Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 157943 September 4, 2013

PEOPLE OF THE PHILIPPINES, PLAINTIFF-APPELLEE,

vs.
GILBERT REYES WAGAS, ACCUSED-APPELLANT.

DECISION

BERSAMIN, J.:

The Bill of Rights guarantees the right of an accused to be presumed innocent until the contrary is
proved. In order to overcome the presumption of innocence, the Prosecution is required to adduce
against him nothing less than proof beyond reasonable doubt. Such proof is not only in relation to
the elements of the offense, but also in relation to the identity of the offender. If the Prosecution fails
to discharge its heavy burden, then it is not only the right of the accused to be freed, it becomes the
Court’s constitutional duty to acquit him.

The Case

Gilbert R. Wagas appeals his conviction for estafa under the decision rendered on July 11, 2002 by
the Regional Trial Court, Branch 58, in Cebu City (RTC), meting on him the indeterminate penalty of
12 years of prision mayor, as minimum, to 30 years of reclusion perpetua, as maximum.

Antecedents

Wagas was charged with estafa under the information that reads:

That on or about the 30th day of April, 1997, and for sometime prior and subsequent thereto, in the
City of Cebu, Philippines, and within the jurisdiction of this Honorable Court, the said accused, with
deliberate intent, with intent to gain and by means of false pretenses or fraudulent acts executed
prior to or simultaneously with the commission of the fraud, to wit: knowing that he did not have
sufficient funds deposited with the Bank of Philippine Islands, and without informing Alberto Ligaray
of that circumstance, with intent to defraud the latter, did then and there issue Bank of the Philippine
Islands Check No. 0011003, dated May 08, 1997 in the amount of ₱200,000.00, which check was
issued in payment of an obligation, but which check when presented for encashment with the bank,
was dishonored for the reason "drawn against insufficient funds" and inspite of notice and several
demands made upon said accused to make good said check or replace the same with cash, he had
failed and refused and up to the present time still fails and refuses to do so, to the damage and
prejudice of Alberto Ligaray in the amount aforestated.

CONTRARY TO LAW.1

After Wagas entered a plea of not guilty,2 the pre-trial was held, during which the Defense admitted
that the check alleged in the information had been dishonored due to insufficient funds.3 On its part,
the Prosecution made no admission.4
At the trial, the Prosecution presented complainant Alberto Ligaray as its lone witness. Ligaray
testified that on April 30, 1997, Wagas placed an order for 200 bags of rice over the telephone; that
he and his wife would not agree at first to the proposed payment of the order by postdated check,
but because of Wagas’ assurance that he would not disappoint them and that he had the means to
pay them because he had a lending business and money in the bank, they relented and accepted
the order; that he released the goods to Wagas on April 30, 1997 and at the same time received
Bank of the Philippine Islands (BPI) Check No. 0011003 for ₱200,000.00 payable to cash and
postdated May 8, 1997; that he later deposited the check with Solid Bank, his depository bank, but
the check was dishonored due to insufficiency of funds;5 that he called Wagas about the matter, and
the latter told him that he would pay upon his return to Cebu; and that despite repeated demands,
Wagas did not pay him.6

On cross-examination, Ligaray admitted that he did not personally meet Wagas because they
transacted through telephone only; that he released the 200 bags of rice directly to Robert Cañada,
the brother-in-law of Wagas, who signed the delivery receipt upon receiving the rice.7

After Ligaray testified, the Prosecution formally offered the following: (a) BPI Check No. 0011003 in
the amount of ₱200,000.00 payable to "cash;" (b) the return slip dated May 13, 1997 issued by Solid
Bank; (c) Ligaray’s affidavit; and (d) the delivery receipt signed by Cañada. After the RTC admitted
the exhibits, the Prosecution then rested its case.8

In his defense, Wagas himself testified. He admitted having issued BPI Check No. 0011003 to
Cañada, his brother-in-law, not to Ligaray. He denied having any telephone conversation or any
dealings with Ligaray. He explained that the check was intended as payment for a portion of
Cañada’s property that he wanted to buy, but when the sale did not push through, he did not
anymore fund the check.9

On cross-examination, the Prosecution confronted Wagas with a letter dated July 3, 1997 apparently
signed by him and addressed to Ligaray’s counsel, wherein he admitted owing Ligaray ₱200,000.00
for goods received, to wit:

This is to acknowledge receipt of your letter dated June 23, 1997 which is self-explanatory. It is
worthy also to discuss with you the environmental facts of the case for your consideration, to wit:

It is true that I obtained goods from your client worth ₱200,000.00 and I promised to settle the same
last May 10, 1997, but to no avail. On this point, let me inform you that I sold my real property to a
buyer in Manila, and promised to pay the consideration on the same date as I promised with your
client. Unfortunately, said buyer likewise failed to make good with such obligation. Hence, I failed to
fulfill my promise resultant thereof. (sic)

Again, I made another promise to settle said obligation on or before June 15, 1997, but still to no
avail attributable to the same reason as aforementioned. (sic)

To arrest this problem, we decided to source some funds using the subject property as collateral.
This other means is resorted to for the purpose of settling the herein obligation. And as to its status,
said funds will be rele[a]sed within thirty (30) days from today.

In view of the foregoing, it is my sincere request and promise to settle said obligation on or before
August 15, 1997.

Lastly, I would like to manifest that it is not my intention to shy away from any financial obligation.
xxxx

Respectfully yours,

(SGD.)
GILBERT R. WAGAS10

Wagas admitted the letter, but insisted that it was Cañada who had transacted with Ligaray, and that
he had signed the letter only because his sister and her husband (Cañada) had begged him to
assume the responsibility.11 On redirect examination, Wagas declared that Cañada, a seafarer, was
then out of the country; that he signed the letter only to accommodate the pleas of his sister and
Cañada, and to avoid jeopardizing Cañada’s application for overseas employment.12 The
Prosecution subsequently offered and the RTC admitted the letter as rebuttal evidence.13

Decision of the RTC

As stated, the RTC convicted Wagas of estafa on July 11, 2002, viz:

WHEREFORE, premises considered, the Court finds the accused GUILTY beyond reasonable doubt
as charged and he is hereby sentenced as follows:

To suffer an indeterminate penalty of from twelve (12) years of pris[i]on mayor, as minimum, to thirty
(30) years of reclusion perpetua as maximum;

To indemnify the complainant, Albert[o] Ligaray in the sum of ₱200,000.00;

To pay said complainant the sum of ₱30,000.00 by way of attorney’s fees; and the costs of suit.

SO ORDERED.14

The RTC held that the Prosecution had proved beyond reasonable doubt all the elements
constituting the crime of estafa, namely: (a) that Wagas issued the postdated check as payment for
an obligation contracted at the time the check was issued; (b) that he failed to deposit an amount
sufficient to cover the check despite having been informed that the check had been dishonored; and
(c) that Ligaray released the goods upon receipt of the postdated check and upon Wagas’ assurance
that the check would be funded on its date.

