appropriate action to the PI Bank, which opposed the return
2132655
Marcela Antonio Domingo 6-18-52P8,722.377- 1-52
of the warrants or to have the value thereof charged against its account in the Clearing
2132650
Gregoria Santos Castro 6-23-5214,605.917- 8-52 Office and requested the Central Bank to return the warrants to the Treasurer.
2468943
Josefa Castro de Villanueva
10-34-52
14,250.15
11-14-52
The records of G.R. No. L-15894 show that the four (4) warrants involved therein were
2159698
Anacleta Santos de Angeles
10-18-52
15,800.00
12- 5-52 deposited with the Equitable Bank by persons known thereto as its depositors or
2159668
Virginia Salem de Marcelino
11-13-52
16,900.00
12-10-52
customers, namely, Robert Wong, Lu Chill Kau and Chung Ching; that, in due course, the
Equitable Bank cleared said warrants, thru the Clearing Office, then collected the
corresponding amounts from the Treasurer and thereafter credited said amounts to the
accounts of the respective depositors; that on January 15, 1958, the Treasurer notified
the Equitable Bank of the alleged defect of said warrants and demanded reimbursement
of the amounts thereof; and that this demand was rejected by the Equitable Bank. Hence,
the institution of G.R. No. L-15895 (Civil Case No. 19599 of the Court of First Instance of
Manila), against the PI Bank, for the recovery of P342,767.63, and of G.R. No. L-15894
(Civil Case No. 19600 of the Court of First Instance of Manila), against the Equitable Bank
for, the recovery of P17,100.00.
Upon leave of the lower court, the PI Bank filed a third-party complaint against the
Corporacion. In G.R. No. L-15895, and the Equitable Bank filed a similar complaint
against, Robert Wong, Lu Chill Kau and Chung Ching in G.R. No. L-15894, for whatever
reimbursements the PI Bank and the Equitable Bank may respectively be sentenced to
make to the Government. By agreement of the parties, the two (2) cases were jointly
heard, and after appropriate proceedings, the lower court rendered the decision adverted
to above. 1äwphï1.ñët
The clearing of the aforementioned twenty-eight (28) warrants thru the Clearing Office was
made pursuant to the "24-hour clearing house rule", which had been adopted by the
Central Bank in a conference with representatives and officials of the different banking
institutions in the Philippines. The rule is embodied in Section 4, subsection (c) of Circular
No. 9 of the Central Bank, dated February 17, 1949 (Exhibit B), as amended by the letter
of the Governor of the Central Bank, dated June 4, 1949 (Exhibit D), reading:
Items which should be returned for any reason whatsoever shall be returned directly to
the bank, institution or entity from which the item was received. For this purpose, the
Receipt for Returned Checks (Cash Form No. 9) should be used. The original and
duplicate copies of said Receipt shall be given to the bank, institution or entity which
returned the items and the triplicate copy should be retained by the bank, institution or
entity whose demand is being returned. At the following clearing, the original of the Receipt
for returned Checks shall be presented through the Clearing Office as a demand against
the bank, institution or entity whose item has been returned. Nothing in this section shall
prevent the resumed items from being settled by direct reimbursement to the bank,
institution or entity returning the items. All items cleared at 11:00 o'clock a.m. shall be
returned not later than 2:00 o'clock p.m. on the same day and all items cleared at 3:00
o'clock p.m. shall be returned not later than 8:30 a.m. of the following business day, except
for items cleared on Saturday which may be returned not later than 3:30 a.m. of the
following day. (Emphasis supplied.)
The Government maintains that it is not bound by this rule because: (1) the Treasury is
not a bank; and (2) the Treasurer has objected to the application of said rule to his office.
This contention, however, untenable for, admittedly, the Treasury is a member of the
aforementioned Clearing Office and Exh. A clearly shows that the former "has agreed to
clear its clearable items through" the latter "subject to the rules and regulations of the
Central Bank." Besides, the above quoted rule applies not only to banks, but, also, to
the institutions and entities therein alluded to. Then too, the opposition of the Treasurer to
the "24-hour clearing house rule" is not sufficient to exempt the Treasury from the
operation thereof. Upon the other hand, said opposition is predicated upon the allegation
that it is physically impossible for the Treasury to check and verify the genuineness of
treasury warrants within twenty-four (24) hours, because, during 1952 said office used to
receive daily from 3,000 to 4,000 warrants which, considering its very limited personnel at
that time, would have required one (1) or two (2) months clear. This claim is belied,
however, by the statements the Treasurer, Exhibits 38 and 38-A to 38-C, showing that on
September 15, 23 and 24 and November 25, 1952, his office had cleared 1,618, 2,851,
1,742 and 2,360 warrant respectively. Moreover, if the rule was unwise, the Treasurer
could have secured the proper remedy through the President of the Philippines, since the
Treasury and Central Bank are both agencies of the Government.
At any rate, the aforementioned twenty-eight (28) warrants were cleared and paid by the
Treasurer, in view which the PI Bank and the Equitable Bank credited the corresponding
amounts to the respective depositors of the warrants and then honored their checks for
said amounts. Thus, the Treasury had not only been negligent in clearing its own warrants,
but had, also, thereby induced the PI Bank and the Equitable Bank to pay the amounts
thereof to said depositors. The gross nature of the negligence of the Treasury becomes
more apparent when we consider that each one of the twenty-four (24) warrants involve
in G.R. No. L-15895 was for over P5,000, and, hence; beyond the authority of the auditor
of the Treasury — whose signature thereon had been forged — to approve. In other words,
the irregularity of said warrants was apparent the face thereof, from the viewpoint of the
Treasury. Moreover, the same had not advertised the loss of genuine forms of its warrants.
Neither had the PI Bank nor the Equitable Bank been informed of any irregularity in
connection with any of the warrants involved in these two (2) cases, until after December
23, 1952, — or after the warrants had been cleared and honored — when the Treasury
gave notice of the forgeries adverted to above. As a consequence, the loss of the amounts
thereof is mainly imputable to acts and omissions of the Treasury, for which the PI Bank
and the Equitable Bank should not and cannot be penalized.
Where a loss, which must be borne by one of two parties alike innocent of forgery, can be
traced to the neglect or fault of either, it is reasonable that it would be borne by him, even
if innocent of any intentional fraud, through whose means it has succeeded, (Phil. National
Bank v. National City Bank of New York, 63 Phil. 711, 723.)
Generally, where a drawee bank otherwise would have a right of recovery against a
collecting or indorsing bank for its payment of a forged check its action will be barred if it
is guilty of an unreasonable delay in discovering the forgery and in giving notice? thereof.
(C.J.S. 769-700.).
Where defendant bank, on presentation to it on September 2, of forged check drawn on
another bank, paid part of amount to presenter, drawee paying check through clearing
house on said day, held that the latter, not giving notice of forgery until December 5, could
not hold defendant for amount so paid. (First State Bank & Trust Co. v. First Nat. Bank,
145 N. E. 382, 314 Ill. 269, affirming 234 Ill. App. 39.)
WHEREFORE, the decision appealed from is hereby affirmed, without special
pronouncement as to costs. It is so ordered.
G.R. No. 70145 November 13, 1986 representative Albert Uy, informed Cpl. Gimao of the Western Police District that the lost
MESINA V IAC check of Jose Go is in the possession of Marcelo Mesina, herein petitioner. When Cpl.
