COMMREV WEEK 1

Compiled Digests
Atty. Ampil
DINO V. JUDAL-LOOT

DOCTRINE: When the negotiable instrument involved is a crossed check, the following principles must also be considered
other than the requisites under Sec. 52 of the NIL: A crossed check (a) may not be encashed but only deposited in the bank;
(b) may be negotiated only once — to one who has an account with a bank; and (c) warns the holder that it has been issued
for a definite purpose so that the holder thereof must inquire if he has received the check pursuant to that purpose; otherwise,
he is not a holder in due course.

FACTS:
Sometime in December 1992, petitioner was approached by a syndicate, one of whose members posed as an owner of
several parcels of land, and induced petitioner to lend the group P3M. Said member who used the name Vivencia Ompok
Consing offered to execute a Deed of Absolute Sale instead of the usual mortgage contract. Enticed, petitioner issued three
checks in the said amount. One such check was Check No. C-MA-142119406-CA, a cross check, postdated 13 February,
1993 in the amount of P1M payable to Vivencia Ompok Consing and/or Fe Lobitana.

Petitioner later on discovered that the documents involving the properties covered rights over government properties.
Realizing he had been deceived, petitioner advised the bank to stop payment on the checks. Meanwhile, Lobitana negotiated
the said check to respondents in exchange of the amount P948,000.00. Before respondents accepted the check, they inquired
with Metrobank if the check was sufficiently funded to which the bank responded in the positive. However, when
respondents deposited the check, it was dishonored for the reason of ‘PAYMENT STOPPED.’

Respondents filed a collection suit with the RTC arguing that they were holders in due course. The RTC found the
respondents to be holders in due course and ordered petitioner and Lobitana to jointly and severally pay the respondents the
amount of the check plus damages and interest. The CA affirmed but deleted the award for damages. Hence, this appeal.

ISSUES:
1) WON respondents are holders in due course.

RULING:

1) NO. Section 52 of the Negotiable Instruments Law defines a holder in due course, thus:

A holder in due course is a holder who has taken the instrument under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice that it has been previously
dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in
the title of the person negotiating it.

In the case of a crossed check, as in this case, the following principles must additionally be considered: A crossed
check (a) may not be encashed but only deposited in the bank; (b) may be negotiated only once — to one who has
an account with a bank; and (c) warns the holder that it has been issued for a definite purpose so that the holder
thereof must inquire if he has received the check pursuant to that purpose; otherwise, he is not a holder in due course.

Based on the foregoing, respondents had the duty to ascertain the indorser’s, in this case Lobitana’s, title to the
check or the nature of her possession. Respondents failed to do this. Respondents’ verification from Metrobank on
the funding of the check does not amount to determination of Lobitana’s title to the check. Failing in this respect,
respondents are guilty of gross negligence amounting to legal absence of good faith, contrary to Section 52(c) of the
Negotiable Instruments Law. Hence, respondents are not deemed holders in due course of the subject check.

However, the fact that respondents are not holders in due course does not automatically mean that they cannot
recover on the check. The NIL does not provide that a holder who is not a holder in due course may not in any case
COMMREV WEEK 1
Compiled Digests
Atty. Ampil
recover on the instrument. 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. Among such defenses is the absence or failure of
consideration, which petitioner sufficiently established in this case. Petitioner issued the subject check supposedly
for a loan in favor of Consing’s group, who turned out to be a syndicate defrauding gullible individuals. Since there
is in fact no valid loan to speak of, there is no consideration for the issuance of the check. Consequently, petitioner
cannot be obliged to pay the face value of the check.

Respondents can collect from the immediate indorser, in this case Lobitana. Significantly, Lobitana did not appeal the trial
court’s decision, finding her solidarily liable to pay, among others, the face value of the subject check. Therefore, the trial
court’s judgment has long become final and executory as to Lobitana.

BANK OF AMERICA V. PHILIPPINE RACING CLUB

Facts:

1. Plaintiff PRCI is a domestic corporation which maintains a current account with petitioner Bank of America. Its
authorized signatories are the company President and Vice-President. By virtue of a travel abroad for these officers, they
pre-signed checks to accommodate any expenses that may come up while they were abroad for a business trip. The said
pre-signed checks were left for safekeeping by PRCs accounting officer.