Wagas filed a motion for new trial and/or reconsideration,15 arguing that the Prosecution did not
establish that it was he who had transacted with Ligaray and who had negotiated the check to the
latter; that the records showed that Ligaray did not meet him at any time; and that Ligaray’s
testimony on their alleged telephone conversation was not reliable because it was not shown that
Ligaray had been familiar with his voice. Wagas also sought the reopening of the case based on
newly discovered evidence, specifically: (a) the testimony of Cañada who could not testify during the
trial because he was then out of the country, and (b) Ligaray’s testimony given against Wagas in
another criminal case for violation of Batas Pambansa Blg. 22.

On October 21, 2002, the RTC denied the motion for new trial and/or reconsideration, opining that
the evidence Wagas desired to present at a new trial did not qualify as newly discovered, and that
there was no compelling ground to reverse its decision.16

Wagas appealed directly to this Court by notice of appeal.17

Prior to the elevation of the records to the Court, Wagas filed a petition for admission to bail pending
appeal. The RTC granted the petition and fixed Wagas’ bond at ₱40,000.00.18 Wagas then posted
bail for his provisional liberty pending appeal.19

The resolution of this appeal was delayed by incidents bearing on the grant of Wagas’ application for
bail. On November 17, 2003, the Court required the RTC Judge to explain why Wagas was out on
bail.20 On January 15, 2004, the RTC Judge submitted to the Court a so-called manifestation and
compliance which the Court referred to the Office of the Court Administrator (OCA) for evaluation,
report, and recommendation.21 On July 5, 2005, the Court, upon the OCA’s recommendation,
directed the filing of an administrative complaint for simple ignorance of the law against the RTC
Judge.22 On September 12, 2006, the Court directed the OCA to comply with its July 5, 2005
directive, and to cause the filing of the administrative complaint against the RTC Judge. The Court
also directed Wagas to explain why his bail should not be cancelled for having been erroneously
granted.23 Finally, in its memorandum dated September 27, 2006, the OCA manifested to the Court
that it had meanwhile filed the administrative complaint against the RTC Judge.24

Issues

In this appeal, Wagas insists that he and Ligaray were neither friends nor personally known to one
other; that it was highly incredible that Ligaray, a businessman, would have entered into a
transaction with him involving a huge amount of money only over the telephone; that on the contrary,
the evidence pointed to Cañada as the person with whom Ligaray had transacted, considering that
the delivery receipt, which had been signed by Cañada, indicated that the goods had been "Ordered
by ROBERT CAÑADA," that the goods had been received by Cañada in good order and condition,
and that there was no showing that Cañada had been acting on behalf of Wagas; that he had issued
the check to Cañada upon a different transaction; that Cañada had negotiated the check to Ligaray;
and that the element of deceit had not been established because it had not been proved with
certainty that it was him who had transacted with Ligaray over the telephone.

The circumstances beg the question: did the Prosecution establish beyond reasonable doubt the
existence of all the elements of the crime of estafa as charged, as well as the identity of the
perpetrator of the crime?

Ruling

The appeal is meritorious.

Article 315, paragraph 2(d) of the Revised Penal Code, as amended, provides:

Article 315. Swindling (estafa). — Any person who shall defraud another by any of the means
mentioned hereinbelow shall be punished by:

xxxx

2. By means of any of the following false pretenses or fraudulent acts executed prior to or
simultaneously with the commission of the fraud:

xxxx

(d) By postdating a check, or issuing a check in payment of an obligation when the offender had no
funds in the bank, or his funds deposited therein were not sufficient to cover the amount of the
check. The failure of the drawer of the check to deposit the amount necessary to cover his check
within three (3) days from receipt of notice from the bank and/or the payee or holder that said check
has been dishonored for lack or insufficiency of funds shall be prima facie evidence of deceit
constituting false pretense or fraudulent act.

In order to constitute estafa under this statutory provision, the act of postdating or issuing a check in
payment of an obligation must be the efficient cause of the defraudation. This means that the
offender must be able to obtain money or property from the offended party by reason of the issuance
of the check, whether dated or postdated. In other words, the Prosecution must show that the person
to whom the check was delivered would not have parted with his money or property were it not for
the issuance of the check by the offender.25

The essential elements of the crime charged are that: (a) a check is postdated or issued in payment
of an obligation contracted at the time the check is issued; (b) lack or insufficiency of funds to cover
the check; and (c) damage to the payee thereof.26 It is the criminal fraud or deceit in the issuance of
a check that is punishable, not the non-payment of a debt.27 Prima facie evidence of deceit exists by
law upon proof that the drawer of the check failed to deposit the amount necessary to cover his
check within three days from receipt of the notice of dishonor.

The Prosecution established that Ligaray had released the goods to Cañada because of the
postdated check the latter had given to him; and that the check was dishonored when presented for
payment because of the insufficiency of funds.

In every criminal prosecution, however, the identity of the offender, like the crime itself, must be
established by proof beyond reasonable doubt.28 In that regard, the Prosecution did not establish
beyond reasonable doubt that it was Wagas who had defrauded Ligaray by issuing the check.

Firstly, Ligaray expressly admitted that he did not personally meet the person with whom he was
transacting over the telephone, thus:

Q:

On April 30, 1997, do you remember having a transaction with the accused in this case?

A:

Yes, sir. He purchased two hundred bags of rice from me.

Q:

How did this purchase of rice transaction started? (sic)

A:

He talked with me over the phone and told me that he would like to purchase two hundred bags of
rice and he will just issue a check.29

Even after the dishonor of the check, Ligaray did not personally see and meet whoever he had dealt
with and to whom he had made the demand for payment, and that he had talked with him only over
the telephone, to wit:
Q:

After the check was (sic) bounced, what did you do next?

A:

I made a demand on them.

Q:

How did you make a demand?

A:

I called him over the phone.

Q:

Who is that "him" that you are referring to?

A:

Gilbert Wagas.30

Secondly, the check delivered to Ligaray was made payable to cash. Under the Negotiable
Instruments Law, this type of check was payable to the bearer and could be negotiated by mere
delivery without the need of an indorsement.31 This rendered it highly probable that Wagas had
issued the check not to Ligaray, but to somebody else like Cañada, his brother-in-law, who then
negotiated it to Ligaray. Relevantly, Ligaray confirmed that he did not himself see or meet Wagas at
1âw phi 1

the time of the transaction and thereafter, and expressly stated that the person who signed for and
received the stocks of rice was Cañada.

It bears stressing that the accused, to be guilty of estafa as charged, must have used the check in
order to defraud the complainant. What the law punishes is the fraud or deceit, not the mere
issuance of the worthless check. Wagas could not be held guilty of estafa simply because he had
issued the check used to defraud Ligaray. The proof of guilt must still clearly show that it had been
Wagas as the drawer who had defrauded Ligaray by means of the check.

Thirdly, Ligaray admitted that it was Cañada who received the rice from him and who delivered the
check to him. Considering that the records are bereft of any showing that Cañada was then acting
on behalf of Wagas, the RTC had no factual and legal bases to conclude and find that Cañada had
been acting for Wagas. This lack of factual and legal bases for the RTC to infer so obtained despite
Wagas being Cañada’s brother-in-law.