Gimao went to Marcelo Mesina to ask how he came to possess the check, he said it was
paid to him by Alexander Lim in a "certain transaction" but refused to elucidate further. An
This is an appeal by certiorari from the decision of the then Intermediate Appellate Court
information for theft (Annex J) was instituted against Alexander Lim and the corresponding
(IAC for short), now the Court of Appeals (CA) in AC-G.R. S.P. 04710, dated Jan. 22,
warrant for his arrest was issued (Annex 6-A) which up to the date of the filing of this
1985, which dismissed the petition for certiorari and prohibition filed by Marcelo A. Mesina
instant petition remains unserved because of Alexander Lim's successful evation thereof.
against the trial court in Civil Case No. 84-22515. Said case (an Interpleader) was filed by
Associated Bank against Jose Go and Marcelo A. Mesina regarding their conflicting claims
over Associated Bank Cashier's Check No. 011302 for P800,000.00, dated December 29, Meanwhile, Jose Go filed his answer on February 24, 1984 in the Interpleader Case and
1983. moved to participate as intervenor in the complain for damages. Albert Uy filed a motion
of intervention and answer in the complaint for Interpleader. On the Scheduled date of
pretrial conference inthe interpleader case, it was disclosed that the "John Doe" impleaded
Briefly, the facts and statement of the case are as follows:
as one of the defendants is actually petitioner Marcelo A. Mesina. Petitioner instead of
filing his answer to the complaint in the interpleader filed on May 17, 1984 an Omnibus
Respondent Jose Go, on December 29, 1983, purchased from Associated Bank Cashier's Motion to Dismiss Ex Abudante Cautela alleging lack of jurisdiction in view of the absence
Check No. 011302 for P800,000.00. Unfortunately, Jose Go left said check on the top of of an order to litigate, failure to state a cause of action and lack of personality to sue.
the desk of the bank manager when he left the bank. The bank manager entrusted the Respondent bank in the other civil case (CC-11139) for damages moved to dismiss suit
check for safekeeping to a bank official, a certain Albert Uy, who had then a visitor in the in view of the existence already of the Interpleader case.
person of Alexander Lim. Uy had to answer a phone call on a nearby telephone after which
he proceeded to the men's room. When he returned to his desk, his visitor Lim was already
The trial court in the interpleader case issued an order dated July 13, 1984, denying the
gone. When Jose Go inquired for his cashier's check from Albert Uy, the check was not in
motion to dismiss of petitioner Mesina and ruling that respondent bank's complaint
his folder and nowhere to be found. The latter advised Jose Go to go to the bank to
sufficiently pleaded a cause of action for itnerpleader. Petitioner filed his motion for
accomplish a "STOP PAYMENT" order, which suggestion Jose Go immediately followed.
reconsideration which was denied by the trial court on September 26, 1984. Upon motion
He also executed an affidavit of loss. Albert Uy went to the police to report the loss of the
for respondent Jose Go dated October 31, 1984, respondent judge issued an order on
check, pointing to the person of Alexander Lim as the one who could shed light on it.
November 6, 1984, declaring petitioner in default since his period to answer has already
expirecd and set the ex-parte presentation of respondent bank's evidence on November
The records of the police show that Associated Bank received the lost check for clearing 7, 1984.
on December 31, 1983, coming from Prudential Bank, Escolta Branch. The check was
immediately dishonored by Associated Bank by sending it back to Prudential Bank, with
Petitioner Mesina filed a petition for certioari with preliminary injunction with IAC to set
the words "Payment Stopped" stamped on it. However, the same was again returned to
aside 1) order of respondent court denying his omnibus Motion to Dismiss 2) order of 3)
Associated Bank on January 4, 1984 and for the second time it was dishonored. Several
the order of default against him.
days later, respondent Associated Bank received a letter, dated January 9, 1984, from a
certain Atty. Lorenzo Navarro demanding payment on the cashier's check in question,
which was being held by his client. He however refused to reveal the name of his client On January 22, 1985, IAC rendered its decision dimissing the petition for certiorari.
and threatened to sue, if payment is not made. Respondent bank, in its letter, dated Petitioner Mesina filed his Motion for Reconsideration which was also denied by the same
January 20, 1984, replied saying the check belonged to Jose Go who lost it in the bank court in its resolution dated February 18, 1985.
and is laying claim to it.
Meanwhile, on same date (February 18, 1985), the trial court in Civil Case #84-22515
On February 1, 1984, police sent a letter to the Manager of the Prudential Bank, Escolta (Interpleader) rendered a decisio, the dispositive portion reading as follows:
Branch, requesting assistance in Identifying the person who tried to encash the check but
said bank refused saying that it had to protect its client's interest and the Identity could
WHEREFORE, in view of the foregoing, judgment is hereby rendered ordering plaintiff
only be revealed with the client's conformity. Unsure of what to do on the matter,
Associate Bank to replace Cashier's Check No. 011302 in favor of Jose Go or its cas
respondent Associated Bank on February 2, 1984 filed an action for Interpleader naming
equivalent with legal rate of itnerest from date of complaint, and with costs of suit against
as respondent, Jose Go and one John Doe, Atty. Navarro's then unnamed client. On even
the latter.
date, respondent bank received summons and copy of the complaint for damages of a
certain Marcelo A. Mesina from the Regional Trial Court (RTC) of Caloocan City filed on
January 23, 1984 bearing the number C-11139. Respondent bank moved to amend its SO ORDERED.
complaint, having been notified for the first time of the name of Atty. Navarro's client and
substituted Marcelo A. Mesina for John Doe. Simultaneously, respondent bank, thru
On March 29, 1985, the trial court in Civil Case No. C-11139, for damages, issued an
order, the pertinent portion of which states:
The records of this case show that on August 20, 1984 proceedings in this case was
(were) ordered suspended because the main issue in Civil Case No. 84-22515 and in this
instant case are the same which is: who between Marcelo Mesina and Jose Go is entitled
to payment of Associated Bank's Cashier's Check No. CC-011302? Said issue having
been resolved already in Civil casde No. 84-22515, really this instant case has become
moot and academic.
WHEREFORE, in view of the foregoing, the motion sholud be as it is hereby granted and
this case is ordered dismissed.
In view of the foregoing ruling no more action should be taken on the "Motion For
Reconsideration (of the order admitting the Intervention)" dated June 21, 1984 as well as
the Motion For Reconsideration dated September 10, 1984.
SO ORDERED.
Petitioner now comes to Us, alleging that:
1. IAC erred in ruling that a cashier's check can be countermanded even in the hands of
a holder in due course.
2. IAC erred in countenancing the filing and maintenance of an interpleader suit by a party
who had earlier been sued on the same claim.
3. IAC erred in upholding the trial court's order declaring petitioner as in default when there
was no proper order for him to plead in the interpleader complaint.
4. IAC went beyond the scope of its certiorari jurisdiction by making findings of facts in
advance of trial.
Petitioner now interposes the following prayer:
1. Reverse the decision of the IAC, dated January 22, 1985 and set aside the February
18, 1985 resolution denying the Motion for Reconsideration.
2. Annul the orders of respondent Judge of RTC Manila giving due course to the
interpleader suit and declaring petitioner in default.
Petitioner's allegations hold no water. Theories and examples advanced by petitioner on
causes and effects of a cashier's check such as 1) it cannot be countermanded in the
hands of a holder in due course and 2) a cashier's check is a bill of exchange drawn by
the bank against itself-are general principles which cannot be aptly applied to the case at
bar, without considering other things. Petitioner failed to substantiate his claim that he is
a holder in due course and for consideration or value as shown by the established facts
of the case. Admittedly, petitioner became the holder of the cashier's check as endorsed
by Alexander Lim who stole the check. He refused to say how and why it was passed to
him. He had therefore notice of the defect of his title over the check from the start. The
holder of a cashier's check who is not a holder in due course cannot enforce such check
against the issuing bank which dishonors the same. If a payee of a cashier's check
obtained it from the issuing bank by fraud, or if there is some other reason why the payee
is not entitled to collect the check, the respondent bank would, of course, have the right
to refuse payment of the check when presented by the payee, since respondent bank was
aware of the facts surrounding the loss of the check in question. Moreover, there is no
similarity in the cases cited by petitioner since respondent bank did not issue the cashier's
check in payment of its obligation. Jose Go bought it from respondent bank for purposes
of transferring his funds from respondent bank to another bank near his establishment
realizing that carrying money in this form is safer than if it were in cash. The check was
Jose Go's property when it was misplaced or stolen, hence he stopped its payment. At the
outset, respondent bank knew it was Jose Go's check and no one else since Go had not
paid or indorsed it to anyone. The bank was therefore liable to nobody on the check but
Jose Go. The bank had no intention to issue it to petitioner but only to buyer Jose Go.