On the space where the name of the payee should be indicated (Pay To The Order Of) the following 2-line entries were
instead typewritten: on the upper line was the word CASH while the lower line had the following typewritten words, viz:
ONE HUNDRED TEN THOUSAND PESOS ONLY.

2. Clearly there was an irregularity with the filling up of the blank checks as both showed similar infirmities and
irregularities and yet, the petitioner bank did not try to verify with the corporation and proceeded to encash the
checks.

3. PRC filed an action for damages against the bank. The lower court awarded actual and exemplary damages. On appeal,
the CA affirmed the lower court’s decision and held that the bank was negligent. Hence this appeal. Petitioner contends that
it was merely doing its obligation under the law and contract in encashing the checks, since the signatures in the checks are
genuine.

Issues:

(1) WON the bank was negligent

(2) WON Section 14 of the Negotiable Instruments Law must be applied

Petitioner insists that it merely fulfilled its obligation under law and contract when it encashed the aforesaid checks. Invoking
Sections 126[7] and 185[8] of the Negotiable Instruments Law (NIL), petitioner claims that its duty as a drawee bank to a
drawer-client maintaining a checking account with it is to pay orders for checks bearing the drawer-clients genuine
signatures. Thus, pursuant to the said obligation, the drawee bank has the duty to determine whether the signatures appearing
on the check are the drawer-clients or its duly authorized signatories. If the signatures are genuine, the bank has the
unavoidable legal and contractual duty to pay. If the signatures are forged and falsified, the drawee bank has the corollary,
but equally unavoidable legal and contractual, duty not to pay.

Although not in the strict sense material alterations, the misplacement of the typewritten entries for the payee and the amount
on the same blank and the repetition of the amount using a check writer were glaringly obvious irregularities on the face of
the check. Clearly, someone made a mistake in filling up the checks and the repetition of the entries was possibly an attempt
to rectify the mistake.
COMMREV WEEK 1
Compiled Digests
Atty. Ampil
Indeed, it is highly uncommon for a corporation to make out checks payable to CASH for substantial amounts such as in
this case. If each irregular circumstance in this case were taken singly or isolated, the banks employees might have been
justified in ignoring them. However, the confluence of the irregularities on the face of the checks and circumstances that
depart from the usual banking practice of respondent should have put petitioners’ employees on guard that the checks were
possibly not issued by the respondent in due course of its business. Petitioners subtle sophistry cannot exculpate it from
behavior that fell extremely short of the highest degree of care and diligence required of it as a banking institution.

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.

Sec. 16, Delivery; when effectual; when presumed. Every contract on a negotiable instrument is incomplete and revocable
until delivery of the instrument for the purpose of giving effect thereto. As between immediate parties, and as regards a
remote party other than a holder in due course, the delivery in order to be effectual, must be made either by or under the
authority of the party making, drawing, accepting, or indorsing as the case may be; and in such case the delivery may be
shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the
instrument. But where the instrument is in the hands of a holder of a due course, a valid delivery thereof by all parties prior
to him so as to make them liable to him is conclusively presumed. And where the instrument is no longer in the possession
of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved.

In defense of its cashier/tellers questionable action, petitioner insists that pursuant to Sections 14 and 16 of the NIL, it could
validly presume, upon presentation of the checks, that the party who filled up the blanks had authority and that a valid and
intentional delivery to the party presenting the checks had taken place. Thus, in petitioners view, the sole blame for this
debacle should be shifted to respondent for having its signatories pre-sign and deliver the subject checks.

Petitioners contention would have been correct if the subject checks were correctly and properly filled out by the thief and
presented to the bank in good order. In that instance, there would be nothing to give notice to the bank of any infirmity in
the title of the holder of the checks and it could validly presume that there was proper delivery to the holder. The bank could
not be faulted if it encashed the checks under those circumstances. However, the undisputed facts plainly show that there
were circumstances that should have alerted the bank to the likelihood that the checks were not properly delivered to the
person who encashed the same. In all, we see no reason to depart from the finding in the assailed CA Decision that the
subject checks are properly characterized as incomplete and undelivered instruments thus making Section 15 [20] of the
NIL applicable in this case.