Finally, Ligaray’s declaration that it was Wagas who had transacted with him over the telephone was
not reliable because he did not explain how he determined that the person with whom he had the
telephone conversation was really Wagas whom he had not yet met or known before then. We deem
it essential for purposes of reliability and trustworthiness that a telephone conversation like that one
Ligaray supposedly had with the buyer of rice to be first authenticated before it could be received in
evidence. Among others, the person with whom the witness conversed by telephone should be first
satisfactorily identified by voice recognition or any other means.32 Without the authentication,
incriminating another person just by adverting to the telephone conversation with him would be all
too easy. In this respect, an identification based on familiarity with the voice of the caller, or because
of clearly recognizable peculiarities of the caller would have sufficed.33 The identity of the caller could
also be established by the caller’s self-identification, coupled with additional evidence, like the
context and timing of the telephone call, the contents of the statement challenged, internal patterns,
and other distinctive characteristics, and disclosure of knowledge of facts known peculiarly to the
caller.34

Verily, it is only fair that the caller be reliably identified first before a telephone communication is
accorded probative weight. The identity of the caller may be established by direct or circumstantial
evidence. According to one ruling of the Kansas Supreme Court:

Communications by telephone are admissible in evidence where they are relevant to the fact or facts
in issue, and admissibility is governed by the same rules of evidence concerning face-to-face
conversations except the party against whom the conversations are sought to be used must
ordinarily be identified. It is not necessary that the witness be able, at the time of the conversation, to
identify the person with whom the conversation was had, provided subsequent identification is
proved by direct or circumstantial evidence somewhere in the development of the case. The mere
statement of his identity by the party calling is not in itself sufficient proof of such identity, in the
absence of corroborating circumstances so as to render the conversation admissible. However,
circumstances preceding or following the conversation may serve to sufficiently identify the caller.
The completeness of the identification goes to the weight of the evidence rather than its
admissibility, and the responsibility lies in the first instance with the district court to determine within
its sound discretion whether the threshold of admissibility has been met.35 (Bold emphasis supplied)

Yet, the Prosecution did not tender any plausible explanation or offer any proof to definitely establish
that it had been Wagas whom Ligaray had conversed with on the telephone. The Prosecution did not
show through Ligaray during the trial as to how he had determined that his caller was Wagas. All
that the Prosecution sought to elicit from him was whether he had known and why he had known
Wagas, and he answered as follows:

Q:

Do you know the accused in this case?

A:

Yes, sir.

Q:

If he is present inside the courtroom […]

A:

No, sir. He is not around.

Q:

Why do you know him?

A:

I know him as a resident of Compostela because he is an ex-mayor of Compostela.36

During cross-examination, Ligaray was allowed another opportunity to show how he had determined
that his caller was Wagas, but he still failed to provide a satisfactory showing, to wit:

Q:

Mr. Witness, you mentioned that you and the accused entered into [a] transaction of rice selling,
particularly with these 200 sacks of rice subject of this case, through telephone conversation?

A:

Yes, sir.

Q:

But you cannot really ascertain that it was the accused whom you are talking with?

A:

I know it was him because I know him.

Q:

Am I right to say [that] that was the first time that you had a transaction with the accused through
telephone conversation, and as a consequence of that alleged conversation with the accused
through telephone he issued a check in your favor?

A:

No. Before that call I had a talk[ ] with the accused.

Q:

But still through the telephone?

A:

Yes, sir.

Q:

There was no instant (sic) that the accused went to see you personally regarding the 200 bags rice
transaction?

A:

No. It was through telephone only.

Q:

In fact[,] you did not cause the delivery of these 200 bags of rice through the accused himself?

A:

Yes. It was through Robert.

Q:

So, after that phone call[,] you deliver[ed] th[ose] 200 sacks of rice through somebody other than the
accused?

A:

Yes, sir.37

Ligaray’s statement that he could tell that it was Wagas who had ordered the rice because he
"know[s]" him was still vague and unreliable for not assuring the certainty of the identification, and
should not support a finding of Ligaray’s familiarity with Wagas as the caller by his voice. It was
evident from Ligaray’s answers that Wagas was not even an acquaintance of Ligaray’s prior to the
transaction. Thus, the RTC’s conclusion that Ligaray had transacted with Wagas had no factual
basis. Without that factual basis, the RTC was speculating on a matter as decisive as the
identification of the buyer to be Wagas.

The letter of Wagas did not competently establish that he was the person who had conversed with
Ligaray by telephone to place the order for the rice. The letter was admitted exclusively as the
State’s rebuttal evidence to controvert or impeach the denial of Wagas of entering into any
transaction with Ligaray on the rice; hence, it could be considered and appreciated only for that
purpose. Under the law of evidence, the court shall consider evidence solely for the purpose for
which it is offered,38 not for any other purpose.39 Fairness to the adverse party demands such
exclusivity. Moreover, the high plausibility of the explanation of Wagas that he had signed the letter
only because his sister and her husband had pleaded with him to do so could not be taken for
granted.

It is a fundamental rule in criminal procedure that the State carries the onus probandi in establishing
the guilt of the accused beyond a reasonable doubt, as a consequence of the tenet ei incumbit
probation, qui dicit, non qui negat, which means that he who asserts, not he who denies, must
prove,40 and as a means of respecting the presumption of innocence in favor of the man or woman
on the dock for a crime. Accordingly, the State has the burden of proof to show: (1) the correct
identification of the author of a crime, and (2) the actuality of the commission of the offense with the
participation of the accused. All these facts must be proved by the State beyond reasonable doubt
on the strength of its evidence and without solace from the weakness of the defense. That the
defense the accused puts up may be weak is inconsequential if, in the first place, the State has
failed to discharge the onus of his identity and culpability. The presumption of innocence dictates
that it is for the Prosecution to demonstrate the guilt and not for the accused to establish
innocence.41 Indeed, the accused, being presumed innocent, carries no burden of proof on his or her
shoulders. For this reason, the first duty of the Prosecution is not to prove the crime but to prove the
identity of the criminal. For even if the commission of the crime can be established, without
competent proof of the identity of the accused beyond reasonable doubt, there can be no
conviction.42
There is no question that an identification that does not preclude a reasonable possibility of mistake
cannot be accorded any evidentiary force.43 Thus, considering that the circumstances of the
identification of Wagas as the person who transacted on the rice did not preclude a reasonable
possibility of mistake, the proof of guilt did not measure up to the standard of proof beyond
reasonable doubt demanded in criminal cases. Perforce, the accused’s constitutional right of
presumption of innocence until the contrary is proved is not overcome, and he is entitled to an
acquittal,44 even though his innocence may be doubted.45

Nevertheless, an accused, though acquitted of estafa, may still be held civilly liable where the
preponderance of the established facts so warrants.46 Wagas as the admitted drawer of the check
was legally liable to pay the amount of it to Ligaray, a holder in due course.47 Consequently, we
pronounce and hold him fully liable to pay the amount of the dishonored check, plus legal interest of
6% per annum from the finality of this decision.