When payment on it was therefore stopped, respondent bank was not the one who did it
but Jose Go, the owner of the check. Respondent bank could not be drawer and drawee
for clearly, Jose Go owns the money it represents and he is therefore the drawer and the
drawee in the same manner as if he has a current account and he issued a check against
it; and from the moment said cashier's check was lost and/or stolen no one outside of Jose
Go can be termed a holder in due course because Jose Go had not indorsed it in due
course. The check in question suffers from the infirmity of not having been properly
negotiated and for value by respondent Jose Go who as already been said is the real
owner of said instrument.
In his second assignment of error, petitioner stubbornly insists that there is no showing of
conflicting claims and interpleader is out of the question. There is enough evidence to
establish the contrary. Considering the aforementioned facts and circumstances,
respondent bank merely took the necessary precaution not to make a mistake as to whom
to pay and therefore interpleader was its proper remedy. It has been shown that the
interpleader suit was filed by respondent bank because petitioner and Jose Go were both
laying their claims on the check, petitioner asking payment thereon and Jose Go as the
purchaser or owner. The allegation of petitioner that respondent bank had effectively
relieved itself of its primary liability under the check by simply filing a complaint for
interpleader is belied by the willingness of respondent bank to issue a certificate of time
deposit in the amount of P800,000 representing the cashier's check in question in the
name of the Clerk of Court of Manila to be awarded to whoever wig be found by the court
as validly entitled to it. Said validity will depend on the strength of the parties' respective
rights and titles thereto. Bank filed the interpleader suit not because petitioner sued it but
because petitioner is laying claim to the same check that Go is claiming. On the very day
that the bank instituted the case in interpleader, it was not aware of any suit for damages
filed by petitioner against it as supported by the fact that the interpleader case was first
entitled Associated Bank vs. Jose Go and John Doe, but later on changed to Marcelo A.
Mesina for John Doe when his name became known to respondent bank.
In his third assignment of error, petitioner assails the then respondent IAC in upholding
the trial court's order declaring petitioner in default when there was no proper order for
him to plead in the interpleader case. Again, such contention is untenable. The trial court
issued an order, compelling petitioner and respondent Jose Go to file
their Answers setting forth their respective claims. Subsequently, a Pre-Trial Conference
was set with notice to parties to submit position papers. Petitioner argues in his
memorandum that this order requiring petitioner to file his answer was issued without
jurisdiction alleging that since he is presumably a holder in due course and for value, how
can he be compelled to litigate against Jose Go who is not even a party to the check?
Such argument is trite and ridiculous if we have to consider that neither his name or Jose
Go's name appears on the check. Following such line of argument, petitioner is not a party
to the check either and therefore has no valid claim to the Check. Furthermore, the Order
of the trial court requiring the parties to file their answers is to all intents and purposes an
order to interplead, substantially and essentially and therefore in compliance with the
provisions of Rule 63 of the Rules of Court. What else is the purpose of a law suit but to
litigate?
The records of the case show that respondent bank had to resort to details in support of
its action for Interpleader. Before it resorted to Interpleader, respondent bank took an
precautionary and necessary measures to bring out the truth. On the other hand, petitioner
concealed the circumstances known to him and now that private respondent bank brought
these circumstances out in court (which eventually rendered its decision in the light of
these facts), petitioner charges it with "gratuitous excursions into these non-issues."
Respondent IAC cannot rule on whether respondent RTC committed an abuse of
discretion or not, without being apprised of the facts and reasons why respondent
Associated Bank instituted the Interpleader case. Both parties were given an opportunity
to present their sides. Petitioner chose to withhold substantial facts. Respondents were
not forbidden to present their side-this is the purpose of the Comment of respondent to
the petition. IAC decided the question by considering both the facts submitted by petitioner
and those given by respondents. IAC did not act therefore beyond the scope of the remedy
sought in the petition.
WHEREFORE, finding that the instant petition is merely dilatory, the same is hereby
denied and the assailed orders of the respondent court are hereby AFFIRMED in toto.
SO ORDERED.
G.R. No. 104612 May 10, 1994
BPI V CA
The petitioner urges us to review and set aside the amended Decision 1 of 6 March 1992
of respondent Court of Appeals in CA- G.R. CV No. 25739 which modified the Decision of
15 November 1990 of Branch 19 of the Regional Trial Court (RTC) of Manila in Civil Case
No. 87-42967, entitled Bank of the Philippine Islands (successor-in-interest of Commercial
Bank and Trust Company) versus Eastern Plywood Corporation and Benigno D. Lim. The
Court of Appeals had affirmed the dismissal of the complaint but had granted the
defendants' counterclaim for P331,261.44 which represents the outstanding balance of
their account with the plaintiff.
As culled from the records and the pleadings of the parties, the following facts were duly
established:
Private respondents Eastern Plywood Corporation (Eastern) and
Benigno D. Lim (Lim), an officer and stockholder of Eastern, held at least one joint bank
account ("and/or" account) with the Commercial Bank and Trust Co. (CBTC), the
predecessor-in-interest of petitioner Bank of the Philippine Islands (BPI). Sometime in
March 1975, a joint checking account ("and" account) with Lim in the amount of
P120,000.00 was opened by Mariano Velasco with funds withdrawn from the account of
Eastern and/or Lim. Various amounts were later deposited or withdrawn from the joint
account of Velasco and Lim. The money therein was placed in the money market.
Velasco died on 7 April 1977. At the time of his death, the outstanding balance of the
account stood at P662,522.87. On 5 May 1977, by virtue of an Indemnity Undertaking
executed by Lim for himself and as President and General Manager of Eastern, 2 one-half
of this amount was provisionally released and transferred to one of the bank accounts of
Eastern with CBTC. 3
Thereafter, on 18 August 1978, Eastern obtained a loan of P73,000.00 from CBTC as
"Additional Working Capital," evidenced by the "Disclosure Statement on Loan/Credit
Transaction" (Disclosure Statement) signed by CBTC through its branch manager,
Ceferino Jimenez, and Eastern, through Lim, as its President and General Manager. 4The
loan was payable on demand with interest at 14% per annum.
For this loan, Eastern issued on the same day a negotiable promissory note for
P73,000.00 payable on demand to the order of CBTC with interest at 14% per
annum. 5 The note was signed by Lim both in his own capacity and as President and
General Manager of Eastern. No reference to any security for the loan appears on the
note. In the Disclosure Statement, the box with the printed word "UNSECURED" was
marked with "X" — meaning unsecured, while the line with the words "this loan is
wholly/partly secured by" is followed by the typewritten words "Hold-Out on a 1:1 on C/A
No. 2310-001-42," which refers to the joint account of Velasco and Lim with a balance of
P331,261.44.
In addition, Eastern and Lim, and CBTC signed another document entitled "Holdout
Agreement," also dated 18 August 1978, 6 wherein it was stated that "as security for the
Loan [Lim and Eastern] have offered [CBTC] and the latter accepts a holdout on said
[Current Account No. 2310-011-42 in the joint names of Lim and Velasco] to the full extent
of their alleged interests therein as these may appear as a result of final and definitive
judicial action or a settlement between and among the contesting parties
thereto." 7 Paragraph 02 of the Agreement provides as follows:
Eastply [Eastern] and Mr. Lim hereby confer upon Comtrust [CBTC], when and if their
alleged interests in the Account Balance shall have been established with finality, ample
and sufficient power as shall be necessary to retain said Account Balance and enable
Comtrust to apply the Account Balance for the purpose of liquidating the Loan in respect
of principal and/or accrued interest.
And paragraph 05 thereof reads:
The acceptance of this holdout shall not impair the right of Comtrust to declare the loan
payable on demand at any time, nor shall the existence hereof and the non-resolution of
the dispute between the contending parties in respect of entitlement to the Account
Balance, preclude Comtrust from instituting an action for recovery against Eastply and/or
Mr. Lim in the event the Loan is declared due and payable and Eastply and/or Mr. Lim
shall default in payment of all obligations and liabilities thereunder.