ASSOCIATED BANK V CA

Facts:
The Province of Tarlac maintains a current account with the Philippine National Bank (PNB Tarlac Branch) where the
provincial funds are deposited. Portions of the funds were allocated to the Concepcion Emergency Hospital. Checks were
issued to it and were received by the hospital’s administrative officer and cashier (Fausto Pangilinan). Pangilinan, through
the help of Associated Bank but after forging the signature of the hospital’s chief (Adena Canlas), was able to deposit the
checks in his personal account. All the checks bore the stamp “All prior endorsement guaranteed Associated Bank.” Through
post-audit, the province discovered that the hospital did not receive several allotted checks, and sought the restoration of the
debited amounts from PNB. In turn, PNB demanded reimbursement from Associated Bank. Both banks resisted payment.
Hence, the present action.

Issue:
Who shall bear the loss resulting from the forged checks?
COMMREV WEEK 1
Compiled Digests
Atty. Ampil

Held:
PNB is not negligent as it is not required to return the check to the collecting bank within 24 hours as the banks involved
are covered by Central Bank Circular 580 and not the rules of the Philippine Clearing House. Associated Bank, and not
PNB, is the one duty-bound to warrant the instrument as genuine, valid and subsisting at the time of indorsement pursuant
to Section 66 of the Negotiable Instruments Law. The stamp guaranteeing prior indorsement is not an empty rubric; the
collecting bank is held accountable for checks deposited by its customers. However, due to the fact that the Province of
Tarlac is equally negligent in permitting Pangilinan to collect the checks when he was no longer connected with the hospital,
it shares the burden of loss from the checks bearing a forged indorsement. Therefore, the Province can only recover 50% of
the amount from the drawee bank (PNB), and the collecting bank (Associated Bank) is liable to PNB for 50% of the same
amount.

BANK OF AMERICA V. ASSOCIATED CITIZENS BANK

FACTS:
BA-Finance Corporation entered into a transaction with Miller Offset Press, Inc. through the latter’s authorized
representatives, respondents herein. BA-Finance granted Miller a credit line facility through which the latter could assign
or discount its trade receivables with the former.
Miller discounted and assigned several trade receivables to BA-Finance by executing Deeds of Assignment in favor of the
latter. In consideration of the assignment, BA-Finance issued four checks payable to the "Order of Miller Offset Press, Inc."
with the notation "For Payee’s Account Only." These checks were drawn against Bank of America.
The 4 checks were deposited by respondent Ching Uy Seng, corporate secretary of Miller, in his joint bank account with
respondent Uy Chung Guan Seng in Associated Bank. Associated Bank stamped the checks with the notation "all prior
endorsements and/or lack of endorsements guaranteed," and sent them through clearing. Later, the drawee bank, Bank of
America, honored the checks and paid the proceeds to Associated Bank as collecting bank.

Miller failed to deliver to BA-Finance the proceeds of the assigned trade receivables. Consequently, BA-Finance filed a
complaint against respondents for collection of the amount which BA-Finance allegedly paid in consideration of the
assignment.

Respondents denied signing the Continuing Suretyship Agreement with BA-Finance. In view thereof, BA-Finance
impleaded Bank of America as additional defendant for allowing encashment and collection of the checks by persons other
than the payee named thereon. Bank of America filed a Third Party Complaint against Associated Bank.

The RTC rendered judgment against Bank of America, ordering it to pay BA Finance the value of the 4 checks. Judgment
is likewise rendered ordering Associated Bank to reimburse Bank of America. The CA affirmed with the modification that
respondents are also ordered to pay Associated Bank the value of the 4 checks.