WHEREFORE, the Court REVERSES and SETS ASIDE the decision rendered on July 11, 2002 by
the Regional Trial Court, Branch 58, in Cebu City; and ACQUITS Gilbert R. Wagas of the crime of
estafa on the ground of reasonable doubt, but ORDERS him to pay Alberto Ligaray the amount of
₱200,000.00 as actual damages, plus interest of 6% per annum from the finality of this decision.

No pronouncement on costs of suit.

SO ORDERED.

LUCAS P. BERSAMIN
Associate Justice

WE CONCUR:

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 187769 June 4, 2014

ALVIN PATRIMONIO, Petitioner,

vs.
NAPOLEON GUTIERREZ and OCTAVIO MARASIGAN III, Respondents.

DECISION

BRION, J.:

Assailed in this petition for review on certiorari1 under Rule 45 of the Revised Rules of Court is the
decision2 dated September 24, 2008 and the resolution3 dated April 30, 2009 of the Court of Appeals
(CA) in CA-G.R. CV No. 82301. The appellate court affirmed the decision of the Regional Trial Court
(RTC) of Quezon City, Branch 77, dismissing the complaint for declaration of nullity of loan filed by
petitioner Alvin Patrimonio and ordering him to pay respondent Octavio Marasigan III (Marasigan)
the sum of ₱200,000.00.

The Factual Background

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

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

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

In the middle of 1993, without the petitioner’s knowledge and consent, Gutierrez went to Marasigan
(the petitioner’s former teammate), to secure a loan in the amount of ₱200,000.00 on the excuse
that the petitioner needed the money for the construction of his house. In addition to the payment of
the principal, Gutierrez assured Marasigan that he would be paid an interest of 5% per month from
March to May 1994.

After much contemplation and taking into account his relationship with the petitioner and Gutierrez,
Marasigan acceded to Gutierrez’ request and gave him ₱200,000.00 sometime in February 1994.
Gutierrez simultaneously delivered to Marasigan one of the blank checks the petitioner pre-signed
with Pilipinas Bank, Greenhills Branch, Check No. 21001764 with the blank portions filled out with
the words "Cash" "Two Hundred Thousand Pesos Only", and the amount of "₱200,000.00". The
upper right portion of the check corresponding to the date was also filled out with the words "May 23,
1994" but the petitioner contended that the same was not written by Gutierrez.

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

Marasigan sought recovery from Gutierrez, to no avail. He thereafter sent several demand letters to
the petitioner asking for the payment of ₱200,000.00, but his demands likewise went unheeded.
Consequently, he filed a criminal case for violation of B.P. 22 against the petitioner, docketed as
Criminal Case No. 42816.

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

Only Marasigan filed his answer to the complaint. In the RTC’s order dated December 22,
1997,Gutierrez was declared in default.

The Ruling of the RTC

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

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

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

The Ruling of the CA

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

The CA also concluded that the check had been strictly filled out by Gutierrez in accordance with the
petitioner’s authority. It held that the loan may not be nullified since it is grounded on an obligation
arising from law and ruled that the petitioner is still liable to pay Marasigan the sum of ₱200,000.00.

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

The Petition

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

The Issues

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

1. Whether the contract of loan in the amount of ₱200,000.00 granted by respondent

Marasigan to petitioner, through respondent Gutierrez, may be nullified for being
void;
 2. Whether there is basis to hold the petitioner liable for the payment of the
₱200,000.00 loan;

3. Whether respondent Gutierrez has completely filled out the subject check strictly
under the authority given by the petitioner; and

4. Whether Marasigan is a holder in due course.

The Court’s Ruling

The petition is impressed with merit.

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

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

I. Liability Under the Contract of Loan

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

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

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

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

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

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

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

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

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

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

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

A review of the records reveals that Gutierrez did not have any authority to borrow money in behalf
of the petitioner. Records do not show that the petitioner executed any special power of attorney
1âwphi 1

(SPA) in favor of Gutierrez. In fact, the petitioner’s testimony confirmed that he never authorized
Gutierrez (or anyone for that matter), whether verbally or in writing, to borrow money in his behalf,
nor was he aware of any such transaction:

ALVIN PATRIMONIO (witness)

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

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

xxxx

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

Marasigan’s submission fails to persuade us.

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

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

xxxx

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

xxxx

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

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

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

xxxx

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

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

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

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

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

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

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

No Contract of Loan Was Perfected Between Marasigan And Petitioner, as The Latter’s Consent
Was Not Obtained.

Another significant point that the lower courts failed to consider is that a contract of loan, like any
other contract, is subject to the rules governing the requisites and validity of contracts in general.13
Article 1318 of the Civil Code14 enumerates the essential requisites for a valid contract, namely:

1. consent of the contracting parties;

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

3. cause of the obligation which is established.

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

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

II. Liability Under the Instrument

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

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

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

In order however that one who is not a holder in due course can enforce the instrument against a
party prior to the instrument’s completion, two requisites must exist: (1) that the blank must be filled
strictly in accordance with the authority given; and (2) it must be filled up within a reasonable time. If
it was proven that the instrument had not been filled up strictly in accordance with the authority given
and within a reasonable time, the maker can set this up as a personal defense and avoid liability.
However, if the holder is a holder in due course, there is a conclusive presumption that authority to
fill it up had been given and that the same was not in excess of authority.17

In the present case, the petitioner contends that there is no legal basis to hold him liable both under
the contract and loan and under the check because: first, the subject check was not completely filled
out strictly under the authority he has given and second, Marasigan was not a holder in due course.

Marasigan is Not a Holder in Due Course

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

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

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

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

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

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

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

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

As held in De Ocampo v. Gatchalian:20

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

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

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

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

WITNESS: AMBET NABUS

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

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

xxxx

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

Q: What was your reply, if any?

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

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

Q: What was his answer?

A: It was Alvin’s check.

Q: What was your reply, if any?

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

xxxx

Q: What was his reply?

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

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

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

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

Check Was Not Completed Strictly Under The Authority Given by The Petitioner

Our own examination of the records tells us that Gutierrez has exceeded the authority to fill up the
blanks and use the check. To repeat, petitioner gave Gutierrez pre-signed checks to be used in
1âwphi 1

their business provided that he could only use them upon his approval. His instruction could not be
any clearer as Gutierrez’ authority was limited to the use of the checks for the operation of their
business, and on the condition that the petitioner’s prior approval be first secured.

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

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

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

WITNESS: No, sir.

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

A: No, sir.

Q: Did you authorize anyone including Nap Gutierrez to write the figure ₱200,000 in this check?

A: No, sir.

Q: And lastly, did you authorize anyone including Nap Gutierrez to write the words ₱200,000 only xx
in this check?

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

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

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

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

SO ORDERED.

ARTURO D. BRION
Associate Justice

WE CONCUR:
G.R. No. 156294 November 29, 2006

MELVA THERESA ALVIAR GONZALES, Petitioner,

vs.
RIZAL COMMERCIAL BANKING CORPORATION, Respondent.