In the meantime, a case for the settlement of Velasco's estate was filed with Branch 152
of the RTC of Pasig, entitled "In re Intestate Estate of Mariano Velasco," and docketed as
Sp. Proc. No. 8959. In the said case, the whole balance of P331,261.44 in the aforesaid
joint account of Velasco and Lim was being claimed as part of Velasco's estate. On 9
September 1986, the intestate court granted the urgent motion of the heirs of Velasco to
withdraw the deposit under the joint account of Lim and Velasco and authorized the heirs
to divide among themselves the amount withdrawn. 8
Sometime in 1980, CBTC was merged with BPI. 9 On 2 December 1987, BPI filed with the
RTC of Manila a complaint against Lim and Eastern demanding payment of the promissory
note for P73,000.00. The complaint was docketed as Civil Case No. 87- 42967 and was
raffled to Branch 19 of the said court, then presided over by Judge Wenceslao M. Polo.
Defendants Lim and Eastern, in turn, filed a counterclaim against BPI for the return of the
balance in the disputed account subject of the Holdout Agreement and the interests
thereon after deducting the amount due on the promissory note.
After due proceedings, the trial court rendered its decision on
15 November 1990 dismissing the complaint because BPI failed to make out its case.
Furthermore, it ruled that "the promissory note in question is subject to the 'hold-out'
agreement," 10 and that based on this agreement, "it was the duty of plaintiff Bank [BPI] to
debit the account of the defendants under the promissory note to set off the loan even
though the same has no fixed maturity." 11 As to the defendants' counterclaim, the trial
court, recognizing the fact that the entire amount in question had been withdrawn by
Velasco's heirs pursuant to the order of the intestate court in Sp. Proc. No. 8959, denied
it because the "said claim cannot be awarded without disturbing the resolution" of the
intestate court. 12
Both parties appealed from the said decision to the Court of Appeals. Their appeal was
docketed as CA-G.R. CV No. 25739.
On 23 January 1991, the Court of Appeals rendered a decision affirming the decision of
the trial court. It, however, failed to rule on the defendants' (private respondents') partial
appeal from the trial court's denial of their counterclaim. Upon their motion for
reconsideration, the Court of Appeals promulgated on 6 March 1992 an Amended
Decision 13 wherein it ruled that the settlement of Velasco's estate had nothing to do with
the claim of the defendants for the return of the balance of their account with CBTC/BPI
as they were not privy to that case, and that the defendants, as depositors of CBTC/BPI,
are the latter's creditors; hence, CBTC/BPI should have protected the defendants' interest
in Sp. Proc. No. 8959 when the said account was claimed by Velasco's estate. It then
ordered BPI "to pay defendants the amount of P331,261.44 representing the outstanding
balance in the bank account of defendants." 14
On 22 April 1992, BPI filed the instant petition alleging therein that the Holdout Agreement
in question was subject to a suspensive condition stated therein, viz., that the
"P331,261.44 shall become a security for respondent Lim's promissory note only if
respondents' Lim and Eastern Plywood Corporation's interests to that amount are
established as a result of a final and definitive judicial action or a settlement between and
among the contesting parties thereto." 15 Hence, BPI asserts, the Court of Appeals erred
in affirming the trial court's decision dismissing the complaint on the ground that it was the
duty of CBTC to debit the account of the defendants to set off the amount of P73,000.00
covered by the promissory note.
Private respondents Eastern and Lim dispute the "suspensive condition" argument of the
petitioner. They interpret the findings of both the trial and appellate courts that the money
deposited in the joint account of Velasco and Lim came from Eastern and Lim's own
account as a finding that the money deposited in the joint account of Lim and Velasco
"rightfully belong[ed] to Eastern Plywood Corporation and/or Benigno Lim." And because
the latter are the rightful owners of the money in question, the suspensive condition does
not find any application in this case and the bank had the duty to set off this deposit with
the loan. They add that the ruling of the lower court that they own the disputed amount is
the final and definitive judicial action required by the Holdout Agreement; hence, the
petitioner can only hold the amount of P73,000.00 representing the security required for
the note and must return the rest. 16
The petitioner filed a Reply to the aforesaid Comment. The private respondents filed a
Rejoinder thereto.
We gave due course to the petition and required the parties to submit simultaneously their
memoranda.
The key issues in this case are whether BPI can demand payment of the loan of
P73,000.00 despite the existence of the Holdout Agreement and whether BPI is still liable
to the private respondents on the account subject of the Holdout Agreement after its
withdrawal by the heirs of Velasco.
The collection suit of BPI is based on the promissory note for P73,000.00. On its face, the
note is an unconditional promise to pay the said amount, and as stated by the respondent
Court of Appeals, "[t]here is no question that the promissory note is a negotiable
instrument." 17 It further correctly ruled that BPI was not a holder in due course because
the note was not indorsed to BPI by the payee, CBTC. Only a negotiation by indorsement
could have operated as a valid transfer to make BPI a holder in due course. It acquired
the note from CBTC by the contract of merger or sale between the two banks. BPI,
therefore, took the note subject to the Holdout Agreement.
We disagree, however, with the Court of Appeals in its interpretation of the Holdout
Agreement. It is clear from paragraph 02 thereof that CBTC, or BPI as its successor-in-
interest, had every right to demand that Eastern and Lim settle their liability under the
promissory note. It cannot be compelled to retain and apply the deposit in Lim and
Velasco's joint account to the payment of the note. What the agreement conferred on
CBTC was a power, not a duty. Generally, a bank is under no duty or obligation to make
the application. 18 To apply the deposit to the payment of a loan is a privilege, a right of
set-off which the bank has the option to exercise. 19
Also, paragraph 05 of the Holdout Agreement itself states that notwithstanding the
agreement, CBTC was not in any way precluded from demanding payment from Eastern
and from instituting an action to recover payment of the loan. What it provides is an
alternative, not an exclusive, method of enforcing its claim on the note. When it demanded
payment of the debt directly from Eastern and Lim, BPI had opted not to exercise its right
to apply part of the deposit subject of the Holdout Agreement to the payment of the
promissory note for P73,000.00. Its suit for the enforcement of the note was then in order
and it was error for the trial court to dismiss it on the theory that it was set off by an
equivalent portion in C/A No. 2310-001-42 which BPI should have debited. The Court of
Appeals also erred in affirming such dismissal.
particular property is disputed, the determination by a probate court of whether that
property is included in the estate of a deceased is merely provisional in character and
cannot be the subject of execution. 24
Because the ownership of the deposit remained undetermined, BPI, as the debtor with
respect thereto, had no right to pay to persons other than those in whose favor the
obligation was constituted or whose right or authority to receive payment is indisputable.
The payment of the money deposited with BPI that will extinguish its obligation to the
creditor-depositor is payment to the person of the creditor or to one authorized by him or
by the law to receive it. 25 Payment made by the debtor to the wrong party does not
extinguish the obligation as to the creditor who is without fault or negligence, even if the
debtor acted in utmost good faith and by mistake as to the person of the creditor, or
through error induced by fraud of a third person. 26 The payment then by BPI to the heirs
of Velasco, even if done in good faith, did not extinguish its obligation to the true depositor,
Eastern.
In the light of the above findings, the dismissal of the petitioner's complaint is reversed
and set aside. The award on the counterclaim is sustained subject to a modification of the
interest.

The "suspensive condition" theory of the petitioner is, therefore, untenable.

WHEREFORE, the instant petition is partly GRANTED. The challenged amended decision
in CA-G.R. CV No. 25735 is hereby MODIFIED. As modified:
The Court of Appeals correctly decided on the counterclaim. The counterclaim of Eastern
and Lim for the return of the P331,261.44 20 was equivalent to a demand that they be
(1) Private respondents are ordered to pay the petitioner the promissory note for
allowed to withdraw their deposit with the bank. Article 1980 of the Civil Code expressly
P73,000.00 with interest at:
provides that "[f]ixed, savings, and current deposits of money in banks and similar
institutions shall be governed by the provisions concerning simple loan." In Serrano vs.