ISSUE: Whether or not Bank of America, as drawee bank who accepted and honored the 4 checks, is liable to pay BA-
Finance the amount of said checks

HELD:

Yes. The drawee bank is under strict liability, based on the contract between the bank and its customer (drawer), to pay the
check only to the payee or the payee’s order. The drawer’s instructions are reflected on the face and by the terms of the
check. When the drawee bank pays a person other than the payee named on the check, it does not comply with the terms of
the check and violates its duty to charge the drawer’s account only for properly payable items. Thus, the drawee shall be
liable for the amount charged to the drawer’s account.

A check with two parallel lines in the upper left hand corner means that it could only be deposited and could not be converted
into cash. Thus, the effect of crossing a check relates to the mode of payment, meaning that the drawer had intended the
check for deposit only by the rightful person, i.e., the payee named therein. In this case, the checks were drawn by BA-
Finance and made payable to the "Order of Miller Offset Press, Inc." The checks were also crossed and issued "For Payee’s
COMMREV WEEK 1
Compiled Digests
Atty. Ampil
Account Only." Clearly, the drawer intended the check for deposit only by Miller Offset Press, Inc. in the latter’s bank
account. Thus, when a person other than Miller, i.e., Ching Uy Seng, presented and deposited the checks in his own personal
account, and the drawee bank, Bank of America, paid the value of the checks and charged BA-Finance’s account therefor,
the drawee is deemed to have violated the instructions of the drawer, and therefore, is liable for the amount charged to the
drawer’s account.

REPUBLIC BANK V CA

FACTS:
San Miguel Corporation (SMC) drew a check amounting to P240.00 on its account in First National City Bank (FNCB) in
favor of Delgado, a stockholder. Delgado fraudulently altered the amount of the check to P9,240 after which he endorsed
and deposited it with Republic Bank. Republic Bank endorsed the check to First National City Bank (FNCB), the drawee
bank, by stamping on the back of the check “all prior and / or lack of indorsement guaranteed". Based on such endorsement,
FNCB paid the amount to Republic Bank. Later on, San Miguel informed FNCB of the material alteration of the amount.
FNCB recredited the amount to San Miguel’s account, and demanded refund from Republic Bank. Republic Bank refused,
claiming there was delay in giving it notice of the alteration.

ISSUE:
Whether petitioner Republic Bank as the collecting bank should bear the loss resulting from the altered check.

RULING:
The drawee bank, FNCB, should bear the loss for the payment of the altered check for its failure to detect and warn Republic
Bank of the fraudulent character of the check within the 24-hour clearing house rule. Republic Bank, as the collecting bank,
is protected by the 24-hour clearing house rule found in Central Bank Circular No. 9. When an indorsement is forged, the
collecting bank or last indorser, as a general rule, bears the loss. But the unqualified indorsement of the collecting bank on
the check should be read together with the 24-hour regulation on clearing house operation. Hence, 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.

AREZA V. EXPRESS SAVINGS BANK

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

Facts: Petitioners received an order for the purchase of a motor vehicle from Gerry Mambuay where the latter 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). Petitioners deposited
the said checks in their savings account with the Express Savings Bank which, in turn, deposited the checks with its
depositary bank, Equitable-PCI Bank and the latter presented the checks to the drawee, the Philippine Veterans Bank, which
honored the checks. However, the subject checks 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. After informing Express Savings
Bank that the drawee dishonored the checks, Equitable-PCI Bank debited the deposit account of ESB in the amount of
P1.8M. Express Savings Bank then withdrew the amount of P1.8M representing the returned checks from petitioners saving
account.
COMMREV WEEK 1
Compiled Digests
Atty. Ampil
Issue: Whether or not Express Savings Bank had the right to debit ₱1,800,000.00 from petitioners’ accounts.

Held: No, Express Savings Bank cannot debit the savings account of petitioners. 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.” As collecting bank, Express Savings Bank is liable for the amount of the materially
altered checks. 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.

WESTMONT BANK VS. ONG

Facts: Respondent Eugene Ong maintained a current account with petitioner, formerly the Associated Banking Corporation,
but now known as Westmont Bank. He sold certain shares of stocks through Island Securities Corporation, which in turn,
purchased 2 Pacific Banking Corporation’s Check to pay the former. Both checks were issued in the name of Ong but before
the he could get hold of the checks, his friend Paciano Tanlimco got hold of them, forged Ong’s signature and deposited
these with petitioner, where Tanlimco was also a depositor. Even though Ongs specimen signature was on file, petitioner
accepted and credited both checks to the account of Tanlimco, without verifying the signature indorsements appearing at
the back thereof. Tanlimco then immediately withdrew the money and absconded.