DECISION

GARCIA, J.:

An action for a sum of money originating from the Regional Trial Court (RTC) of Makati City, Branch
61, thereat docketed as Civil Case No. 88-1502, was decided in favor of therein plaintiff, now
respondent Rizal Commercial Banking Corporation (RCBC). On appeal to the Court of Appeals (CA)
in CA-G.R. CV No. 48596, that court, in a decision1 dated August 30, 2002, affirmed the RTC minus
the award of attorney’s fees. Upon the instance of herein petitioner Melva Theresa Alviar Gonzales,
the case is now before this Court via this petition for review on certiorari, based on the following
undisputed facts as unanimously found by the RTC and the CA, which the latter summarized as
follows:

Gonzales was an employee of Rizal Commercial Banking Corporation (or RCBC) as New Accounts
Clerk in the Retail Banking Department at its Head Office.

A foreign check in the amount of $7,500 was drawn by Dr. Don Zapanta of the Ade Medical Group
with address at 569 Western Avenue, Los Angeles, California, against the drawee bank Wilshire
Center Bank, N.A., of Los Angeles, California, U.S.A., and payable to Gonzales’ mother, defendant
Eva Alviar (or Alviar). Alviar then endorsed this check. Since RCBC gives special accommodations
to its employees to receive the check’s value without awaiting the clearing period, Gonzales
presented the foreign check to Olivia Gomez, the RCBC’s Head of Retail Banking. After examining
this, Olivia Gomez requested Gonzales to endorse it which she did. Olivia Gomez then acquiesced
to the early encashment of the check and signed the check but indicated thereon her authority of "up
to ₱17,500.00 only". Afterwards, Olivia Gomez directed Gonzales to present the check to RCBC
employee Carlos Ramos and procure his signature. After inspecting the check, Carlos Ramos also
signed it with an "ok" annotation. After getting the said signatures Gonzales presented the check to
Rolando Zornosa, Supervisor of the Remittance section of the Foreign Department of the RCBC
Head Office, who after scrutinizing the entries and signatures therein authorized its encashment.
Gonzales then received its peso equivalent of ₱155,270.85.

RCBC then tried to collect the amount of the check with the drawee bank by the latter through its
correspondent bank, the First Interstate Bank of California, on two occasions dishonored the check
because of "END. IRREG" or irregular indorsement. Insisting, RCBC again sent the check to the
drawee bank, but this time the check was returned due to "account closed". Unable to collect, RCBC
demanded from Gonzales the payment of the peso equivalent of the check that she received.
Gonzales settled the matter by agreeing that payment be made thru salary deduction. This
temporary arrangement for salary deductions was communicated by Gonzales to RCBC through a
letter dated November 27, 1987 xxx

xxx xxx xxx

The deductions was implemented starting October 1987. On March 7, 1988 RCBC sent a demand
letter to Alviar for the payment of her obligation but this fell on deaf ears as RCBC did not receive
any response from Alviar. Taking further action to collect, RCBC then conveyed the matter to its
counsel and on June 16, 1988, a letter was sent to Gonzales reminding her of her liability as an
indorser of the subject check and that for her to avoid litigation she has to fulfill her commitment to
settle her obligation as assured in her said letter. On July 1988 Gonzales resigned from RCBC.
What had been deducted from her salary was only ₱12,822.20 covering ten months.

It was against the foregoing factual backdrop that RCBC filed a complaint for a sum of money
against Eva Alviar, Melva Theresa Alviar-Gonzales and the latter’s husband Gino Gonzales. The
spouses Gonzales filed an Answer with Counterclaim praying for the dismissal of the complaint as
well as payment of ₱10,822.20 as actual damages, ₱20,000.00 as moral damages, ₱20,000.00 as
exemplary damages, and ₱20,000.00 as attorney’s fees and litigation expenses. Defendant Eva
Alviar, on the other hand, was declared in default for having filed her Answer out of time.

After trial, the RTC, in its three-page decision,2 held two of the three defendants liable as follows:

WHEREFORE, premises above considered and plaintiff having established its case against the
defendants as above stated, judgment is hereby rendered for plaintiff and as against defendant EVA.
P. ALVIAR as principal debtor and defendants MELVA THERESA ALVIAR GONZLAES as guarantor
as follows:

1. To pay plaintiff the amount of ₱142,648.65 (₱155,270.85 less the amount of

₱12,622.20, as salary deduction of [Gonzales]), representing the outstanding
obligation of the defendants with interest of 12% per annum starting February 1987
until fully paid;

2. To pay the amount of ₱40,000.00 as and for attorney’s fees; and to

3. Pay the costs of this suit.

SO ORDERED.

On appeal, the CA, except for the award of attorney’s fees, affirmed the RTC judgment.

Hence, this recourse by the petitioner on her submission that the CA erred ̶

XXX IN FINDING [PETITIONER], AN ACCOMMODATION PARTY TO A CHECK

SUBSEQUENTLY ENDORSED PARTIALLY, LIABLE TO RCBC AS GUARANTOR;

XXX IN FINDING THAT THE SIGNATURE OF GOMEZ, AN RCBC EMPLOYEE,

DOES NOT CONSTITUTE AS AN ENDORSEMENT BUT ONLY AN INTER-BANK
APPROVAL OF SIGNATURE NECESSARY FOR THE ENCASHMENT OF THE
CHECK;

XXX IN NOT FINDING RCBC LIABLE ON THE COUNTERCLAIMS OF [THE

PETITIONER].

The recourse is impressed with merit.

The dollar-check3 in question in the amount of $7,500.00 drawn by Don Zapanta of Ade Medical
Group (U.S.A.) against a Los Angeles, California bank, Wilshire Center Bank N.A., was dishonored
because of "End. Irregular," i.e., an irregular endorsement. While the foreign drawee bank did not
specifically state which among the four signatures found on the dorsal portion of the check made the
check irregularly endorsed, it is absolutely undeniable that only the signature of Olivia Gomez, an
RCBC employee, was a qualified endorsement because of the phrase "up to ₱17,500.00 only."
There can be no other acceptable explanation for the dishonor of the foreign check than this
signature of Olivia Gomez with the phrase "up to ₱17,500.00 only" accompanying it. This Court
definitely agrees with the petitioner that the foreign drawee bank would not have dishonored the
check had it not been for this signature of Gomez with the same phrase written by her.

The foreign drawee bank, Wilshire Center Bank N.A., refused to pay the bearer of this dollar-check
drawn by Don Zapanta because of the defect introduced by RCBC, through its employee, Olivia
Gomez. It is, therefore, a useless piece of paper if returned in that state to its original payee, Eva
Alviar.