Central Bank of the Philippines, 21 we held that bank deposits are in the nature of irregular (a) 14% per annum on the principal, computed from
deposits; they are really loans because they earn interest. The relationship then between 18 August 1978 until payment;
a depositor and a bank is one of creditor and debtor. The deposit under the questioned
account was an ordinary bank deposit; hence, it was payable on demand of the
depositor. 22 (b) 12% per annum on the interest which had accrued up to the date of the filing of the
complaint, computed from that date until payment pursuant to Article 2212 of the Civil
Code.
The account was proved and established to belong to Eastern even if it was deposited in
the names of Lim and Velasco. As the real creditor of the bank, Eastern has the right to
withdraw it or to demand payment thereof. BPI cannot be relieved of its duty to pay Eastern (2) The award of P331,264.44 in favor of the private respondents shall bear interest at the
rate of 12%per annum computed from the filing of the counterclaim.
simply because it already allowed the heirs of Velasco to withdraw the whole balance of
the account. The petitioner should not have allowed such withdrawal because it had
admitted in the Holdout Agreement the questioned ownership of the money deposited in No pronouncement as to costs.
the account. As early as 12 May 1979, CBTC was notified by the Corporate Secretary of
Eastern that the deposit in the joint account of Velasco and Lim was being claimed by
them and that one-half was being claimed by the heirs of Velasco.23 SO ORDERED.

Moreover, the order of the court in Sp. Proc. No. 8959 merely authorized the heirs of
Velasco to withdraw the account. BPI was not specifically ordered to release the account
to the said heirs; hence, it was under no judicial compulsion to do so. The authorization
given to the heirs of Velasco cannot be construed as a final determination or adjudication
that the account belonged to Velasco. We have ruled that when the ownership of a
G.R. No. L-33549 January 31, 1978 the Embassy against its depository bank, the Philippine National Bank branch in New
York, U.S.A." This claim is erroneous. The Embassy never maintained any checking
account with Banco Atlantico at any time in the past. Only the individual staff members of
BANCO ATLANTICO V AUDITOR GENERAL
the Embassy, including Miss Virginia Boncan, in their personal and private capacities,
maintained accounts with said bank.
This is an appeal from the decision of the Auditor General contained in a letter dated April
22, 1971 addressed to the counsel of the petitioner, Banco Atlantico, stating that, ... for
2) Counsel for claimant alleges that the three checks for the amount of US$10,109.10,
want of legal basis, this Office cannot snow in audit the payment of the said claim of Banco
US$35,075.00 and US$90,000.00 were honored and full amount of the aforementioned
Atlantico against the Philippine Embassy in Madrid, Spain." 1
checks paid to Miss Boncan in the ordinary course of its banking transactions. While the
aforementioned checks of the Embassy may have appeared valid, payment to Miss
The record discloses that the petitioner is a commercial Bank doing business in Madrid, Boncan in her capacity as endorser and payee of the checks without clearing them first
Spain; that on October 31, i968, Virginia Boncan, then the Finance Officer of the Philippine with the drawee bank is definitely not in accordance with normal or ordinary banking
Embassy in Madrid, Spain, negotiated with Banco Atlantico a Philippine Embassy check practice, especially so in this case where the drawee bank was a foreign bank, and the
signed by Luis M. Gonzales, its ambassador and by said Virginia Boncan as Finance amounts involved were quite large. The normal procedure would have been for the Banco
Officer, dated October 31, 1968 in the sum of US$10,109.10 payable to Azucena Pace Atlantico to clear the three cheeks concerned with the drawee bank before paying Miss
and drawn against the Philippine National Bank branch in New York, U.S.A.; that the check Boncan.
was endorsed by Azucena Pace and Virginia Boncan; that the petitioner, without clearing
the check with the drawn bank in New York, U.S.A., paid the full amount of US$10,109.10
From our investigation we have gathered enough proof that Miss Boncan had very special
to Virginia Boncan; that on November 2, 1968, Virginia Boncan negotiated by
relations with the employees and chiefs of the claimant bank's foreign department. This
endorsement with the petitioner another embassy check signed by Luis M. Gonzales as
personal relationship that existed between Miss Boncan and said employees and officers
ambassador and by her as finance officer in the sum of US$35,000.75 dated November
was one thing and ordinary banking transactions were something else. Because of this
2, 1968 payable to Virginia Boncan and drawn against the Philippine National Bank branch
special relationship, the bank took a risk and sacrificed normal banking procedures by
in New York, U.S.A.; that the petitioner paid the full amount of the check to Virginia Boncan
cashing the aforementioned checks without prior clearance from the drawee bank.
without clearing said check with the drawn bank, that on November 5, 1968, Virginia
Boncan negotiated by endorsement with petitioner another embassy check signed by
Ambassador Luis M. Gonzales and by Finance Officer Virginia Boncan in the sum of 3) Counsel for claimant says that Banco Atlantico has every right to recover from the
US$90,000.00 dated November 5, 1968 payable to Virginia Boncan and drawn against Embassy as drawer of the checks because it is a holder in due course. Basis for the claim
the Philippine National Bank in New York, U.S.A.; that the petitioner paid the full amount is Section 61 of the Negotiable Instruments Law, to wit:
of the aforementioned check of US$90,000.00 to Virginia Boncan without clearing said
check with the drawn bank; that upon presentment for acceptance and payment of the
SEC. 61. Liability of drawer — The drawer by drawing the instrument admits the existence
aforementioned checks by Banco Atlantico through its collecting bank in New York, U.S.A.
of the payee and his then capacity to endorse and engages that on the due presentment
to the drawn bank, the Philippine National Bank branch in U.S.A., said drawee bank
the instrument will be accepted or paid, or both, according to its tenor and that if it be
dishonored the checks by non-acceptance allegedly on the ground that the drawer had
dishonored, and the n proceedings on dishonor be duly taken, he will pay the amount
ordered payments to be stopped; that upon receipt of the notice of the dishonor, the
thereof to the holder, or to any subsequent indorser who may be compelled to pay it. But
collecting bank of the petitioner in New York, U.S.A. sent individual notices of protest with
the drawer may insert in the instrument an express stipulation negativing or limiting his
respect to the checks in question to the Philippine Embassy in Madrid, Spain and to
own liability to the holder.
Virginia Boncan as endorser payee that Virginia Boncan and the Philippine Embassy in
Madrid, Spain refused to pay the petitioner the amounts of the aforementioned checks. 2
It is erroneous for claimant bank's Counsel to single out this particular provision because
the interpretation thereof would be out of context. All the other related provisions of said
The petitioner, Banco Atlantico, filed the corresponding money claim with the Auditor
law must be interpreted together, and it would then be doubtful if Banco Atlantico could
General.
qualify as a holder in due course.

In denying the claim of the petitioner for the amounts of the three checks in question, the
respondent Auditor General concurred in the following views expressed by Ambassador
Luis M. Gonzales in his second endorsement dated November 13, 1970:
1) Counsel for Claimant alleges that the "Embassy of the Republic of the Philippines
maintained a checking account with Claimant who honored and cashed checks drawn by
4) As regards the checks for US$10,109.10 and US$35,075.00 Miss. Boncan had altered
them by fraudulently increasing the amounts for which said cheeks were issued, and
claimant bank failed to protect itself by cashing them without first clearing them with the
drawer bank. When claimant bank gave Miss Boncan special treatment as a privileged
client in disregard of the elementary principles of prudence that should attend banking
transactions, they should stand to suffer the loss that was due to their own negligence.
Further proof of the special relationship between claimant bank and Miss Boncan was the
leniency of the bank towards her when it accepted for deposit to Miss Boncan's dollar
account an Embassy check for US$75.00 payable to Mr. Antonio P. Villamor without his
indorsement. Such leniency on the part of the bank could even lead to the suspicion that
there was collusion between the bank and Miss Boncan A photocopy of this check is
enclose for ease of reference.