Ong first sought the help of Tanlimco’s family to recover the amount then reported the incident to the Central Bank but
both efforts unfortunately proved futile. Five months from the discovery of the fraud, he filed a complaint and demanded
that petitioner pay the value of the two checks from the bank on whose gross negligence he imputed his loss. In his suit, he
insisted that he did not deliver, negotiate, endorse or transfer to any person or entity the subject checks issued to him and
asserted that the signatures on the back were spurious.

Both the trial court and the CA ruled in favor of Ong.

Issues:
(1) W/N respondent Ong has a cause of action against petitioner Westmont Bank.
(2) W/N Westmont Bank shall be held liable.
(3) W/N Ong is barred to recover the money from Westmont Bank due to laches.

Held:
(1) Yes. Respondent admitted that he was never in actual or physical possession of the two checks of the Island Securities
nor did he authorize Tanlimco or any of the latter’s representative to demand, accept and receive the same. For this reason,
petitioner argues, respondent cannot sue petitioner because under Section 51 of the Negotiable Instruments Law it is only
when a person becomes a holder of a negotiable instrument can he sue in his own name.

Petitioners claim that respondent has no cause of action against the bank is clearly misplaced. As defined, a cause of action
is the act or omission by which a party violates a right of another. The essential elements of a cause of action are: (a) a legal
right or rights of the plaintiff, (b) a correlative obligation of the defendant, and (c) an act or omission of the defendant in
violation of said legal right.

The complaint filed before the trial court expressly alleged respondents right as payee of the managers checks to receive the
amount involved, petitioners correlative duty as collecting bank to ensure that the amount gets to the rightful payee or his
order, and a breach of that duty because of a blatant act of negligence on the part of petitioner which violated respondents
rights.

Therefore, Ong has a cause of action against petitioner Westmont Bank.

(2) Yes. As a general rule, a bank or corporation who has obtained possession of a check upon an unauthorized or forged
indorsement of the payees signature and who collects the amount of the check from the drawee, is liable for the proceeds
COMMREV WEEK 1
Compiled Digests
Atty. Ampil
thereof to the payee or other owner, notwithstanding that the amount has been paid to the person from whom the check was
obtained. Banks are engaged in a business impressed with public interest, and they have the obligation to treat their clients
account meticulously and with the highest degree of care, considering the fiduciary nature of their relationship. The diligence
required of banks, therefore, is more than that of a good father of a family.

Given the substantial face value of the two checks, totalling P1,754,787.50, and the fact that they were being deposited by
a person not the payee, the very least defendant bank should have done, as any reasonable prudent man would have done,
was to verify the genuineness of the indorsements thereon. However, defendant apparently failed to make such a verification
or, what is worse did so but, chose to disregard the obvious dissimilarity of the signatures. The first omission makes it guilty
of gross negligence; the second of bad faith. In either case, defendant is liable to plaintiff for the proceeds of the checks in
question.

(3) No. Laches may be defined as the failure or neglect for an unreasonable and unexplained length of time, to do that which,
by exercising due diligence, could or should have been done earlier. It is negligence or omission to assert a right within a
reasonable time, warranting a presumption that the party entitled thereto has either abandoned or declined to assert it.

In the case at bar, it cannot be said that respondent sat on his rights. He immediately acted after knowing of the forgery by
proceeding to seek help from the Tanlimco family and later the Central Bank, to remedy the situation and recover his money
from the forger, Paciano Tanlimco. Only after he had exhausted possibilities of settling the matter amicably with the
family of Tanlimco and through the CB, about five months after the unlawful transaction took place, did he resort to making
the demand upon the petitioner and eventually before the court for recovery of the money value of the two checks. These
acts cannot be construed as undue delay in or abandonment of the assertion of his rights.