There is no doubt in the mind of the Court that a subsequent party which caused the defect in the
instrument cannot have any recourse against any of the prior endorsers in good faith. Eva Alviar’s
and the petitioner’s liability to subsequent holders of the foreign check is governed by the Negotiable
Instruments Law as follows:

Sec. 66. Liability of general indorser. - Every indorser who indorses without qualification, warrants to
all subsequent holders in due course;

(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next
preceding section; and

(b) That the instrument is, at the time of his indorsement, valid and subsisting;

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

The matters and things mentioned in subdivisions (a), (b) and (c) of Section 65 are the following:

(a) That the instrument is genuine and in all respects what it purports to be;

(b) That he has a good title to it;

(c) That all prior parties had capacity to contract;

Under Section 66, the warranties for which Alviar and Gonzales are liable as general endorsers in
favor of subsequent endorsers extend only to the state of the instrument at the time of their
endorsements, specifically, that the instrument is genuine and in all respects what it purports to be;
that they have good title thereto; that all prior parties had capacity to contract; and that the
instrument, at the time of their endorsements, is valid and subsisting. This provision, however,
cannot be used by the party which introduced a defect on the instrument, such as respondent RCBC
in this case, which qualifiedly endorsed the same, to hold prior endorsers liable on the instrument
because it results in the absurd situation whereby a subsequent party may render an instrument
useless and inutile and let innocent parties bear the loss while he himself gets away scot-free. It
cannot be over-stressed that had it not been for the qualified endorsement ("up to ₱17,500.00 only")
of Olivia Gomez, who is the employee of RCBC, there would have been no reason for the dishonor
of the check, and full payment by drawee bank therefor would have taken place as a matter of
course.
Section 66 of the Negotiable Instruments Law which further states that the general endorser
additionally engages that, on due presentment, the instrument shall be accepted or paid, or both, as
the case may be, according to its tenor, and that if it be dishonored and the necessary proceedings
on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent
endorser who may be compelled to pay it, must be read in the light of the rule in equity requiring that
those who come to court should come with clean hands. The holder or subsequent endorser who
tries to claim under the instrument which had been dishonored for "irregular endorsement" must not
be the irregular endorser himself who gave cause for the dishonor. Otherwise, a clear injustice
results when any subsequent party to the instrument may simply make the instrument defective and
later claim from prior endorsers who have no knowledge or participation in causing or introducing
said defect to the instrument, which thereby caused its dishonor.

Courts in this jurisdiction are not only courts of law but also of equity, and therefore cannot
unqualifiedly apply a provision of law so as to cause clear injustice which the framers of the law
could not have intended to so deliberately cause. In Carceller v. Court of Appeals,4 this Court had
occasion to stress:

Courts of law, being also courts of equity, may not countenance such grossly unfair results without
doing violence to its solemn obligation to administer fair and equal justice for all.

RCBC, which caused the dishonor of the check upon presentment to the drawee bank, through the
qualified endorsement of its employee, Olivia Gomez, cannot hold prior endorsers, Alviar and
Gonzales in this case, liable on the instrument.

Moreover, it is a well-established principle in law that as between two parties, he who, by his acts,
caused the loss shall bear the same.5 RCBC, in this instance, should therefore bear the loss.

Relative to the petitioner’s counterclaim against RCBC for the amount of ₱12,822.20 which it
admittedly deducted from petitioner’s salary, the Court must order the return thereof to the petitioner,
with legal interest of 12% per annum, notwithstanding the petitioner’s apparent acquiescence to
such an arrangement. It must be noted that petitioner is not any ordinary client or depositor with
whom RCBC had this isolated transaction. Petitioner was a rank-and-file employee of RCBC, being
a new accounts clerk thereat. It is easy to understand how a vulnerable Gonzales, who is financially
dependent upon RCBC, would rather bite the bullet, so to speak, and expectedly opt for salary
deduction rather than lose her job and her entire salary altogether. In this sense, we cannot take
petitioner’s apparent acquiescence to the salary deduction as being an entirely free and voluntary
act on her part. Additionally, under the obtaining facts and circumstances surrounding the present
complaint for collection of sum of money by RCBC against its employee, which may be deemed
tantamount to harassment, and the fact that RCBC itself was the one, acting through its employee,
Olivia Gomez, which gave reason for the dishonor of the dollar-check in question, RCBC may
likewise be held liable for moral and exemplary damages and attorney’s fees by way of damages, in
the amount of ₱20,000.00 for each.

WHEREFORE, the assailed CA Decision dated August 30, 2002 is REVERSED and SET ASIDE
and the Complaint in this case DISMISSED for lack of merit. Petitioner’s counterclaim is GRANTED,
ordering the respondent RCBC to reimburse petitioner the amount ₱12,822.20, with legal interest
computed from the time of salary deduction up to actual payment, and to pay petitioner the total
amount of ₱60,000.00 as moral and exemplary damages, and attorney’s fees.

Costs against the respondent.

SO ORDERED.
 [G.R. No. 188363, February 27, 2013]

ALLIED BANKING CORPORATION, Petitioner, v. 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 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 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.20

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 post-dated 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 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. 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 pater familias 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.

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.

FIRST DIVISION

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 (₱200,000.00) for a total of One Million Eight Hundred Thousand
Pesos (₱1,800,000.00).

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

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

On 6 May 2000, Potenciano informedpetitioners that the checks they deposited with the Bank
werehonored. He allegedly warned petitioners that the clearing of the checks pertained only to the
availability of funds and did not mean that the checks were not infirmed.6 Thus, the entire amount of
₱1,800,000.00 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 ₱4,000.00 to
₱200,000.00. 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 ₱1,800,000.00.

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 ₱500,000.00. 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
₱1,179,659.69 and transferred said amount to their savings account. The Bank then withdrew the
amount of ₱1,800,000.00representing 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. ₱1,800,000.00 representing the amount unlawfully withdrawn by the defendants

from the account of plaintiffs;

2. ₱500,000.00 as moral damages; and

3. ₱300,000.00 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 ₱1,800,000.00 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 ₱100,000.00 each. The trial
court first applied the principle of liberality when it disregarded the alleged absence of a notice of
hearing in respondents’ motion for reconsideration. On the merits, the trial court considered the
relationship of the Bank and petitioners with respect to their savings account deposits as a contract
of loan with the bank as the debtor and petitioners as creditors. As such, Article 1977 of the Civil
Code prohibiting the depository from making use of the thing deposited without the express
permission of the depositor is not applicable. Instead, the trial court applied Article 1980 which
provides that fixed, savings and current deposits ofmoney in banks and similar institutions shall be
governed by the provisions governing simple loan. The trial court then opined thatthe Bank had all
the right to set-off against petitioners’ savings deposits the value of their nine checks that were
returned.

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

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

The core issues in this case revolve on whether the appellee bank had the right to debit the amount
of ₱1,800,000.00 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 ₱1,800,000.00 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 ₱1,800,000.00 from petitioners’
accounts.

On 6 May 2000, the Bank informed petitioners that the subject checks had been honored. Thus, the
amountof ₱1,800,000.00 was accordingly credited to petitioners’ accounts, prompting them to
release the purchased cars to the buyer.

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

We reverse.