In the particular case of the check for US$90,000.00 we can demonstrate that claimant
bank likewise has no ewe at all. Section 61 of the Negotiable instruments Law can only
be availed of by holders in due course and Banco Atlantico cannot be considered as one
under the definition of Section 52 of the N.I.L., to wit:
SEC. 52. What constitutes a holder in due course — A holder in due course is a holder
who has taken the instrument under the following conditions:
a. That it is complete and regular on its face;
b. That he became the holder of it before it was overdue, and without notice that it has
been previously dishonored, if such was the fact;
c. That he took it in good faith and for value;
d. That at the time it was negotiated to him he had no notice of infirmity in the instrument
or defect in the title of the person negotiating it.
All four conditions enumerated under this section must concur before a holder can be
considered as a holder in due course. The absence or failure to comply with any of the
conditions set forth under this section will make one's title to the instrument defective.
The check for US$90,000.00 was a demand note. When Miss Boncan the payee of this
check, negotiated the same by depositing it in her account, at the game time informing the
bank in writing (copy of her letter is enclosed for ease of reference) that it be not presented
for collection until a later date, Banco Atlantico through its agent teller or cashier should
have been put on guard that there was something wrong with the check. The fact that the
amount involved was quite big and it was the payee herself who made the request that
the same not be presented for collection until a fixed date in the future was proof of a
glaring infirmity or defect in the instrument. It loudly proclaims, "Take me at your risk." The
interest of the payee was the immediate punishment of the check of which she was the
beneficiary and not the deferment of the presentment for collection of the same to the
drawee bank. This being the case, Banco Atlantico was not a holder in due course as
defined by Section 52 of the N.I.L., because it was obvious that it had knowledge of the
infirmity or defect of the cheek. The fact that the check was honored by claimant bank was
proof not only of their gross negligence but a further manifestation of the special treatment
they were according Miss Boncan. 3
According to the petitioner, the issues at bar are the follow:
1. Was there a forgery committed on the three (3) checks as contemplated by See. 23 of
the Negotiable Instruments Law (NIL) as to bar petitioner from enforcing collection from
the drawer-Philippine Embassy in Madrid, Spain? And, if there was such a forgery, is the
drawer precluded from setting up forgery or want of authority of Miss Boncan? and,
2. Do the payments of the aforecited checks without clearing them first with the drawee
bank constitute an actual notice of a defective title in the endorser thereof and/or an
assumption of risk by the petitioner as to defeat collection thereon? 4
The record shows that the chock dated October 31, 1968 and payable to Azucena Pace
was intended to be issued for the sum of US$109.10 for the payment of said payee's
salary as consular clerk in the Philippine Embassy in Madrid for the second half of
October, 1968 as shown in the Embassy's General Payroll. 5 It also appears that the check
dated November 2, 1968 was to be issued for the amount of US$75.00 in reimbursement
of Virginia Boncan's living quarters allowance for November 1968 as shown in Cash
Voucher No. MA-132/69. 6 There is also a showing that on November 8, 1968, Virginia
Boncan cashed with the petitioner a check for US$90,000.00 dated November 5, 1968
drawn on the Philippine National Bank branch at New York City, and although said check
was payable on demand, Virginia Boncan asked that the same be not presented for
collection until a later date. 7
The petitioner paid the amounts of the three (3) checks in question to Virginia Boncan
without previously clearing the said checks with the drawee bank, Philippine National
Bank, New York. This is contrary to normal or ordinary banking practice specially so where
the drawee bank is a foreign bank and the amounts involved were large. The drawer of
the aforementioned checks was not even a client of the petitioner. There is a showing that
Virginia Boncan enjoyed special treatment from the employees and chiefs of the
petitioner's foreign department. It was probably because of this special relation. ship that
the petitioner, in of the elementary principle that should attend banking transactions,
cashed the three (3) checks in question without prior clearances from the drawee bank.
In view of the foregoing, the Philippine Embassy in Madrid, as drawer of the three (3)
checks in question, cannot be held liable. It is apparent that the said three (3) checks were
fraudulently altered by Virginia Boncan as to their amounts and, therefore, wholly
inoperative. 8 No right of payment thereof against any party thereto could have been
acquired by the petitioner.
WHEREFORE, the decision of the Auditor General denying the claim of the petitioner for
payment of the three (3) checks, Annex "C", Annex "D", and Annex "E" of the petition, is
hereby affirmed, without pronouncement as to costs.
SO ORDERED.
G.R. No. L-15126 November 30, 1961 defendant the following day when the car and its certificate of registration will be brought
by Manuel Gonzales to defendants, but which facts were not known to plaintiff, defendant
Anita C. Gatchalian drew and issued a check, Exh. "B"; that Manuel Gonzales executed
DE OCAMPO V GATCHALIAN
and issued a receipt for said check, Exh. "1";

Appeal from a judgment of the Court of First Instance of Manila, Hon. Conrado M.
Fifth. — That on the failure of Manuel Gonzales to appear the day following and on his
Velasquez, presiding, sentencing the defendants to pay the plaintiff the sum of P600, with
failure to bring the car and its certificate of registration and to return the check, Exh. "B",
legal interest from September 10, 1953 until paid, and to pay the costs.
on the following day as previously agreed upon, defendant Anita C. Gatchalian issued a
"Stop Payment Order" on the check, Exh. "3", with the drawee bank. Said "Stop Payment
The action is for the recovery of the value of a check for P600 payable to the plaintiff and Order" was issued without previous notice on plaintiff not being know to defendant, Anita
drawn by defendant Anita C. Gatchalian. The complaint sets forth the check and alleges C. Gatchalian and who furthermore had no reason to know check was given to plaintiff;
that plaintiff received it in payment of the indebtedness of one Matilde Gonzales; that upon
receipt of said check, plaintiff gave Matilde Gonzales P158.25, the difference between the
Sixth. — That defendants, both or either of them, did not know personally Manuel
face value of the check and Matilde Gonzales' indebtedness. The defendants admit the
Gonzales or any member of his family at any time prior to September 1953, but that
execution of the check but they allege in their answer, as affirmative defense, that it was
defendant Hipolito Gatchalian is personally acquainted with V. R. de Ocampo;
issued subject to a condition, which was not fulfilled, and that plaintiff was guilty of gross
negligence in not taking steps to protect itself.
Seventh. — That defendants, both or either of them, had no arrangements or agreement
with the Ocampo Clinic at any time prior to, on or after 9 September 1953 for the
At the time of the trial, the parties submitted a stipulation of facts, which reads as follows:
hospitalization of the wife of Manuel Gonzales and neither or both of said defendants had
assumed, expressly or impliedly, with the Ocampo Clinic, the obligation of Manuel
Plaintiff and defendants through their respective undersigned attorney's respectfully Gonzales or his wife for the hospitalization of the latter;
submit the following Agreed Stipulation of Facts;
Eight. — That defendants, both or either of them, had no obligation or liability, directly or
First. — That on or about 8 September 1953, in the evening, defendant Anita C. indirectly with the Ocampo Clinic before, or on 9 September 1953;
Gatchalian who was then interested in looking for a car for the use of her husband and
the family, was shown and offered a car by Manuel Gonzales who was accompanied by
Ninth. — That Manuel Gonzales having received the check Exh. "B" from defendant Anita
Emil Fajardo, the latter being personally known to defendant Anita C. Gatchalian;
C. Gatchalian under the representations and conditions herein above specified, delivered
the same to the Ocampo Clinic, in payment of the fees and expenses arising from the
Second. — That Manuel Gonzales represented to defend Anita C. Gatchalian that he was hospitalization of his wife;
duly authorized by the owner of the car, Ocampo Clinic, to look for a buyer of said car and
to negotiate for and accomplish said sale, but which facts were not known to plaintiff;
Tenth. — That plaintiff for and in consideration of fees and expenses of hospitalization
and the release of the wife of Manuel Gonzales from its hospital, accepted said check,
Third. — That defendant Anita C. Gatchalian, finding the price of the car quoted by Manuel applying P441.75 (Exhibit "A") thereof to payment of said fees and expenses and
Gonzales to her satisfaction, requested Manuel Gonzales to bring the car the day following delivering to Manuel Gonzales the amount of P158.25 (as per receipt, Exhibit "D")
together with the certificate of registration of the car, so that her husband would be able representing the balance on the amount of the said check, Exh. "B";
to see same; that on this request of defendant Anita C. Gatchalian, Manuel Gonzales
advised her that the owner of the car will not be willing to give the certificate of registration
Eleventh. — That the acts of acceptance of the check and application of its proceeds in
unless there is a showing that the party interested in the purchase of said car is ready and
the manner specified above were made without previous inquiry by plaintiff from
willing to make such purchase and that for this purpose Manuel Gonzales requested
defendants:
defendant Anita C. Gatchalian to give him (Manuel Gonzales) a check which will be shown
to the owner as evidence of buyer's good faith in the intention to purchase the said car,
the said check to be for safekeeping only of Manuel Gonzales and to be returned to Twelfth. — That plaintiff filed or caused to be filed with the Office of the City Fiscal of
defendant Anita C. Gatchalian the following day when Manuel Gonzales brings the car Manila, a complaint for estafa against Manuel Gonzales based on and arising from the
and the certificate of registration, but which facts were not known to plaintiff; acts of said Manuel Gonzales in paying his obligations with plaintiff and receiving the cash
balance of the check, Exh. "B" and that said complaint was subsequently dropped;
Fourth. — That relying on these representations of Manuel Gonzales and with his
assurance that said check will be only for safekeeping and which will be returned to said
Thirteenth. — That the exhibits mentioned in this stipulation and the other exhibits
submitted previously, be considered as parts of this stipulation, without necessity of
formally offering them in evidence;
WHEREFORE, it is most respectfully prayed that this agreed stipulation of facts be
admitted and that the parties hereto be given fifteen days from today within which to submit
simultaneously their memorandum to discuss the issues of law arising from the facts,
reserving to either party the right to submit reply memorandum, if necessary, within ten
days from receipt of their main memoranda. (pp. 21-25, Defendant's Record on Appeal).
No other evidence was submitted and upon said stipulation the court rendered the
judgment already alluded above.
In their appeal defendants-appellants contend that the check is not a negotiable
instrument, under the facts and circumstances stated in the stipulation of facts, and that
plaintiff is not a holder in due course. In support of the first contention, it is argued that
defendant Gatchalian had no intention to transfer her property in the instrument as it was
for safekeeping merely and, therefore, there was no delivery required by law (Section 16,
Negotiable Instruments Law); that assuming for the sake of argument that delivery was
not for safekeeping merely, delivery was conditional and the condition was not fulfilled.
In support of the contention that plaintiff-appellee is not a holder in due course, the
appellant argues that plaintiff-appellee cannot be a holder in due course because there
was no negotiation prior to plaintiff-appellee's acquiring the possession of the check; that
a holder in due course presupposes a prior party from whose hands negotiation
proceeded, and in the case at bar, plaintiff-appellee is the payee, the maker and the payee
being original parties. It is also claimed that the plaintiff-appellee is not a holder in due
course because it acquired the check with notice of defect in the title of the holder, Manuel
Gonzales, and because under the circumstances stated in the stipulation of facts there
were circumstances that brought suspicion about Gonzales' possession and negotiation,
which circumstances should have placed the plaintiff-appellee under the duty, to inquire
into the title of the holder. The circumstances are as follows:
The check is not a personal check of Manuel Gonzales. (Paragraph Ninth, Stipulation of
Facts). Plaintiff could have inquired why a person would use the check of another to pay
his own debt. Furthermore, plaintiff had the "means of knowledge" inasmuch as defendant
Hipolito Gatchalian is personally acquainted with V. R. de Ocampo (Paragraph Sixth,
Stipulation of Facts.).
The maker Anita C. Gatchalian is a complete stranger to Manuel Gonzales and Dr. V. R.
de Ocampo (Paragraph Sixth, Stipulation of Facts).
The maker is not in any manner obligated to Ocampo Clinic nor to Manuel Gonzales. (Par.
7, Stipulation of Facts.)
The check could not have been intended to pay the hospital fees which amounted only to
P441.75. The check is in the amount of P600.00, which is in excess of the amount due
plaintiff. (Par. 10, Stipulation of Facts).
It was necessary for plaintiff to give Manuel Gonzales change in the sum P158.25 (Par.
10, Stipulation of Facts). Since Manuel Gonzales is the party obliged to pay, plaintiff
should have been more cautious and wary in accepting a piece of paper and disbursing
cold cash.
The check is payable to bearer. Hence, any person who holds it should have been
subjected to inquiries. EVEN IN A BANK, CHECKS ARE NOT CASHED WITHOUT
INQUIRY FROM THE BEARER. The same inquiries should have been made by plaintiff.
(Defendants-appellants' brief, pp. 52-53)
Answering the first contention of appellant, counsel for plaintiff-appellee argues that in
accordance with the best authority on the Negotiable Instruments Law, plaintiff-appellee
may be considered as a holder in due course, citing Brannan's Negotiable Instruments
Law, 6th edition, page 252. On this issue Brannan holds that a payee may be a holder in
due course and says that to this effect is the greater weight of authority, thus:
Whether the payee may be a holder in due course under the N. I. L., as he was at common
law, is a question upon which the courts are in serious conflict. There can be no doubt that
a proper interpretation of the act read as a whole leads to the conclusion that a payee may
be a holder in due course under any circumstance in which he meets the requirements of
Sec. 52.
The argument of Professor Brannan in an earlier edition of this work has never been
successfully answered and is here repeated.
Section 191 defines "holder" as the payee or indorsee of a bill or note, who is in possession
of it, or the bearer thereof. Sec. 52 defendants defines a holder in due course as "a holder
who has taken the instrument under the following conditions: 1. That it is complete and
regular on its face. 2. That he became the holder of it before it was overdue, and without
notice that it had been previously dishonored, if such was the fact. 3. That he took it in
good faith and for value. 4. That at the time it was negotiated to him he had no notice of
any infirmity in the instrument or defect in the title of the person negotiating it."
Since "holder", as defined in sec. 191, includes a payee who is in possession the word
holder in the first clause of sec. 52 and in the second subsection may be replaced by the
definition in sec. 191 so as to read "a holder in due course is a payee or indorsee who is
in possession," etc. (Brannan's on Negotiable Instruments Law, 6th ed., p. 543).
The first argument of the defendants-appellants, therefore, depends upon whether or not
the plaintiff-appellee is a holder in due course. If it is such a holder in due course, it is
immaterial that it was the payee and an immediate party to the instrument.
The other contention of the plaintiff is that there has been no negotiation of the instrument,
because the drawer did not deliver the instrument to Manuel Gonzales with the intention
of negotiating the same, or for the purpose of giving effect thereto, for as the stipulation of
facts declares the check was to remain in the possession Manuel Gonzales, and was not
to be negotiated, but was to serve merely as evidence of good faith of defendants in their
desire to purchase the car being sold to them. Admitting that such was the intention of the
drawer of the check when she delivered it to Manuel Gonzales, it was no fault of the
plaintiff-appellee drawee if Manuel Gonzales delivered the check or negotiated it. As the
check was payable to the plaintiff-appellee, and was entrusted to Manuel Gonzales by
Gatchalian, the delivery to Manuel Gonzales was a delivery by the drawer to his own
agent; in other words, Manuel Gonzales was the agent of the drawer Anita Gatchalian
insofar as the possession of the check is concerned. So, when the agent of drawer Manuel
Gonzales negotiated the check with the intention of getting its value from plaintiff-appellee,
negotiation took place through no fault of the plaintiff-appellee, unless it can be shown that
the plaintiff-appellee should be considered as having notice of the defect in the possession
of the holder Manuel Gonzales. Our resolution of this issue leads us to a consideration of
the last question presented by the appellants, i.e., whether the plaintiff-appellee may be
considered as a holder in due course.
Section 52, Negotiable Instruments Law, defines holder in due course, thus:
A holder in due course is a holder who has taken the instrument under the following
conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice that it had
been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.
The stipulation of facts expressly states that plaintiff-appellee was not aware of the
circumstances under which the check was delivered to Manuel Gonzales, but we agree
with the defendants-appellants that the circumstances indicated by them in their briefs,
such as the fact that appellants had no obligation or liability to the Ocampo Clinic; that the
amount of the check did not correspond exactly with the obligation of Matilde Gonzales to
Dr. V. R. de Ocampo; and that the check had two parallel lines in the upper left hand
corner, which practice means that the check could only be deposited but may not be
converted into cash — all these circumstances should have put the plaintiff-appellee to
inquiry as to the why and wherefore of the possession of the check by Manuel Gonzales,
and why he used it to pay Matilde's account. It was payee's duty to ascertain from the
holder Manuel Gonzales what the nature of the latter's title to the check was or the nature
of his possession. Having failed in this respect, we must declare that plaintiff-appellee was
guilty of gross neglect in not finding out the nature of the title and possession of Manuel
Gonzales, amounting to legal absence of good faith, and it may not be considered as a
holder of the check in good faith. To such effect is the consensus of authority.
In order to show that the defendant had "knowledge of such facts that his action in taking
the instrument amounted to bad faith," it is not necessary to prove that the defendant knew
the exact fraud that was practiced upon the plaintiff by the defendant's assignor, it being
sufficient to show that the defendant had notice that there was something wrong about his
assignor's acquisition of title, although he did not have notice of the particular wrong that
was committed. Paika v. Perry, 225 Mass. 563, 114 N.E. 830.
It is sufficient that the buyer of a note had notice or knowledge that the note was in some
way tainted with fraud. It is not necessary that he should know the particulars or even the
nature of the fraud, since all that is required is knowledge of such facts that his action in
taking the note amounted bad faith. Ozark Motor Co. v. Horton (Mo. App.), 196 S.W. 395.
Accord. Davis v. First Nat. Bank, 26 Ariz. 621, 229 Pac. 391.
Liberty bonds stolen from the plaintiff were brought by the thief, a boy fifteen years old,
less than five feet tall, immature in appearance and bearing on his face the stamp a
degenerate, to the defendants' clerk for sale. The boy stated that they belonged to his
mother. The defendants paid the boy for the bonds without any further inquiry. Held, the
plaintiff could recover the value of the bonds. The term 'bad faith' does not necessarily
involve furtive motives, but means bad faith in a commercial sense. The manner in which
the defendants conducted their Liberty Loan department provided an easy way for thieves
to dispose of their plunder. It was a case of "no questions asked." Although gross
negligence does not of itself constitute bad faith, it is evidence from which bad faith may
be inferred. The circumstances thrust the duty upon the defendants to make further
inquiries and they had no right to shut their eyes deliberately to obvious facts. Morris v.
Muir, 111 Misc. Rep. 739, 181 N.Y. Supp. 913, affd. in memo., 191 App. Div. 947, 181
N.Y. Supp. 945." (pp. 640-642, Brannan's Negotiable Instruments Law, 6th ed.).
The above considerations would seem sufficient to justify our ruling that plaintiff-appellee
should not be allowed to recover the value of the check. Let us now examine the express
provisions of the Negotiable Instruments Law pertinent to the matter to find if our ruling
conforms thereto. Section 52 (c) provides that a holder in due course is one who takes the
instrument "in good faith and for value;" Section 59, "that every holder is deemed prima
facie to be a holder in due course;" and Section 52 (d), that in order that one may be a
holder in due course it is necessary that "at the time the instrument was negotiated to him
"he had no notice of any . . . defect in the title of the person negotiating it;" and lastly
Section 59, that every holder is deemed prima facieto be a holder in due course.
In the case at bar the rule that a possessor of the instrument is prima faciea holder in due
course does not apply because there was a defect in the title of the holder (Manuel
Gonzales), because the instrument is not payable to him or to bearer. On the other hand,
the stipulation of facts indicated by the appellants in their brief, like the fact that the drawer
had no account with the payee; that the holder did not show or tell the payee why he had
the check in his possession and why he was using it for the payment of his own personal
account — show that holder's title was defective or suspicious, to say the least. As holder's
title was defective or suspicious, it cannot be stated that the payee acquired the check
without knowledge of said defect in holder's title, and for this reason the presumption that
it is a holder in due course or that it acquired the instrument in good faith does not exist.
And having presented no evidence that it acquired the check in good faith, it (payee)
cannot be considered as a holder in due course. In other words, under the circumstances
of the case, instead of the presumption that payee was a holder in good faith, the fact is
that it acquired possession of the instrument under circumstances that should have put it
to inquiry as to the title of the holder who negotiated the check to it. The burden was,
therefore, placed upon it to show that notwithstanding the suspicious circumstances, it
acquired the check in actual good faith.
The rule applicable to the case at bar is that described in the case of Howard National
Bank v. Wilson, et al., 96 Vt. 438, 120 At. 889, 894, where the Supreme Court of Vermont
made the following disquisition:
In the case at bar as the payee acquired the check under circumstances which should
have put it to inquiry, why the holder had the check and used it to pay his own personal
account, the duty devolved upon it, plaintiff-appellee, to prove that it actually acquired said
check in good faith. The stipulation of facts contains no statement of such good faith,
hence we are forced to the conclusion that plaintiff payee has not proved that it acquired
the check in good faith and may not be deemed a holder in due course thereof.
For the foregoing considerations, the decision appealed from should be, as it is hereby,
reversed, and the defendants are absolved from the complaint. With costs against plaintiff-
appellee.

Prior to the Negotiable Instruments Act, two distinct lines of cases had developed in this
country. The first had its origin in Gill v. Cubitt, 3 B. & C. 466, 10 E. L. 215, where the rule
was distinctly laid down by the court of King's Bench that the purchaser of negotiable
paper must exercise reasonable prudence and caution, and that, if the circumstances
were such as ought to have excited the suspicion of a prudent and careful man, and he
made no inquiry, he did not stand in the legal position of a bona fide holder. The rule was
adopted by the courts of this country generally and seem to have become a fixed rule in
the law of negotiable paper. Later in Goodman v. Harvey, 4 A. & E. 870, 31 E. C. L. 381,
the English court abandoned its former position and adopted the rule that nothing short of
actual bad faith or fraud in the purchaser would deprive him of the character of a bona fide
purchaser and let in defenses existing between prior parties, that no circumstances of
suspicion merely, or want of proper caution in the purchaser, would have this effect, and
that even gross negligence would have no effect, except as evidence tending to establish
bad faith or fraud. Some of the American courts adhered to the earlier rule, while others
followed the change inaugurated in Goodman v. Harvey. The question was before this
court in Roth v. Colvin, 32 Vt. 125, and, on full consideration of the question, a rule was
adopted in harmony with that announced in Gill v. Cubitt, which has been adhered to in
subsequent cases, including those cited above. Stated briefly, one line of cases including
our own had adopted the test of the reasonably prudent man and the other that of actual
good faith. It would seem that it was the intent of the Negotiable Instruments Act to
harmonize this disagreement by adopting the latter test. That such is the view generally
accepted by the courts appears from a recent review of the cases concerning what
constitutes notice of defect. Brannan on Neg. Ins. Law, 187-201. To effectuate the general
purpose of the act to make uniform the Negotiable Instruments Law of those states which
should enact it, we are constrained to hold (contrary to the rule adopted in our former
decisions) that negligence on the part of the plaintiff, or suspicious circumstances
sufficient to put a prudent man on inquiry, will not of themselves prevent a recovery, but
are to be considered merely as evidence bearing on the question of bad faith. See G. L.
3113, 3172, where such a course is required in construing other uniform acts.

It comes to this then: When the case has taken such shape that the plaintiff is called upon
to prove himself a holder in due course to be entitled to recover, he is required to establish
the conditions entitling him to standing as such, including good faith in taking the
instrument. It devolves upon him to disclose the facts and circumstances attending the
transfer, from which good or bad faith in the transaction may be inferred.