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

LIABILITY OF THE DRAWEE

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

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

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

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

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

LIABILITY OF DEPOSITARY BANK AND COLLECTING BANK

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

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

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

A depositary/collecting bank where a check is deposited, and which endorses the check upon
presentment with the drawee bank, is an endorser. Under Section 66 of the Negotiable Instruments
Law, an endorser warrants "that the instrument is genuine and in all respects what it purports to be;
that he has good title to it; that all prior parties had capacity to contract; and that the instrument is at
the time of his endorsement valid and subsisting." It has been repeatedly held that in check
transactions, the depositary/collecting bank or last endorser generally suffers the loss because it has
the duty to ascertain the genuineness of all prior endorsements considering that the act of
presenting the check for payment to the drawee is an assertion that the party making the
presentment has done its duty to ascertain the genuineness of the endorsements.26 If any of the
warranties made by the depositary/collecting bank turns out to be false, then the drawee bank may
recover from it up to the amount of the check.27

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

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

24-HOUR CLEARING RULE

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

We do not subscribe to the position taken by petitioners that the drawee bank was at fault because it
did not follow the 24-hour clearing period which provides that when a drawee bank fails to return a
forged or altered check to the collecting bank within the 24-hour clearing period, the collecting bank
is absolved from liability.

Section 21 of the Philippine Clearing House Rules and Regulations provides: Sec. 21. Special
Return Items Beyond The Reglementary Clearing Period.- Items which have been the subject of
material alteration or items bearing forged endorsement when such endorsement is necessary for
negotiation shall be returned by direct presentation or demand to the Presenting Bank and not
through the regular clearing house facilities within the period prescribed by law for the filing of a legal
action by the returning bank/branch, institution or entity sending the same.

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

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

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

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

LIABILITY OF PETITIONERS
The 2008 case of Far East Bank & Trust Company v. Gold Palace Jewellery Co.30 is in point. A
foreigner purchased several pieces of jewelry from Gold Palace Jewellery using a United Overseas
Bank (Malaysia) issued draft addressed to the Land Bank of the Philippines (LBP). Gold Palace
Jewellery deposited the draft in the company’s account with Far East Bank. Far East Bank
presented the draft for clearing to LBP. The latter cleared the same and Gold Palace Jewellery’s
account was credited with the amount stated in the draft. Consequently, Gold Palace Jewellery
released the pieces of jewelries to the foreigner. Three weeks later, LBP informed Far East Bank
that the amount in the foreign draft had been materially altered from ₱300,000.00 to ₱380,000.00.
LBP returnedthe check to Far East Bank. Far East Bank refunded LBP the ₱380,000.00 paid by
LBP. Far East Bank initially debited ₱168,053.36 from Gold Palace Jewellery’s account and
demanded the payment of the difference between the amount in the altered draft and the amount
debited from Gold Palace Jewellery.

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

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

Thus, considering that, in this case, Gold Palace is protected by Section 62 of the NIL, its collecting
agent, Far East, should not have debited the money paid by the drawee bank from respondent
company's account. When Gold Palace deposited the check with Far East, the latter, under the
terms of the deposit and the provisions of the NIL, became an agent of the former for the collection
of the amount in the draft. The subsequent payment by the drawee bank and the collection of the
amount by the collecting bank closed the transaction insofar as the drawee and the holder of the
check or his agent are concerned, converted the check into a mere voucher, and, as already
discussed, foreclosed the recovery by the drawee of the amount paid. This closure of the transaction
is a matter of course; otherwise, uncertainty in commercial transactions, delay and annoyance will
arise if a bank at some future time will call on the payee for the return of the money paid to him on
the check.

As the transaction in this case had been closed and the principalagent relationship between the
payee and the collecting bank had already ceased, the latter in returning the amount to the drawee
bank was already acting on its own and should now be responsible for its own actions. x x x
Likewise, Far East cannot invoke the warranty of the payee/depositor who indorsed the instrument
for collection to shift the burden it brought upon itself. This is precisely because the said indorsement
is only for purposes of collection which, under Section 36 of the NIL, is a restrictive indorsement. It
did not in any way transfer the title of the instrument to the collecting bank. Far East did not own the
draft, it merely presented it for payment. Considering that the warranties of a general indorser as
provided in Section 66 of the NIL are based upon a transfer of title and are available only to holders
in due course, these warranties did not attach to the indorsement for deposit and collection made by
Gold Palace to Far East. Without any legal right to do so, the collecting bank, therefore, could not
debit respondent's account for the amount it refunded to the drawee bank.

The foregoing considered, we affirm the ruling of the appellate court to the extent that Far East could
not debit the account of Gold Palace, and for doing so, it must return what it had erroneously taken.32

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

ON LEGAL COMPENSATION

Petitioners insist that the Bank cannotbe considered a creditor of the petitioners because it should
have made a claim of the amount of ₱1,800,000.00 from Equitable-PCI Bank, its own depositary
bank and the collecting bank in this case and not from them.

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

Art. 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same
time a principal creditor of the other;

(2) That both debts consist in a sum of money, or if the things due are consumable,
they be of the same kind, and also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by
third persons and communicated in due time to the debtor.

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

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

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

Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay,
and those who in any manner contravene the tenor thereof, are liable for damages.
The damages in the form of actual or compensatory damages represent the amount debited by the
Bank from petitioners’ account.

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

To recap, the drawee bank, Philippine Veterans Bank in this case, is only liable to the extent of the
check prior to alteration. Since Philippine Veterans Bank paid the altered amount of the check, it
1âwphi 1

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 ₱1,800,000.00, representing the amount withdrawn from the latter’s
account. We do not conform with said ruling regarding the finding of bad faith on the part of
respondents, as well as its failure toobserve the 24-hour clearing rule.

WHEREFORE, the petition is GRANTED. The Decision and Resolution dated 29 June 2006 and 12
February 2007 respectively of the Court of Appeals in CA-G.R. CV No. 83192 are REVERSED and
SET ASIDE. The 15 January 2004 Decision of the Regional Trial Court of Calamba City, Branch 92
in Civil Case No. B-5886 rendered by Judge Antonio S. Pozas is REINSTATEDonly insofar as it
ordered respondents to jointly and severally pay petitioners ₱1,800,000.00 representing the amount
withdrawn from the latter’s account. The award of moral damages and attorney’s fees are
DELETED.

SO ORDERED.

JOSE PORTUGAL PEREZ

Associate Justice

WE CONCUR:

vFIRST DIVISION

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 (₱200,000.00) for a total of One Million Eight Hundred Thousand
Pesos (₱1,800,000.00).

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

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

On 6 May 2000, Potenciano informedpetitioners that the checks they deposited with the Bank
werehonored. He allegedly warned petitioners that the clearing of the checks pertained only to the
availability of funds and did not mean that the checks were not infirmed.6 Thus, the entire amount of
₱1,800,000.00 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 ₱4,000.00 to
₱200,000.00. 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 ₱1,800,000.00.

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 ₱500,000.00. 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
₱1,179,659.69 and transferred said amount to their savings account. The Bank then withdrew the
amount of ₱1,800,000.00representing 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. ₱1,800,000.00 representing the amount unlawfully withdrawn by the defendants

from the account of plaintiffs;

2. ₱500,000.00 as moral damages; and

3. ₱300,000.00 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 ₱1,800,000.00 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 ₱100,000.00 each. The trial
court first applied the principle of liberality when it disregarded the alleged absence of a notice of
hearing in respondents’ motion for reconsideration. On the merits, the trial court considered the
relationship of the Bank and petitioners with respect to their savings account deposits as a contract
of loan with the bank as the debtor and petitioners as creditors. As such, Article 1977 of the Civil
Code prohibiting the depository from making use of the thing deposited without the express
permission of the depositor is not applicable. Instead, the trial court applied Article 1980 which
provides that fixed, savings and current deposits ofmoney in banks and similar institutions shall be
governed by the provisions governing simple loan. The trial court then opined thatthe Bank had all
the right to set-off against petitioners’ savings deposits the value of their nine checks that were
returned.

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

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

The core issues in this case revolve on whether the appellee bank had the right to debit the amount
of ₱1,800,000.00 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 ₱1,800,000.00 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 ₱1,800,000.00 from petitioners’
accounts.

On 6 May 2000, the Bank informed petitioners that the subject checks had been honored. Thus, the
amountof ₱1,800,000.00 was accordingly credited to petitioners’ accounts, prompting them to
release the purchased cars to the buyer.

Unknown to petitioners, the Bank deposited the checks in its depositary bank, Equitable-PCI Bank.
Three months had passed when the Bank was informed by its depositary bank that the drawee had
dishonored the checks on the ground of material alterations.

The return of the checks created a chain of debiting of accounts, the last loss eventually falling upon
the savings account of petitioners with respondent bank. The trial court inits reconsidered decision
and the appellate court were one in declaring that petitioners should bear the loss.

We reverse.

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

LIABILITY OF THE DRAWEE

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

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

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

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

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

LIABILITY OF DEPOSITARY BANK AND COLLECTING BANK

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

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

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

A depositary/collecting bank where a check is deposited, and which endorses the check upon
presentment with the drawee bank, is an endorser. Under Section 66 of the Negotiable Instruments
Law, an endorser warrants "that the instrument is genuine and in all respects what it purports to be;
that he has good title to it; that all prior parties had capacity to contract; and that the instrument is at
the time of his endorsement valid and subsisting." It has been repeatedly held that in check
transactions, the depositary/collecting bank or last endorser generally suffers the loss because it has
the duty to ascertain the genuineness of all prior endorsements considering that the act of
presenting the check for payment to the drawee is an assertion that the party making the
presentment has done its duty to ascertain the genuineness of the endorsements.26 If any of the
warranties made by the depositary/collecting bank turns out to be false, then the drawee bank may
recover from it up to the amount of the check.27

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

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

24-HOUR CLEARING RULE

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

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

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

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

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

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

LIABILITY OF PETITIONERS

The 2008 case of Far East Bank & Trust Company v. Gold Palace Jewellery Co.30 is in point. A
foreigner purchased several pieces of jewelry from Gold Palace Jewellery using a United Overseas
Bank (Malaysia) issued draft addressed to the Land Bank of the Philippines (LBP). Gold Palace
Jewellery deposited the draft in the company’s account with Far East Bank. Far East Bank
presented the draft for clearing to LBP. The latter cleared the same and Gold Palace Jewellery’s
account was credited with the amount stated in the draft. Consequently, Gold Palace Jewellery
released the pieces of jewelries to the foreigner. Three weeks later, LBP informed Far East Bank
that the amount in the foreign draft had been materially altered from ₱300,000.00 to ₱380,000.00.
LBP returnedthe check to Far East Bank. Far East Bank refunded LBP the ₱380,000.00 paid by
LBP. Far East Bank initially debited ₱168,053.36 from Gold Palace Jewellery’s account and
demanded the payment of the difference between the amount in the altered draft and the amount
debited from Gold Palace Jewellery.

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

We only adopt said decision in so far as it adjudged liability on the part of the collecting bank, thus:
Thus, considering that, in this case, Gold Palace is protected by Section 62 of the NIL, its collecting
agent, Far East, should not have debited the money paid by the drawee bank from respondent
company's account. When Gold Palace deposited the check with Far East, the latter, under the
terms of the deposit and the provisions of the NIL, became an agent of the former for the collection
of the amount in the draft. The subsequent payment by the drawee bank and the collection of the
amount by the collecting bank closed the transaction insofar as the drawee and the holder of the
check or his agent are concerned, converted the check into a mere voucher, and, as already
discussed, foreclosed the recovery by the drawee of the amount paid. This closure of the transaction
is a matter of course; otherwise, uncertainty in commercial transactions, delay and annoyance will
arise if a bank at some future time will call on the payee for the return of the money paid to him on
the check.

As the transaction in this case had been closed and the principalagent relationship between the
payee and the collecting bank had already ceased, the latter in returning the amount to the drawee
bank was already acting on its own and should now be responsible for its own actions. x x x
Likewise, Far East cannot invoke the warranty of the payee/depositor who indorsed the instrument
for collection to shift the burden it brought upon itself. This is precisely because the said indorsement
is only for purposes of collection which, under Section 36 of the NIL, is a restrictive indorsement. It
did not in any way transfer the title of the instrument to the collecting bank. Far East did not own the
draft, it merely presented it for payment. Considering that the warranties of a general indorser as
provided in Section 66 of the NIL are based upon a transfer of title and are available only to holders
in due course, these warranties did not attach to the indorsement for deposit and collection made by
Gold Palace to Far East. Without any legal right to do so, the collecting bank, therefore, could not
debit respondent's account for the amount it refunded to the drawee bank.

The foregoing considered, we affirm the ruling of the appellate court to the extent that Far East could
not debit the account of Gold Palace, and for doing so, it must return what it had erroneously taken.32

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

ON LEGAL COMPENSATION

Petitioners insist that the Bank cannotbe considered a creditor of the petitioners because it should
have made a claim of the amount of ₱1,800,000.00 from Equitable-PCI Bank, its own depositary
bank and the collecting bank in this case and not from them.

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

Art. 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same
time a principal creditor of the other;
 (2) That both debts consist in a sum of money, or if the things due are consumable,
they be of the same kind, and also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by
third persons and communicated in due time to the debtor.

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

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

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

Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay,
and those who in any manner contravene the tenor thereof, are liable for damages.

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

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

To recap, the drawee bank, Philippine Veterans Bank in this case, is only liable to the extent of the
check prior to alteration. Since Philippine Veterans Bank paid the altered amount of the check, it
1âwphi 1

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 ₱1,800,000.00, representing the amount withdrawn from the latter’s
account. We do not conform with said ruling regarding the finding of bad faith on the part of
respondents, as well as its failure toobserve the 24-hour clearing rule.

WHEREFORE, the petition is GRANTED. The Decision and Resolution dated 29 June 2006 and 12
February 2007 respectively of the Court of Appeals in CA-G.R. CV No. 83192 are REVERSED and
SET ASIDE. The 15 January 2004 Decision of the Regional Trial Court of Calamba City, Branch 92
in Civil Case No. B-5886 rendered by Judge Antonio S. Pozas is REINSTATEDonly insofar as it
ordered respondents to jointly and severally pay petitioners ₱1,800,000.00 representing the amount
withdrawn from the latter’s account. The award of moral damages and attorney’s fees are
DELETED.

SO ORDERED.

JOSE PORTUGAL PEREZ

Associate Justice

WE CONCUR: